e10vk
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C.
20549
Form 10-K
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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For the fiscal year ended
September 30, 2010
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OR
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
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For the transition period
from to
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Commission file
number: 0-26906
ASTA FUNDING, INC.
(Exact Name of Registrant
Specified in its Charter)
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Delaware
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22-3388607
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(State or other jurisdiction
of
incorporation or organization)
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(I.R.S. Employer
Identification No.)
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210 Sylvan Avenue, Englewood
Cliffs, NJ
(Address of principal
executive offices)
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07632
(Zip
Code)
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Issuers
telephone number, including area code:
(201) 567-5648
Securities registered pursuant to Section 12(b) of the
Exchange Act: None
Securities registered pursuant to Section 12(g) of the
Exchange Act:
Common
Stock, par value $.01 per share
(Title of Class)
Indicate by check mark if the registrant is a well-known
seasoned issuer, as defined in Rule 405 of the Securities
Act Yes o No þ
Indicate by check mark if the registrant is not required to file
reports pursuant to Section 13 or Section 15(d) of the
Act Yes o No þ
Indicate by check mark whether the registrant: (1) filed
all reports required to be filed by Section 13 or 15(d) of
the Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the registrant was required to file
such reports), and (2) has been subject to such filing
requirements for the past
90 days. Yes þ No o
Indicate by check mark whether the registrant has submitted
electronically and posted on its corporate Web site, if any,
every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of
Regulation S-T
during the preceding 12 months (or for such shorter period
that the registrant was required to submit and post such
files). Yes o No o
Indicate by check mark if disclosure of delinquent filers
pursuant to Item 405 of
Regulation S-K
(Section 229.405 of this chapter) is not contained herein,
and will not be contained, to the best of the registrants
knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this
Form 10-K
or any amendment to this
Form 10-K. þ
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
$75,333,576 as of the last business day of the registrants
most recently completed second fiscal quarter.
As of December 10, 2010, the registrant had
14,600,423 shares of Common Stock issued and outstanding.
Documents
incorporated by reference:
Portions of the registrants Proxy Statement for the 2011
Annual Meeting of Stockholders are incorporated herein by
reference in Part III of this Annual Report on
Form 10-K
to the extent stated herein. Such proxy statement will be filed
with the Securities and Exchange Commission within 120 days
of the registrants fiscal year ended September 30,
2010.
FORM 10-K
TABLE OF CONTENTS
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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. All
statements other than statements of historical facts included or
incorporated by reference in this annual report on
Form 10-K,
including without limitation, statements regarding our future
financial position, business strategy, budgets, projected
revenues, projected costs and plans and objective of management
for future operations, are forward-looking statements.
Forward-looking statements generally can be identified by the
use of forward-looking terminology such as may,
will, expects, intends,
plans, projects, estimates,
anticipates, or believes or the negative
thereof or any variation there on or similar terminology or
expressions.
We have based these forward-looking statements on our current
expectations and projections about future events. These
forward-looking statements are not guarantees and are subject to
known and unknown risks, uncertainties and assumptions about us
that may cause our actual results, levels of activity,
performance or achievements to be materially different from any
future results, levels of activity, performance or achievements
expressed or implied by such forward-looking statements.
Important factors which could materially affect our results and
our future performance include, without limitation, our ability
to purchase defaulted consumer receivables at appropriate
prices, changes in government regulations that affect our
ability to collect sufficient amounts on our defaulted consumer
receivables, our ability to employ and retain qualified
employees, changes in the credit or capital markets, changes in
interest rates, deterioration in economic conditions, negative
press regarding the debt collection industry which may have a
negative impact on a debtors willingness to pay the debt
we acquire, and statements of assumption underlying any of the
foregoing, as well as other factors set forth under
Item 1A. Risk Factors beginning on page 14
of this report and Item 7
Managements Discussions and Analysis of Financial
Condition and Results of Operation below.
All subsequent written and oral forward-looking statements
attributable to us, or persons acting on our behalf, are
expressly qualified in their entirety by the foregoing. Except
as required by law, we assume no duty to update or revise any
forward-looking statements.
