10-K
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, 2008
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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
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07632
(Zip Code
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(Address of principal executive
offices)
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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 o No þ
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 þ
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Non-accelerated
filer o
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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
$147,869,000, as of the last business day of the
registrants most recently completed second fiscal quarter.
As of February 16, 2009, the registrant had
14,271,824 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
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 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
The Company acquires, manages, collects and services portfolios
of consumer receivables for its own account. These portfolios
generally consist of one or more of the following types of
consumer receivables:
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charged-off receivables accounts that have been
written-off by the originators and may have been previously
serviced by collection agencies;
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semi-performing receivables accounts where the
debtor is currently making partial or irregular monthly
payments, but the accounts may have been written-off by the
originators; and in limited circumstances; and
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performing receivables accounts where the debtor is
making regular monthly payments that may or may not have been
delinquent in the past.
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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 creditors 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 credit card
accounts, telecommunication charge-offs, and auto deficiency
receivables, 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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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.
If we elect to 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 the
portfolio. Additionally, we have two collection centers, which
currently employ approximately 100 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.
We fund portfolios through a combination of internally generated
cash flow and bank debt. In the past, on certain large portfolio
acquisitions, we have partnered with a large financial
institution in which we shared in the finance income generated
from the collections. At September 30, 2008, we have no
such relationships outstanding.
For the years ended September 30, 2008, 2007 and 2006, our
finance income was approximately $115.3 million,
$138.4 million and $101.0 million, respectively, and
our net income was approximately $8.8 million,
$52.3 million
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and $45.8 million, respectively. During these same years
our net cash collections were approximately $208.0 million,
$281.8 million and $214.5 million, respectively.
We were formed in 1994 as an affiliate of Asta Group,
Incorporated, an entity owned by Arthur Stern, our Chairman of
the Board and Executive Vice President, Gary Stern, our
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 Asta Group. As a result, we ceased
purchasing automobile contracts and, with the assistance and
financial support of Asta Group and a partner, purchased our
first significant consumer receivable portfolio. Since then,
Asta Group 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 a growing
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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We believe that as a result of the difficulty in collecting
these receivables and the desire of originating institutions to
focus on their core businesses and to generate revenue from
these receivables, originating institutions are increasingly
electing to sell these portfolios.
Strategy
Although we are in a challenging economic environment, our
primary objective remains to utilize our managements
experience and expertise to effectively grow our business 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 our purchases of consumer receivable portfolios are at
a lower level than in recent years, we remain focused on
capitalizing on our strategic relationships to identify and
acquire consumer receivable portfolios as pricing and conditions
permit.
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We have curtailed our purchases of new portfolios of consumer
receivables during the second, third and fourth quarters of
fiscal year 2008. We expect to see a reduction in finance income
in future quarters and future years, to the extent we are not
replacing our receivables acquired for liquidation. Instead, we
are focusing, in the short term, on reducing our debt and being
highly disciplined in our portfolio purchases. We continue to
review potential portfolio acquisitions regularly and will be
buyers at the right price, where we believe the purchase will
yield our desired rate of return.
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.
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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.
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), private label credit card accounts,
telecom receivables, and auto deficiency receivables, 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. 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
source 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 fifty percent sharing arrangement after the
Company has recouped one hundred percent 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 five member committee composed
of the Chairman of the Board, the President & Chief
Executive Officer, the Chief Operating Officer, the Chief
Financial Officer, and the Senior
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Vice President. As the Chairman of the Board and
President & 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, we use a
variety of qualitative and quantitative factors to determine the
estimated cash flows. Included in our analysis for purchasing a
portfolio of receivables and determining a reasonable estimate
of collections and the timing thereof, the following variables
are analyzed and factored into our original estimates:
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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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time elapsed 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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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 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 collectibility 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 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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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. Accounts returned to sellers for fiscal
years 2008 and 2006 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.
We generally use third-parties to determine bankrupt and
deceased accounts, which allows 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 discounted beyond
the typical discounts we receive on the portfolios we purchase
that meet our purchasing criteria.
In February 2006, we acquired VATIV Recovery Solutions LLC
(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
to assist it in evaluating the results of the efforts of the
third-party collection agencies and attorneys. Based on
portfolio performance guidelines, our management will move
certain receivables from one third-party collection agency or
attorney to another if we believe such change will enhance
collections.
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At September 30, 2008 approximately 36% of our portfolios
were serviced by two collection organizations. We have servicing
agreements in place with these two collection organizations as
well as all other third party collection agencies and attorneys.
These service agreements cover standard contingency fees and
servicing of the accounts.
We have two collection centers that currently employ
approximately 100 experienced collection personnel, including
management. These facilities provide the majority of our
internal collection and servicing capabilities, giving us
flexibility and control over the servicing of our consumer
receivable portfolios and assisting us in benchmarking our
third-party collection agencies and attorneys.
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 obligors
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 that are responsible for collecting on our consumer
receivable portfolios;
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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 customer payments;
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posting these payments to the customers account; and
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in conjunction with the customer service department, providing
senior management with 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 who have purchased receivables
from us. In 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 feel 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 on obligors, allows us the
flexibility to sell accounts at prices that are attractive to us
and as important, sell the less desirable accounts within our
collective 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, 2008, 2007 and 2006 were
$20.4 million, $54.2 million and $55.0 million,
respectively. Collections represented by account sales as a
percentage of total collections for the fiscal years ended
September 30, 2008, 2007 and 2006 were 9.8%, 19.2% and
25.7%, 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 increase. 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 market place 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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making purchase decisions in a timely manner; 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
10
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.
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 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 our consumer receivable portfolios.
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 have complied 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
11
or our third-party collection agencies and attorneys
collection activities, failure to comply with such laws could
have a material adverse effect on us.
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. 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, 2008, we had 158 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
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
affected, the trading price of our common stock could decline
and shareholders might lose all or part of their investment.
The
Company has risks associated with its purchase of
$6.9 billion in face value of receivable purchase for
$300 million in March 2007 (the Portfolio
Purchase)
On February 5, 2007, Palisades Acquisition XV, LLC, a
wholly-owned subsidiary of the Company, entered into a Purchase
and Sale Agreement (the Portfolio Purchase
Agreement) with Great Seneca Financial Corporation,
Platinum Financial Services Corporation, Monarch Capital
Corporation, Colonial Credit Corporation, Centurion Capital
Corporation, Sage Financial Corporation and Hawker Financial
Corporation (collectively, the Sellers), under which
we agreed to acquire 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. The Portfolio
Purchase (now owned by our subsidiary Palisades Acquisition XVI,
LLC (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.
Under the Portfolio Purchase Agreement, we assumed certain risks
associated with the Portfolio Purchase. The representations and
warranties with respect to the Portfolio which we received from
the Sellers have limitations both in scope and, in certain
cases, duration, including a limitation of our put-back rights
with respect to certain types of claims, a requirement that
certain claims be brought within 120 days of closing or be
deemed waived, and a limitation with respect to the
Sellers responsibilities for acts of prior owners. Other
than the representations contained in the Portfolio Purchase
Agreement, the accounts were sold as is. We may not have an
adequate remedy against the sellers if our understandings about
the quality, quantity and characteristics of the Accounts in the
Portfolio prove to be contrary to our expectations.
Recent
amendments to our credit agreements increase our risk and
potential loss and will limit our ability to purchase
portfolios.
Since the Portfolio Purchase in March 2007, Palisades XVI has
not performed well with respect to the Receivables Financing
Agreement with the Bank of Montreal (BMO). In
September 2007, Palisades XVI was
12
required to remit an additional $13.1 million to BMO in
order to be in compliance with its repayment obligations. We
purchased a portion of this Portfolio from Palisades XVI at a
price of $13.1 million, giving Palisades XVI the ability to
make this payment. In December 2007, Palisades XVI entered into
an amendment of the Receivables Financing Agreement to extend
the required repayment schedule. Again in May 2008, as a result
of collections being slower than anticipated at the time of the
December 2007 amendment, Palisades XVI and BMO amended the
Receivables Financing Agreement to further extend the repayment
schedule. In addition, on May 19, 2008, the Company entered
into an amended and restated servicing agreement among Palisades
XVI, Palisades Collection, L.L.C. and BMO (the Service
Agreement). The amendment calls for increased
documentation, responsibilities and approvals of subservicers
engaged by Palisades Collection L.L.C. On February 20,
2009, Palisades XVI entered into the fourth amendment to the
Receivables Financing Agreement (the Fourth
Amendment) to further extend the required payment schedule
in light of continued lower level of collections. As an
inducement to BMO to enter into such an amendment, the Company
agreed to provide BMO with an $8 million limited secured
subordinated guaranty of Palisades XVIs performance, which
may constrain future borrowing ability.
On February 20, 2009, the Company entered into the Seventh
Amendment to Fourth Amended and Restated Loan Agreement with a
consortium of banks (the Bank Group) that, among
other changes, lowers the level of borrowing from
$175 million to a low of $80 million at June 30,
2009 while in the short term, we maintain the same level of
borrowing availability (approximately $20 million) as a
result of recent normal pay down of the loan. In the longer term
this reduction in the line will limit our ability to purchase
portfolios and grow. In addition, individual portfolio purchases
in excess of $7.5 million will now require the consent of
the collateral agent of the Bank Group, Israel Discount Bank
(the Collateral Agent) and portfolio purchases in
excess of $15.0 million in the aggregate during any
120 day period will require the consent of the Bank Group
which may limit our ability to purchase portfolios and grow.
The
anticipated benefits of the Portfolio Purchase have not and may
not meet our expectations.
The Portfolio Purchase increased our assets acquired for
liquidation by more than 100%, so that our future operating
results became highly dependent on the returns realized from the
Portfolio Purchase. While we believed that we had the capability
to manage such a significantly increased asset base, no
assurances can be given that we will not experience operational
difficulties internally or with our third party collection
agencies and attorneys in managing an asset base of this size.
Further, the returns on the Portfolio Purchase have not proved
to be as favorable as our historic returns on smaller portfolio
purchases. The Portfolio Purchase has not met our initial
expectations, and the shortfall has been exacerbated by the
general economic down turn. We have suffered impairments in our
portfolios of $53.2 million in 2008, compared to
$9.1 million in 2007, and $2.2 million in 2006. Of
these overall impairment losses, $30.3 million was
attributed to the Portfolio Purchase in fiscal year 2008.
Further, in the third quarter ending June 30, 2008, we
discontinued using the interest method for income recognition
under AICPA Statement of Position
03-3,
Accounting for Loans or Certain Securities Acquired in a
Transfer
(SOP 03-3)
for the Portfolio Purchase. Accordingly, we will recognize
income only after we recover our carrying value, which, as of
September 30, 2008, was approximately $207 million. As
a result, our revenue in the future will be negatively impacted.
There can be no assurance as to when or if the carrying value
will be recovered.
We
incurred substantial debt in connection with the Portfolio
Purchase Agreement. The BMO Facility has been amended on a
number of occasions and has required additional credit support
from the Company.
To finance the Portfolio Purchase, we incurred substantial
indebtedness. We utilized substantially all of the availability
under our existing $175 million credit facility (including
a temporary $15 million increase in the line) to make
$75 million in deposit payments.
The remaining $225 million of the purchase price was paid
in full at the closing of the Portfolio Purchase on
March 5, 2007, by borrowing approximately $227 million
(inclusive of transaction costs) under a Receivables Financing
Agreement entered into by Palisades XVI, with BMO as the funding
source, consisting of debt with full recourse only to Palisades
XVI (the BMO Facility). The original term of the
Receivables Financing Agreement
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was three years. All assets of Palisades XVI, principally the
Portfolio Purchase, were pledged to secure such borrowing, and
all proceeds received as a result of the net collections from
this 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. As of
September 30, 2008 the balance due on the Receivables
Financing Agreement was $128.6 million.
As of September 30, 2007, Palisades XVI was required to
remit an additional $13.1 million to BMO in order to be in
compliance under the Receivables Financing Agreement. The
Company facilitated the ability of Palisades XVI to make this
payment by borrowing $13.1 million under its current
revolving credit facility and causing another of its
subsidiaries to purchase a portion of the Portfolio Purchase
from Palisades XVI at a price of $13.1 million prior to the
measurement date under the Receivables Financing Agreement.
The Receivables Financing Agreement required that the principal
amount thereunder be reduced under a schedule tied to projected
collections on the Portfolio Purchase. As we fell behind the
minimum required amortization schedule, principally as a result
of sales of accounts that were built into that schedule, but
that we did not effect, the Company and BMO entered into an
amendment dated December 27, 2007. The amendment
substantially eliminated any scheduled sales of accounts used in
the original projections and effectively extended the repayment
schedule from 25 months to 31 months.
On May 19, 2008, Palisades XVI entered into the third
amendment of its Receivables Financing Agreement. As the actual
collections on the Portfolio Purchase continued to be slower
than the minimum collections scheduled under the second
amendment, the lender and Palisades XVI agreed to an extension
to the amortization schedule determined in connection with the
second amendment. The lender also increased the interest rate
from approximately 170 basis points 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.
As a result of the actual collections being lower than the
minimum collection rates required under the Receivables
Financing Agreement for the months ended November 30, 2008,
December 31, 2008 and January 31, 2009, termination
events occurred under the Receivables Financing Agreement. In
order to resolve these issues, on February 20, 2009, we
executed the Fourth Amendment to the Receivables Financing
Agreement with BMO. The effect of this Fourth Amendment is,
among other things, to (i) lower the collection rate
minimum to $1 million per month 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 will remain 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 offered 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.
In addition, as further credit support under the Receivables
Financing Agreement, Asta Group Inc. (the Family
Entity) offered 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. 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, unless
the terms of the arrangement are not met, 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, 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
14
payment under such indemnity, until the termination of the
Companys senior lending facility or lenders under any
successor senior facility.
As a result of the Companys current capital structure and
their interrelated components, it may be difficult to obtain new
financing.
We are
highly leveraged and may incur further debt in the future which
could adversely affect our ability to obtain additional
funds.
To finance the Portfolio Purchase, we needed to incur
substantial indebtedness of over $300 million, inclusive of
utilizing substantially all of the availability (approximately
$25 million) under our existing $175 million credit
facility.
On December 4, 2007, we signed the Sixth Amendment to the
Fourth Amended and Restated Loan Agreement with the Bank Group
that temporarily increased the total revolving loan commitment
from $175 million to $185 million. The temporary
increase of $10 million, which was not used, was required
to be repaid by February 29, 2008. Our ability to grow
through this line was limited as we were approaching the upper
limit of our borrowing availability. Because we have made
limited purchases this year, we have paid down this line of
credit to $84.9 million at September 30, 2008.
On April 29, 2008, we 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
of the Board of the Company, Gary Stern, the 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 us to resolve certain
issues described below. Proceeds from the Seventh Amendment to
Fourth Amended and Restated Loan Agreement with the Bank Group
subordinated loan were used initially to further collateralize
the Companys $175 million revolving loan facility
with the Bank Group and was used to reduce the balance due on
that facility as of May 31, 2008. This facility is secured
by substantially all of the assets of the Company and its
subsidiaries (the Bank Group Collateral), other than
the assets of Palisades XVI, the entity that made the Portfolio
Purchase.
On February 20, 2009, the Company entered into the Seventh
Amendment to the Fourth Amended and Restated Loan Agreement with
the Bank Group (the Seventh Amendment) in order to,
among other items, reduce the level of the loan commitment,
redefine certain financial covenant ratios, revise the
requirement for an unqualified opinion on annual audited
financial statements, and permit certain encumbrances relating
to restructuring of the BMO Facility. Pursuant to the Seventh
Amendment, the loan commitment has been 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), earnings before interest taxes
depreciation and amortization (EBITDA) and fixed
charges attributable to Palisades XVI shall be excluded from the
computation of the fixed charge coverage ratio for Asta Funding
and its Subsidiaries. In addition, the fixed charge coverage has
been revised to exclude impairment expense of portfolios of
consumer receivables acquired for liquidation and increase the
ratio from a minimum of 1.50 to1.0 to a minimum of 1.75 to 1.0.
The permitted encumbrances under the Credit Agreement were
revised to include certain encumbrances incurred by the Company
in connection with certain guarantees and liens provided to BMO
Facility and the Family Entity. Further, individual portfolio
purchases in excess of $7.5 million will now require the
consent of the agent and portfolio purchases in excess of
$15.0 million in the aggregate during any 120 day
period will require the consent of the Bank Group.
The Company and the Bank Group are in the beginning phase of
discussions to renew the current Loan Agreement. If, however, a
renewal cannot be ultimately agreed to, the Company, at
maturity, will consider the sale of assets collateralized by
this loan agreement, to satisfy its obligations after
July 11, 2009.
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Business
issues with a significant third party servicer (the
Servicer) has 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, 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, lag the costs and fees which are 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
current economic environment, (b) the fact that Palisades
Collection believed that it 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 pays the Servicer a monthly fee of
$275,000 for twenty five months for consulting, asset
identification and skiptracing efforts in connection with the
Portfolio Purchase. 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 have, 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 will not make any further set-offs against
collections.
We are
highly leveraged which places constraints on our business and
increases our vulnerability to economic and business
downturns.
By incurring such substantial indebtedness, as described above,
and by incurring additional indebtedness from time to time in
connection with the purchase of consumer receivable portfolios
in the future, we are subject to the risks associated with
incurring such indebtedness, including:
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we are required to dedicate a significant portion of our cash
flows from operations to pay debt service costs and, as a
result, we will have less funds available for operations, future
acquisitions of consumer receivable portfolios, and other
purposes;
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it may be more difficult and expensive to obtain additional
funds through financings, if available at all;
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we are more vulnerable to economic downturns and fluctuations in
interest rates, less able to withstand competitive pressures and
less flexible in reacting to changes in our industry and general
economic conditions; and
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if we defaulted under our existing credit facilities or if our
creditors demanded payment of a portion or all of our
indebtedness, we may not have sufficient funds to make such
payments.
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We have pledged all of our portfolios of consumer receivables to
secure our borrowings and are subject to covenants that may
restrict our ability to operate our business.
As we borrow funds to purchase portfolios we may fully utilize
our availability under that facility and no future borrowings
are permitted under the new Receivables Financing Agreement.
This may place us at a competitive disadvantage as compared to
less leveraged companies.
Any indebtedness that we incur under our existing line of credit
is collateralized by all of our portfolios of consumer
receivables acquired for liquidation, except the Portfolio
Purchase only collateralizes the Receivables Financing
Agreement. If we default under the indebtedness secured by our
assets, including failure to comply with borrowing base
requirements, those assets would be available to the secured
creditor to satisfy our obligations to the secured creditor. In
addition, our credit facility imposes certain restrictive
covenants, including financial covenants and borrowing base
requirements. Failure to satisfy any of these covenants could
result in all or any of the following:
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acceleration of the payment of our outstanding indebtedness;
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cross defaults to and acceleration of the payment under other
financing arrangements;
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our inability to borrow additional amounts under our existing
financing arrangements; and
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our inability to secure financing on favorable terms or at all
from alternative sources.
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Any of these consequences could adversely affect our ability to
acquire consumer receivable portfolios and operate our business.
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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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 slow down in the economy will continue to
adversely affect 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
17
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 suffer 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 during fiscal year ended 2008 slowed
dramatically during the last three quarters. 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 2008 were only
$49.9 million, compared to $440.9 million in 2007 and
$200.2 million in 2006. Our lack of buying during 2008,
which has continued into the first quarter of fiscal year 2009,
will have a negative effect on our future revenues and operating
results. Furthermore, we cannot predict how our ability to
identify and purchase receivables and 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.
18
Any increase in the prices we are required to pay for such
portfolios in turn will reduce the profit, if any, 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 an impairment charge if we do not achieve the
collections forecasted by our model.
We use qualitative and quantitative analysis 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 or we may be required to record an impairment
charge, which would result in a reduction of our earnings. For
the year ended September 30, 2008, we recorded impairment
charges of $53.2 million. As relative collections compared
to our expectations on certain portfolios were deteriorating,
and this deterioration was confirmed by our third party
collection agencies and attorneys, we believed that impairment
charges were necessary. As the environment continues to be
challenging, data received in the 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
offsetting income, are required in the first quarter of fiscal
year 2009.
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 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 impairment charges
under
SOP 03-3.
Under the guidance of
SOP 03-3
(and the amended Practice Bulletin 6), static pools of
accounts are established. These pools are aggregated based on
certain common risk criteria. Each static pool is recorded at
cost and is accounted for as a single unit for the recognition
of income, principal payments and loss provision. Once a static
pool is established for a quarter, individual receivable
accounts are not added to the pool (unless replaced by the
seller) or removed from the pool (unless sold or returned to the
seller).
SOP 03-3
(and the amended Practice Bulletin 6) requires that
the excess of the contractual cash flows over expected cash
flows not be recognized as an adjustment of revenue or expense
or on the balance sheet. The SOP 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. Effective for fiscal years beginning
October 1, 2005 under
SOP 03-3
(and the amended Practice Bulletin 6), rather than lowering
the estimated IRR if the collection estimates are not received
or projected to be received, the carrying value of a pool would
be written down to maintain the then current IRR. Any reduction
in our earnings 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 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;
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subsequently deemed these obligations as uncollectible; and
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charged-off these obligations.
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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,
19
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 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 our 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 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 36% of our portfolios are serviced by two organizations, we
are dependent on them to perform.
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
outside the United States, 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.
20
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 collectibility of these consumer receivable
portfolios, we may pay too much for such portfolios and suffer
an impairment and our earnings could be negatively affected.
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.
We depend on loans from our credit facility and other external
sources, in part, to fund and expand our operations. Our ability
to grow our business is dependent on our access to additional
financing and capital resources. With the most recent amendment
to our credit facility, our line has been reduced from
$175 million to a graduated reduction to a level of
$80 million by June 30, 2009. The failure to obtain
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.
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In addition, our financing sources 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.
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The
loss of an asset type could impact our ability to acquire
receivable portfolios.
In the event one of the asset classes of receivables which we
purchase is no longer available to us, our purchases may decline
and our results might suffer.
We may
not be successful at acquiring receivables of new asset types or
in implementing a new pricing structure.
We may pursue the acquisition of receivable portfolios of asset
types in which we have little current experience. We may not be
successful in completing any acquisitions of receivables of
these asset types and our limited experience in these asset
types may impair our ability to collect on these receivables.
This may cause us to pay too much for these receivables, and
consequently, we may not generate a profit from these receivable
portfolio acquisitions.
21
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 and Executive Vice
President, Gary Stern, our President and Chief Executive
Officer, Mitchell Cohen, our Chief Financial Officer,
Cameron Williams, our Chief Operating 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. Mitchell Cohen
has announced that he will be leaving the Company to relocate
and take another position shortly after the filing of this
Form 10-K.
He will be replaced by Robert J. Michel, CPA, who has served in
senior financial positions at the Company for four years,
including the last year as Controller. Additionally, as of
January 2009, Arthur Stern has stepped down as an employee of
the Company, although he will continue to serve on the Board and
to consult with our executives. Significant losses of the
services of our executive officers or the need to replace our
officers with individuals who do not have experience 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.
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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.
We
have experienced rapid growth over the past several years, which
has placed significant demands on our administrative,
operational and financial resources and could result in an
increase in our expenses.
We plan to continue our growth at the appropriate time, which
could place additional demands on our resources and cause our
expenses to increase. Future internal growth will depend on a
number of factors, including:
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the effective and timely initiation and development of
relationships with sellers of consumer receivable portfolios and
strategic partners;
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our ability to maintain the collection of consumer receivables
efficiently; and
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the recruitment, motivation and retention of qualified personnel.
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Sustaining growth will also require the implementation of
enhancements to our operational and financial systems and will
require additional management, operational and financial
resources. There can be no assurance that we will be able to
manage our expanding operations effectively or that we will be
able to maintain or accelerate our growth or attract additional
management talent and any failure to do so could adversely
affect our ability to generate finance income and control our
expenses.
22
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 2008, and may be limited in 2009 and beyond. Net
collections represented by account sales for 2008 were only
$20.4 million, compared to $54.2 million and
$55.0 million in 2007 and 2006, respectively. Collections
represented by account sales as a percentage of total
collections were 9.8% in 2008, compared to 19.2% and 25.7% in
2007 and 2006. 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 media
and validation of accounts with respect to accounts in the
Portfolio Purchase.
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 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.
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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.
23
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.
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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.
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In addition, future acquisitions by us may result in:
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potentially dilutive issuances of our equity securities;
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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.
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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.
24
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 14,271,824 shares of common stock
issued and outstanding as of the date hereof. 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 are freely tradable. In
addition, options to purchase approximately
1,037,438 shares of our common stock were outstanding as of
September 30, 2008, of which 1,031,438 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,
2008 there were 1,267,334 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 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, 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 purchase, 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.
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Unresolved
Staff Comments.
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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 2008 fiscal year and that remain
unresolved.
Our executive and administrative offices are located in
Englewood Cliffs, New Jersey, where we lease approximately
15,000 square feet of general office space for
approximately $25,000 per month, plus utilities. The lease
expires on July 31, 2010.
In addition, a call center is located in Bethlehem,
Pennsylvania, where we lease approximately 9,070 square
feet of general office space for approximately $10,000 per
month. The lease expires on December 31, 2009. In February
2009, the Company announced the closing of its Pennsylvania
facility. See Note Q Subsequent Events
(unaudited). 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
February 28, 2011.
We believe that our existing facilities are adequate for our
current and anticipated needs.
|
|
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.
|
|
Item 4.
|
Submission
of Matters to a Vote of Security Holders.
|
None.
26
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 8, 2008 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 fourth below (such quotations reflect inter-dealer
prices without retail markup, markdown, or commission, and may
not necessarily represent actual transactions):
|
|
|
|
|
|
|
|
|
|
|
High
|
|
|
Low
|
|
|
October 1, 2006 to December 31, 2006
|
|
$
|
37.25
|
|
|
$
|
27.63
|
|
January 1, 2007 to March 31, 2007
|
|
|
43.89
|
|
|
|
29.03
|
|
April 1, 2007 to June 30, 2007
|
|
|
46.50
|
|
|
|
36.90
|
|
July 1, 2007 to September 30, 2007
|
|
|
43.80
|
|
|
|
31.85
|
|
|
|
|
|
|
|
|
|
|
October 1, 2007 to December 31, 2007
|
|
$
|
39.78
|
|
|
$
|
24.71
|
|
January 1, 2008 to March 31, 2008
|
|
|
26.29
|
|
|
|
12.92
|
|
April 1, 2008 to June 30, 2008
|
|
|
15.25
|
|
|
|
6.74
|
|
July 1, 2008 to September 30, 2008
|
|
|
10.01
|
|
|
|
6.76
|
|
Dividends
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. During the year ended September 30,
2007 the Company declared quarterly cash dividends aggregating
$2,221,000 ($0.04 per share, per quarter), of which $557,000 was
paid November 1, 2007. On December 17, 2008 the Board
of Directors declared a dividend of $0.02 per share for
stockholders of record on December 29, 2008, payable on
February 2, 2009. 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.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of
|
|
|
|
|
|
|
|
|
|
Securities
|
|
|
|
|
|
|
|
|
|
Remaining Available
|
|
|
|
Number of
|
|
|
|
|
|
for Future Issuance
|
|
|
|
Securities to be
|
|
|
|
|
|
Under Equity
|
|
|
|
Issued Upon
|
|
|
Weighted-Average
|
|
|
Compensation Plans
|
|
|
|
Exercise of
|
|
|
Exercise Price of
|
|
|
(Excluding
|
|
|
|
Outstanding
|
|
|
Outstanding
|
|
|
Securities
|
|
|
|
Options, Warrants
|
|
|
Options, Warrants
|
|
|
Reflected in Column
|
|
Equity Compensation Plan
|
|
and Rights
|
|
|
and Rights
|
|
|
(a))
|
|
Information: Plan Category
|
|
(a)
|
|
|
(b)
|
|
|
(c)
|
|
|
Equity compensation plans approved by security holders
|
|
|
1,037,438
|
|
|
$
|
11.69
|
|
|
|
1,267,334
|
|
Equity compensation plans not approved by security holders
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
1,037,438
|
|
|
$
|
11.69
|
|
|
|
1,267,334
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
27
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, 2003, 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, 2003
ASSUMES DIVIDEND REINVESTED
FISCAL YEAR ENDING SEPT. 30, 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2003
|
|
|
|
2004
|
|
|
|
2005
|
|
|
|
2006
|
|
|
|
2007
|
|
|
|
2008
|
|
ASTA FUNDING, INC.
|
|
|
|
100.00
|
|
|
|
|
125.67
|
|
|
|
|
236.92
|
|
|
|
|
324.42
|
|
|
|
|
333.05
|
|
|
|
|
61.80
|
|
PEER GROUP INDEX
|
|
|
|
100.00
|
|
|
|
|
112.80
|
|
|
|
|
223.39
|
|
|
|
|
168.29
|
|
|
|
|
147.05
|
|
|
|
|
82.13
|
|
NASDAQ MARKET INDEX
|
|
|
|
100.00
|
|
|
|
|
106.02
|
|
|
|
|
120.61
|
|
|
|
|
127.77
|
|
|
|
|
152.68
|
|
|
|
|
118.28
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
28
|
|
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, 2008. The selected financial data for the
five fiscal years ended September 30, 2008, 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. All share and per share amounts for fiscal year
2004 have been restated to give effect to a 2:1 stock split in
March 2004. Certain items in prior years information have
been reclassified to conform to the current years
presentation.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended September 30,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
|
(In thousands, except per share data)
|
|
|
Operations Statement Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Finance income
|
|
$
|
115,295
|
|
|
$
|
138,356
|
|
|
$
|
101,024
|
|
|
$
|
69,479
|
|
|
$
|
51,175
|
|
Other income
|
|
|
200
|
|
|
|
2,181
|
|
|
|
405
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue
|
|
|
115,495
|
|
|
|
140,537
|
|
|
|
101,429
|
|
|
|
69,479
|
|
|
|
51,175
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Costs and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
General and administrative
|
|
|
29,561
|
|
|
|
25,450
|
|
|
|
18,268
|
|
|
|
15,340
|
|
|
|
11,258
|
|
Interest expense
|
|
|
17,881
|
|
|
|
18,246
|
|
|
|
4,641
|
|
|
|
1,853
|
|
|
|
845
|
|
Impairments
|
|
|
53,160
|
|
|
|
9,097
|
|
|
|
2,245
|
|
|
|
|
|
|
|
|
|
Third party servicing
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,316
|
|
Provision for credit losses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
300
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total expenses
|
|
|
100,602
|
|
|
|
52,793
|
|
|
|
25,154
|
|
|
|
17,193
|
|
|
|
13,719
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before equity in earnings in venture and income taxes
|
|
|
14,893
|
|
|
|
87,744
|
|
|
|
76,275
|
|
|
|
52,286
|
|
|
|
37,456
|
|
Equity in earnings in venture
|
|
|
55
|
|
|
|
225
|
|
|
|
550
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes
|
|
|
14,948
|
|
|
|
87,969
|
|
|
|
76,825
|
|
|
|
52,286
|
|
|
|
37,456
|
|
Provisions for income taxes
|
|
|
6,119
|
|
|
|
35,703
|
|
|
|
31,060
|
|
|
|
21,290
|
|
|
|
15,219
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
8,829
|
|
|
$
|
52,266
|
|
|
$
|
45,765
|
|
|
$
|
30,996
|
|
|
$
|
22,237
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic net income per share
|
|
$
|
0.62
|
|
|
$
|
3.79
|
|
|
$
|
3.36
|
|
|
$
|
2.29
|
|
|
$
|
1.67
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted net income per share
|
|
$
|
0.61
|
|
|
$
|
3.56
|
|
|
$
|
3.13
|
|
|
$
|
2.15
|
|
|
$
|
1.57
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
|
(In millions)
|
|
|
Other Financial Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year ended September 30
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash collections
|
|
$
|
208.0
|
|
|
$
|
281.8
|
|
|
$
|
214.5
|
|
|
$
|
168.9
|
|
|
$
|
114.0
|
|
Portfolio purchases, at cost
|
|
|
49.9
|
|
|
|
440.9
|
|
|
|
200.2
|
|
|
|
126.0
|
|
|
|
103.7
|
|
Portfolio purchases, at face
|
|
|
1,456.1
|
|
|
|
10,891.9
|
|
|
|
5,194.0
|
|
|
|
3,445.2
|
|
|
|
2,833.6
|
|
Return on average assets(1)
|
|
|
1.7
|
%
|
|
|
12.0
|
%
|
|
|
19.6
|
%
|
|
|
18.3
|
%
|
|
|
16.3
|
%
|
Return on average stockholders equity(1)
|
|
|
3.6
|
%
|
|
|
24.8
|
%
|
|
|
27.8
|
%
|
|
|
23.9
|
%
|
|
|
21.5
|
%
|
Dividends declared per share(2)
|
|
$
|
0.16
|
|
|
$
|
0.16
|
|
|
$
|
0.56
|
|
|
$
|
0.14
|
|
|
$
|
0.12
|
|
At September 30,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
|
481.1
|
|
|
|
580.3
|
|
|
|
287.8
|
|
|
|
180.0
|
|
|
|
158.6
|
|
Total debt
|
|
|
221.7
|
|
|
|
326.5
|
|
|
|
82.8
|
|
|
|
29.3
|
|
|
|
39.4
|
|
Total stockholders equity
|
|
|
247.9
|
|
|
|
237.5
|
|
|
|
184.3
|
|
|
|
145.2
|
|
|
|
114.5
|
|
Inception to date September 30,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cumulative aggregate purchases, at face
|
|
|
31,049.9
|
|
|
|
29,593.8
|
|
|
|
18,701.9
|
|
|
|
13,507.9
|
|
|
|
10,062.7
|
|
|
|
|
(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. |
29
|
|
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,
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 acquisition costs and servicing expenses.
After purchasing a portfolio, we actively monitor its
performance and review and adjust our collection and servicing
strategies accordingly.
We purchase receivables from credit grantors and others through
privately negotiated direct sales and auctions in which sellers
of receivables seek bids from several pre-qualified debt
purchasers. We pursue new acquisitions of consumer receivable
portfolios on an ongoing basis through:
|
|
|
|
|
our relationships with industry participants, collection
agencies, investors and our financing sources;
|
|
|
|
brokers who specialize in the sale of consumer receivable
portfolios; and
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other sources.
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Critical
Accounting Policies
We account for our investments in consumer receivable
portfolios, using either:
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The interest method; or
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The cost recovery method.
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30
As we believe our extensive liquidating experience in certain
asset classes such as distressed credit card receivables,
telecom receivables, consumer loan receivables, retail
installment contracts, mixed consumer receivables, and auto
deficiency receivables has matured, we use the interest method
for accounting for substantially all asset acquisitions within
these classes of receivables 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.
Over time, as we continue to purchase asset classes to the point
where we believe we have developed the requisite expertise and
experience, we are more likely to utilize the interest method to
account for such purchases.
Prior to October 1, 2005, the Company accounted for its
investment in finance receivables using the interest method
under the guidance of Practice Bulletin 6. Each purchase
was treated as a separate portfolio of receivables and was
considered a separate financial investment, and accordingly we
did not aggregate such loans under Practice Bulletin 6
although the underlying collateral had similar characteristics.
As
SOP 03-3
was adopted by the Company for our fiscal year beginning
October 1, 2005, we began aggregating portfolios of
receivables acquired sharing specific common characteristics
which were acquired within a given quarter. We currently
consider for aggregation portfolios of accounts, purchased
within the same fiscal quarter, that generally have the
following characteristics:
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same issuer/originator
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same underlying credit quality
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similar geographic distribution of the accounts
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similar age of the receivable and
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same type of asset class (credit cards, telecommunications, etc.)
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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:
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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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31
We will obtain and utilize as appropriate input including, but
not limited to, monthly collection projections and liquidation
rates, from our third party collection agencies and attorneys,
as further evidentiary matter, to assist us in developing
collection strategies and in modeling the expected cash flows
for a given portfolio.
We acquire accounts that have experienced deterioration of
credit quality between origination and the date of our
acquisition of the accounts. The amount paid for a portfolio of
accounts reflects our determination that it is probable we
will be unable to collect all amounts due according to the
portfolio of accounts contractual terms. We consider the
expected payments and estimate the amount and timing of
undiscounted expected principal, interest and other cash flows
for each acquired portfolio coupled with expected cash flows
from accounts available for 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 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.
Typically, when purchasing portfolios for which we have the
experience detailed above, we have expectations of recovering
100% return of our invested capital back within an
18-28 month
time frame and expectations of collecting in the range of
130-150% of
our invested capital over 3-5 years. Historically, we have
generally been able to achieve these results and we continue to
use this as our basis for establishing the original cash flow
estimates for our portfolio purchases. We routinely monitor
these results against the actual cash flows and, in the event
the cash flows are below our expectations and we believe there
are no reasons relating to mere timing differences or
explainable delays (such as can occur particularly when the
court system is involved) for the reduced collections, an
impairment would be recorded as a provision for credit losses.
Conversely, in the event the cash flows are in excess of our
expectations and the reason is due to timing, we would defer the
excess collection as deferred revenue.
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.
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Years Ending September 30,
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2008
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2007
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2006
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|
Finance income
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99.8
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%
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|
98.4
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%
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|
99.6
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%
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Other income
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|
0.2
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%
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|
1.6
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%
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|
0.4
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%
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|
|
|
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|
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Total revenue
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100.0
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%
|
|
|
100.0
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%
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|
|
100.0
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%
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|
|
|
|
|
|
|
|
|
|
|
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|
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General and administrative expenses
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25.6
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%
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|
18.1
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%
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|
18.0
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%
|
|
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|
Interest expense
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|
15.5
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%
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|
13.0
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%
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|
4.6
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%
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|
Impairments
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|
46.0
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%
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|
6.5
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%
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|
2.2
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%
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|
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Income before equity in earnings in venture and income taxes
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|
12.9
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%
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|
62.4
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%
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|
75.2
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%
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|
Equity in earnings in venture
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0
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%
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|
|
0.2
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%
|
|
|
0.5
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%
|
|
|
|
|
|
|
|
|
|
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|
|
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|
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Income before income taxes
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|
|
12.9
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%
|
|
|
62.6
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%
|
|
|
75.7
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%
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|
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Provision for income taxes
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|
|
5.3
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%
|
|
|
25.4
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%
|
|
|
30.6
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%
|
|
|
|
|
|
|
|
|
|
|
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|
|
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Net income
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|
|
7.6
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%
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|
|
37.2
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%
|
|
|
45.1
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%
|
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|
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|
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32
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 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
33
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 twenty -five 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 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.
Year
Ended September 30, 2007 Compared to the Year Ended
September 30, 2006
Finance income. For the year ended
September 30, 2007, finance income increased
$37.3 million or 37.0% to $138.4 million from
$101.0 million for the year ended September 30, 2006.
The increase in finance income primarily resulted from an
increase in the average outstanding level of consumer receivable
accounts acquired for liquidation during the year ended
September 30, 2007, as compared to the prior year, coupled
with the effect of adjustments to accretable yields on certain
portfolios. The average level of consumer receivables acquired
for liquidation increased from $215.0 million for the year
ended September 30, 2006 to $401.4 million for the
same period in 2007. The increase in the average level of
consumer receivables acquired for liquidation is due primarily
to the Portfolio Purchase in March 2007. During the year ended
September 30, 2007, we acquired consumer receivable
portfolios at a cost of
34
$440.9 million as compared to $200.2 million during
the prior year. During the year ended September 30, 2007,
commissions and fees associated with gross collections from our
third party collection agencies and attorneys increased
$10.9 million, or 10.3%, to $116.6 million from
$105.7 million for year ended September 30, 2006. The
increase is indicative of a shift to the suit strategy
implemented by the Company and includes advances of court costs
by our legal network, and by us. While the dollar amount has
increased, the cost as a percentage of collections decreased
during the year ended 2007. The slight percentage decrease
reflects slightly lower rates charged by the servicers of the
large portfolio and other portfolios they service for us. Our
network of attorneys typically advances the cost of suing
debtors. These court costs are recovered by our attorneys from
collections received from debtor payments. During the fourth
quarter ended September 30, 2007, the Company accrued
$1.8 million for lawsuits commenced against debtors,
primarily for the Portfolio Purchase. We do anticipate expending
court costs during fiscal year 2008 on the Portfolio Purchase in
order to accelerate the suit process. As we continue to purchase
portfolios and utilize our third party collection agencies and
attorney networks, the contingency fees should stabilize in the
30%-33% range of gross collections based upon the current mix of
portfolios.
Adjustments to accretable yields on certain portfolios were made
based on available information, and based on improved
liquidation rates from our third party collection agencies and
attorneys. Management believes the anticipated collections on
these portfolios to be in excess of our original projections. As
we believe these improved liquidation rates will continue on
these portfolios, we adjusted our accretable yields by
$16.6 million and $44.5 million for the years ended
September 30, 2007 and 2006, respectively. Finance income
related to the accretable yield reclassifications during the
year ended September 30, 2007 was approximately
$11.1 million. While our expectations on our fiscal year
2007 purchases are lower than in the prior year, the portfolios
still fit our investment criteria. Income recognized from fully
amortized portfolios (zero based revenue) was $23.9 million
and $4.4 million for the years ended September 30,
2007 and 2006, 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 telecom portfolios
purchased from 2004 through 2005. Collections with regard to the
$6.9 billion face value portfolio purchased in the second
quarter of fiscal year 2007, (the Portfolio
Purchase) were $55.0 million through
September 30, 2007, which includes approximately
$5.5 million of accounts returned to the seller, and
finance income earned was $20.4 million.
Other income. 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, 2007, general and administrative
expenses increased $7.2 million or 39.3% to
$25.5 million from $18.3 million for the year ended
September 30, 2006, and represented 48.2% of total expenses
(excluding income taxes) 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, 2007, as compared to
the year ended September 30, 2006. The increase in
receivable servicing expenses resulted from the substantial
increase in our average number of accounts acquired for
liquidation, primarily due to the Portfolio Purchase in the
second quarter of 2007. A majority of the increased costs were
from collection expenses, 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. This fee will be charged from March
2007 and we believe this arrangement will enhance our collection
efforts. Additionally, the Company will pay this third party
servicer a monthly fee of $275,000 per month for twenty four
months for its consulting and skiptracing efforts in connection
with the Portfolio Purchase. This fee began in May 2007.
Interest expense. For the year ended
September 30, 2007, interest expense increased to
$18.2 million from $4.6 million during the year ended
September 30, 2006, and represented 34.6% of total expenses
(excluding income taxes) for the year ended September 30,
2007. The increase was due to an increase in average outstanding
borrowings under our line of credit and our new
$227 million Receivables Financing Agreement during the
year
35
ended September 30, 2007, as compared to the average
outstanding borrowings during the year ended September 30,
2006, coupled with higher interest rates during the year ended
September 30, 2007. The average interest rate (excluding
unused credit line fees) for the year ended September 30,
2007 was 7.34% as compared to 6.97% during the year ended
September 30, 2006. The average outstanding borrowings
increased from $63.2 million to $241.5 million for the
years ended September 30, 2006 and 2007, respectively. The
increase in borrowings was due to the increase in acquisitions
of consumer receivables acquired for liquidation during the year
ended September 30, 2007, as compared to the year ended
September 30, 2006.
Impairments. Impairments of $9.1 million
were recorded by the Company during the year ended
September 30, 2007 as compared to $2.2 million for the
year ended September 30, 2006, and represented 17.2% of
total expenses (excluding income taxes) for the year ended
September 30, 2007. Impairments were taken on eleven
portfolios during the year ended 2007 including nine portfolios
in the fourth quarter of 2007. As relative collections with
respect to our expectations on these portfolios were
deteriorating in the fourth quarter, 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 will collect on existing rental
contracts and the liquidation of inventory. The investment is
expected to return to the Company its normal expected investment
result over a two to three year period. The Companys share
of the income was $225,000 during the year ended
September 30, 2007. The Company has received approximately
$6.6 million in cash distributions from the inception of
the venture through September 30, 2007. Subsequent to
September 30, 2007, and through December 6, 2007 an
additional $350,000 has been received by the Company.
Net income. For the year ended
September 30, 2007, net income increased $6.5 million,
or 14.2% to $52.3 million from $45.8 million for the
year ended September 30, 2006. Net income per share for the
year ended September 30, 2007 increased $0.43 per diluted
share, or 13.7% to $3.56 per diluted share, from $3.13 per
diluted share for the year ended September 30, 2006.
Liquidity
and Capital Resources
Our primary source of cash from operations is collections on the
receivable portfolios we have acquired. Our primary uses of cash
include repayments under our line of credit, purchases of
consumer receivable portfolios, interest payments, costs
involved in the collections of consumer receivables, dividends
and taxes. Management believes the results of operations will
provide enough liquidity to meet our obligations of the business
and be in compliance with debt covenant. We rely significantly
upon our lenders to provide the funds necessary for the purchase
of consumer accounts receivable portfolios. As of
September 30, 2008, we had a $175 million line of
credit with the Bank Group for portfolio purchases (the
Loan Agreement). The Loan Agreement bears interest
at the lesser of LIBOR plus an applicable margin, or the prime
rate minus an applicable margin based on certain leverage
ratios. The Loan Agreement is collateralized by all portfolios
of consumer receivables acquired for liquidation and all other
assets of the Company excluding the assets of Palisades XVI, and
contains financial and other covenants (relative to tangible net
worth, interest coverage, and leverage ratio, as defined) that
must be maintained in order to borrow funds. As of
September 30, 2008, there was an $84.9 million
outstanding balance under this facility and availability of
$18.5 million. Our borrowing availability is based on a
formula calculated on the age of the receivables. As of
January 31, 2009, our debt was $58.7 million.
Availability has remained at approximately the same level as the
end of the fiscal year. The balance outstanding at
September 30, 2007 was $141.7 million. Although we are
within the borrowing limits of this facility, there are certain
limitations in place with regard to collateralization whereby
the Company may be limited in its ability to borrow funds to
purchase additional portfolios. On March 30, 2007 the
Company signed the Third Amendment to the Fourth Amended and
Restated Loan Agreement (the Third Credit Agreement)
with the Bank Group that amended certain terms of the Credit
Agreement, whereby the parties agreed to a Temporary Overadvance
of $16 million to be reduced to zero on or before
May 17, 2007. In addition, the parties agreed to an
increase in interest rate to LIBOR plus 275 basis points
for LIBOR loans, an increase from 175 basis points. The
rate is subject to adjustment each quarter upon delivery of
results that evidence a need for an adjustment. As of
May 7, 2007, the Temporary Overadvance was approximately
$12 million. On May 10, 2007, the Company signed the
Fourth Amendment to the Credit Agreement (the Fourth
36
Credit Agreement) whereby the parties agreed to revise
certain terms of the agreement which eliminated the Temporary
Overadvance provision. On June 26, 2007 the Company signed
the Fifth Amendment to the Fourth Amended and Restated Loan
Agreement (the Fifth Credit Agreement) with the Bank
Group that amended certain terms of the Credit Agreement whereby
the parties agreed to further amend the definition of the
Borrowing Base and increase the advance rates on portfolio
purchases allowing the Company more borrowing availability
within the $175 million upper limit. On December 4,
2007, the Company signed the Sixth Amendment to the Fourth
Amended and Restated Loan Agreement (the Sixth Credit
Agreement) with the Bank Group that temporarily increased
the total revolving loan commitment from $175 million to
$185 million. If utilized, the increase of $10 million
was required to be repaid by February 29, 2008. The
temporary increase was not used. During the fiscal year ended
September 30, 2008, the Company purchased portfolios for an
aggregate purchase price of $49.9 million, including an
$8.6 million investment in a portfolio domiciled in South
America.
The term of the Loan Agreement ends July 11, 2009. If the
loan agreement cannot be renewed at maturity, we believe we can
sell any of the assets secured by this line of credit, which is
all assets of the Company except those owned by Palisades XVI.
On February 20, 2009, the Company and the Bank Group
entered into the Seventh Amendment to Fourth Amended and
Restated loan Agreement. See below for more information.
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,
accounts as to which the sellers had 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 the Receivables Financing Agreement
entered into by Palisades XVI with BMO as the funding source,
and consists of debt with full recourse only to Palisades XVI,
bore an interest rate of approximately 170 basis points
over LIBOR at the inception of the agreement. 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. As of September 30, 2008, there was a
$128.6 million outstanding balance under this facility.
On December 27, 2007, Palisades XVI entered into the second
amendment of its Receivables Financing Agreement. As the actual
collections had been slower than the minimum collections
scheduled under the original agreement, which contemplated sales
of accounts which had not occurred, the lender and Palisades XVI
agreed to a lower amortization schedule which did not
contemplate the sales of accounts. The effect of this reduction
was to extend the payments of the loan from approximately
25 months to approximately 31 months from the date of
the second amendment. The lender 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.