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Part I
Overview
Asta Funding, Inc., together with its wholly owned significant
operating subsidiaries Palisades Collection LLC, Palisades
Acquisition XVI, LLC (Palisades XVI), VATIV Recovery
Solutions LLC (VATIV) and other subsidiaries, not
all wholly owned, and not considered material (the
Company), is engaged in the business of purchasing,
and managing for its own account:
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Primary charged-off receivables consisting of 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 consisting of accounts where the
debtor is currently making partial or irregular monthly
payments, but the accounts may have been written-off by the
originators;
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Performing receivables consisting of accounts where the debtor
is making regular monthly payments that may or may not have been
delinquent in the past; and
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Distressed consumer receivables consisting of the unpaid debts
of individuals to banks, finance companies and other credit and
service providers.
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A large portion of our distressed consumer receivables are
MasterCard®,
Visa®
and other credit card accounts which were charged-off by the
issuers or providers for non-payment. We acquire these and other
consumer receivable portfolios at substantial discounts to their
face values. The discounts are based on the characteristics
(issuer, account size, debtor location and age of debt) of the
underlying accounts of each portfolio.
We operate solely in the United States in one reportable
business segment.
Prior to purchasing a portfolio, we perform a qualitative and
quantitative analysis of the underlying receivables and
calculate the purchase price which is intended to offer us an
adequate return on our investment after servicing expenses.
After purchasing a portfolio, we actively monitor performance
and review and adjust our collection and servicing strategies
accordingly.
We purchase receivables from credit grantors and others through
privately negotiated direct sales, brokered transactions and
auctions in which sellers of receivables seek bids from several
pre-qualified debt purchasers. We fund portfolios through a
combination of internally generated cash flow and bank debt, if
needed.
Our objective is to maximize our return on investment in
acquired consumer receivable portfolios. As a result, before
acquiring a portfolio, we analyze the portfolio to determine how
to best maximize collections in a cost efficient manner and
decide whether to use our internal servicing and collection
department, third-party collection agencies, attorneys, or a
combination of all three options.
When we outsource the servicing of receivables, our management
typically determines the appropriate third-party collection
agencies and attorneys based on the type of receivables
purchased. Once a group of receivables is sent to third-party
collection agencies and attorneys, our management actively
monitors and reviews the third-party collection agencies
and attorneys performance on an ongoing basis. Based on
portfolio performance considerations, our management will either
(i) 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 (ii) sell portions of the
portfolio accounts. Our internal collection unit, which
currently employs approximately 40 collection-related staff,
including senior management, assists us in benchmarking our
third-party collection agencies and attorneys, and provides us
with greater flexibility for servicing a percentage of our
consumer receivable portfolios in-house.
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. We were
formed as an affiliate of Asta Group, Incorporated (the
Family Entity), an entity owned by Arthur Stern, our
Chairman
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Emeritus, Gary Stern, our Chairman, President and Chief
Executive Officer, and other members of the Stern family, to
purchase, at a small discount to face value, retail installment
sales contracts secured by motor vehicles. We became a public
company in November 1995. In 1999, we capitalized on our
managements more than 40 years of experience and
expertise in acquiring and managing consumer receivable
portfolios for the Family Entity. As a result, we ceased
purchasing automobile contracts and, with the assistance and
financial support of the Family Entity and a partner, purchased
our first significant consumer receivable portfolio. Since then,
the Family Entity ceased acquiring consumer receivable
portfolios and, accordingly, does not compete with the Company.
Industry
Overview
The purchasing, servicing and collection of charged-off,
semi-performing and performing consumer receivables is an
industry that is driven by:
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increasing levels of consumer debt;
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increasing defaults of the underlying receivables; and
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increasing utilization of third-party providers to collect such
receivables.
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Strategy
Although we are in a challenging economic period and an enhanced
regulatory environment, our primary objective remains to utilize
our managements experience and expertise by identifying,
evaluating, pricing and acquiring consumer receivable portfolios
and maximizing collections of such receivables in a cost
efficient manner. Our strategies include:
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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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selling accounts on an opportunistic basis, generally when our
efforts have been exhausted through traditional collecting
methods, or when we can capitalize on pricing during times when
we feel the pricing environment is high; and
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capitalizing on our strategic relationships to identify and
acquire consumer receivable portfolios as pricing, financing and
conditions permit.