On May 19, 2008, Palisades XVI entered into the third
amendment of its Receivables Financing Agreement. As the actual
collections on the Portfolio Purchase continued to be slower
than the minimum collections scheduled under the second
amendment, the lender and Palisades XVI agreed to an extended
amortization schedule. The effect of this reduction is to extend
the length of the original loan to three years, nine months, an
extension of nine months. The lender also increased the interest
rate to approximately 320 basis points (from 170 basis
points) over LIBOR, subject to automatic reduction in the future
if additional capital contributions are made by the parent of
Palisades XVI. In addition, on May 19, 2008, the Company
entered into an amended and restated Servicing Agreement among
Palisades XVI, Palisades Collection, L.L.C. and the BMO (the
Servicing Agreement). The amendment calls for
increased documentation, responsibilities and approvals of
subservicers engaged by Palisades Collection L.L.C.
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
$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
37
repayment in full of the Companys senior loan facility
with the Bank Group. Interest expense on this loan was $154,000
from the inception of the loan through September 30, 2008.
The subordinated loan was incurred by the Company to resolve
certain issues described below. 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 the Bank Group Collateral, other than the assets of
Palisades XVI, which was separately financed by the BMO Facility.
The Servicer that provides servicing for certain portfolios
within the Bank Group Collateral, was also engaged by Palisades
Collection, LLC, after the initial purchase of the Portfolio
Purchase in March 2007, 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, lag the costs and fees which are
expended to generate those collections, particularly when court
costs are advanced to pursue an aggressive litigation strategy,
as is 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
current economic environment, (b) the fact that Palisades
Collection believed that it 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 Portfolio Purchase and (c) Palisades
Collection believed it would be desirable to commence
litigations and incur court costs at a faster rate than
initially budgeted. 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 collections from the Portfolio Purchase in excess of
$500 million. Additionally, the Company pays the Servicer a
monthly fee of $275,000 for twenty-five months commencing May
2007 for its consulting, asset identification and skiptracing
efforts in connection with the Portfolio Purchase. 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 have to date
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
portfolio valuation.
Rather than waiting for collections from the Portfolio Purchase
to satisfy sums of approximately $8.2 million due it 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
due to the Bank Group 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 this time. The Company
believed that avoiding a dispute with the Servicer was in its
best interests. Although we have not experienced an increase in
collections as of September 30, 2008, the arrangement
should improve collections on the Portfolio Purchase. The
Company also believes that the terms of the subordinated loan
from the Family Entity are more favorable than could be obtained
from an unrelated third party institution.
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 will not make any further set-offs against
collections. The Company believes that any future sums due to
the Servicer will be available from the cash flow of the
Portfolio Purchase.
On February 20, 2009, the Company entered into the Seventh
Amendment to the Credit Agerement in order to, among other
items, reduce the level of the loan commitment, redefine certain
financial covenant ratios, revise the requirement for an
unqualified opinion on annual audited financial statements, and
permit certain encumbrances relating to restructuring of the BMO
Facility. Pursuant to the Seventh Amendment, the loan commitment
has been 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. In addition, the
38
Company shall pay interest to the Bank Group at the following
rates: the lesser of LIBOR plus an applicable margin or the
prime rate plus an applicable margin per annum or, at the
election of the Company, the applicable LIBOR Rate plus the
Applicable LIBOR Margin per annum, based on the aggregate
Advances outstanding from time to time; provided, however, at no
time shall the interest rate be less than five hundred
(500) basis points per annum. 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), EBITDA and fixed charges attributable to
Palisades XVI shall be excluded from the computation of the
fixed charge coverage ratio for Asta Funding and its
Subsidiaries. In addition, the fixed charge coverage has been
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. In
addition, the Seventh Amendment provides that a qualification on
the Companys audited financial statements, as
consolidated, resulting solely from the Bank Group maturity date
being scheduled to occur in less than one year shall not be
deemed to violate the Credit Agreement. The permitted
encumbrances under the Credit Agreement were revised to include
certain encumbrances incurred by the Company in connection with
certain guarantees and liens provided to BMO Facility and the
Family Entity. Further, individual portfolio purchases in excess
of $7.5 million will now require the consent of the agent
and portfolio purchases in excess of $15.0 million in the
aggregate during any 120 day period will require the
consent of the Bank Group. The Company and the Bank Group are in
the beginning phase of discussions to renew the current Loan
Agreement. If, however, a renewal cannot be ultimately agreed
to, the Company, at maturity, will consider the sale of assets
collateralized by this loan agreement, to satisfy its
obligations after July 11, 2009.
As a result of the actual collections being lower than the
minimum collection rates required under the Receivables
Financing Agreement for the months ended November 30, 2008,
December 31, 2008 and January 31, 2009, termination
events occurred under the Receivables Financing Agreement. In
order to resolve these issues, on February 20, 2009, we
executed the Fourth Amendment to the Receivables Financing
Agreement with BMO. The effect of this Fourth Amendment is,
among other things, to (i) lower the collection rate
minimum to $1 million per month 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 will remain 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 offered 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.
In addition, as further credit support under the Receivables
Financing Agreement, the Family Entity offered 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. 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, 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 lenders under any
successor senior facility. As a result of the Companys
current capital structure and their interrelated components, it
may be difficult to obtain new financing.
39
As of September 30, 2008, our cash decreased $902,000 to
$3.6 million from $4.5 million at September 30,
2007, including an $18,000 positive effect of foreign exchange
on cash. The decrease in cash during the fiscal year ended
September 30, 2008, was due to a decrease in net income for
the period, and a decrease in cash flows from financing
activities offset by an increase in cash flows from investing
activities due to the decrease in the purchases of accounts
acquired for liquidation.
Net cash provided by operating activities was $55.8 million
during the fiscal year ended September 30, 2008, compared
to net cash provided by operating activities of
$55.6 million for the fiscal year ended September 30,
2007. The decrease in net income for the year ended
September 30, 2008 is primarily attributable to an increase
in impairments, a non-cash expense. Net cash provided by
investing activities was $44.6 million during the fiscal
year ended September 30, 2008, as compared to net cash used
by investing activities of $291.2 million during the fiscal
year ended September 30, 2007. 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, 2008, reflecting
the effect of the acquisition of the Portfolio Purchase which
was consummated in the second quarter of 2007. Net cash used in
financing activities was $101.3 million during the fiscal
year ended September 30, 2008, as compared to cash provided
by financing activities of $232.3 million in the prior
period. The change in net cash used by financing activities was
primarily due to an increase in the pay down of the lines of
credit during the fiscal year ended September 30, 2008.
Our cash requirements have been and will continue to be
significant and we depend on external financing to acquire
consumer receivables. Significant requirements include
repayments under our line of credit, purchase of consumer
receivable portfolios, interest payments, costs involved in the
collections of consumer receivables, dividends and taxes.
Acquisitions are financed primarily through cash flows from
operating activities and with our credit facility, which matures
on July 11, 2009. At December 31, 2007, March 31,
2008, June 30, 2008 and September 30, 2008, due to the
borrowing base required by the Bank Group, the Company was
approaching the upper limit of its borrowing capacity. However,
with limited purchases of portfolios through the fiscal year
ended September 30, 2008, coupled with the
$8.2 million of subordinated debt incurred by the Company,
availability is approximately $18.5 million at
September 30, 2008. Our borrowing availability is based on
a formula calculated on the age of the receivables. As of
January 31, 2009 our debt on this facility was
$58.7 million. Availability has remained at the same level
as of the end of fiscal year 2008. As the collection environment
remains challenging, we may be required to seek additional
funding. Although availability has increased, the limited
availability coupled with slower collections has had and could
continue to have a negative impact on our ability to purchase
new portfolios for future growth.
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,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
|
(In millions)
|
|
|
Balance at beginning of period
|
|
$
|
545.6
|
|
|
$
|
257.3
|
|
|
$
|
172.7
|
|
|
$
|
146.1
|
|
|
$
|
105.6
|
|
Acquisitions of finance receivables, net of buybacks
|
|
|
49.9
|
|
|
|
440.9
|
|
|
|
200.2
|
|
|
|
126.0
|
|
|
|
103.7
|
|
Cash collections from debtors applied to principal(1)(2)
|
|
|
(81.7
|
)
|
|
|
(114.4
|
)
|
|
|
(90.4
|
)
|
|
|
(59.6
|
)
|
|
|
(37.6
|
)
|
Cash collections represented by account sales applied to
principal(1)
|
|
|
(11.0
|
)
|
|
|
(29.1
|
)
|
|
|
(23.0
|
)
|
|
|
(39.8
|
)
|
|
|
(25.3
|
)
|
Impairments/Portfolio write down
|
|
|
(53.2
|
)
|
|
|
(9.1
|
)
|
|
|
(2.2
|
)
|
|
|
|
|
|
|
(0.3
|
)
|
Effect of foreign exchange
|
|
|
(0.6
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at end of period
|
|
$
|
449.0
|
|
|
$
|
545.6
|
|
|
$
|
257.3
|
|
|
$
|
172.7
|
|
|
$
|
146.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
40
|
|
|
(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. |
Supplementary Information on Consumer Receivables Portfolios:
Portfolio
Purchases
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended September 30,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
(In millions)
|
|
|
Aggregate Purchase Price
|
|
$
|
49.9
|
|
|
$
|
440.9
|
|
|
$
|
200.2
|
|
Aggregate Portfolio Face Amount
|
|
|
1,605.1
|
|
|
|
10,891.9
|
|
|
|
5,194.0
|
|
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 over 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, 2008
|
|
|
September 30, 2007
|
|
|
September 30, 2006
|
|
|
|
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)
|
|
$
|
405.9
|
|
|
$
|
789.5
|
|
|
$
|
101.1
|
|
|
$
|
1,045.4
|
|
|
$
|
50.6
|
|
|
$
|
655.0
|
|
Cumulative Aggregate Managed Portfolios (at period end)
|
|
|
12,053.4
|
|
|
|
18,980.0
|
|
|
|
3,961.5
|
|
|
|
25,464.7
|
|
|
|
2,205.0
|
|
|
|
16,332.8
|
|
Receivable Carrying Value (at period end)
|
|
|
245.5
|
|
|
|
203.5
|
|
|
|
32.0
|
|
|
|
513.6
|
|
|
|
1.1
|
|
|
|
256.3
|
|
Finance Income Earned (for the respective period)
|
|
|
1.2
|
|
|
|
114.0
|
|
|
|
2.2
|
|
|
|
136.2
|
|
|
|
3.4
|
|
|
|
97.6
|
|
Total Cash Flows (for the respective period)
|
|
|
24.9
|
|
|
|
183.0
|
|
|
|
21.2
|
|
|
|
260.6
|
|
|
|
3.7
|
|
|
|
210.8
|
|
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
|
|
|
2008
|
|
$
|
20,395,000
|
|
|
$
|
9,361,000
|
|
2007
|
|
|
54,193,000
|
|
|
|
25,164,000
|
|
2006
|
|
|
55,035,000
|
|
|
|
32,041,000
|
|
41
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, 2008.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
|
$
|
105,302,000
|
|
|
|
|
|
|
|
105,302,000
|
|
|
|
162
|
%
|
2002
|
|
|
36,557,000
|
|
|
|
47,826,000
|
|
|
|
|
|
|
|
47,826,000
|
|
|
|
131
|
%
|
2003
|
|
|
115,626,000
|
|
|
|
203,875,000
|
|
|
|
2,692,000
|
|
|
|
206,567,000
|
|
|
|
179
|
%
|
2004
|
|
|
103,743,000
|
|
|
|
171,857,000
|
|
|
|
3,635,000
|
|
|
|
175,492,000
|
|
|
|
169
|
%
|
2005
|
|
|
126,023,000
|
|
|
|
185,217,000
|
|
|
|
37,717,000
|
|
|
|
222,934,000
|
|
|
|
177
|
%
|
2006
|
|
|
200,237,000
|
|
|
|
203,438,000
|
|
|
|
103,504,000
|
|
|
|
306,942,000
|
|
|
|
153
|
%
|
2007(6)
|
|
|
109,235,000
|
|
|
|
59,176,000
|
|
|
|
90,521,000
|
|
|
|
149,697,000
|
|
|
|
137
|
%
|
2008
|
|
|
26,626,000
|
|
|
|
12,449,000
|
|
|
|
23,535,000
|
|
|
|
35,984,000
|
|
|
|
135
|
%
|
|
|
|
(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) |
|
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 Activity
|
|
|
|
|
|
|
35,266,000
|
|
|
|
(34,983,000
|
)
|
|
|
283,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As reported 2008
|
|
$
|
109,235,000
|
|
|
$
|
59,176,000
|
|
|
$
|
90,521,000
|
|
|
$
|
149,697,000
|
|
|
|
137
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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, 2008, we recognized
finance income of $1.2 million under the cost recovery
method because we collected $1.2 million in excess of our
purchase price on certain of these portfolios. In addition, we
earned $114.1 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, 2008, we purchased portfolios with an
aggregate purchase price of $49.9 million with a face value
(gross contracted amount) of $1.6 billion.
42
New
Accounting Pronouncements
In December 2007, the Securities and Exchange Commission
(SEC) issued Staff Accounting Bulletin 110
(SAB 110). This staff accounting bulletin
(SAB) expresses the views of the staff regarding the
use of a simplified method, as discussed in
SAB No. 107 (SAB 107), in developing
an estimate of expected term of plain vanilla share
options in accordance with Financial Accounting Standards Board
(FASB) Statement No. 123 (revised 2004),
Share-Based Payment . In particular, the Staff indicated
in SAB 107 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 SAB 107 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
SAB 107 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
SAB does not have a material impact on the Company.
In February 2007, the FASB issued Statement 159, The Fair
Value Option for Financial Assets and Financial Liabilities
(SFAS No. 159). The objective of
SFAS No. 159 is to provide companies with the option
to recognize most financial assets and liabilities and certain
other items at fair value. Statement 159 will allow companies
the opportunity to mitigate earnings volatility caused by
measuring related assets and liabilities differently without
having to apply complex hedge accounting. Unrealized gains and
losses on items for which the fair value option has been elected
should be reported in earnings. The fair value option election
is applied on an instrument by instrument basis (with some
exceptions), is irrevocable, and is applied to an entire
instrument. The election may be made as of the date of initial
adoption for existing eligible items. Subsequent to initial
adoption, the Company may elect the fair value option at initial
recognition of eligible items or on entering into an eligible
firm commitment. The Company can only elect the fair value
option after initial recognition in limited circumstances.
SFAS No. 159 requires similar assets and liabilities
for which the Company has elected the fair value option to be
displayed on the face of the balance sheet either
(a) together with financial instruments measured using
other measurement attributes with parenthetical disclosure of
the amount measured at fair value or (b) in separate line
items. In addition, SFAS No. 159 requires additional
disclosures to allow financial statement users to compare
similar assets and liabilities measured differently either
within the financial statements of the Company or between
financial statements of different companies.
SFAS No. 159 is required to be adopted by the Company
on October 1, 2008. Early adoption is permitted; however,
the Company did not adopt SFAS No. 159 prior to the
required adoption date of October 1, 2008. The Company is
required to adopt SFAS No. 159 concurrent with
SFAS No. 157, Fair Value Measurements. The
remeasurement to fair-value will be reported as a
cumulative-effect adjustment in the opening balance of retained
earnings. Additionally, any changes in fair value due to the
concurrent adoption of SFAS No. 157 will be included
in the cumulative-effect adjustment if the fair value option is
also elected for that item.
The Company opted to not apply the fair value option to any of
its financial assets or liabilities. If the Company elects to
recognize items at fair value as a result of Statement 159, this
could result in increased earnings volatility.
In September 2006 the FASB issued SFAS No. 157,
Fair Value Measurements. The Statement is effective for
all financial statements issued for fiscal years beginning after
November 15, 2007, or October 1, 2008 as to the
Company. The Statement defines fair value as the price that
would be received to sell an asset or paid to transfer a
liability in an orderly transaction between market participants
at the measurement date, establishes a framework for measuring
fair value, and expands disclosures about fair value
measurements. Adoption of SFAS No. 157 is not expected
to have a material impact on the Companys results of
operations or financial condition.
Inflation
We believe that inflation has not had a material impact on our
results of operations for the years ended September 30,
2008, 2007 and 2006.
43
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, 2008, our $175 million
credit facility, all of which is variable rate debt, had an
outstanding balance of $84.9 million and our Receivables
Financing Agreement, all of which is variable rate debt, had an
outstanding balance of $128.6 million. A 25 basis-point
increase in interest rates would have increased our annual
interest expense by approximately $700,000 based on the average
debt obligation outstanding during the fiscal year. We do not
currently invest in derivative financial or commodity
instruments.
44
|
|
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
|
|
Report of Independent Registered Public Accounting Firms
|
|
|
F-2
|
|
Consolidated Balance Sheets September 30, 2008
and 2007
|
|
|
F-4
|
|
Consolidated Statements of Operations Years ended
September 30, 2008, 2007 and 2006
|
|
|
F-5
|
|
Consolidated Statements of Shareholders Equity
Years ended September 30, 2008, 2007 and 2006
|
|
|
F-6
|
|
Consolidated Statements of Cash Flows Years ended
September 30, 2008, 2007 and 2006
|
|
|
F-7
|
|
Notes to Consolidated Financial Statements
|
|
|
F-8
|
|
|
|
Item 9.
|
Changes
in and Disagreements With Accountants on Accounting and
Financial Disclosure.
|
During the fiscal year ended September 30, 2008, the
Company changed Independent Registered Public Accounting Firms.
Eisner LLP was replaced by Grant Thornton LLP.
|
|
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, 2008. 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 timely providing them
with 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, 2008, 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:
(iii) 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.
45
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, 2008 and their
report dated February 20, 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. There were no
significant deficiencies or material weaknesses, and therefore
no corrective actions were taken.
46
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, 2008, 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, 2008, 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 sheet of Asta Funding, Inc. and
subsidiaries as of September 30, 2008 and the related
consolidated statements of operations, stockholders equity
and comprehensive income, and cash flows for the year ended
September 30, 2008, and our report dated February 20,
2009, expressed an unqualified opinion.
New York, New York
February 20, 2009
47
|
|
Item 9B.
|
Other
Information.
|
None.
PART III
|
|
Item 10.
|
Directors,
Executive Officers and Corporate Governance.
|
Directors
and Executive Officers
The following table sets forth certain information with respect
to our directors and executive officers, as of
September 30, 2008:
|
|
|
|
|
|
|
Name
|
|
Age
|
|
Position
|
|
Arthur Stern
|
|
|
88
|
|
|
Director, Chairman of the Board and Executive Vice President
|
Gary Stern
|
|
|
56
|
|
|
Director, President and Chief Executive Officer
|
Herman Badillo(1)(3)
|
|
|
79
|
|
|
Director
|
Edward Celano(1)
|
|
|
70
|
|
|
Director
|
David Slackman(2)(4)
|
|
|
61
|
|
|
Director
|
Harvey Leibowitz(1)(2)
|
|
|
74
|
|
|
Director
|
Alan Rivera(2)(3)(5)
|
|
|
46
|
|
|
Director
|
Louis A. Piccolo(3)
|
|
|
56
|
|
|
Director
|
Cameron E. Williams
|
|
|
61
|
|
|
Chief Operating Officer
|
Mary Curtin
|
|
|
47
|
|
|
Senior Vice President
|
Mitchell Cohen(6)
|
|
|
53
|
|
|
Chief Financial Officer
|
Robert J. Michel(7)
|
|
|
51
|
|
|
Controller
|
|
|
|
(1) |
|
Member of Audit Committee |
|
(2) |
|
Member of Compensation Committee |
|
(3) |
|
Member of Governance Committee |
|
(4) |
|
Lead Independent Director |
|
(5) |
|
Resigned from the Board of Directors on December 17, 2008 |
|
(6) |
|
Resigned as Chief Financial Officer effective after the filing
of Report on
Form 10-K
for 2008 |
|
(7) |
|
Assumes the role of Chief Financial Officer effective after the
filing of Report on
Form 10-K
for 2008 |
Board
of Directors
Arthur Stern has been a director and has served as
Chairman Emeritus since January 2009. Mr. Stern served as
Chairman of the Board of Directors and Executive Vice President
of the Company since the Companys inception in July 1994
through January 2009. Since 1963, Mr. Arthur Stern has been
President of Asta Group, Incorporated, a consumer finance
company (Group). In such capacities, he has obtained
substantial experience in distressed consumer credit analysis
and receivables collections.
Gary Stern has been a director and the President and
Chief Executive Officer of the Company since the Companys
inception in July 1994. Mr. Gary Stern has been Vice
President, Secretary, Treasurer and a director of the Group
since 1980 and held other positions with Group prior thereto. In
such capacities, he has obtained substantial experience in
distressed consumer credit analysis and receivables collections.
Herman Badillo has been a director of the Company since
September 1995. He has been Of Counsel at Sullivan Papain Block
McGrath & Cannavo P.C. since 2005. Prior to joining
his current firm Mr. Badillo was a founding member of
Fischbein, Badillo, Wagner & Harding, a law firm
located in New York City, for more than six years. He
48
has formerly served as Special Counsel to the Mayor of New York
City for Fiscal Oversight of Education and as a member of the
Mayors Advisory Committee on the Judiciary.
Mr. Badillo served as a United States Congressman from 1971
to 1978 and Deputy Mayor of New York City from 1978 to 1979.
Edward Celano has been a director of the Company since
September 1995. Mr. Celano has served as a consultant to
Walters and Samuels, Incorporated since 2003. He was formally a
consultant with M.R. Weiser & Co., from 2001 to 2003
and an Executive Vice President of Atlantic Bank from May 1996
to February 2001. Prior to May 1996, Mr. Celano was a
Senior Vice President of NatWest Bank, now Bank of America,
after having held different positions at the bank for over
20 years.
David Slackman has been a director of the Company since
May 2002. Mr. Slackman has served as Managing Director at
HT Capital Advisors LLC from August 2008 to present.
Mr. Slackman served as President, Manhattan
Market New York of Commerce Bank from March 2001
through June 2008. Prior to March 2001, Mr. Slackman was an
Executive Vice President of Atlantic Bank of New York from 1994
to 2001 and a Senior Vice President of the Dime Savings Bank
from 1986 to 1994.
Harvey Leibowitz has been a director of the Company since
March 2000. Mr. Leibowitz has served as a Senior Vice
President of Sterling National Bank since June 1994. Prior to
June 1994, Mr. Leibowitz was employed as a Senior Vice
President and Vice President of several banks and financial
institutions since 1963.
Alan Rivera had been a director of the Company since
February 2004. Mr. Rivera has served as Chief Financial
Officer and General Counsel of Millbrook Capital Management Inc.
since September 1996. Prior to September 1996, Mr. Rivera
was an Executive Vice President of Finance and Administration
and General Counsel of the New York City Economic Development
Corporation from 1994 to 1996. Mr. Rivera resigned from the
Board of Directors effective December 17, 2008.
Louis A. Piccolo has been a director of the Company since
June 2004. Mr. Piccolo has served as President of A.L.
Piccolo & Co., Inc since 1988. A.L.
Piccolo & Co. is a business consulting firm
specializing in management and financial consulting. Prior to
1988, Mr. Piccolo was an Executive Vice President and Chief
Financial Officer of Alfred Dunhill of London, Inc from 1983 to
1988, and held the same positions at Debenhams PLC, from
1981 to 1983. From 1977 to 1981, Mr. Piccolo was a senior
accountant at KPMG Peat Marwick.
Arthur Stern is the father of Gary Stern. There are no other
family relationships among directors or officers of the Company.
Corporate
Officers
Cameron Williams has been Chief Operating Officer of the
Company since January 2008. Mr. Williams was Vice
President Strategic Initiatives from August 2007
through January 2008. Prior to joining the Company
Mr. Williams was President and Chief Executive Officer of
Popular Financial Holdings from 1998 through 2007.
Mary Curtin has been Senior Vice President of the Company
since January 2008. Ms. Curtin was Vice
President Operations from March 2001 through January
2008.
Mitchell Cohen has been Chief Financial Officer of the
Company since October 2004. Prior to joining the Company
Mr. Cohen was a financial consultant to various private and
public companies. Mr. Cohen has resigned from the Company.
Mr. Cohens resignation takes affect after the filing
of this
Form 10-K.
Mr. Cohen will continue to consult with the Company to
insure a smooth transition, and will receive a consulting fee of
$5,000 per month for six months. The Board has also agreed to
accelerate the vesting of 5,000 shares of restricted stock
of the Company which otherwise would have vested on
March 19, 2009.
Robert J. Michel has been Controller of the Company since
January 2008. Prior to taking the Controller position
Mr. Michel was the Director of Financial Reporting and
Compliance at the Company since December 2004. Prior to joining
the Company, Mr. Michel was a partner at Laurence
Rothblatt & Company LLP, a CPA firm located in Great
Neck, New York. Mr. Michel will assume the role of Chief
Financial officer upon the departure of Mr. Cohen.
49
Committees
of the Board of Directors
Compensation Committee. The Compensation
Committee is comprised of David Slackman (Chairman), Harvey
Leibowitz and Alan Rivera. The Compensation Committee is
empowered by the Board of Directors to review the executive
compensation of the Companys officers and directors and to
recommend any changes in compensation to the full Board of
Directors. Effective December 17, 2008, Mr. Rivera
resigned from the Board of Directors of the Company. A
replacement for Mr. Rivera will be determined as soon as
possible.
Audit Committee. The Audit Committee is
comprised of Harvey Leibowitz (Chairman), David Slackman and
Edward Celano. The Audit Committee is empowered by the Board of
Directors to, among other things: serve as an independent and
objective party to monitor the Companys financial
reporting process, internal control system and disclosure
control system; review and appraise the audit efforts of the
Companys independent accountants; assume direct
responsibility for the appointment, compensation, retention and
oversight of the work of the outside auditors and for the
resolution of disputes between the outside auditors and the
Companys management regarding financial reporting issues;
and provide an open avenue of communication among the
independent accountants, financial and senior management, and
the Board of Directors.
Audit Committee Financial Expert. The Board of
Directors has determined that Harvey Leibowitz is an audit
committee financial expert as such term is defined by the
Securities and Exchange Commission (SEC). As noted
above, Mr. Leibowitz as well as the other
members of the Audit Committee has been determined
to be independent within the meaning of SEC and
NASDAQ regulations.
Governance Committee. The Nominating and
Corporate Governance Committee (the Governance
Committee) is comprised of Herman Badillo (Chairman),
Louis Piccolo, and Alan Rivera. The Governance Committee is
empowered by the Board of Directors to, among other things,
recommend to the Board of Directors qualified individuals to
serve on the Companys Board of Directors and to identify
the manner in which the Nominating Committee evaluates nominees
recommended for the Board. Effective December 17, 2008,
Mr. Rivera resigned form the Board of Directors. A
replacement for Mr. Rivera will be determined as soon as
possible.
Code
of Ethics
We have adopted a Code of Ethics that applies to the
Companys chief executive officer, chief financial officer,
chief accounting officer, controller, and treasurer. A copy of
the Code of Ethics for Senior Financial Officers is attached
hereto as Exhibit 14.1 to this
Form 10-K.
|
|
Item 11.
|
Executive
Compensation.
|
Compensation
Discussion and Analysis
Introduction
This discussion presents the principles underlying our executive
officer compensation program. Our goal in this discussion is to
provide the reasons why we award compensation as we do and to
place in perspective the data presented in the tables that
follow this discussion. The focus is primarily on our
executives compensation for the fiscal year ended
September 30, 2008, but some historical and forward-looking
information is also provided to put the fiscal 2008 information
in context. The information we present relates to Gary Stern,
our President and Chief Executive Officer, Mitchell Cohen, our
Chief Financial Officer, Arthur Stern, our Chairman of the Board
and Executive Vice President, Cameron Williams, our Chief
Operating Officer and Mary Curtin, our Senior Vice President,
collectively referred to Named Executive Officers.
50
Compensation
Philosophy and Objectives
We seek to have compensation programs for our Named Executive
Officers that achieve a variety of goals, including to:
o attract
and retain talented and experienced executives in the
competitive debt buying industry;
|
|
|
|
o
|
motivate and fairly reward executives whose knowledge, skills
and performance are critical to our success; and
|
o provide
fair and competitive compensation.
In determining executive compensation for 2008, the Compensation
Committee continued its process, initiated the prior year, to
focus more on a pay-for-performance objective, to attempt to
better link pay and performance, and to assure that its
compensation practices are competitive with those in the
industry, both for executive officers and for directors. To that
end, the Compensation Committee again engaged a professional
compensation consultant, Compensation Resources, Inc.
(CRI), to provide benchmarking data, make
suggestions, and assist it in the compensation process. CRI had
assisted the Compensation Committee in determining appropriate
bonuses and equity grants made in January 2008. CRI this year
assisted the Committee in developing a more detailed performance
plan for the Named Executive Officers for fiscal 2008, including
the development of appropriate performance metrics for variable
compensation determinations. Again this year, the chief
executive officer assisted the Compensation Committee in
determining compensation for the other Named Executive Officers.
Prior to this effort, the Compensation Committee determined
bonuses and equity grants on a discretionary basis. In
exercising discretion for fiscal 2007 performance, however, the
Compensation Committee noted the results of the CRI study of
comparable peer companies and sought to begin to make sure that
its officers and directors had competitive compensation
consistent with the Companys financial performance in
fiscal 2007.
In fiscal 2008, the Compensation Committee continued the process
of making sure that compensation rewarded good performance, that
a greater percentage of overall compensation be tied to
performance, and that there be a reasonable mix of cash and
equity compensation. The Company also sought compensation levels
that would put its executives within the range of compensation
for its five peer group companies in its industry (Asset
Acceptance Capital Corp., Encore Capital Group, Inc., NewStar
Financial, Inc., Portfolio Recovery Associates, Inc., and Primus
Guaranty, Ltd.), and for comparable companies available to our
consultant from general compensation surveys. We selected our
peer group companies with the concurrence of CRI. Our
Compensation Committee realizes that benchmarking compensation
may not always be appropriate, but believes that engaging in a
comparative analysis of our compensation practices is useful.
As part of the process for fiscal 2008, the Compensation
Committee first had a series of meetings and discussions with
CRI to determine the appropriate performance measures on which
to base its plan for variable compensation. The Compensation
Committee desired a program that had internal and external
components and that was also flexible, so that targets could be
adjusted and weighted differently over time as the needs of the
business changed. There was also a desire to take into account
windfalls or unfair detriments that objective factors might
produce at times, and to retain some measure of discretion for a
portion of bonuses to be awarded each year. The Compensation
Committee determined with the help of CRI to utilize the
following performance measures for determining variable
compensation: (a) performance of the Companys stock
vs. NASDAQ, (b) performance vs. the identified peer
companies, (c) net income, (d) return on equity and
(e) net collections as a percent of total investment.
Different weights were assigned to each component, as well as a
10% discretionary reserve. The Compensation Committee also
believed there should be a circuit breaker, i.e., a
minimum level of performance that must be achieved in order to
qualify for payment of any variable compensation award. The
Compensation Committee reviewed its tentative conclusions with
respect to the plan with the full Board to get the input of the
entire Board about the process and the results of the
Compensation Committees deliberations, and the Board
approved the plan subject to development of threshold, target
and maximum bonus level performance goals.
During the first quarter of calendar 2008 when the plan was
being developed with CRI, there had already been a significant
decline in the market price of the Companys common stock.
As a result of that decline, the Compensation Committee believed
that the circuit breaker feature of any plan would be such that
there would be no
51
bonus and equity grants made for fiscal 2008. Accordingly, there
was no need to develop specific performance parameters for 2008.
Performance measures for fiscal year 2009 have not been
finalized.
Elements
of Executive Officer Compensation
Overview. Total compensation paid to our
executive officers is divided among three principal components.
Salary is generally fixed and does not vary based on our
financial and other performance. Some components, such as
bonuses, stock options and restricted stock award grants, are
variable and dependent upon our performance. Historically,
judgments about these elements have been made subjectively. The
value of certain of these components, such as stock options and
restricted stock, is dependent upon our future stock price. At
the recommendation of CRI, we have begun to move away from stock
options towards restricted stock as the preferred form of equity
compensation, as we believe it will result in less dilution and
more straightforward accounting treatment.
We view the three components of our executive officer
compensation as related but distinct. Our Compensation
Committee, with the assistance of our compensation consultant,
reviews total compensation to see if it falls in line with peer
company and overall market data, and has made a
comparison of the relationship of variable compensation, as well
as base, to total compensation. Last year, the Compensation
Committee determined that our compensation program was generally
competitive on base salary, but had been below industry norms in
variable compensation (bonuses), and, therefore, total
compensation. The Compensation Committee attempted to align
executive compensation more directly with company performance by
increasing the potential for executives to earn variable
compensation, while placing less emphasis on growth in base
salaries.
Base Salary. We pay our executives a base
salary, which we review and determine annually. We believe that
a competitive base salary is a necessary element of any
compensation program. Base salaries are established, in part,
based on the individual position, responsibility, experience,
skills, historic salary levels and the executives
performance during the prior year. We are also seeking over a
period of years to align base compensation levels comparable to
our competitors and other companies similarly situated. We do
not view base salaries as primarily serving our objective of
paying for performance.
For fiscal 2008, we held the salary level of Gary Stern and
Arthur Stern constant, as we believed their overall compensation
should have a greater reliance on performance. Mitchell Cohen
was given a small raise in part for the same reason. Raises for
Mary Curtin and Cameron Williams were more substantial to
reflect their respective promotions and increased
responsibilities as executive officers of the Company. We
believe that our salary levels are generally sufficient to
retain our existing executive officers and to hire new executive
officers when and as required.
For fiscal 2009, we held the salary levels of the Named
Executive Officers constant as the performance of the Company
did not reach goals set for the year. Mr. Williams is
contractually entitled to a salary increase of at least
$50,000 June 1, 2009. We believe that our salary
levels are generally sufficient to retain our existing executive
officers and to hire new executive officers when and as required.
Cash Incentive Bonuses. Consistent with our
emphasis on pay-for-performance incentive compensation programs,
our executives are eligible to receive annual cash incentive
bonuses primarily based upon their performance during the year.
As indicated above, based on the circuit breaker aspect of our
2008 plan, no cash bonuses were awarded for fiscal 2008. In the
past, bonus levels have been subjective, impacted in part by
comparisons to overall cash compensation paid by our competitors
as well as a broader range of comparable companies.
Under the terms of each of our executive employment agreements,
when we adopt more objective performance bonus standards,
subsequent restatement to the financial statements due to
malfeasance or negligence of the executive will subject the
executive to return of excess bonuses awarded if the executive
would have received a reduced bonus amount based on the restated
financial statements.
Equity Compensation. We believe that
restricted stock awards are an important long-term incentive for
our executive officers and employees and align officer interest
with that of our stockholders. We recognize that Gary Stern and
Arthur Stern already have a very significant equity stake in the
Company, so that for them equity grants do not serve to further
align their interests with that of our stockholders but do
assure that their overall compensation is
52
fair from the point of view of comparable overall compensation
with our competitors. We review our equity compensation plan
annually. For fiscal 2008 performance, no awards were made.
We do not have any plan or obligation that requires us to grant
equity compensation to any executive officer on specified dates.
In recent years, we have developed the practice of approving
bonuses and equity grants at about the time our audit of the
prior fiscal year is completed to reward executives for work in
the completed year. The authority to make equity grants to our
executive officers rests with our Compensation Committee;
however, our practice has been to make those grants subject to
ratification and approval by the full Board of Directors. The
Committee does consider the input of our chief executive officer
in setting the compensation of our other executive officers,
including in the determination of appropriate levels of equity
grants.
Severance and
Change-in-Control
Benefits. Historically, we have provided our
executive officers with employment contracts. In January 2007,
we entered into three-year contracts with Gary Stern and
Mitchell Cohen, and a one-year contract with Arthur Stern. In
January 2008, we entered into a new one-year contract with
Arthur Stern, which has now expired, and a two-year employment
agreement with Cameron Williams. All contacts are similarly
structured. These contracts set minimum base salary levels, but
leave discretion as to bonuses and equity grants, with the
agreement for Mr. Williams setting an expected level of the
maximum cash bonus and stock grant. The contracts also provide
for certain severance benefits in the event of termination, as
well as a provision providing for a higher payment in the event
of termination or retirement following a
change-in-control
as defined in the employment agreements. Those severance and
other benefits are described under Employment
Agreements below, and certain estimates of these severance
and change of control benefits are provided in a chart below.
When the existing employment agreements were negotiated, we did
not review wealth and retirement accumulation as a result of
employment with us in fixing severance benefits or any other
compensation issues, and we only focused on fair compensation
for the year in question. We provided this benefit to retain our
executives and believed these provisions were consistent with
the provisions of similar benefits by competitive companies.
Share
Retention
We do not have a share retention policy or guideline for
executive officers and directors encouraging or requiring them
to retain a certain amount of equity in the Company. However,
the most recent grant of restricted stock to directors in 2008
provided that, of the 5,000 restricted shares granted to each
director, 1,000 shares would not vest until death,
disability, retirement from the board or reaching the age of 80.
Regulatory
Considerations
We account for the equity compensation expense for our employees
under the rules of Statement of Financial Accounting Standards
No. 123R, Share-Based Payment
(SFAS 123R), which requires us to estimate and
record an expense for each award of equity compensation over the
service period of the award. Accounting rules also require us to
record cash compensation as an expense at the time the
obligation is accrued.
THE
COMPENSATION COMMITTEE REPORT
ON EXECUTIVE COMPENSATION
The Compensation Committee has reviewed and discussed the
following Compensation Discussion and Analysis with management.
Based on this review and these discussions, the Compensation
Committee recommended to the Board of Directors that the
following Compensation Discussion and Analysis be included in
this Proxy Statement.
Submitted by the Compensation Committee:
David Slackman, Chairman
Harvey Leibowitz
53
SUMMARY
OF COMPENSATION
The following table contains information about compensation
received by the named executive officers for the fiscal year
ended September 30, 2008.
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|
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|
|
|
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Summary Compensation Table
|
|
|
|
|
|
|
|
|
|
|
All Other
|
|
|
|
|
Fiscal
|
|
Salary
|
|
Bonus
|
|
Stock Awards
|
|
Compensation
|
|
Total
|
Name and Principal Position
|
|
Year
|
|
($)
|
|
($)(1)
|
|
($)(3)
|
|
($)(8)
|
|
($)
|
|
Arthur Stern
|
|
|
2008
|
|
|
|
360,385
|
|
|
|
0
|
|
|
|
167,055
|
|
|
|
466
|
|
|
|
527,906
|
|
Executive Vice President
|
|
|
2007
|
|
|
|
370,962
|
|
|
|
0
|
(2)
|
|
|
220,340
|
|
|
|
455
|
|
|
|
591,757
|
|
Chairman of the Board(4)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gary Stern
|
|
|
2008
|
|
|
|
577,500
|
|
|
|
0
|
|
|
|
236,406
|
|
|
|
33,695
|
|
|
|
847,601
|
|
President & CEO
|
|
|
2007
|
|
|
|
570,096
|
|
|
|
0
|
(2)
|
|
|
220,340
|
|
|
|
21,124
|
|
|
|
811,560
|
|
Mitchell Cohen
|
|
|
2008
|
|
|
|
277,308
|
|
|
|
0
|
|
|
|
143,956
|
|
|
|
28,662
|
|
|
|
449,926
|
|
Chief Financial Officer(5)
|
|
|
2007
|
|
|
|
260,577
|
|
|
|
75,000
|
|
|
|
220,340
|
|
|
|
19,570
|
|
|
|
575,487
|
|
Cameron Williams
|
|
|
2008
|
|
|
|
286,538
|
|
|
|
0
|
|
|
|
0
|
|
|
|
17,145
|
|
|
|
303,683
|
|
Chief Operating Officer(6)
|
|
|
2007
|
|
|
|
16,346
|
|
|
|
0
|
|
|
|
0
|
|
|
|
1,200
|
|
|
|
17,546
|
|
Mary Curtin
|
|
|
2008
|
|
|
|
225,577
|
|
|
|
0
|
|
|
|
61,854
|
|
|
|
8,782
|
|
|
|
296,213
|
|
Senior Vice President(7)
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|
|
2007
|
|
|
|
190,577
|
|
|
|
70,000
|
|
|
|
73,456
|
|
|
|
8,400
|
|
|
|
342,433
|
|
|
|
|
(1) |
|
No bonuses were awarded to Named Executive Officers for fiscal
year 2008. Bonuses reflected in the table above were awarded in
January 2008 for fiscal year ended September 30, 2007. Also
included above is a $50,000 bonus paid to Mr. Cohen during
fiscal year 2007 for his work in connection with the
$300 million portfolio purchase in March 2007. Bonuses paid
in fiscal year 2007 for services provided in fiscal year 2006,
as reported in our 2007 proxy statement, were as follows: |
|
|
|
|
|
Arthur Stern
|
|
$
|
50,000
|
|
Gary Stern
|
|
$
|
100,000
|
|
Mitchell Cohen
|
|
$
|
50,000
|
|
|
|
|
(2) |
|
Bonuses awarded to Gary Stern and Arthur Stern of $250,000 and
$50,000, respectively, were not paid at the election of the two
Named Executive Officers. |
|
(3) |
|
The amounts shown in the Stock Awards column represent the
approximate amount we recognized for financial statement
reporting purposes in fiscal year 2008 for the fair value of
equity awards granted to the named executive officers in fiscal
year 2008 and prior years, in accordance with
SFAS No. 123(R), excluding the impact of estimated
forfeitures related to service-based vesting conditions, as
required by SEC rules. As a result, these amounts do not reflect
the amount of compensation actually received by the named
executive officer during the fiscal year. For a description of
the assumptions used in calculating the fair value of equity
awards under SFAS No. 123(R), see Note A [10] and
Note K of our financial statements in our
Form 10-K
for the year ended September 30, 2008. |
|
(4) |
|
Arthur Stern as of January 2009 has stepped down as an employee
of the Company, although he will continue to serve on the Board,
with the title Chairman Emeritus and to consult for a
combined annual directors and consulting fee of $300,000.
Mr. Stern founded the Company and has served as Executive
Vice President and Chairman of Board of the Company since 1995. |
|
(5) |
|
Mitchell Cohen has resigned from the Company.
Mr. Cohens resignation takes affect after the filing
of this Form
10-K.
Mr. Cohen will continue to consult with the Company to
insure a smooth transition, and will receive a consulting fee of
$5,000 per month for six months. The Board has also agreed to
accelerate the vesting of 5,000 shares of restricted stock
of the Company which otherwise would have vested on
March 19, 2009. |
|
(6) |
|
Mr. Williams was appointed to the Chief Operating Officer
position on January 8, 2008. Salary for fiscal year 2007
represents the period August 27, 2007 (commencement of
employment with the Company) through September 30, 2007.
Salary earned for period was in the capacity of Vice
President Strategic Initiatives. |
|
(7) |
|
Ms. Curtin was appointed to the Senior Vice President
position on January 8, 2008. Salary, Bonus and Stock Awards
were in a non-executive capacity for 2007. |
54
|
|
|
(8) |
|
These amounts consist of: |
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|
|
matching Company contributions under our 401(k) plan, and |
|
|
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life premiums as follows: |
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|
|
|
|
|
|
|
|
|
|
|
|
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|
401(k)
|
|
Life
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|
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Health
|
|
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|
Company
|
|
Insurance
|
|
Automobile
|
|
Insurance
|
|
|
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|
|
Match
|
|
Premium
|
|
Allowance
|
|
Premiums
|
|
Total
|
Name
|
|
Year
|
|
($)
|
|
($)
|
|
($)
|
|
($)
|
|
($)
|
|
Arthur Stern
|
|
|
2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
466
|
|
|
|
466
|
|
|
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
455
|
|
|
|
455
|
|
Gary Stern
|
|
|
2008
|
|
|
|
5,661
|
|
|
|
24,982
|
|
|
|
|
|
|
|
3,052
|
|
|
|
33,695
|
|
|
|
|
2007
|
|
|
|
10,000
|
|
|
|
8,224
|
|
|
|
|
|
|
|
2,900
|
|
|
|
21,124
|
|
Mitchell Cohen
|
|
|
2008
|
|
|
|
6,933
|
|
|
|
19,000
|
|
|
|
|
|
|
|
2,729
|
|
|
|
28,662
|
|
|
|
|
2007
|
|
|
|
7,500
|
|
|
|
9,475
|
|
|
|
|
|
|
|
2,595
|
|
|
|
19,570
|
|
Cameron Williams
|
|
|
2008
|
|
|
|
5,250
|
|
|
|
|
|
|
|
9,600
|
|
|
|
2,296
|
|
|
|
17,146
|
|
|
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
1,200
|
|
|
|
0
|
|
|
|
1,200
|
|
Mary Curtin
|
|
|
2008
|
|
|
|
7,750
|
|
|
|
|
|
|
|
|
|
|
|
1,032
|
|
|
|
8,782
|
|
|
|
|
2007
|
|
|
|
7,500
|
|
|
|
|
|
|
|
|
|
|
|
900
|
|
|
|
8,400
|
|
GRANTS
OF STOCK OPTION AND STOCK AWARDS
The following table provides certain information with respect to
restricted stock awards granted to our Named Executive Officers
during fiscal year 2008. None of the Named Executive Officers
received stock options during fiscal year 2008.
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|
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|
|
|
|
|
|
|
|
|
|
|
All Other
|
|
|
|
|
|
|
|
|
|
Stock Awards:
|
|
|
|
|
|
|
|
|
|
Number of
|
|
|
|
|
|
|
|
|
|
Shares of
|
|
|
|
|
|
|
|
|
|
Stocks or
|
|
|
Grant Date Fair
|
|
|
|
|
|
|
Units
|
|
|
Value of Stock and
|
|
Name
|
|
Grant Date
|
|
|
(#)(1)
|
|
|
Option Awards ($)
|
|
|
Arthur Stern
|
|
|
1/17/08
|
|
|
|
5,000
|
|
|
$
|
98,650
|
|
Gary Stern
|
|
|
1/17/08
|
|
|
|
20,000
|
|
|
$
|
394,600
|
|
Mitchell Cohen
|
|
|
|
|
|
|
|
|
|
|
|
|
Cameron Williams
|
|
|
|
|
|
|
|
|
|
|
|
|
Mary Curtin
|
|
|
1/17/08
|
|
|
|
3,000
|
|
|
$
|
59,190
|
|
|
|
|
(1) |
|
These restricted stock awards vest in three equal annual
installments beginning 10/1/08. |
55
OUTSTANDING
EQUITY AWARDS AT FISCAL YEAR-END
The following table provides information on exercisable and
unexercisable options and unvested stock awards held by the
Named Executive Officers on September 30, 2008.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Option Awards
|
|
|
Stock Awards
|
|
|
|
Number of
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Underlying
|
|
|
|
|
|
|
|
|
|
|
|
Market Value of
|
|
|
|
Unexercised
|
|
|
Option
|
|
|
|
|
|
Number of Shares or
|
|
|
Shares or Units of
|
|
|
|
Options
|
|
|
Exercise
|
|
|
Option
|
|
|
Units of Stock That
|
|
|
Stock That Have Not
|
|
|
|
(#)
|
|
|
Price
|
|
|
Expiration
|
|
|
Have Not Vested
|
|
|
Vested
|
|
Name
|
|
Exercisable
|
|
|
($)
|
|
|
Date
|
|
|
(#)
|
|
|
($)(1)
|
|
|
Arthur Stern
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,000
|
|
|
|
35,050
|
|
|
|
|
6,000
|
|
|
|
5.96
|
|
|
|
11/14/11
|
|
|
|
3,334
|
|
|
|
23,371
|
|
|
|
|
30,000
|
|
|
|
4.725
|
|
|
|
11/1/12
|
|
|
|
|
|
|
|
|
|
|
|
|
70,000
|
|
|
|
14.87
|
|
|
|
11/3/13
|
|
|
|
|
|
|
|
|
|
|
|
|
80,000
|
|
|
|
18.22
|
|
|
|
10/28/14
|
|
|
|
|
|
|
|
|
|
Gary Stern
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,000
|
|
|
|
35,050
|
|
|
|
|
300,000
|
|
|
|
2.625
|
|
|
|
9/18/10
|
|
|
|
13,334
|
|
|
|
93,471
|
|
|
|
|
6,000
|
|
|
|
5.96
|
|
|
|
11/14/11
|
|
|
|
|
|
|
|
|
|
|
|
|
60,000
|
|
|
|
4.725
|
|
|
|
11/1/12
|
|
|
|
|
|
|
|
|
|
|
|
|
70,000
|
|
|
|
14.87
|
|
|
|
11/3/13
|
|
|
|
|
|
|
|
|
|
|
|
|
150,000
|
|
|
|
18.22
|
|
|
|
10/28/14
|
|
|
|
|
|
|
|
|
|
Mitchell Cohen
|
|
|
20,000
|
|
|
|
16.57
|
|
|
|
9/9/14
|
|
|
|
5,000
|
|
|
|
35,050
|
|
Cameron Williams
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mary Curtin
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,668
|
|
|
|
11,693
|
|
|
|
|
3,334
|
|
|
|
18.76
|
|
|
|
11/16/14
|
|
|
|
2,000
|
|
|
|
14,020
|
|
|
|
|
(1) |
|
Based on $7.01 per share, the closing price of the common stock
as reported by NASDAQ on September 30, 2008. |
OPTION
EXERCISES AND VESTING OF RESTRICTED STOCK AWARDS
The following table provides information on option exercises and
vesting of stock awards of Named Executive Officers during the
fiscal year ended September 30, 2008
OPTION
EXERCISES AND STOCK VESTED
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock Awards
|
|
|
|
Option Awards
|
|
|
Number of
|
|
|
|
|
|
|
Number of
|
|
|
Value
|
|
|
Shares
|
|
|
Value
|
|
|
|
Shares
|
|
|
Realized
|
|
|
Acquired
|
|
|
Realized
|
|
|
|
Acquired
|
|
|
on
|
|
|
on
|
|
|
on
|
|
|
|
on Exercise
|
|
|
Exercise
|
|
|
Vesting
|
|
|
Vesting
|
|
Name
|
|
(#)
|
|
|
($)(1)
|
|
|
(#)
|
|
|
($)(2)
|
|
|
Arthur Stern
|
|
|
100,000
|
|
|
|
1,237,500
|
|
|
|
6,666
|
|
|
|
79,479
|
|
Gary Stern
|
|
|
200,000
|
|
|
|
4,407,500
|
|
|
|
11,666
|
|
|
|
114,679
|
|
Mitchell Cohen
|
|
|
0
|
|
|
|
0
|
|
|
|
5,000
|
|
|
|
67,750
|
|
Cameron Williams
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
Mary Curtin
|
|
|
0
|
|
|
|
0
|
|
|
|
2,667
|
|
|
|
29,623
|
|
|
|
|
(1) |
|
Represents the difference between the market price of the
underlying securities at exercise and the exercise price of the
option. |
|
(2) |
|
Represents the number of shares vested multiplied by the market
value of the shares on the vesting date. |
56
Employment
Agreements
In January 2007, the Company entered into employment agreements
(each an Employment Agreement) with each of Gary
Stern, the Companys President and Chief Executive Officer,
Arthur Stern, the Companys Executive Vice President and
Mitchell Cohen, the Companys Chief Financial Officer
(each, an Executive). Each of Gary Sterns
and Mitchell Cohens Employment Agreements expire on
December 31, 2009, provided, however, that the parties are
required to provide ninety days prior written notice if
they do not intend to seek an extension or renewal of the
Employment Agreement. Arthur Sterns agreement had a one
year term. If each Employment Agreement is not renewed by the
expiration dates each executive will continue in their
respective roles as officers of the Company at the discretion of
the Board of Directors. In January 2008, the Company entered
into a similar employment agreement with Cameron Williams, and a
one -year agreement with Arthur Stern. Mr. Cohen has
resigned from the Company. Mr. Cohens resignation
takes affect after the filing of this
Form 10-K.