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Because our purchases of new portfolios of consumer receivables
has been reduced, we expect to see a corresponding reduction in
finance income in future quarters and future years, to the
extent we have not replaced our receivables acquired for
liquidation. Instead, we focused on reducing our debt and being
highly disciplined in our portfolio purchases. We continue to
review potential portfolio acquisitions regularly and will buy
at the right price, where we believe the purchase will yield our
desired rate of return.
We believe that, given our managements experience and
expertise, along with the fragmented yet growing market in which
we operate, as we implement this short-term strategy, we will be
in position to again grow our business when economic conditions
stabilize.
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®,
Visa®
and private label credit card accounts, among other types of
receivables.
In the past we have acquired, directly and indirectly, through
the consumer receivable portfolios that we acquire, secured
consumer asset portfolios, consisting primarily of receivables
secured by automobiles.
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We identify potential portfolio acquisitions on an ongoing basis
through:
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our relationships with industry participants, financial
institutions, collection agencies, investors and our financing
sources;
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brokers who specialize in the sale of consumer receivable
portfolios; and
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Other sources.
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Historically, the purchase prices of the consumer receivable
portfolios we have acquired have ranged from less than $100,000
to approximately $15,000,000; however, we acquired one group of
portfolios in March 2007 for $300 million (the
Portfolio Purchase). As a part of our strategy to
acquire consumer receivable portfolios, we have, from time to
time, entered into, and may continue to enter into,
participation and profit sharing agreements with our sources of
financing and our third-party collection agencies and attorneys.
These arrangements may take the form of a joint bid, with one of
our third-party collection agencies, collection attorneys, or
financing sources that assist 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 an approximate 50% sharing arrangement after
we have recouped 100% of the cost of the portfolio purchase plus
the cost of funds.
We utilize our relationships with brokers, third-party
collection agencies and attorneys, and sellers of portfolios to
locate portfolios for purchase. Our senior management is
responsible for:
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coordinating due diligence, including, in some cases,
on-site
visits to the sellers office;
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stratifying and analyzing the portfolio characteristics;
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valuing the portfolio;
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preparing bid proposals;
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negotiating pricing and terms;
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negotiating and executing a purchase contract;
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closing the purchase; and
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coordinating the receipt of account documentation for the
acquired portfolios.
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The seller or broker typically supplies us with either a sample
listing or the actual portfolio being sold, through an
electronic form of media. We analyze each consumer receivable
portfolio to determine if it meets our purchasing criteria. We
may then prepare a bid or negotiate a purchase price. If a
purchase is completed, management monitors the portfolios
performance and uses this information in determining future
buying criteria including pricing. An integral part of the
acquisition process is the oversight by our 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. The current members of the committee are
the Chairman Emeritus, the Chief Executive Officer, the Chief
Financial Officer, and the Senior Vice President. As the
Chairman Emeritus and Chief Executive Officer are related family
members, at least one other officer must approve transactions.
After determining that an investment should yield an adequate
return on our acquisition cost after servicing fees, including
court costs, we use a variety of qualitative and quantitative
factors to calculate the estimated cash flows. 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 states with better
regulatory environments, better collection histories, and that
are better suited to attempt to collect in and ultimately we
have better predictability of the liquidations and the expected
cash flows all of which factor into our cash flow analysis;
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financial wherewithal of the seller;
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jobs or property of the debtors within portfolios
this is of particular importance. Debtors with jobs or property
are more likely to repay their obligation and conversely,
debtors without jobs or property are less likely to repay their
obligation; and
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the ability to obtain customer statements from the original
issuer.
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We obtain and utilize, as appropriate, input including, but not
limited to, monthly collection projections and liquidation rates
from our third party collection agencies and attorneys, as
further evidentiary matter, to assist us in developing
collection strategies and in modeling the expected cash flows
for a given portfolio.
Once a receivable portfolio has been identified for potential
purchase, we prepare various analyses based on extracting
customer level data from external sources, other than the
issuer, to analyze the potential collectability of the
portfolio. We also analyze the portfolio by comparing it to
similar portfolios previously acquired by us. In addition, we
perform qualitative analyses of other matters affecting the
value of portfolios, including a review of the delinquency,
charge off, placement and recovery policies of the originator as
well as the collection authority granted by the originator to
any third-party collection agencies, and, if possible, by
reviewing their recovery efforts on the particular portfolio.
After these evaluations are completed, members of our senior
management discuss the findings, decide whether to make the
purchase and finalize the price at which we are willing to
purchase the portfolio.
We purchase most of our consumer receivable portfolios directly
from originators and other sellers including, from time to time,
our third-party collection agencies and attorneys, through
privately negotiated direct sales, and through auction-type
sales in which sellers of receivables seek bids from several
pre-qualified debt purchasers. We also, from time to time, use
the services of brokers for sourcing consumer receivable
portfolios. In order for us to consider a potential seller as a
source of receivables, a variety of factors are considered.
Sellers must demonstrate that they have:
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adequate internal controls to detect fraud;
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the ability to provide post-sale support; and
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the capacity to honor put-back and return warranty requests.
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Generally, our portfolio purchase agreements provide that we can
return certain accounts to the seller within a specified time
period. However, in some transactions, we may acquire a
portfolio with few, if any, rights to return accounts to the
seller. After acquiring a portfolio, we conduct a detailed
analysis to determine which accounts in the portfolio should be
returned to the seller. Although the terms of each portfolio
purchase agreement differ, examples of accounts that may be
returned to the seller include:
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debts paid prior to the cutoff date;
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debts in which the consumer filed bankruptcy prior to the cutoff
date;
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debts in which the consumer was deceased prior to cutoff
date; and
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fraudulent accounts.
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Accounts returned to sellers for fiscal years 2010 and 2009 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, allowing us to focus our resources on
portfolio collections. Under a typical portfolio purchase
agreement, the seller refunds the portion of the purchase
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price attributable to the returned accounts or delivers
replacement receivables to us. Occasionally, we will acquire a
well-seasoned or older portfolio at a reduced price from a
seller that is unable to meet all of our purchasing criteria.
When we acquire such portfolios, the purchase price is further
discounted beyond the typical discounts we receive on the
portfolios we purchase.
VATIV, our wholly-owned subsidiary located in Sugar Land, Texas,
provides bankruptcy and deceased account servicing. VATIV
provides us 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.
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.
We presently outsource a significant amount of our receivable
servicing to third-party collection agencies and attorneys. Our
senior management typically determines the appropriate
third-party collection agency and attorney based on the type of
receivables purchased. Once a group of receivables is sent to a
third-party collection agency or attorney, our management
actively monitors and reviews the third-party collection
agencys and attorneys performance on an ongoing
basis. Our management receives detailed analyses, including
collection activity and portfolio performance, from our internal
servicing departments for the purpose of evaluating the results
of the efforts of the third-party collection agencies and
attorneys. Based on portfolio performance guidelines, our
management will reassign certain receivables from one
third-party collection agency or attorney to another if we
believe such change will enhance collections.
At September 30, 2010 approximately 36% of our portfolios
were serviced by five collection organizations. We have
servicing agreements in place with these five collection
organizations as well as all other third-party collection
agencies and attorneys. These servicing agreements cover
standard contingency fees and servicing of the accounts.
Operations
The Operations servicing division consists of the following
units:
Collections
The Collection Department is responsible for making and
receiving contact with and from consumers for the purpose of
collecting upon the accounts contained in our consumer
receivables portfolios. Collection efforts are specific to
accounts that are not yet being serviced by our network of
external agencies and attorneys. The Collection Department uses
a friendly, customer service approach to collect on receivables
and utilizes collection software, a dialer and telephone system
to accomplish this goal. Each collector is responsible for:
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Initiating outbound collection calls and handling incoming calls
from the consumer. If a call is received for an account that has
already been outsourced to a servicer; the collector relays the
corresponding contact information and directs the customer to
call the servicer directly.
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Identifying the debt and iterating the benefits of paying the
obligation.
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Working with the customer to develop acceptable means of
satisfying the obligation. The Collection Department (and our
third party network of servicers) has the ability to tailor
repayment plans that accommodate the situation of the obligor by
considering components including their monthly budgets and
employment status.
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Offering (if necessary and based upon the individual situation)
an obligor a discount on the overall obligation.
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Additionally, the Collection Department utilizes 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 the Collection Department.
If the Collection Department cannot contact the customer by
either telephone or mail, the account is skip traced through an
automated process to obtain the most recent contact information
for the debtor. This process employs usage of data supplied by a
variety of third party databases. Once new contact information
is obtained, the account is referred back to the Collections
Department and collection activity is once again initiated.
Other members of the collection department are responsible for:
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Coordinating customer inquiries and assisting the collection
agencies in their processes, if needed.