Mr. Cohen will continue to consult with the Company to
insure a smooth transition, and will receive a consulting fee of
$5,000 per month for six months. The Board has also agreed to
accelerate the vesting of 5,000 shares of restricted stock
of the Company which otherwise would have vested on
March 19, 2009.
As of January 2009 Arthur Stern has stepped down as an employee
of the Company, although he will continue to serve on the Board,
with the title Chairman Emeritus and to consult for a
combined annual directors and consulting fee of $300,000.
Mr. Stern founded the Company and has served as Executive
Vice President and Chairman of Board of the Company since 1995.
The following is a summary of the employment agreements in place
between the Company and its Named Executive Officers. The actual
agreements are on file with the Securities and Exchange
Commission.
The employment agreements each provide for a base salary, which
may be increased by the Board in its sole discretion. The base
contractual salary for each Executive Officer under their
employment agreements is as follows:
|
|
|
|
|
Gary Stern
|
|
$
|
577,500
|
|
Arthur Stern
|
|
$
|
355,000
|
|
Cameron Williams
|
|
$
|
300,000
|
|
Mitchell Cohen
|
|
$
|
280,000
|
|
The executive is eligible to receive bonuses and equity awards
in amounts to be determined by the Compensation Committee of the
Board of Directors. Each executive may also participate in all
of the Companys employee benefit plans and programs
generally available to other employees. Mr. Williams
contract provides that he will be entitled to a cash bonus of up
to $175,000 and a restricted stock grant of up to $175,000 if
all performance goals for 2008 are satisfied at the highest
level set by the Board. Such goals were not satisfied therefore
the bonus and the stock grant were not awarded.
If the executives employment is terminated Without
Cause (as such term is defined in the Employment
Agreement), subject to the execution of a general release
agreement by the executive in favor of the Company, the Company
must continue to pay the executive his base salary for
12 months following the effective date of termination and
maintain insurance benefits for that period. (Insurance benefits
for Mr. Williams must be maintained for 18 months.)
Except as provided above, the executive will not be eligible to
participate in the Companys benefit plans and programs as
of the last day of his employment by the Company; provided,
however that he will not be precluded from exercising his
rights, if any, under COBRA or with respect to grants made under
the Companys 1995 Stock Option Plan, the 2002 Plan, or the
Equity Compensation Plan, pursuant to the terms of such plans
and the applicable grant agreements thereunder. The Company must
provide the executive either ninety days prior written
notice of such termination or an amount equal to ninety
days of his base salary in lieu of such notice of
termination. Each party is required to provide ninety days
prior written notice if it does not intend to seek an extension
or renewal of the Employment Agreement. The term
Cause under the contract includes:
(i) the employees failure or refusal to perform his
duties and responsibilities under the contract or the
Companys policies and procedures (subject to certain cure
rights); (ii) the employees conviction of a felony or
of any crime involving moral turpitude; (iii) the
commission by the employee of a fraudulent, illegal or dishonest
act in connection with the performance of his duties; or
(iv) the commission by the employee of any willful
misconduct or gross negligence which reasonably could be
expected to have the effect of injuring the Company.
57
If the executives employment with the Company is
terminated for any reason within 180 days following a
change of control of the Company (as such term is
defined in the 2002 Plan), the Company is required to pay:
|
|
|
|
|
a lump sum amount in cash equal to two (2) times the sum of
the executives base salary in effect on the date of
termination and the highest annual bonus earned by the executive
during his employment with the Company, and
|
|
|
|
the executive will continue to receive the benefits and
perquisites as provided in the employment agreement for two
years from the date of termination.
|
The executive is also subject to standard non-compete and
confidentiality provisions contained in the employment agreement.
The following table describes the potential payments and
benefits upon employment termination for each of out Named
Executive Officers pursuant to applicable law an the terms of
their employment agreements with us, as if their employment had
terminated on September 30, 2008 (the last day of the
fiscal year) under the various scenarios described in the column
headings as explained in the footnotes below: No severance is
paid on a termination with Cause, if the executive terminates
employment, if employment terminates at the end of the
employment period, or if termination is because of death. Upon
disability the individual will be paid his base salary for the
remainder of the agreement from the date of disability.
|
|
|
|
|
|
|
|
|
|
|
Termination
|
|
|
Change-in
|
|
|
|
without Cause
|
|
|
control Trigger
|
|
Name(1)
|
|
(2)
|
|
|
Event(3)
|
|
|
Arthur Stern(4)
|
|
$
|
355,000
|
|
|
$
|
810,000
|
|
Gary Stern
|
|
$
|
577,500
|
|
|
$
|
1,355,000
|
|
Mitchell Cohen(5)
|
|
$
|
280,000
|
|
|
$
|
710,000
|
|
Cameron Williams
|
|
$
|
450,000
|
|
|
$
|
600,000
|
|
|
|
|
(1) |
|
Ms. Curtin does not have an employment agreement. |
|
(2) |
|
Executive is paid for a period of twelve months following
termination date. Chart does not include the value of
12 months continued health, medical and other benefits nor
the effects of the requirement to give 90 days notice of
termination or pay for such 90 day period. |
|
(3) |
|
Executive is paid a lump sum amount in cash equal to two
(2) times the sum of the executives base salary in
effect on the date of termination and the highest annual bonus
earned by the executive during his employment with the Company.
Chart does not include the value of 24 months continued
health, medical and other benefits. |
|
(4) |
|
Arthur Sterns contract expired 12/31/08. Additionally,
Mr. Stern as of January 2009 has stepped down as an
employee of the Company, although he will continue to serve on
the Board, with the title Chairman Emeritus and to consult
for a combined annual directors and consulting fee of $300,000. |
|
(5) |
|
Mitchell Cohen, will be leaving the Company to relocate and take
another position. A date has not yet been set for his departure
as Mr. Cohen intends to stay with the Company until the
latest banking arrangements are finalized and the Company has
filed its
Form 10-K
for fiscal 2008. Mr. Cohen will continue to consult with
the Company to insure a smooth transition, and will receive a
consulting fee of $5,000 per month for six months. The Board has
also agreed to accelerate the vesting of 5,000 shares of
restricted stock of the Company which otherwise would have
vested on March 19, 2009. |
DIRECTOR
COMPENSATION
Mr. Arthur Stern and Mr. Gary Stern received no
compensation for serving as directors, except that they, like
all directors, are eligible to be reimbursed for any expenses
incurred in attending Board and committee meetings. For fiscal
year 2008, the total annual fees that a director, other than
Mr. Arthur Stern and Mr. Gary Stern, could have
received for serving on our Board of Directors and committees of
the Board of Directors were set as follow:
|
|
|
|
|
An annual fee of $35,000 per year for each Independent Director,
|
|
|
|
An annual fee for the Lead Independent Director of $25,000 per
year,
|
58
|
|
|
|
|
An annual fee of $20,000 for Chairman of Audit Committee,
|
|
|
|
An annual fee of $10,000 for Audit Committee Member,
|
|
|
|
An annual fee of $15,000 for Chairman of the Compensation
Committee,
|
|
|
|
An annual fee of $7,500 for Compensation Committee Member,
|
|
|
|
An annual fee of $15,000 for Chairman of the Governance
Committee, and
|
|
|
|
An annual fee of $7,500 for Governance Committee Member.
|
The following table summarizes compensation paid to outside
directors in fiscal 2008:
DIRECTOR
COMPENSATION
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fees
|
|
|
|
|
|
|
|
|
|
|
|
|
Earned or
|
|
|
|
|
|
|
|
|
|
|
|
|
Paid in
|
|
|
Stock
|
|
|
Option
|
|
|
|
|
|
|
Cash
|
|
|
Awards
|
|
|
Awards
|
|
|
Total
|
|
Name
|
|
($)
|
|
|
($)(1)
|
|
|
($)(1)
|
|
|
($)
|
|
|
Herman Badillo
|
|
|
40,000
|
|
|
|
51,883
|
|
|
|
15,346
|
|
|
|
107,229
|
(2)
|
Edward Celano
|
|
|
48,750
|
|
|
|
51,883
|
|
|
|
15,346
|
|
|
|
115,979
|
(3)
|
Harvey Leibowitz
|
|
|
56,250
|
|
|
|
51,883
|
|
|
|
15,346
|
|
|
|
123,479
|
(4)
|
David Slackman
|
|
|
57,500
|
|
|
|
51,883
|
|
|
|
15,346
|
|
|
|
124,729
|
(5)
|
Alan Rivera
|
|
|
45,000
|
|
|
|
51,883
|
|
|
|
15,346
|
|
|
|
112,229
|
(6)
|
Louis Piccolo
|
|
|
39,375
|
|
|
|
51,502
|
|
|
|
15,346
|
|
|
|
106,604
|
(7)
|
|
|
|
(1) |
|
The amounts shown in the Stock Awards and Option Awards columns
represents the approximate amount we recognized for financial
statement reporting purposes in fiscal year 2008 for the fair
value of equity awards granted to the outside directors in
fiscal year 2008 and prior years, in accordance with
SFAS No. 123(R), excluding the impact of estimated
forfeitures related to service-based vesting conditions, as
required by SEC rules. As a result, these amounts do not reflect
the amount of compensation actually received by the named
executive officer during the fiscal year. For a description of
the assumptions used in calculating the fair value of equity
awards under SFAS No. 123(R), see Note A [10] and
Note K of our financial statements in our
Form 10-K
for the year ended September 30, 2008. |
|
(2) |
|
Includes $3,750 paid in cash for Chairmanship of the Governance
Committee and $2,500 for being a member of the Audit Committee.
Both positions have been held since June 3, 2008. |
|
(3) |
|
Includes $7,500 paid in cash for Chairmanship of the Nominating
Committee (predecessor committee to Governance Committee)
Mr. Celano was chairman until June 3, 2008. Also
includes $7,500 for being a member of the Audit Committee. |
|
(4) |
|
Includes $16,875 paid in cash for Chairmanship of the Audit
Committee and $5,625 for being a member of the Compensation
Committee. |
|
(5) |
|
Includes $12,500 paid in cash for Chairmanship of the
Compensation Committee, $5,000 in cash for being a member of the
Audit Committee (member through June 3, 2008) and
$6,250 for being Lead Independent Director, a position
Mr. Slackman has held since June 3, 2008. |
|
(6) |
|
Includes $11,250 paid in cash for being a member of the
Compensation Committee and the Governance Committee.
Mr. Rivera resigned his position on the Board of Directors
effective December 17, 2008. |
|
(7) |
|
Includes $5,625 paid in cash for being a member of the
Governance Committee. |
59
STOCK
OPTION AND STOCK AWARD 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 Company has
1,000,000 shares of Common Stock authorized under the
Equity Compensation Plan, with 874,000 available for awards as
of December 31, 2008. The following description does not
purport to be complete and is qualified in its entirety by
reference to the full text of the Equity Compensation Plan,
which is included as an exhibit to the Companys reports
filed with the SEC.
The general purpose of the Equity Compensation Plan is to
provide an incentive to our employees, directors and
consultants, including executive officers, employees and
consultants of any subsidiaries, by enabling them to share in
the future growth of our business. The Board of Directors
believes that the granting of stock options and other equity
awards promotes continuity of management and increases incentive
and personal interest in the welfare of the Company by those who
are primarily responsible for shaping and carrying out our long
range plans and securing our growth and financial success.
The Board believes that the Equity Compensation Plan will
advance the Companys interests by enhancing our ability to
(a) attract and retain employees, directors and consultants
who are in a position to make significant contributions to our
success; (b) reward employees, directors and consultants for
these contributions; and (c) encourage employees, directors
and consultants to take into account our long-term interests
through ownership of our shares.
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 393,334 shares were
available as of September 30, 2008. Future grants under the
2002 Plan have not yet been determined.
1995
Stock Option Plan
The 1995 Stock Option Plan expired on September 14, 2005.
The plan was adopted in order to attract and retain qualified
directors, officers and employees of, and consultants, to the
Company. The following description does not purport to be
complete and is qualified in its entirety by reference to the
full text of the 1995 Stock Option Plan, which is included as an
exhibit to the Companys reports filed with the SEC.
The 1995 Stock Option Plan authorized the granting of incentive
stock options (as defined in Section 422 of the 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
authorized for issuance under the 1995 Stock Option Plan. All
but 96,002 shares were utilized. As of September 14,
2005, no more options could be issued under this plan.
60
|
|
Item 12.
|
Security
Ownership of Certain Beneficial Owners and Management and
Related Stockholder Matters.
|
The following table sets forth information as of
December 31, 2008 with respect to beneficial ownership of
the Companys Common Stock by (i) each director and
executive officer acting in the capacity as such on
September 30, 2008, (ii) each person known by the
Company to own beneficially more than five percent of the
Companys outstanding Common Stock, and (iii) all
directors and executive officers as a group. Unless otherwise
indicated, the address of each such person is
c/o Asta
Funding, Inc., 210 Sylvan Avenue, Englewood Cliffs, New Jersey
07632. All persons listed have sole voting and investment power
with respect to their shares unless otherwise indicated.
|
|
|
|
|
|
|
|
|
|
|
Amount and
|
|
|
|
|
Nature
|
|
|
|
|
of Beneficial
|
|
|
Name and Address of Beneficial Owner
|
|
Ownership
|
|
Percentage(1)
|
|
Arthur Stern
|
|
|
647,683
|
(2)
|
|
|
4.5
|
%
|
Gary Stern
|
|
|
1,535,987
|
(3)
|
|
|
10.3
|
%
|
Mitchell Cohen
|
|
|
35,000
|
(4)
|
|
|
|
*
|
Cameron Williams
|
|
|
0
|
|
|
|
n/a
|
|
Mary Curtin
|
|
|
9,667
|
(5)
|
|
|
|
*
|
Herman Badillo
|
|
|
45,000
|
(6)
|
|
|
|
*
|
120 Broadway
New York, NY 10271
|
|
|
|
|
|
|
|
|
Edward Celano
|
|
|
20,334
|
(7)
|
|
|
|
*
|
2115 Scotch Gamble Road
Scotch Plains, NJ
|
|
|
|
|
|
|
|
|
Harvey Leibowitz
|
|
|
80,000
|
(8)
|
|
|
|
*
|
159 West
53rd
Street, Apt 229
New York, NY 10019
|
|
|
|
|
|
|
|
|
David Slackman
|
|
|
54,834
|
(9)
|
|
|
|
*
|
28 Markwood Lane
East Northport, NY 11731
|
|
|
|
|
|
|
|
|
Alan Rivera
|
|
|
49,666
|
(10)
|
|
|
|
*
|
1370
6th Avenue
25th Floor
New York, NY 10019
|
|
|
|
|
|
|
|
|
Louis A. Piccolo
|
|
|
34,769
|
(11)
|
|
|
|
*
|
350 West
50rd
Street
New York, NY 10019
|
|
|
|
|
|
|
|
|
Asta Group, Incorporated
|
|
|
842,000
|
(12)
|
|
|
5.9
|
%
|
Barbara Marburger
|
|
|
440,451
|
(13)
|
|
|
3.1
|
%
|
9 Locust Hollow Road
Monsey, NY 10952
|
|
|
|
|
|
|
|
|
Judith R. Feder
|
|
|
1,573,000
|
(14)
|
|
|
11.0
|
%
|
928 East
10th Street
Brooklyn, NY 11230
|
|
|
|
|
|
|
|
|
Stern Family Investors LLC
928 East
10th Street
Brooklyn, NY 11230
|
|
|
692,000
|
(15)
|
|
|
4.8
|
%
|
GMS Family Investors LLC
928 East
10th Street
Brooklyn, NY 11230
|
|
|
862,000
|
(16)
|
|
|
6.0
|
%
|
Private Capital Management
8889 Pelican Bay Blvd. Suite 500
Naples, FL 34108
|
|
|
1,316,238
|
(17)
|
|
|
9.2
|
%
|
Wellington Management Company, LLP
75 State Street
Boston, MA 02109
|
|
|
840,647
|
(18)
|
|
|
5.9
|
%
|
Peters MacGregor Capital Management Pty Ltd
P.O. Box 107
Spring Hill Old 4004
Australia
|
|
|
1,793,630
|
(19)
|
|
|
12.6
|
%
|
First Wilshire Securities Management Inc.
1224 East Green Street
Suite 200
Pasadena, CA 91106
|
|
|
808,520
|
(20)
|
|
|
5.7
|
%
|
All executive officers and directors as a group (10 persons)
|
|
|
2,512,939
|
(21)
|
|
|
16.4
|
%
|
61
|
|
|
* |
|
Less than 1% |
|
(1) |
|
Any shares of common stock that any person named above has the
right to acquire within 60 days of December 31, 2008,
are deemed to be outstanding for purposes of calculating the
ownership percentage of such person, but are not deemed to be
outstanding for purposes of calculating the beneficial ownership
percentage of any other person not named in the table above. |
|
(2) |
|
Includes 186,000 shares of common stock issuable upon
exercise of options that are exercisable within 60 days of
December 31, 2008, and 214,599 shares of common stock
owned by Asta Group, Incorporated which shares are attributable
to Arthur Stern based on his percentage ownership of Asta Group.
Includes 8,334 shares of restricted stock that will not
have vested within 60 days of December 31, 2008 which
Mr. Stern has the right to vote. Excludes
349,460 shares owned by Stern Family Investors LLC which
shares are attributable to Arthur Stern based on his percentage
ownership of such LLC and 948 shares owned by GMS Family
Investors LLC which shares are attributable to Arthur Stern
based on his percentage ownership of such LLC. Arthur Stern does
not have voting or investment power with respect to any of the
shares held by either LLC and disclaims beneficial ownership of
the shares owned by the LLCs. |
|
(3) |
|
Includes 586,000 shares of common stock issuable upon
exercise of options that are exercisable within 60 days of
December 31, 2008, and 196,656 shares of common stock
owned by Gary Stern as custodian for his minor children and
285,607 shares of common stock owned by Asta Group, which
shares are attributable to Gary Stern based on his percentage
ownership of Asta Group. Includes 18,334 shares of
restricted stock that will not have vested within 60 days
of December 31, 2008 which Mr. Stern has the right to
vote. Excludes 684,945 shares owned by GMS Family Investors
LLC which shares are attributable to Gary Stern based on his
percentage ownership of such LLC. Gary Stern does not have
voting or investment power with respect to any of the shares
held by the LLC and disclaims beneficial ownership of the shares
owned by the LLC. Also excludes 196,656 shares of common
stock held by one of his children who is no longer a minor and
for which he disclaims beneficial ownership. |
|
(4) |
|
Includes 20,000 shares of common stock issuable upon
exercise of options that are exercisable within 60 days of
December 31, 2008. Includes 5,000 shares of restricted
stock that will not have vested within 60 days of
December 31, 2008 which Mr. Cohen has the right to
vote. |
|
(5) |
|
Includes 3,668 shares of restricted stock that will not
have vested within 60 days of December 31, 2008 which
Ms. Curtin has the right to vote. |
|
(6) |
|
Includes 37,000 shares of common stock issuable upon
exercise of options that are exercisable within 60 days of
December 31, 2008. Includes 3,666 shares of restricted
stock that will not have vested within 60 days of
December 31, 2008 which Mr. Badillo has the right to
vote. Excludes 1,000 shares of common stock issuable upon
exercise of options that are not exercisable within 60 days
of December 31, 2008. |
|
(7) |
|
Includes 10,334 shares of common stock issuable upon
exercise of options that are exercisable within 60 days of
December 31, 2008. Includes 3,666 shares of restricted
stock that will not have vested within 60 days of
December 31, 2008 which Mr. Celano has the right to
vote. Excludes 1,000 shares of common stock issuable upon
exercise of options that are not exercisable within 60 days
of December 31, 2008. |
|
(8) |
|
Includes 72,000 shares of common stock issuable upon
exercise of options that are exercisable within 60 days of
December 31, 2008. Includes 2,666 shares of restricted
stock that will not have vested within 60 days of
December 31, 2008 which Mr. Leibowitz has the right to
vote. Excludes 1,000 shares of common stock issuable upon
exercise of options that are not exercisable within 60 days
of December 31, 2008. |
|
(9) |
|
Includes 45,334 shares of common stock issuable upon
exercise of options that are exercisable within 60 days of
December 31, 2008. Includes 3,666 shares of restricted
stock that will not have vested within 60 days of
December 31, 2008 which Mr. Slackman has the right to
vote. Excludes 1,000 shares of common stock issuable upon
exercise of options that are not exercisable within 60 days
of December 31, 2008. |
|
(10) |
|
Includes 44,000 shares of common stock issuable upon
exercise of options that are exercisable within 60 days of
December 31, 2008. Mr. Rivera resigned from the Board
of Directors effective December 17, 2008. Effective with
his resignation Mr. Rivera forfeited 4,334 restricted
shares of common stock and 1,000 stock options that did not vest
prior to his resignation. |
62
|
|
|
(11) |
|
Includes 25,769 shares of common stock issuable upon
exercise of options that are exercisable within 60 days of
December 31, 2008. Includes 3,666 shares of restricted
stock that will not have vested within 60 days of
December 31, 2008 which Mr. Piccolo has the right to
vote. Excludes 1,000 shares of common stock issuable upon
exercise of options that are not exercisable within 60 days
of December 31, 2008. |
|
(12) |
|
Asta Group, Incorporated is owned by Arthur Stern, our Chairman
of the Board and an Executive Vice President, Gary Stern, our
President and Chief Executive Officer, and other members of the
Stern family, including Barbara Marburger. |
|
(13) |
|
Includes 90,676 shares of common stock owned by
Ms. Marburger as custodian for her minor child and
70,907 shares of common stock owned by Asta Group, which
shares are attributable to Ms. Marburger based on her
percentage ownership of Asta Group. Excludes shares of common
stock held by her children who are no longer minors and for
which she disclaims beneficial ownership. Ms. Marburger is
the daughter of Arthur Stern and the sister of Gary Stern. |
|
(14) |
|
Includes 19,000 shares of common stock owned directly,
692,000 shares owned by Stern Family Investors LLC and
862,000 shares owned by GMS Family Investors LLC.
Ms. Feder is the manager of each LLC and as such has sole
voting and investment power as to such shares. |
|
(15) |
|
A limited liability company of which Judith R. Feder has sole
voting and investment power. Arthur Stern has a 49.5% beneficial
interest in the LLC, his wife, Alice Stern, has a 1% beneficial
interest, and a trust for the benefit of the descendants of
Arthur Stern, of which Judith R. Feder is trustee, has a 49.5%
beneficial interest in the LLC. |
|
(16) |
|
A limited liability company of which Judith R. Feder has sole
voting and investment power. Gary Stern has a 79.46% beneficial
interest in the LLC, trusts for the benefit of the children of
Gary Stern of which Judith R. Feder is the trustee have a
combined 20.43% beneficial interest (10.215% each),
and Arthur Stern has a .11% beneficial interest in the LLC. |
|
(17) |
|
Based on Information reported by Private Capital Management in
its Form 13G/A filed with the Securities &
Exchange Commission (SEC) on December 10, 2008. |
|
(18) |
|
Based on information contained in a NASDAQ online report as of
January 14, 2009, based on the Form 13G and 13F
filings with the SEC as of such date. The Company is not aware
of any additional filings by any person or Company known to
beneficially own more than 5% of the outstanding shares of
common stock. On February 17, 2009 based on the Form 13G/A
filed with the SEC, the ownership of Wellington Management
Company LLP was zero percent. |
|
(19) |
|
Based on Information reported by Peters MacGregor Capital
Management Pty, Ltd in its Form 13G/A filed with the
Securities & Exchange Commission on February 3,
2009. |
|
(20) |
|
Based on information contained in a NASDAQ online report as of
January 14, 2009, based on the Form 13G and 13F
filings with the SEC as of such date. The Company is not aware
of any additional filings by any person or Company known to
beneficially own more than 5% of the outstanding shares of
common stock. |
|
(21) |
|
Includes 1,029,771 shares of common stock issuable upon
exercise of options that are exercisable within 60 days of
December 31, 2008. Includes 57,006 shares of
restricted stock that will not have vested within 60 days
of December 31, 2008. Excludes 5,000 shares of common
stock issuable upon exercise of options that are not exercisable
within 60 days of December 31, 2008. Excludes the
shares owned in the aggregate by Stern Family Investors LLC and
GMS Family Investors LLC. |
63
EQUITY
COMPENSATION PLAN INFORMATION
The following table gives information about the Companys
Common Stock that may be issued upon the exercise of options,
warrants and rights under the Companys Equity Compensation
Plan and 2002 Stock Option Plan, as of September 30, 2008.
These plans were the Companys only equity compensation
plans in existence as of September 30, 2008. The 1995 Stock
Option Plan expired September 14, 2005.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a)
|
|
|
(b)
|
|
|
(c)
|
|
|
|
|
|
|
|
|
|
Number of Securities
|
|
|
|
|
|
|
|
|
|
Remaining Available for
|
|
|
|
Number of Securities
|
|
|
|
|
|
Future Issuance Under
|
|
|
|
to be Issued Upon
|
|
|
Weighted-Average
|
|
|
Equity Compensation
|
|
|
|
Exercise of
|
|
|
Exercise Price of
|
|
|
Plans (Excluding
|
|
|
|
Outstanding Options,
|
|
|
Outstanding Options,
|
|
|
Securities Reflected In
|
|
Plan Category
|
|
Warrants and Rights
|
|
|
Warrants and Rights
|
|
|
Column (a))
|
|
|
Equity Compensation Plans Approved by Shareholders
|
|
|
1,037,438
|
|
|
$
|
11.69
|
|
|
|
1,267,334
|
|
Equity Compensation Plans Not Approved by Shareholders
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
1,037,438
|
|
|
$
|
11.69
|
|
|
|
1,267,334
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SECTION 16(a)
BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934
requires the Companys directors, executive officers and
persons holding more than 10% of a registered class of the
equity securities of the Company to file with the SEC and to
provide the Company with initial reports of ownership, reports
of changes in ownership and annual reports of ownership of
Common Stock and other equity securities of the Company. Based
solely upon a review of such reports furnished to the Company,
the Company believes that all such Section 16(a) reporting
requirements were timely fulfilled during the fiscal year ended
September 30, 2008.
|
|
Item 13.
|
Certain
Relationships and Related Transactions, and Director
Independence.
|
The Company has entered into employment agreements with its
executive officers. See Executive Compensation
Employment Agreements.
Transactions with officers, directors and affiliates of the
Company are anticipated to be minimal and will be approved by a
majority of the Board of Directors, including a majority of the
disinterested members of the Board of Directors, and will be
made on terms no less favorable to the Company than could be
obtained from unaffiliated third parties.
Since the adoption of the Sarbanes-Oxley Act in July 2002, there
has been a growing public and regulatory focus on the
independence of directors. Additional requirements relating to
independence are imposed by the Sarbanes-Oxley Act with respect
to members of the Audit Committee. The Board has established
procedures consistent with the Sarbanes-Oxley Act of 2002, the
Securities and Exchange Commission and The NASDAQ Stock Market.
The Board of Directors has also determined that the following
members of the Board satisfy the NASDAQ definition of
independence: Edward Celano, Harvey Leibowitz, David Slackman,
Alan Rivera, Louis A. Piccolo and Herman Badillo. Mr. Alan
Rivera resigned from the Board of Directors on December 17,
2008.
|
|
Item 14.
|
Principal
Accounting Fees and Services.
|
Audit Fees. The Company incurred $1,141,000
for the audit of the Companys annual financial statements
for the year ended September 30, 2008 and for the review of
the financial statements included in the Companys
Quarterly Reports on
Form 10-Q
filed during fiscal 2008. Such fees included the audit of
internal controls over financial reporting as required by the
Sarbanes- Oxley Act of 2002. The Company paid $727,000 for the
audit of the Companys annual financial statements for the
year ended September 30, 2007 and for the review of the
financial statements included in the Companys Quarterly
Reports on
Form 10-Q
filed during fiscal 2007.
64
Financial Information Systems Design Implementation
Fees. The Company was not billed for and did not
receive any professional services described in Paragraph
(c)(4)(ii) of
Rule 2-01
of the SECs
Regulation S-X
(in general, information technology services) from the
Companys independent registered public accounting firm
during the year ended September 30, 2008 or 2007.
Tax Fees and All Other Fees. The Company was
not billed for any tax compliance or any other services by Grant
Thornton LLP or Eisner LLP during fiscal year 2008. The Company
was not billed for any tax compliance or any other services by
Eisner LLP during fiscal year 2007
The Audit Committee has approved the engagement of Grant
Thornton LLP as the Companys independent registered public
accounting firm. The Audit Committee requires the Companys
independent registered public accounting firm to advise the
Audit Committee in advance of the independent registered public
accounting firms intent to provide any professional
services to the Company other than services provided in
connection with an audit or a review of the Companys
financial statements. The Audit Committee shall approve, in
advance, any non-audit services to be provided to the Company by
the Companys independent registered public accounting firm.
Other Matters. No other matters were
considered by the Audit Committee of the Board of Directors.
65
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
|
|
|
|
|
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*
|
|
10
|
.20
|
|
Form of Amended and Restated Revolving Note*
|
66
|
|
|
|
|
Exhibit
|
|
|
Number
|
|
|
|
|
10
|
.21
|
|
Fourth Amendment to the Receivables Financing Agreement dated
February 20, 2009 between the Company and Bank of Montreal*
|
|
10
|
.22
|
|
Subordinated Guarantor Security Agreement dated February 20,
2009 to Bank of Montreal*
|
|
10
|
.23
|
|
Subordinated Limited Recourse Guaranty Agreement dated February
20, 2009*
|
|
10
|
.24
|
|
Subordinated Guarantor Security Agreement dated February 20,
2009 to Asta Group, Inc.*
|
|
10
|
.25
|
|
Subordinated Limited Recourse Guaranty Agreement dated February
20, 2009 to Asta Group.*
|
|
10
|
.26
|
|
Form of Intercreditor Agreement*
|
|
10
|
.27
|
|
Amended and Restated Management Agreement, dated as of January
16, 2009, between Palisades Collection, L.L.C., and [*].*
|
|
10
|
.28
|
|
Amended and Restated Master Servicing Agreement, dated as of
January 16, 2009, between Palisades Collection, L.L.C., and [*] *
|
|
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 [*]*
|
|
14
|
.1
|
|
Code of Ethics for Senior Financial Officers*
|
|
21
|
.1
|
|
Subsidiaries of the Company*
|
|
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,
Mitchell Cohen, 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,
Mitchell Cohen, 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 |
67
|
|
|
(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 |
|
(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 10.1 to Asta
Fundings Current Report on
Form 8-K
filed May 1, 2008 |
68
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: February 20, 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
|
|
President, Chief Executive Officer and Director
|
|
February 20, 2009
|
|
|
|
|
|
/s/ Mitchell
Cohen
Mitchell
Cohen
|
|
Chief Financial Officer
Principal Financial and Accounting Officer
|
|
February 20, 2009
|
|
|
|
|
|
/s/ Arthur
Stern
Arthur
Stern
|
|
Chairman of the Board and
Executive Vice President
|
|
February 20, 2009
|
|
|
|
|
|
/s/ Herman
Badillo
Herman
Badillo
|
|
Director
|
|
February 20, 2009
|
|
|
|
|
|
/s/ Edward
Celano
Edward
Celano
|
|
Director
|
|
February 20, 2009
|
|
|
|
|
|
/s/ Harvey
Leibowitz
Harvey
Leibowitz
|
|
Director
|
|
February 20, 2009
|
|
|
|
|
|
/s/ David
Slackman
David
Slackman
|
|
Director
|
|
February 20, 2009
|
|
|
|
|
|
/s/ Louis
A. Piccolo
Louis
A. Piccolo
|
|
Director
|
|
February 20, 2009
|
69
ASTA FUNDING, INC. AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2008 and 2007
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 sheet of
Asta Funding, Inc. and subsidiaries (the Company) as
of September 30, 2008, and the related consolidated
statements of operations, stockholders equity and
comprehensive income, and cash flows for the year ended
September 30, 2008. 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 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, 2008 and the results of their operations and
their cash flows for the year ended September 30, 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, 2008, 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 February 20, 2009 expressed an unqualified opinion.
/s/ Grant Thornton LLP
New York, New York
February 20, 2009
F-2
REPORT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors and Stockholders
Asta Funding, Inc.
We have audited the accompanying consolidated balance sheet of
Asta Funding, Inc. and subsidiaries as of September 30,
2007, and the related consolidated statements of operations,
stockholders equity and cash flows for each of the years
in the two-year period 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
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 financial statements enumerated above
present fairly, in all material respects, the consolidated
financial position of Asta Funding, Inc. as of
September 30, 2007, and the consolidated results of their
operations and their consolidated cash flows for each of the
years in the two-year period ended September 30, 2007, in
conformity with accounting principles generally accepted in the
United States of America.
/s/ EISNER LLP
New York, New York
December 27, 2007
F-3
ASTA
FUNDING, INC. AND SUBSIDIARIES
|
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
|
|
2008
|
|
|
2007
|
|
|
ASSETS
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
3,623,000
|
|
|
$
|
4,525,000
|
|
Restricted cash
|
|
|
3,047,000
|
|
|
|
5,694,000
|
|
Consumer receivables acquired for liquidation (at net realizable
value)
|
|
|
449,012,000
|
|
|
|
545,623,000
|
|
Due from third party collection agencies and attorneys
|
|
|
5,070,000
|
|
|
|
4,909,000
|
|
Investment in venture
|
|
|
555,000
|
|
|
|
2,040,000
|
|
Furniture and equipment (net of accumulated depreciation of
$2,367,000 in 2008 and $2,048,000 in 2007)
|
|
|
762,000
|
|
|
|
793,000
|
|
Deferred income taxes
|
|
|
15,567,000
|
|
|
|
12,349,000
|
|
Other assets
|
|
|
3,500,000
|
|
|
|
4,323,000
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
481,136,000
|
|
|
$
|
580,256,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES
|
|
|
|
|
|
|
|
|
Debt
|
|
$
|
213,485,000
|
|
|
$
|
326,466,000
|
|
Subordinated debt related party
|
|
|
8,246,000
|
|
|
|
|
|
Other liabilities
|
|
|
4,618,000
|
|
|
|
7,537,000
|
|
Dividends payable
|
|
|
571,000
|
|
|
|
557,000
|
|
Income taxes payable
|
|
|
6,315,000
|
|
|
|
8,161,000
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
233,235,000
|
|
|
|
342,721,000
|
|
|
|
|
|
|
|
|
|
|
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
14,276,158 shares in 2008 and 13,918,158 in 2007
|
|
|
143,000
|
|
|
|
139,000
|
|
Additional paid-in capital
|
|
|
69,130,000
|
|
|
|
65,030,000
|
|
Retained earnings
|
|
|
178,925,000
|
|
|
|
172,366,000
|
|
Accumulated other comprehensive loss
|
|
|
(297,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total stockholders equity
|
|
|
247,901,000
|
|
|
|
237,535,000
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
481,136,000
|
|
|
$
|
580,256,000
|
|
|
|
|
|
|
|
|
|
|
See Notes to Consolidated Financial Statement
F-4
ASTA
FUNDING, INC. AND SUBSIDIARIES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended September 30,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
Finance income, net
|
|
$
|
115,295,000
|
|
|
$
|
138,356,000
|
|
|
$
|
101,024,000
|
|
Other income
|
|
|
200,000
|
|
|
|
2,181,000
|
|
|
|
405,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
115,495,000
|
|
|
|
140,537,000
|
|
|
|
101,429,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
General and administrative expenses
|
|
|
29,561,000
|
|
|
|
25,450,000
|
|
|
|
18,268,000
|
|
Interest expense (2008 Related party
$154,000)
|
|
|
17,881,000
|
|
|
|
18,246,000
|
|
|
|
4,641,000
|
|
Impairments
|
|
|
53,160,000
|
|
|
|
9,097,000
|
|
|
|
2,245,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
100,602,000
|
|
|
|
52,793,000
|
|
|
|
25,154,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before equity in earnings in venture and income taxes
|
|
|
14,893,000
|
|
|
|
87,744,000
|
|
|
|
76,275,000
|
|
Equity in earnings in venture
|
|
|
55,000
|
|
|
|
225,000
|
|
|
|
550,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes
|
|
|
14,948,000
|
|
|
|
87,969,000
|
|
|
|
76,825,000
|
|
Provision for income taxes
|
|
|
6,119,000
|
|
|
|
35,703,000
|
|
|
|
31,060,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
8,829,000
|
|
|
$
|
52,266,000
|
|
|
$
|
45,765,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic net income per share
|
|
$
|
0.62
|
|
|
$
|
3.79
|
|
|
$
|
3.36
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted net income per share
|
|
$
|
0.61
|
|
|
$
|
3.56
|
|
|
$
|
3.13
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
14,138,650
|
|
|
|
13,807,838
|
|
|
|
13,637,406
|
|
Diluted
|
|
|
14,553,346
|
|
|
|
14,691,861
|
|
|
|
14,615,148
|
|
See Notes to Consolidated Financial Statement
F-5
ASTA
FUNDING, INC. AND SUBSIDIARIES
For the
years ended September 30, 2008, 2007 and 2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional
|
|
|
|
|
|
Other
|
|
|
|
|
|
|
Common Stock
|
|
|
Paid-in
|
|
|
Retained
|
|
|
Comprehensive
|
|
|
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Capital
|
|
|
Earnings
|
|
|
Loss
|
|
|
Total
|
|
|
Balance, September 30, 2005
|
|
|
13,595,324
|
|
|
$
|
136,000
|
|
|
$
|
60,798,000
|
|
|
$
|
84,243,000
|
|
|
$
|
|
|
|
$
|
145,177,000
|
|
Exercise of options
|
|
|
159,833
|
|
|
|
2,000
|
|
|
|
870,000
|
|
|
|
|
|
|
|
|
|
|
|
872,000
|
|
Tax benefit arising from exercise of non qualified stock options
|
|
|
|
|
|
|
|
|
|
|
30,000
|
|
|
|
|
|
|
|
|
|
|
|
30,000
|
|
Dividends
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(7,687,000
|
)
|
|
|
|
|
|
|
(7,687,000
|
)
|
Stock based compensation expense
|
|
|
|
|
|
|
|
|
|
|
105,000
|
|
|
|
|
|
|
|
|
|
|
|
105,000
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
45,765,000
|
|
|
|
|
|
|
|
45,765,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
and vesting of restricted stock of restricted of
|
|
|
|
|
|
|
|
|
|
|
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 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
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive
income is as follows:
|
|
|
|
|
|
|
2008
|
|
|
Net income
|
|
$
|
8,829,000
|
|
Other comprehensive loss, net of tax-foreign currency translation
|
|
|
(297,000
|
)
|
|
|
|
|
|
Comprehensive income
|
|
$
|
8,532,000
|
|
|
|
|
|
|
Accumulated other comprehensive loss
|
|
$
|
(297,000
|
)
|
|
|
|
|
|
There were no elements of other comprehensive income for the
years ended September 30, 2007 or 2006.
|
See Notes to Consolidated Financial Statements
F-6
ASTA
FUNDING, INC. AND SUBSIDIARIES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended September 30,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
Cash flows from operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
8,829,000
|
|
|
$
|
52,266,000
|
|
|
$
|
45,765,000
|
|
Adjustments to reconcile net income to net cash provided by
operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
1,278,000
|
|
|
|
841,000
|
|
|
|
575,000
|
|
Deferred income taxes
|
|
|
(2,634,000
|
)
|
|
|
(4,772,000
|
)
|
|
|
(7,730,000
|
)
|
Impairments of consumer receivables acquired for liquidation
|
|
|
53,160,000
|
|
|
|
9,097,000
|
|
|
|
2,245,000
|
|
Stock based compensation
|
|
|
1,013,000
|
|
|
|
1,140,000
|
|
|
|
105,000
|
|
Changes in:
|
|
|
|
|
|
|
|
|
|
|
|
|
Due from third party collection agencies and attorneys
|
|
|
(161,000
|
)
|
|
|
(1,847,000
|
)
|
|
|
(1,637,000
|
)
|
Other assets
|
|
|
(136,000
|
)
|
|
|
(2,324,000
|
)
|
|
|
(191,000
|
)
|
Income taxes payable
|
|
|
(1,846,000
|
)
|
|
|
(2,216,000
|
)
|
|
|
9,134,000
|
|
Other liabilities
|
|
|
(3,725,000
|
)
|
|
|
3,390,000
|
|
|
|
632,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities
|
|
|
55,778,000
|
|
|
|
55,575,000
|
|
|
|
48,898,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchase of consumer receivables acquired for liquidation
|
|
|
(49,886,000
|
)
|
|
|
(440,895,000
|
)
|
|
|
(200,237,000
|
)
|
Principal payments received from collection of consumer
receivables acquired for liquidation
|
|
|
81,645,000
|
|
|
|
114,421,000
|
|
|
|
90,450,000
|
|
Principal payments received from collections represented by
sales of consumer receivables acquired for liquidation
|
|
|
11,034,000
|
|
|
|
29,029,000
|
|
|
|
22,994,000
|
|
Effect of foreign exchange on consumer receivables acquired for
liquidation
|
|
|
658,000
|
|
|
|
|
|
|
|
|
|
Investment in venture
|
|
|
|
|
|
|
|
|
|
|
(7,810,000
|
)
|
Cash distribution received from venture
|
|
|
1,485,000
|
|
|
|
3,925,000
|
|
|
|
1,845,000
|
|
Purchase of other investments
|
|
|
|
|
|
|
(5,777,000
|
)
|
|
|
(2,862,000
|
)
|
Collections on other investments
|
|
|
|
|
|
|
8,251,000
|
|
|
|
|
|
Acquisition of businesses, net of cash acquired
|
|
|
|
|
|
|
|
|
|
|
(1,406,000
|
)
|
Capital expenditures
|
|
|
(361,000
|
)
|
|
|
(163,000
|
)
|
|
|
(423,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used) in investing activities
|
|
|
44,575,000
|
|
|
|
(291,209,000
|
)
|
|
|
(97,449,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
(Repayments) borrowings under lines of credit, net
|
|
|
(113,001,000
|
)
|
|
|
243,655,000
|
|
|
|
53,526,000
|
|
Borrowings under subordinated loan related party
|
|
|
8,246,000
|
|
|
|
|
|
|
|
|
|
Change in restricted cash
|
|
|
2,647,000
|
|
|
|
(5,694,000
|
)
|
|
|
|
|
Dividends paid
|
|
|
(2,256,000
|
)
|
|
|
(7,716,000
|
)
|
|
|
(2,110,000
|
)
|
Proceeds from exercise of stock options
|
|
|
425,000
|
|
|
|
1,329,000
|
|
|
|
872,000
|
|
Tax benefit arising from exercise of non-qualified stock options
|
|
|
2,666,000
|
|
|
|
759,000
|
|
|
|
30,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash (used in) provided by financing activities
|
|
|
(101,273,000
|
)
|
|
|
232,333,000
|
|
|
|
52,318,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (decrease) increase in cash and cash equivalents
|
|
|
(920,000
|
)
|
|
|
(3,301,000
|
)
|
|
|
3,767,000
|
|
Effect of foreign exchange on cash
|
|
|
18,000
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at beginning of year
|
|
|
4,525,000
|
|
|
|
7,826,000
|
|
|
|
4,059,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of year
|
|
$
|
3,623,000
|
|
|
$
|
4,525,000
|
|
|
$
|
7,826,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosure of cash flow information:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash paid for:
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest (2008 Related party $112,000)
|
|
$
|
19,784,000
|
|
|
$
|
16,644,000
|
|
|
$
|
4,766,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income taxes
|
|
$
|
8,282,000
|
|
|
$
|
41,932,000
|
|
|
$
|
29,535,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See notes to consolidated financial statements
F-7
ASTA
FUNDING, INC. AND SUBSIDIARIES
September 30,
2008 and 2007
|
|
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), other credit card accounts,
telecommunication accounts and auto deficiency receivables,
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 and will depend on external financing to
acquire consumer receivables. Significant requirements include
the payments of debt, purchase of consumer receivables,
servicing the consumer receivable portfolios, paying dividends,
interest and income taxes. Acquisitions of consumer receivables
acquired for liquidation are financed primarily through cash
flows from operating activities and with the Companys
credit facility financed by the Sixth Amendment to the Fourth
Amended and Restated Loan Agreement (the Credit
Facility), (all amendments to the Credit Facility
hereafter referred to as the Credit Facility) which matures on
July 11, 2009. At December 31, 2007, March 31,
2008, June 30, 2008 and September 30, 2008, due to the
borrowing base required by a consortium of banks (the Bank
Group), the Company was approaching the upper limit of its
borrowing capacity. However, with limited purchases of
portfolios through the fiscal year ended September 30,
2008, coupled with the $8.2 million of subordinated debt
incurred by the Company, availability is approximately
$18.5 million at September 30, 2008. 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. Although
availability has increased, the limited availability coupled
with slower collections has had and could continue to have a
negative impact on our ability to purchase new portfolios for
future growth.
Subsequent to September 30, 2008, collections deteriorated
resulting in impairments of approximately $21.4 million as
described in Note
Q-Subsequent
Events (Unaudited). If the Companys collections continue
to deteriorate, the Company might need to secure another source
of funding in order to satisfy its working capital needs,
curtail 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 twelve months will be
sufficient to cover its operating expenses. See
Note F-Debt
and Subordinated
Debt-related
party, for further information.
F-8
ASTA
FUNDING, INC. AND SUBSIDIARIES
Notes to
Consolidated Financial Statements
September 30,
2008 and 2007
|
|
Note A
|
The
Company and its Significant Accounting
Policies (Continued)
|
[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. See Note D
Investment in Venture for further information. All significant
intercompany balances and transactions have been eliminated in
consolidation.
[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 a portfolio of approximately
$6.9 billion in face value receivables (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. 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 the Bank of Montreal (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, 2008
represents cash on hand, substantially all of which is
designated to be paid to our lender on or about the tenth day of
the subsequent month of the collections received. The lender has
mandated in which depository institutions the cash is to be
maintained. Generally, the cash balance exceeds Federal Deposit
Insurance Corporation (FDIC) limits.
[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 AICPA Statement of Position
03-3,
Accounting for Loans or Certain Securities Acquired in a
Transfer
(SOP 03-3).
Practice Bulletin 6 was amended by
SOP 03-3.
Under the guidance of
SOP 03-3
(and the amended Practice Bulletin 6) static pools of
accounts are established. These pools are aggregated based on
certain common risk criteria. Each static pool is recorded at
cost and is accounted for as a single unit for the recognition
of income, principal payments and loss provision.
Once a static pool is established for a quarter, individual
receivable accounts are not added to the pool (unless replaced
by the seller) or removed from the pool (unless sold or returned
to the seller).