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Handling the repurchase process of ineligible accounts received
from a Seller that may be included in a purchased portfolio.
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Working with Buyers during the transition period and post-sale
process.
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Handling any issues that may arise once a purchased receivable
portfolio is sold.
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Reading incoming correspondence for accounts that are currently
assigned to the Collection Department, ensuring the account is
handled properly, taking the initial action required and
forwarding to a collector
and/or
manager for follow up action.
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Media
The Media Department is responsible for obtaining, storing and
tracking the requests and subsequent receipt of
back-up documents associated with specific accounts.
These documents are usually requested from the seller for the
purpose of substantiating the debt if the debt is disputed by
the consumer or is requested by our legal department. The Media
Department is also responsible for reconciling and tracking
expenses incurred by the aforementioned document requests and
ensuring invoices are handled timely and any errors are
corrected.
Disputes
The function of the dispute department is to handle any dispute
received via mail, electronically or telephone. Once a dispute
is communicated, the account is removed from the credit reports
or reported as a dispute, investigated and resolution is
obtained.
Correspondence
The purpose of the correspondence department is to review,
document and scan into the system any written correspondence
related to our accounts. The employees are also required to
notify the Department to whom the correspondence is intended to
ensure appropriate action is initiated.
Accounting
and Finance
In addition to the customary accounting activities, the
Accounting and Finance Department is responsible for:
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Making daily deposits of debtor payments.
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Posting payments to debtors accounts.
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Providing senior management with daily, weekly and monthly
receivable activity and performance reports.
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Accounting and finance employees assist collection department
employees in handling customer disputes relating to payment and
balance information and handling the repurchase requests from
companies to whom we have sold receivables. Additionally, the
Accounting Department reviews the results of the collection of
consumer receivable portfolios that are being serviced by third
party collection agencies and attorneys.
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Collections
Represented by Account Sales
Certain collections represent account sales to other debt buyers
to help maximize revenue and cash flows. We believe that our
business model of not having a large number of collectors,
coupled with a legal strategy which is focused on attempting to
perfect liens and judgments against obligors, allows us the
flexibility to sell accounts at prices that are attractive to
us, and, just as important, sell the less desirable accounts
within our collection portfolios. There are many factors that
contribute to the decision as to which receivable to sell and
which to service, including:
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the age of the receivable;
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the status of the receivable 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, 2010, 2009 and 2008 were
$3.5 million, $8.7 million and $20.4 million,
respectively. Collections represented by account sales as a
percentage of total collections for the fiscal years ended
September 30, 2010, 2009 and 2008 were 3.4%, 5.9% and 9.8%,
respectively.
Marketing
We have 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. We also directly contacts banks, finance companies or
other credit providers to solicit consumer receivables for sale.
Competition
Our business of purchasing distressed consumer receivables is
highly competitive and fragmented, and we expect that
competition from new and existing companies will continue. We
compete with:
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other purchasers of consumer receivables, including third-party
collection companies; and
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other financial services companies who purchase consumer
receivables.
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Some of our competitors are larger and more established and may
have substantially greater financial, technological, personnel
and other resources than we have, including greater access to
the credit and capital markets. We believe that no individual
competitor or group of competitors has a dominant presence in
the market.
We compete in the marketplace for consumer receivable portfolios
based on many factors, including:
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purchase price;
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representations, warranties and indemnities requested;
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timeliness of purchase decisions; and
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reputation.
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Our strategy is designed to capitalize on the markets lack
of a dominant industry player. We believe that our
managements experience and expertise in identifying,
evaluating, pricing and acquiring consumer receivable portfolios
and managing collections, coupled with our strategic alliances
with third-party collection agencies and attorneys and our
sources of financing, give us a competitive advantage. However,
we cannot assure that we will be able to compete successfully
against current or future competitors or that competition will
not increase in the future.
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
10
does become more competitive thereby possibly diminishing our
ability to acquire such distressed receivables at attractive
prices in such periods.
Technology
We believe that a high degree of automation is necessary to
enable us to grow and successfully compete with other finance
companies. Accordingly, we continually look to upgrade our
technology systems to support the servicing and recovery of
consumer receivables acquired for liquidation. Our
telecommunications and technology systems allow us to quickly
and accurately process large amounts of data necessary to
purchase and service consumer receivable portfolios. In
addition, we rely on the information technology of our
third-party collection agencies and attorneys and periodically
review their systems to ensure that they can adequately service
the consumer receivable portfolios outsourced to them.
Due to our desire to increase productivity through automation,
we periodically review our systems for possible upgrades and
enhancements.
Government
Regulation
On July 21, 2010, the Dodd-Frank Wall Street Reform and
Protection Act, or the Dodd-Frank Act, was enacted. There are
significant corporate governance and executive
compensation-related provisions in the Dodd-Frank Act that
require the SEC to adopt additional rules and regulations in
these areas such as corporate governance, say on pay
and proxy access. Our efforts to comply with these requirements
have resulted in, and are likely to continue to result in, an
increase in expenses and a diversion of managements time
from other business activities. We are subject to changing rules
and regulations of federal and state governments as well as the
stock exchange on which our common stock is listed. These
entities, including the Public Company Accounting Oversight
Board, the SEC and the NASDAQ Global Market, have issued a
significant number of new and increasingly complex requirements
and regulations over the course of the last several years and
continue to develop additional regulations and requirements in
response to laws enacted by Congress.
Our business is subject to extensive federal and state
regulations. The relationship of a consumer and a creditor is
extensively regulated by federal, state and local laws, rules,
regulations and ordinances. These laws include, but are not
limited to, the following federal statutes and regulations: the
Federal
Truth-In-Lending
Act, the Fair Credit Billing Act, the Equal Credit Opportunity
Act and the Fair Credit Reporting Act, as well as comparable
statutes in states where consumers reside
and/or where
creditors are located. Among other things, the laws and
regulations applicable to various creditors impose disclosure
requirements regarding the advertisement, application,
establishment and operation of credit card accounts or other
types of credit programs. Federal law requires a creditor to
disclose to consumers, among other things, the interest rates,
fees, grace periods and balance calculation methods associated
with their accounts. In addition, consumers are entitled to have
payments and credits applied to their accounts promptly, to
receive prescribed notices and to request that billing errors be
resolved promptly. In addition, some laws prohibit certain
discriminatory practices in connection with the extension of
credit. Further, state laws may limit the interest rate and the
fees that a creditor may impose on consumers. Failure by the
creditors to comply with applicable laws could create claims and
rights of offset by consumers that would reduce or eliminate
their obligations, which could have a material adverse effect on
our operations. Pursuant to agreements under which we purchase
receivables, we are typically indemnified against losses
resulting from the failure of the creditor to have complied with
applicable laws relating to the receivables prior to our
purchase of such receivables.
Certain laws, including the laws described above, may limit our
ability to collect amounts owing with respect to the receivables
regardless of any act or omission on our part. For example,
under the Federal Fair Credit Billing Act, a credit card issuer
may be subject to certain claims and defenses arising out of
certain transactions in which a credit card is used if the
consumer has made a good faith attempt to obtain satisfactory
resolution of a problem relative to the transaction and, except
in cases where there is a specified relationship between the
person honoring the card and the credit card issuer, the amount
of the initial transaction exceeds $50 and the place where the
initial transaction occurred was in the same state as the
consumers billing address or within 100 miles of that
address. Accordingly, as a purchaser of defaulted receivables,
we may purchase receivables subject to valid defenses on the
part of the consumer. Other laws provide that, in certain
instances, consumers cannot be held liable for, or their
11
liability is limited to $50 with respect to, charges to the
credit card credit account that were a result of an unauthorized
use of the credit card account. No assurances can be given that
certain of the receivables were not established as a result of
unauthorized use of a credit card account, and, accordingly, the
amount of such receivables may not be collectible by us.
Several federal, state and local laws, rules, regulations and
ordinances, including, but not limited to, the Federal Fair Debt
Collection Practices Act (FDCPA) and the Federal
Trade Commission Act and comparable state statutes, regulate
consumer debt collection activity. Although, for a variety of
reasons, we may not be specifically subject to the FDCPA or
certain state statutes that govern third-party debt collectors,
it is our policy to comply with applicable laws in our
collection activities. Additionally, our third-party collection
agencies and attorneys may be subject to these laws. To the
extent that some or all of these laws apply to our collection
activities or our third-party collection agencies and
attorneys collection activities, failure to comply with
such laws could have a material adverse effect on us.