SOP 03-3
(and the amended Practice Bulletin 6) requires that
the excess of the contractual cash flows over expected cash
flows not be recognized as an adjustment of revenue or expense
or on the balance sheet.
SOP 03-3
initially freezes the internal rate of return
F-9
ASTA
FUNDING, INC. AND SUBSIDIARIES
Notes to
Consolidated Financial Statements
September 30,
2008 and 2007
|
|
Note A
|
The
Company and its Significant Accounting
Policies (Continued)
|
[4]
Income recognition, Impairments and Accretable yield
adjustments: (Continued)
(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
SOP 03-3
and the amended Practice Bulletin 6, rather than lowering
the estimated IRR if the collection estimates are not received
or projected to be received, the carrying value of a pool would
be written down to maintain the then current IRR.
Impairments
and accretable yield adjustments
The Company accounts for its impairments in accordance with
SOP 03-3.
This SOP provides guidance on accounting for differences between
contractual and expected cash flows from an investors
initial investment in loans or debt securities acquired in a
transfer if those differences are attributable, at least in
part, to credit quality. Increases in expected cash flows should
be recognized prospectively through an adjustment of the
internal rate of return while decreases in expected cash flows
should be recognized as impairments.
SOP 03-3
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 $53.2 million and
$9.1 million were recorded during the fiscal years ended
September 30, 2008 and 2007, respectively, as compared to
$2.2 million recorded in fiscal year 2006. There were no
accretable yield adjustments recorded in fiscal year ended
September 30, 2008.
In the quarter ended June 30, 2008, the Company
discontinued using the interest method for income recognition
under
SOP 03-3
for the Portfolio Purchase. The recognition of income under
SOP 03-3
is dependent on the Company having the ability to develop
reasonable expectations of both the timing and amount of cash
flows to be collected. In the event the Company cannot develop a
reasonable expectation as to both the timing and amount of cash
flows expected to be collected,
SOP 03-3
permits the use of 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 has the
ability to develop a reasonable expectation of the timing of the
cash flows to be collected and therefore, transferred the
Portfolio Purchase to the cost recovery method. The Company will
recognize income only after it has recovered its carrying value,
which, as of September 30, 2008 was approximately
$207 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 influence 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,
2008 and 2007
|
|
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,
the payments, if any, since charge-off, and the credit
guidelines of the credit originator also represent factors taken
into consideration in our estimation process since, for example,
older receivables might be more difficult to collect in amount
and/or
require more time 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 suit 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 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 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 servicers for their input on liquidation rates and, at
times, incorporate such input into the estimates we use for our
expected cash flows.
Typically, when purchasing portfolios with which we have the
experience detailed above, we have expectations of achieving a
100% return on our invested capital back within an
18-28 month
time frame and expectations of generating in the range of
130-150% of
our invested capital over 3-5 years. We continue to use
this as our basis for establishing the original cash flow
estimates for our portfolio purchases. We routinely monitor
these results against the actual cash flows and, in the event
the cash flows are below our expectations and we believe there
are no reasons relating to mere timing differences or
explainable delays (such as can occur particularly when the
court system is involved) for the reduced collections, an
impairment would be recorded as a provision for credit losses.
Conversely, in the event the cash flows are in excess of our
expectations and the reason is due to timing, we would defer the
excess collections and record as deferred revenue.
F-11
ASTA
FUNDING, INC. AND SUBSIDIARIES
Notes to
Consolidated Financial Statements
September 30,
2008 and 2007
|
|
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 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,
2008, 2007 and 2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
|
|
|
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
|
|
$
|
8,829,000
|
|
|
|
14,138,650
|
|
|
$
|
0.62
|
|
|
$
|
52,266,000
|
|
|
|
13,807,838
|
|
|
$
|
3.79
|
|
|
$
|
45,765,000
|
|
|
|
13,637,406
|
|
|
$
|
3.36
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dilutive effect of stock Options
|
|
|
|
|
|
|
414,696
|
|
|
|
|
|
|
|
|
|
|
|
884,023
|
|
|
|
|
|
|
|
|
|
|
|
977,742
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
$
|
8,829,000
|
|
|
|
14,553,346
|
|
|
$
|
0.61
|
|
|
$
|
52,266,000
|
|
|
|
14,691,861
|
|
|
$
|
3.56
|
|
|
$
|
45,765,000
|
|
|
|
114,615,148
|
|
|
$
|
3.13
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
antidilutive. There were no anti dilutive securities at
September 30, 2007 and 2006.
[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 under the interest method, the Company takes into
consideration the relative credit quality of the underlying
F-12
ASTA
FUNDING, INC. AND SUBSIDIARIES
Notes to
Consolidated Financial Statements
September 30,
2008 and 2007
|
|
Note A
|
The
Company and its Significant Accounting
Policies (Continued)
|
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 SFAS No. 123 (Revised 2005), Share-Based Payment
(SFAS 123R). SFAS 123R, 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 December 2007, the Securities and Exchange Commission
(SEC) issued Staff Accounting Bulletin 110
(SAB 110). This staff accounting bulletin
(SAB) expresses the views of the staff regarding the
use of a simplified method, as discussed in
SAB No. 107 (SAB 107), in developing
an estimate of expected term of plain vanilla share
options in accordance with Financial Accounting Standards Board
(FASB) Statement No. 123 (revised 2004),
Share-Based Payment . In particular, the Staff indicated
in SAB 107 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 SAB 107 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
SAB 107 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 may 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
SAB does not have a material impact on the Company.
In February 2007, the FASB issued Statement 159, The Fair
Value Option for Financial Assets and Financial Liabilities
(SFAS No. 159). The objective of
SFAS No. 159 is to provide companies with the option
to recognize most financial assets and liabilities and certain
other items at fair value. Statement 159 will allow companies
the opportunity to mitigate earnings volatility caused by
measuring related assets and liabilities differently without
having to apply complex hedge accounting. Unrealized gains and
losses on items for which the fair value option has been elected
should be reported in earnings. The fair value option election
is applied on an instrument by instrument basis (with some
exceptions), is irrevocable, and is applied to an entire
instrument. The election may be made as of the date of initial
adoption for existing eligible items. Subsequent to initial
adoption, the Company may elect the fair value option at initial
recognition of eligible items or on entering into an eligible
firm commitment. The Company can only elect the fair value
option after initial recognition in limited circumstances.
SFAS No. 159 requires similar assets and liabilities
for which the Company has elected the fair value option to be
displayed on the face of the balance sheet either
(a) together with financial instruments measured using
other measurement attributes with parenthetical disclosure of
the amount measured at fair value or (b) in separate line
items. In addition, SFAS No. 159 requires additional
disclosures to allow financial statement users to compare
similar assets and liabilities measured differently either
within the financial statements of the Company or between
financial statements of different companies.
SFAS No. 159 is required to be adopted by the Company
on October 1, 2008. Early adoption is permitted; however,
the Company did not adopt SFAS No. 159 prior to the
required adoption date of October 1, 2008. The Company is
required to adopt SFAS No. 159 concurrent with
SFAS No. 157, Fair Value Measurements.
The
F-13
ASTA
FUNDING, INC. AND SUBSIDIARIES
Notes to
Consolidated Financial Statements
September 30,
2008 and 2007
|
|
Note A
|
The
Company and its Significant Accounting
Policies (Continued)
|
[11]
Impact of Recently Issued Accounting
Standards (Continued)
remeasurement to fair-value will be reported as a
cumulative-effect adjustment in the opening balance of retained
earnings. Additionally, any changes in fair value due to the
concurrent adoption of SFAS No. 157 will be included
in the cumulative-effect adjustment if the fair value option is
also elected for that item.
The Company opted to not apply the fair value option to any of
its financial assets or liabilities. If the Company elects to
recognize items at fair value as a result of Statement 159, this
could result in increased earnings volatility.
In September 2006 the FASB issued SFAS No. 157,
Fair Value Measurements. The Statement is effective for
all financial statements issued for fiscal years beginning after
November 15, 2007, or October 1, 2008 as to the
Company. The Statement defines fair value as the price that
would be received to sell an asset or paid to transfer a
liability in an orderly transaction between market participants
at the measurement date, establishes a framework for measuring
fair value, and expands disclosures about fair value
measurements. Adoption of SFAS No. 157 is not expected
to have a material impact on the Companys results of
operations or financial condition.
[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 AICPA Statement
of Position
03-3,
Accounting for Loans or Certain Securities Acquired in a
Transfer
(SOP 03-3).
Practice Bulletin 6 Amortization of Discounts on Certain
Acquired Loans (Practice Bulletin 6) was
amended by
SOP 03-3.
Under the guidance of
SOP 03-3
(and the amended Practice Bulletin 6), static pools of
accounts are established. These pools are aggregated based on
certain common risk criteria. Each static pool is recorded at
cost and is accounted for as a single unit for the recognition
of income, principal payments and loss provision.
Once a static pool is established for a quarter, individual
receivable accounts are not added to the pool (unless replaced
by the seller) or removed from the pool (unless sold or returned
to the seller).
SOP 03-3
(and the amended Practice Bulletin 6) requires that
the excess of the contractual cash flows over expected cash
flows not be recognized as an adjustment of revenue or expense
or on the balance sheet.
SOP 03-3
initially freezes the internal rate of return, referred to as
IRR, estimated when the accounts receivable are purchased, as
the basis for subsequent impairment testing. Significant
increases in actual or expected future cash flows may be
recognized prospectively through an upward adjustment of the IRR
over a portfolios remaining life. Any increase to the IRR
then becomes the new benchmark for impairment testing. 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,
2008 and 2007
|
|
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 Company accounts for its investments in consumer receivable
portfolios, using either:
|
|
|
|
|
the interest method; or
|
|
|
|
the cost recovery method.
|
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, 2008,
approximately $203.5 million of the consumer receivables
acquired for liquidation are accounted for using the interest
method, while approximately $245.5 million are accounted
for using the cost recovery method.
After
SOP 03-3
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;
|
F-15
ASTA
FUNDING, INC. AND SUBSIDIARIES
Notes to
Consolidated Financial Statements
September 30,
2008 and 2007
|
|
Note B
|
Consumer
Receivables Acquired For
Liquidation (Continued)
|
|
|
|
|
|
our ability to analyze accounts and resell accounts that meet
our criteria for resale;
|
F-16
ASTA
FUNDING, INC. AND SUBSIDIARIES
Notes to
Consolidated Financial Statements
September 30,
2008 and 2007
|
|
Note B
|
Consumer
Receivables Acquired For
Liquidation (Continued)
|
|
|
|
|
|
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;
|
|
|
|
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, 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
|
|
|
(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
interest method pools. |
F-16
ASTA
FUNDING, INC. AND SUBSIDIARIES
Notes to
Consolidated Financial Statements
September 30,
2008 and 2007
|
|
Note B
|
Consumer
Receivables Acquired For
Liquidation (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended September 30, 2007
|
|
|
|
Interest
|
|
|
Cost
|
|
|
|
|
|
|
Method
|
|
|
Recovery
|
|
|
|
|
|
|
Portfolios
|
|
|
Portfolios
|
|
|
Total
|
|
|
Balance, beginning of period
|
|
$
|
256,199,000
|
|
|
$
|
1,076,000
|
|
|
$
|
257,275,000
|
|
Acquisitions of receivable portfolios, net
|
|
|
390,350,000
|
|
|
|
50,545,000
|
|
|
|
440,895,000
|
|
Net cash collections from collection of consumer receivables
acquired for liquidation(1)
|
|
|
(213,135,000
|
)
|
|
|
(14,478,000
|
)
|
|
|
(227,613,000
|
)
|
Net cash collections represented by account sales of consumer
receivables acquired for liquidation
|
|
|
(47,502,000
|
)
|
|
|
(6,691,000
|
)
|
|
|
(54,193,000
|
)
|
Transfer to cost recovery(2)
|
|
|
(4,478,000
|
)
|
|
|
4,478,000
|
|
|
|
|
|
Impairments
|
|
|
(9,097,000
|
)
|
|
|
|
|
|
|
(9,097,000
|
)
|
Finance income recognized(3)
|
|
|
136,178,000
|
|
|
|
2,178,000
|
|
|
|
138,356,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, end of period
|
|
$
|
508,515,000
|
|
|
$
|
37,108,000
|
|
|
$
|
545,623,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue as a percentage of collections
|
|
|
52.2
|
%
|
|
|
10.3
|
%
|
|
|
49.1
|
%
|
|
|
|
(1) |
|
Includes put backs of purchased accounts returned to the seller
totaling $5.5 million. |
|
(2) |
|
Represents a portfolio acquired during the three months ended
December 31, 2006 which the Company successfully negotiated
the return to the seller. The portfolio was returned on
July 31, 2007. |
|
(3) |
|
Includes $23.9 million derived from fully amortized
interest method pools. |
As of September 30, 2008 the Company had $449,012,000 in
consumer receivables acquired for liquidation, of which
$203,470,000 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, 2009
|
|
$
|
92,701,000
|
|
September 30, 2010
|
|
|
72,015,000
|
|
September 30, 2011
|
|
|
29,519,000
|
|
September 30, 2012
|
|
|
9,121,000
|
|
September 30, 2013
|
|
|
1,342,000
|
|
September 30, 2014
|
|
|
82,000
|
|
September 30, 2015
|
|
|
4,000
|
|
|
|
|
|
|
|
|
|
204,784,000
|
|
Deferred revenue
|
|
|
(1,314,000
|
)
|
|
|
|
|
|
Total
|
|
$
|
203,470,000
|
|
|
|
|
|
|
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, 2008. 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,
2008 and 2007
|
|
Note B
|
Consumer
Receivables Acquired For
Liquidation (Continued)
|
collections will exceed amounts previously estimated. Projected
accretable yield for the fiscal years ended September 30,
2008 and 2007 are as follows:
|
|
|
|
|
|
|
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 nonaccretable difference
|
|
|
43,947,000
|
(1)
|
|
|
|
|
|
Balance at end of period, September 30, 2008
|
|
$
|
58,134,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
|
September 30,
|
|
|
|
2007
|
|
|
Balance at beginning of period, October 1, 2006
|
|
$
|
148,900,000
|
*
|
Income recognized on finance receivables, net
|
|
|
(136,178,000
|
)
|
Additions representing expected revenue from purchases
|
|
|
144,764,000
|
|
Impairments
|
|
|
(3,345,000
|
)
|
Reclassifications from nonaccretable difference
|
|
|
22,474,000
|
|
|
|
|
|
|
Balance at end of period, September 30, 2007
|
|
$
|
176,615,000
|
|
|
|
|
|
|
|
|
|
* |
|
Revised to reflect zero basis income recognized. |
|
|
|
(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, 2008, the Company
purchased $1.5 billion of face value charged-off consumer
receivables at a cost of approximately $49.9 million. This
includes a portfolio with an approximate value of
$8.6 million that was purchased in South America. During
the year ended September 30, 2007, the Company purchased
$10.9 billion of face value charged-off consumer
receivables at a cost of $440.9 million. This includes a
portfolio with an approximate value of $4.5 million that
was returned to the seller at the Companys original cost
and put backs of purchased accounts returned to the seller
totaling $5.5 million. At September 30, 2008, the
estimated remaining net collections on the receivables purchased
and classified under the interest method, ($26.6 million)
during the fiscal year ended September 30, 2008 are
$23.5 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, 2008, 2007 and 2006, respectively.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended, September 30,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
Gross collections(1)
|
|
$
|
332,711,000
|
|
|
$
|
398,432,000
|
|
|
$
|
320,203,000
|
|
Commissions and fees(2)
|
|
|
124,737,000
|
|
|
|
116,626,000
|
|
|
|
105,735,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net collections
|
|
$
|
207,974,000
|
|
|
$
|
281,806,000
|
|
|
$
|
214,468,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-18
ASTA
FUNDING, INC. AND SUBSIDIARIES
Notes to
Consolidated Financial Statements
September 30,
2008 and 2007
|
|
Note B
|
Consumer
Receivables Acquired For
Liquidation (Continued)
|
|
|
|
(1) |
|
Gross collections include: collections from third-party
collection agencies and attorneys, collections from in-house
efforts and collections represented by account sales. |
|
(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 $9.4 million, $25.2 million and
$32.0 million for the fiscal years ended September 30,
2008, 2007 and 2006, respectively.
During the year ended September 30, 2008, the Company
recognized $53.2 million of impairment charges due to
changes in timing of cash flows, of which $22.9 million are
portfolios still being accounted for under the interest method.
The expected cash flows are generated based on a number of
attributes including current economic conditions. Due to current
economic conditions these expected cash flows may be subject to
change. Management has analyzed the sensitivity of the
portfolios which have been impaired. The carrying value of such
portfolios as of September 30, 2008 was $53.6 million.
If changes in the collection assumptions were different, the
results could be as follows:
|
|
|
|
|
|
|
Impairment Charges
|
|
|
|
(Dollars in millions)
|
|
|
Impairment charge for year ended September 30, 2008
|
|
$
|
22.9
|
|
Impact on impairment balance due to10% adverse change in
collections(1)
|
|
$
|
0.5-$5.3
|
|
Impact on impairment balance due to 20% change in collections(1)
|
|
$
|
1.1-$10.6
|
|
Impact on impairment balance due to 30% change in collections(1)
|
|
$
|
1.6-$15.9
|
|
|
|
|
(1) |
|
The assumptions used to calculate the range of the impact is as
follows: |
|
|
|
Decrease in collections in year one without recovery in
subsequent years and decrease in collections in year one with
corresponding increase in collections in subsequent years, and a
decrease in collections without a corresponding recover in the
following years. |
These sensitivities are hypothetical and should be used with
caution. As the table above demonstrates, the Companys
methodology for determining impairment charges is highly
sensitive to changes in assumptions. Actual collection
experience may differ and any difference may have a material
effect on the amount of future impairment charges.
In February 2006, the Company acquired VATIV for approximately
$1.4 million in cash. VATIV provides bankruptcy and
deceased account servicing. The purchase price has been
allocated to goodwill at the VATIV reporting unit. The revenue
and operating results of VATIV are immaterial to the Company.
|
|
Note D
|
Investment In Venture
|
In August 2006, the Company acquired a 25% interest in a newly
formed venture for $7,810,000. The Company accounts for its
investment in the venture using the equity method. This venture
is in business to liquidate the assets of a retail business
which it acquired through bankruptcy proceedings. From the
inception of the venture in 2006, through September 30,
2008, distributions from the venture to the Company were
$8,085,000. During fiscal year 2008, the Company received
distributions in the amount of $1,540,000.
F-19
ASTA
FUNDING, INC. AND SUBSIDIARIES
Notes to
Consolidated Financial Statements
September 30,
2008 and 2007
|
|
Note E
|
Furniture
and Equipment
|
Furniture and equipment as of September 30, 2008 and 2007
consist of the following:
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
Furniture
|
|
$
|
310,000
|
|
|
$
|
307,000
|
|
Equipment
|
|
|
2,714,000
|
|
|
|
2,534,000
|
|
Leasehold improvements
|
|
|
105,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,129,000
|
|
|
|
2,841,000
|
|
Less accumulated depreciation
|
|
|
2,367,000
|
|
|
|
2,048,000
|
|
|
|
|
|
|
|
|
|
|
Balance, end of period
|
|
$
|
762,000
|
|
|
$
|
793,000
|
|
|
|
|
|
|
|
|
|
|
Depreciation expense for the years ended September 30,
2008, 2007 and 2006 aggregated $319,000, $279,000 and $324,000,
respectively.
|
|
Note F
|
Debt and Subordinated Debt Related Party
|
On July 11, 2006, the Company entered into the Fourth
Amended and Restated Loan Agreement with the Bank Group and as a
result the credit facility increased to $175 million, from
$125 million with an expandable feature which enables the
Company to increase the line to $225 million with the
consent of the Bank Group. The line of credit bears interest at
the lesser of LIBOR plus an applicable margin, or the prime rate
minus an applicable margin based on certain leverage ratios. The
credit line is collateralized by all portfolios of consumer
receivables acquired for liquidation, other than 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 term of the agreement
is three years and is to mature in July 2009. The applicable
rate at September 30, 2008 and 2007 was 5.00% and 7.75%,
respectively. The average interest rate excluding unused credit
line fees for the fiscal year ended September 30, 2008 and
2007, respectively, was 6.12% and 7.61%. The outstanding balance
on this line of credit was approximately $84.9 million as
of September 30, 2008. The outstanding balance on this line
of credit was approximately $141.7 million as of
September 30, 2007. The Company and the Bank Group are in
the beginning phase of discussions to renew the current Credit
Facility. If, however, a renewal cannot be ultimately agreed to,
the Company, at maturity, will consider the sale of assets
collateralized by this loan agreement, to satisfy its
obligations after July 11, 2009.
On December 4, 2007, the Company signed the Sixth Amendment
to the Fourth Amended and Restated Loan Agreement (the
Credit Agreement) with the Bank Group that
temporarily increased the total revolving loan commitment from
$175 million to $185 million. The temporary increase
of $10 million, which was not used, was required to be
repaid by February 29, 2008.
On February 20, 2009, the Company entered into the Seventh
Amendment to the Credit Agreement in order to, among other
items, reduce the level of the loan commitment, redefine certain
financial covenant ratios, revise the requirement for an
unqualified opinion on annual audited financial statements, and
permit certain encumbrances relating to restructuring of the BMO
Facility. The level of the Loan Agreement is reduced from
$175 million to a low of $80 million. See
Note Q Subsequent Events for more information.
In March 2007, Palisades XVI borrowed approximately
$227 million under a new Receivables Financing Agreement
(Receivables Financing Agreement), as amended in
July 2007, December 2007 and May 2008, 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). 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
F-20
ASTA
FUNDING, INC. AND SUBSIDIARIES
Notes to
Consolidated Financial Statements
September 30,
2008 and 2007
|
|
Note F
|
Debt and Subordinated Debt Related
Party (Continued)
|
extended by the second and third amendments to the Receivables
Financing Agreement as discussed below. 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. As of September 30, 2008 and 2007, the
outstanding balance on this loan was approximately
$128.6 million, and $184.8 million, respectively.
At September 30, 2007, Palisades XVI was required to remit
an additional $13.1 million to its lender in order to be in
compliance under the Receivables Financing Agreement. The
Company facilitated the ability of Palisades XVI to make this
payment by borrowing $13.1 million under its current
revolving credit facility and causing another of its
subsidiaries to purchase a portion of the Portfolio Purchase
from Palisades XVI at a price of $13.1 million prior to the
measurement date under the Receivables Financing Agreement.
On December 27, 2007, Palisades XVI entered into the second
amendment to its Receivables Financing Agreement. As the actual
collections had been slower than the minimum collections
scheduled under the original agreement, coupled with
contemplated sales of accounts which had not occurred, BMO and
Palisades XVI agreed to an extended amortization schedule which
did not contemplate the sales of accounts. The effect of this
reduction was to extend the payments of the loan from
approximately 25 months to approximately 31 months
from the amendment date. 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.
On May 19, 2008, Palisades XVI entered into the third
amendment to its Receivables Financing Agreement. As the actual
collections on the Portfolio Purchase continued to be slower
than the minimum collections scheduled under the second
amendment, BMO and Palisades XVI agreed to a more extended
amortization schedule than the schedule determined in connection
with the second amendment. The effect of this amendment is to
extend the payments of the loan which is now scheduled to be
repaid by December 2010, approximately nine months longer than
the original term. 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. The applicable rate was 6.69% and
7.46% at September 30, 2008 and 2007, respectively. The
average interest rate of the Receivable Financing Agreement was
6.10% for the year ended September 30, 2008. From the
inception of the Receivables Financing Agreement on
March 2, 2007 through September 30, 2007 the average
rate was 7.06%. In addition, on May 19, 2008, the Company
entered into an amended and restated Servicing Agreement . The
amendment calls for increased documentation, responsibilities
and approvals of subservicers engaged by Palisades Collection
L.L.C
The aggregate minimum repayment obligations required under the
third amendment to the Receivables Financing Agreement entered
into on May 19, 2008 with Palisades Acquisition XVI
including interest and principal for fiscal years ending
September 30, 2009 and September 30, 2010 are
$67.0 million, and $75.0 million, respectively. As the
payments are to be made on a monthly basis and the minimums are
based on averages, these minimums could vary somewhat. While the
Company believes it will be able to make all payments due under
the new payment schedule, the Company also believes that if it
fails to do so, it will be required to sell the Portfolio
Purchase or may be subject to a foreclosure on the Portfolio
Purchase.
As a result of the actual collections being lower than the
minimum collection rates required under the Receivables
Financing Agreement for the months ended November 30, 2008,
December 31, 2008 and January 31, 2009, termination
events occurred under the Agreement. In order to resolve these
issues, on February 20, 2009, Palisades XVI entered into
the fourth amendment to its Receivables Financing Agreement. The
effect of this amendment is, among other things, to
(i) lower the collection rate minimum to $1 million
per month and as an average for each period of three consecutive
months and (ii) provide for an automatic extension of the
maturity date
F-21
ASTA
FUNDING, INC. AND SUBSIDIARIES
Notes to
Consolidated Financial Statements
September 30,
2008 and 2007
|
|
Note F
|
Debt and Subordinated Debt Related
Party (Continued)
|
from April 30, 2011 to April 30, 2012 should the
outstanding balance be reduced to $25 million or less by
April 30, 2011. In addition, the rate will remain the
unchanged at approximately 320 basis points over LIBOR,
subject to automatic downward adjustments in the future should
certain collection milestones be attained. See
Note Q Subsequent Events for more information
on this amendment.
On April 29, 2008, the Company obtained a subordinated loan
pursuant to a subordinated promissory note from Asta Group, Inc
(the Family Entity). The Family Entity is a greater
than 5% shareholder of the Company beneficially owned and
controlled by Arthur Stern, the Chairman of the Board of the
Company, Gary Stern, the 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 L.L.C. under the Receivables Financing Agreement.
Proceeds from the subordinated loan were used initially to
further collateralize the Companys $175 million
revolving loan facility with the Bank Group and was used to
reduce the balance due on that facility as of May 31, 2008.
The Companys average debt obligation (excluding the
subordinated debt related party) for the periods
ended September 30, 2008 and 2007, was approximately
$283.1 million, and $241.5 million, respectively. The
average interest rate for the fiscal years ended
September 30, 2008 and 2007, respectively was 6.11% and
7.34%, respectively.
The Companys cash requirements have been and will continue
to be significant and will depend on external financing to
acquire consumer receivables. Acquisitions are financed
primarily through cash flows from operating activities and with
the Companys credit facility, which matures on
July 11, 2009. At December 31, 2007, March 31,
2008, June 30, 2008 and September 30, 2008, due to the
borrowing base required by the Bank Group, the Company was
approaching the upper limit of its borrowing capacity. However,
with limited purchases of portfolios through the fiscal year
ended September 30, 2008, coupled with the
$8.2 million of subordinated debt incurred by the Company,
availability is approximately $18.5 million at
September 30, 2008. 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. Although availability has increased,
the limited availability coupled with slower collections has had
and could continue to have a negative impact on our ability to
purchase new portfolios for future growth.
Subsequent to September 30, 2008, collections deteriorated
resulting in impairments of approximately $21.4 million as
described in Note Q-Subsequent Events (Unaudited). If the
Companys collections continue to deteriorate, the Company
might need to secure another source of funding in order to
satisfy its working capital needs, curtail 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 twelve months will be sufficient to cover its operating
expenses.
F-22
ASTA
FUNDING, INC. AND SUBSIDIARIES
Notes to
Consolidated Financial Statements
September 30,
2008 and 2007
|
|
Note F
|
Debt and Subordinated Debt Related
Party (Continued)
|
The Companys debt and subordinated debt
related party at September 30, 2008 and 2007 are summarized
as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
|
|
|
|
|
|
|
Stated
|
|
|
Average
|
|
|
|
|
|
|
|
|
|
Interest
|
|
|
Interest
|
|
|
|
2008
|
|
|
2007
|
|
|
Rate
|
|
|
Rate
|
|
|
Credit Facility
|
|
$
|
84,934,000
|
|
|
$
|
141,656,000
|
|
|
|
5.00
|
%
|
|
|
6.12
|
%
|
Receivables Financing Agreement
|
|
|
128,551,000
|
|
|
|
184,810,000
|
|
|
|
6.69
|
%
|
|
|
6.10
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total debt
|
|
$
|
213,485,000
|
|
|
$
|
326,466,000
|
|
|
|
n/a
|
|
|
|
6.11
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subordinated debt related party
|
|
$
|
8,246,000
|
|
|
|
|
|
|
|
6.25
|
%
|
|
|
6.25
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Note G
|
Other Liabilities
|
Other liabilities as of September 30, 2008 and 2007 are as
follows:
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
Accounts payable and accrued expenses
|
|
$
|
3,145,000
|
|
|
$
|
4,934,000
|
|
Accrued interest payable
|
|
|
1,135,000
|
|
|
|
2,064,000
|
|
Other
|
|
|
338,000
|
|
|
|
539,000
|
|
|
|
|
|
|
|
|
|
|
Total other liabilities
|
|
$
|
4,618,000
|
|
|
$
|
7,537,000
|
|
|
|
|
|
|
|
|
|
|
The components of the provision for income taxes for the years
ended September 30, 2008, 2007 and 2006 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
Current:
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
6,567,000
|
|
|
$
|
30,476,000
|
|
|
$
|
29,206,000
|
|
State
|
|
|
2,152,000
|
|
|
|
9,999,000
|
|
|
|
9,584,000
|
|
Foreign
|
|
|
34,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8,753,000
|
|
|
|
40,475,000
|
|
|
|
38,790,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred:
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
|
(1,987,000
|
)
|
|
|
(3,593,000
|
)
|
|
|
(5,820,000
|
)
|
State
|
|
|
(647,000
|
)
|
|
|
(1,179,000
|
)
|
|
|
(1,910,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2,634,000
|
)
|
|
|
(4,772,000
|
)
|
|
|
(7,730,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision for income taxes
|
|
$
|
6,119,000
|
|
|
$
|
35,703,000
|
|
|
$
|
31,060,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-23
ASTA
FUNDING, INC. AND SUBSIDIARIES
Notes to
Consolidated Financial Statements
September 30,
2008 and 2007
|
|
Note H
|
Income Taxes (Continued)
|
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:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
Statutory federal income tax rate
|
|
|
35.0
|
%
|
|
|
35.0
|
%
|
|
|
35.0
|
%
|
State income tax, net of federal benefit
|
|
|
5.8
|
|
|
|
5.8
|
|
|
|
5.8
|
|
Other
|
|
|
0.1
|
|
|
|
(0.2
|
)
|
|
|
(0.4
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effective income tax rate
|
|
|
40.9
|
%
|
|
|
40.6
|
%
|
|
|
40.4
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Company recognized a net deferred tax asset of $15,567,000
and $12,349,000 as of September 30, 2008 and 2007,
respectively. The components are as follows:
|
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2008
|
|
|
2007
|
|
|
Deferred revenue
|
|
$
|
534,000
|
|
|
|
7,564,000
|
|
Impairments
|
|
|
13,930,000
|
|
|
|
4,594,000
|
|
Compensation expense
|
|
|
880,000
|
|
|
|
505,000
|
|
Other
|
|
|
223,000
|
|
|
|
|
|
Equity in venture
|
|
|
|
|
|
|
(314,000
|
)
|
|
|
|
|
|
|
|
|
|
Net deferred asset
|
|
$
|
15,567,000
|
|
|
$
|
12,349,000
|
|
|
|
|
|
|
|
|
|
|
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 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 would be required to provide a
valuation allowance for any portion of our deferred tax assets
that, more likely than not, will not be realized. There is no
valuation allowance recorded at September 30, 2008. As
required by FASB Interpretation 48, Accounting for
Uncertainty in Income Taxes (FIN 48), 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.
The corporate federal income tax returns of the Company for
2004, 2005 and 2006 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.
F-24
ASTA
FUNDING, INC. AND SUBSIDIARIES
Notes to
Consolidated Financial Statements
September 30,
2008 and 2007
|
|
Note I
|
Commitments and Contingencies
|
Employment
Agreements
On January 25, 2007, the Company entered into an employment
agreement (the Employment Agreement) with the
Companys President and Chief Executive Officer, the
Companys Executive Vice President and the Companys
Chief Financial Officer (each, an Executive). Each
of Gary Sterns and Mitchell Cohens Employment
Agreements, the Companys Chief Executive Officer and Chief
Financial Officer, respectively, expire on December 31,
2009, provided, however, that the parties are required to
provide ninety days prior written notice if they do not
intend to seek an extension or renewal of the Employment
Agreement. The agreement for Arthur Stern, the Companys
Executive Vice President, had a one year term. In January 2008,
the Company entered into a similar two year employment agreement
with Cameron Williams, the Companys Chief Operating
Officer, and a one year agreement with Arthur Stern. The
employment agreements each provide for a base salary, which may
be increased by the Board of Directors in its sole discretion as
follows: Arthur Stern $355,000 and Cameron
Williams $300,000, except that by June 1, 2009,
Mr. Williams base salary shall equal or exceed
$350,000.
In February 2009, Mitchell Cohen, CFO, announced his resignation
from the Company effective with the filing of this Report on
Form 10-K.
On January 17, 2008, the Compensation Committee awarded
58,000 shares of restricted stock to certain officers and
directors of the Company. These shares vest in three equal
annual installments starting on October 1, 2008.
Leases
The Company leases its facilities in Englewood Cliffs, New
Jersey; Bethlehem, Pennsylvania; and Sugar Land, Texas. The
leases are operating leases, and the Company incurred related
rent expense in the amounts of $526,000, $526,000 and $381,000
during the years ended September 30, 2008, 2007 and 2006,
respectively. The future minimum lease payments are as follows:
|
|
|
|
|
Year
|
|
|
|
Ending
|
|
|
|
September 30,
|
|
|
|
|
2009
|
|
$
|
496,000
|
|
2010
|
|
|
354,000
|
|
2011
|
|
|
12,000
|
|
2012
|
|
|
|
|
2013
|
|
|
|
|
|
|
|
|
|
|
|
$
|
862,000
|
|
|
|
|
|
|
As discussed in Note Q-Subsequent Events (unaudited) the Company
announced it is closing its Pennsylvania 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.
F-25
ASTA
FUNDING, INC. AND SUBSIDIARIES
Notes to
Consolidated Financial Statements
September 30,
2008 and 2007
|
|
Note I
|
Commitments and
Contingencies (Continued)
|
During 2006, a subsidiary of the Company received subpoenas from
three jurisdictions to produce information in connection with
debt collection practices in those jurisdictions. The Company
has fully cooperated with the issuing agencies and has provided
the requested documentation. One jurisdiction has closed the
case with no action taken against the Company. The Company has
not made any provision with respect to the remaining matters in
the financial statements as the nature of these matters is
information requests only and the Company considers these
matters closed.
In the course of conducting its business, the Company is
required by certain of the jurisdictions within which it
operates to obtain licenses and permits to conduct its
collection activities. The Company has been notified by one such
jurisdiction that it did not operate for a period of time from
February 1, 2005 to April 17, 2006 with the proper
license. The Company did not make any provision for such matter
in the financial statements. There has been no communication
from the jurisdiction regarding this matter for over a year and
the Company is properly licensed in this jurisdiction. The
Company considers this matter closed.
At September 30, 2008 approximately 36% of our portfolios
were serviced by two collection organizations. We have servicing
agreements in place with these two collection organizations as
well as all other third party collection agencies and attorneys
that cover standard contingency fees and servicing of the
accounts.
|
|
Note K
|
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 874,000 were
available as of September 30, 2008. As of
September 30, 2008, approximately 158 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.
F-26
ASTA
FUNDING, INC. AND SUBSIDIARIES
Notes to
Consolidated Financial Statements
September 30,
2008 and 2007
|
|
Note K
|
Stock Option Plans (Continued)
|
2002
Stock Option Plan
On March 5, 2002, the Board of Directors adopted the Asta
Funding, Inc. 2002 Stock Option Plan (the 2002
Plan), which plan was approved by the Companys
stockholders on May 1, 2002. The 2002 Plan was adopted in
order to attract and retain qualified directors, officers and
employees of, and consultants to, the Company. The following
description does not purport to be complete and is qualified in
its entirety by reference to the full text of the 2002 Plan,
which is included as an exhibit to the Companys reports
filed with the SEC.
The 2002 Plan authorizes the granting of incentive stock options
(as defined in Section 422 of the Code) and non-qualified
stock options to eligible employees of the Company, including
officers and directors of the Company (whether or not employees)
and consultants of the Company.
The Company has 1,000,000 shares of Common Stock authorized
for issuance under the 2002 Plan and 393,334 were available as
of September 30, 2008. As of September 30, 2008,
approximately 158 of the Companys employees were eligible
to participate in the 2002 Plan. Future grants under the 2002
Plan have not yet been determined.
1995
Stock Option Plan
The 1995 Stock Option Plan expired on September 14, 2005.
The plan was adopted in order to attract and retain qualified
directors, officers and employees of, and consultants, to the
Company. The following description does not purport to be
complete and is qualified in its entirety by reference to the
full text of the 1995 Stock Option Plan, which is included as an
exhibit to the Companys reports filed with the SEC.
The 1995 Stock Option Plan authorized the granting of incentive
stock options (as defined in Section 422 of the 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,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
Average
|
|
|
|
|
|
Average
|
|
|
|
|
|
|
Exercise
|
|
|
|
|
|
Exercise
|
|
|
|
|
|
Exercise
|
|
|
|
Shares
|
|
|
Price
|
|
|
Shares
|
|
|
Price
|
|
|
Shares
|
|
|
Price
|
|
|
Outstanding options at the beginning of year
|
|
|
1,337,438
|
|
|
$
|
9.39
|
|
|
|
1,414,439
|
|
|
$
|
9.45
|
|
|
|
1,580,605
|
|
|
$
|
9.11
|
|
Options granted
|
|
|
|
|
|
|
|
|
|
|
18,000
|
|
|
|
28.75
|
|
|
|
|
|
|
|
0.00
|
|
Options cancelled
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
0.00
|
|
|
|
(6,333
|
)
|
|
|
22.36
|
|
Options exercised
|
|
|
(300,000
|
)
|
|
|
1.42
|
|
|
|
(95,001
|
)
|
|
|
13.99
|
|
|
|
(159,833
|
)
|
|
|
5.51
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding options at the end of year
|
|
|
1,037,438
|
|
|
$
|
11.69
|
|
|
|
1,337,438
|
|
|
$
|
9.39
|
|
|
|
1,414,439
|
|
|
$
|
9.45
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable options at the end of year
|
|
|
1,031,438
|
|
|
$
|
11.59
|
|
|
|
1,325,438
|
|
|
$
|
9.21
|
|
|
|
1,414,439
|
|
|
$
|
9.45
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-27
ASTA
FUNDING, INC. AND SUBSIDIARIES
Notes to
Consolidated Financial Statements
September 30,
2008 and 2007
|
|
Note K
|
Stock Option Plans (Continued)
|
The Company recognized $92,000 of compensation expense related
to stock options granted during the fiscal year ended
September 30, 2008 for options granted in preceding
periods. As of September 30, 2008, there was $43,000 of
unrecognized compensation cost related to unvested stock
options. The Company recognized $141,000 and $105,000 of stock
based compensation expense related to stock option grants in
fiscal year 2007 and 2006, respectively.
The intrinsic value of options exercised during the fiscal years
ended September 30, 2008, 2007 and 2006, was
$6.3 million, $2.1 million, and $4.6 million,
respectively.
The aggregate intrinsic value of the outstanding and exercisable
options as of September 30, 2007 and 2006 was
$38.6 million and $40.4 million, respectively. There
was no intrinsic value of the outstanding and exercisable
options as of September 30, 2008.
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.
The following table summarizes information about the plans
outstanding options as of September 30, 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
|
|
2.0
|
|
|
$
|
2.63
|
|
|
|
300,000
|
|
|
$
|
2.63
|
|
$ 2.8751 - $ 5.7500
|
|
|
106,667
|
|
|
|
4.1
|
|
|
|
4.73
|
|
|
|
106,667
|
|
|
|
4.73
|
|
$5.7501 - $ 8.6250
|
|
|
12,000
|
|
|
|
3.1
|
|
|
|
5.96
|
|
|
|
12,000
|
|
|
|
5.96
|
|
$14.3751 - $17.2500
|
|
|
218,611
|
|
|
|
5.2
|
|
|
|
15.04
|
|
|
|
218,611
|
|
|
|
15.04
|
|
$17.2501 - $20.1250
|
|
|
382,160
|
|
|
|
6.0
|
|
|
|
18.22
|
|
|
|
382,160
|
|
|
|
18.22
|
|
$25.8751 - $28.7500
|
|
|
18,000
|
|
|
|
8.2
|
|
|
|
28.75
|
|
|
|
12,000
|
|
|
|
28.75
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,037,438
|
|
|
|
4.8
|
|
|
$
|
11.69
|
|
|
|
1,031,438
|
|
|
$
|
11.59
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table summarizes information about restricted
stock transactions:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
Weighted
|
|
|
|
Year Ended
|
|
|
Average
|
|
|
Year Ended
|
|
|
Average
|
|
|
|
September 30, 2008
|
|
|
Grant Date
|
|
|
September 30, 2007
|
|
|
Grant Date
|
|
|
|
Shares
|
|
|
Fair Value
|
|
|
Shares
|
|
|
Fair Value
|
|
|
Unvested at the beginning of period
|
|
|
45,333
|
|
|
$
|
28.75
|
|
|
|
0
|
|
|
$
|
28.75
|
|
Awards granted
|
|
|
58,000
|
|
|
|
19.73
|
|
|
|
68,000
|
|
|
|
19.73
|
|
Vested
|
|
|
(22,666
|
)
|
|
|
28.75
|
|
|
|
(22,667
|
)
|
|
|
28.75
|
|
Forfeited
|
|
|
0
|
|
|
|
0.00
|
|
|
|
0
|
|
|
|
0.00
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unvested at the end of period
|
|
|
80,667
|
|
|
$
|
22.26
|
|
|
|
45,333
|
|
|
$
|
22.26
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
No restricted stock awards granted in fiscal year 2006.
The Company recognized $921,000 and $999,000 of compensation
expense during the fiscal years ended September 30, 2008
and 2007, respectively, related to the shares of restricted
stock granted under this plan. There
F-28
ASTA
FUNDING, INC. AND SUBSIDIARIES
Notes to
Consolidated Financial Statements
September 30,
2008 and 2007
|
|
Note K
|
Stock Option Plans (Continued)
|
was no compensation expense related to this plan in fiscal year
2006. As of September 30, 2007, there was $1,179,000 of
unrecognized compensation cost related to unvested restricted
stock.
The Company recognized a total of $1,013,000 and $1,140,000 in
compensation expense for the fiscal years ended
September 30, 2008 and 2007, respectively, for the stock
options and restricted stock grants. As of September 30,
2008, there was a total of $1,180,000 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 L
|
Stockholders Equity
|
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. During the year ended September 30, 2006, the Company
declared quarterly cash dividends aggregating $7,687,000 which
includes $0.04 per share, per quarter, plus a special dividend
of $0.40 per share which in total amounted to $6,052,000 and was
paid November 1, 2006.
The Company expects to pay a regular cash dividend in future
quarters, but 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.
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, 2008, 2007 and 2006 were $121,000, $117,000
and $96,000, respectively.
|
|
Note N
|
Fair Value of Financial Instruments
|
SFAS No. 107, Disclosures about Fair Values of
Financial Instruments (SFAS 107),
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 receivables was $449,012,000 and
$545,623,000 at September 30, 2008 and 2007, respectively.
The Company computed the fair value of these receivables using
its forecasting model and the fair value approximated the
carrying value at both September 30, 2008 and 2007.
The carrying value of advances under lines of credit and
subordinated debt (related party) was $221,731,000 and
$326,466,000 at September 30, 2008 and 2007, respectively.
The majority of these loans are variable rate and short-term,
therefore, the carrying amounts approximate fair value.
F-29
ASTA
FUNDING, INC. AND SUBSIDIARIES
Notes to
Consolidated Financial Statements
September 30,
2008 and 2007
|
|
Note O
|
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.
The Company had a consulting agreement with a member of the
Board of Directors of the Company, who, during the period of the
consulting agreement was a non-independent director. The
agreement commenced March 1, 2006 and ceased
December 31, 2007. The director has since become an
independent director of the Company. The agreement called for
the consultant to provide services as requested. Expense under
the agreement totaled $15,000 for the fiscal year ended
September 30, 2008. Expenses under the agreement for the
fiscal years ended 2007 and 2006 were immaterial.
|
|
Note P
|
Summarized
Quarterly Data (unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First
|
|
|
Second
|
|
|
Third
|
|
|
Fourth
|
|
|
Full
|
|
|
|
Quarter
|
|
|
Quarter
|
|
|
Quarter
|
|
|
Quarter
|
|
|
Year
|
|
|
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 per share
|
|
$
|
0.96
|
|
|
$
|
(0.54
|
)
|
|
$
|
0.17
|
|
|
$
|
0.05
|
|
|
$
|
0.62
|
|
Diluted net income per share
|
|
$
|
0.90
|
|
|
$
|
(0.54
|
)
|
|
$
|
0.17
|
|
|
$
|
0.05
|
|
|
$
|
0.61
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue
|
|
$
|
25,645,000
|
|
|
$
|
33,083,000
|
|
|
$
|
38,938,000
|
|
|
$
|
43,096,000
|
|
|
$
|
140,762,000
|
|
Income before income taxes
|
|
|
19,038,000
|
|
|
|
21,102,000
|
|
|
|
25,777,000
|
|
|
|
22,052,000
|
|
|
|
87,969,000
|
|
Net income
|
|
|
11,326,000
|
|
|
|
12,552,000
|
|
|
|
15,308,000
|
|
|
|
13,080,000
|
|
|
|
52,266,000
|
|
Basic net income per share
|
|
$
|
0.82
|
|
|
$
|
0.91
|
|
|
$
|
1.10
|
|
|
$
|
0.94
|
|
|
$
|
3.79
|
|
Diluted net income per share
|
|
$
|
0.77
|
|
|
$
|
0.85
|
|
|
$
|
1.03
|
|
|
$
|
0.88
|
|
|
$
|
3.56
|
|
|
|
|
* |
|
Due to rounding the sum of quarterly totals for earnings per
share may not add to the yearly total. |
|
|
Note Q
|
Subsequent
events (unaudited)
|
On February 20, 2009, the Company received the necessary
Bank Group approval and entered into the Seventh Amendment to
the Credit Agreement in order to, among other items, reduce the
level of the loan commitment, redefine certain financial
covenant ratios, revise the requirement for an unqualified
opinion on annual audited financial statements, and permit
certain encumbrances relating to restructuring of the BMO
Facility. Pursuant to the Seventh Amendment, the loan commitment
has been 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), EBITDA and fixed charges attributable to
Palisades XVI shall be excluded from the computation of the
fixed charge coverage ratio for Asta Funding and its
Subsidiaries. In addition, the fixed charge coverage ratio has
been revised to exclude impairment expense of portfolios of
consumer receivables acquired
F-30
ASTA
FUNDING, INC. AND SUBSIDIARIES
Notes to
Consolidated Financial Statements
September 30,
2008 and 2007
|
|
NOTE Q
|
Subsequent
events (unaudited) (Continued)
|
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 Agreement were revised to include certain
encumbrances incurred by the Company in connection with certain
guarantees and liens provided to BMO Facility and the Family
Entity. Further, individual portfolio purchases in excess of
$7.5 million will now require the consent of the agent and
portfolio purchases in excess of $15.0 million in the
aggregate during any 120 day period will require the
consent of the Bank Group. In addition, as the environment
continues to be challenging, data received during the second
quarter of fiscal 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.
As of January 31, 2009 our debt on the Bank Group facility
was $58.7 million, as compared to $84.9 million at
September 30, 2008. Our borrowing availability is based on
a formula calculated on the age of the receivables. As of
December 31, 2008 our borrowing availability was
approximately the same level as of September 30, 2008,
$18.5 million.
As a result of the actual collections being lower than the
minimum collection rates required under the Agreement for the
months ended November 30, 2008, December 31, 2008 and
January 31, 2009, termination events occurred under the
Agreement. In order to resolve these issues, on
February 20, 2009, we executed the Fourth Amendment to the
Receivables Financing Agreement with BMO. The effect of this
Fourth Amendment is, among other things, to (i) lower the
collection rate minimum to $1 million per month 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 will remain
unchanged at approximately 320 basis points over LIBOR,
subject to automatic reduction in the future should certain
collection milestones be attained. The milestones are achieving
certain levels of debt as of various dates during the remainder
of the agreement.
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 offered 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.
In addition, as further credit support under the Receivables
Financing Agreement, the Family Entity offered 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. 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, 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 lenders under any
successor senior facility.
On February 12, 2009 the Company announced the closing of
the collection facility located in Pennsylvania.
Managements preliminary estimates of the cost related to
the closing of the facility will be approximately $250,000
including but not limited to, severance costs for approximately
38 employees. There will be no material impact on the level
of collections, as the operations will be shifted to the New
Jersey location, or accounts will be outsourced. The event will
be treated as restructuring charges in the second quarter of
fiscal year 2009.
F-31