In order to comply with the forging laws and regulations, we
provide a comprehensive development training program for our new
collection/dispute department representatives and on-going
training for all collection/dispute department associates. All
collection and dispute representatives are tested annually on
their knowledge of the FDCPA and other applicable laws. Account
representatives not achieving our minimum standards are required
to complete a FDCPA review session and are then retested. In
addition, annual supplemental instruction in the FDCPA and
collection techniques is provided to all our account
representatives.
The enactment of the Dodd-Frank Wall Street Reform and Consumer
Protection Act will subject us to substantial additional federal
regulation, and we cannot predict the effect of such regulation
on our business, results of operations, cash flows or financial
condition, and Government regulations may limit our ability to
recover and enforce the collection of our receivables.
Additional laws or amendments to existing laws, may be enacted
that could impose additional restrictions on the servicing and
collection of receivables. Such new laws or amendments may
adversely affect our ability to collect the receivables.
We currently hold a number of licenses issued under applicable
consumer credit laws or other licensing statutes or regulations.
Certain of our current licenses, and any licenses that we may be
required to obtain in the future, may be subject to periodic
renewal provisions
and/or other
requirements. Our inability to renew licenses or to take any
other required action with respect to such licenses could have a
material adverse effect upon our results of operation and
financial condition.
Employees
As of September 30, 2010, we had 102 full-time
employees. We are not a party to any collective bargaining
agreements.
Our web address is www.astafunding.com. Copies of our
Form 10-Ks,
10-Qs,
8-Ks,
amendments thereto, and other additional information
reports which we file with or furnish to the SEC, are available
on our website as soon as reasonably practical after filing
electronically with the SEC. No part of the Asta Funding, Inc.
web site is incorporated by reference into this report.
Note
Regarding Risk Factors
You should carefully consider the risk factors below 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
risk factors presented below are those which we currently
consider material. However, they are not the only risks facing
our company. Additional risks not presently known to us, or
which we currently consider immaterial, may also adversely
affect us. There may be risks that a particular investor views
differently from us, and our analysis might be wrong. If any of
the risks that we face actually occur, our business, financial
condition and operating results could be materially adversely
affected and could differ materially from
12
any possible results suggested by any forward-looking
statements that we have made or might make. In such case, the
trading price of our common stock could decline, and you could
lose part or all of your investment. Except as required by law,
we expressly disclaim any obligation to update or revise any
forward-looking statements.
The
enactment of the Dodd-Frank Wall Street Reform and Consumer
Protection Act will subject us to substantial additional federal
regulation, and we cannot predict the effect of such regulation
on our business, results of operations, cash flows or financial
condition.
On July 21, 2010, the Dodd-Frank Wall Street Reform and
Protection Act, or the Dodd-Frank Act, was enacted. There are
significant corporate governance and executive
compensation-related provisions in the Dodd-Frank Act that
require the SEC to adopt additional rules and regulations in
these areas such as say on pay and proxy access. Our
efforts to comply with these requirements have resulted in, and
are likely to continue to result in, an increase in expenses and
a diversion of managements time from other business
activities.
Given the uncertainty associated with the manner in which the
provisions of the Dodd-Frank Act will be implemented by the
various regulatory agencies and through regulations, the full
extent of the impact such requirements will have on our
operations is unclear. The changes resulting from the Dodd-Frank
Act may impact the profitability of business activities, require
changes to certain business practices, or otherwise adversely
affect our business. In particular, the potential impact of the
Dodd-Frank Act on our operations and activities, both currently
and prospectively, include, among others:
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increased cost of operations due to greater regulatory
oversight, supervision and compliance with consumer debt
issuance and collection practices;
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the limitation on the ability to expand consumer product and
service offerings due to anticipated stricter consumer
protection laws and regulations.
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The Act establishes a Bureau of Consumer Financial Protection
(the Bureau) that will assume broad regulatory
powers over debt collectors and virtually all other
covered persons who have any connection to consumer
financial products or services. The Bureau will have exclusive
rule-making authority with respect to all significant federal
statutes that impact the collection industry, including the
FDCPA, the Fair Credit Reporting Act (FCRA), and
others. This means, for example, that the Bureau will have the
ability to pass rules and regulations that interpret any of the
provisions of the FDCPA, potentially impacting all facets of the
collection channel. Federal agencies, including the Bureau, will
have been given significant discretion in drafting the rules and
regulations that will implement the Dodd-Frank Act.
Consequently, many of the details and much of the impact of the
Dodd-Frank Act may not be known for some time. In addition, this
legislation mandated multiple studies and reports for Congress,
which could result in additional legislative or regulatory
action.
At this time, it is not possible or practical to attempt to
provide a comprehensive analysis of how these new laws and
regulations will impact debt collectors. The full extent of that
impact probably will not be known for a year or more, when the
Bureau begins to implement regulations.
We expect that we will be required to invest significant
management attention and resources to evaluate and make any
changes to our policies and procedures necessary to comply with
new statutory and regulatory requirements under the Dodd-Frank
Act, which may negatively impact results of operations and
financial condition. We cannot predict the requirements of the
regulations ultimately adopted under the Dodd-Frank Act, the
affect such regulations will have on financial markets
generally, or on our businesses specifically, the additional
costs associated with compliance with such regulations, or any
changes to our operations that may be necessary to comply with
the Dodd-Frank Act, any of which could have a material adverse
affect on our business, results of operations, cash flows or
financial condition.
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
13
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;
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The Fair Credit Reporting Act;
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The Dodd-Frank Wall Street Reform and Consumer Protection Act;
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The Financial Privacy Rule;
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The Safeguards Rule;
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Telephone Consumer Protection Act;
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Health Insurance Portability and Accountability Act
(HIPAA)/Health Information Technology for Economical
and Clinical Health Act (HITECH);
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U.S. Bankruptcy Code; and
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Credit Card Accountability Responsibility and Disclosure Act of
2009.
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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.
The
current economic environment has slowed our ability to collect
from our debtors.
The recent worldwide financial turmoil has adversely affected
all businesses, including our own. The current collection
environment is particularly challenging as a result of factors
in the economy over which we have no control. These factors
include:
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a slowdown in the economy;
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severe problems in the credit and housing markets;
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higher unemployment;
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reductions in consumer spending;
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changes in the underwriting criteria by originators; and
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changes in laws and regulations governing consumer lending and
the related collections.
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Our litigation strategy is highly dependent on our ability to
locate debtors with jobs
and/or
homes. We believe that our debtors are straining to pay their
obligations owed to us. Higher unemployment rates particularly
impact our debtors ability to pay obligations and our
ability to get wage executions as a source of payment. Problems
in the credit markets and lower home values have reduced the
ability of our debtors to secure financing through second
mortgages and home equity lines to pay obligations owed to us. A
continuation of the current problems in the credit and housing
markets and general slowdown in the economy will continue to
adversely affect the effectiveness of our litigation strategy,
and the value of our portfolios and our financial performance.
We may
not be able to purchase consumer receivable portfolios at
favorable prices or on sufficiently favorable terms or at
all.
Our success depends upon the continued availability of consumer
receivable portfolios that meet our purchasing criteria and our
ability to identify and finance the purchases of such
portfolios. The availability of consumer receivable portfolios
at favorable prices and on terms acceptable to us depends on a
number of factors outside of our control, including:
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the growth in consumer debt;
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the volume of consumer receivable portfolios available for sale;
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availability of financing to fund purchases;
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competitive factors affecting potential purchasers and sellers
of consumer receivable portfolios; and
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possible future changes in the bankruptcy laws, state laws and
homestead acts which could make it more difficult for us to
collect.
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Our
future operating results will be negatively impacted as we have
not replaced our defaulted consumer receivables at historic
levels.
To operate profitably, we must continually acquire a sufficient
amount of distressed consumer receivables to generate continued
revenue. Our buying activities during fiscal year 2010, 2009 and
the last three quarters of fiscal year 2008 slowed dramatically.
As the economic environment deteriorated, we felt that pricing
of portfolios had not fallen enough to offset the decline in
ultimate collections. Accordingly, our purchases of receivables
in 2010 were $8.0 million, compared to $19.6 million
in 2009 and $49.9 million in 2008. In part, this led to our
net cash collections in fiscal 2010 decreasing
$45.5 million, or 30.9% from $147.4 million in fiscal
year 2008 to $101.9 million in fiscal year 2010. Further,
of those collections$34.3 million for fiscal year 2010 ,
$40.7 million for fiscal year 2009 and $45.3 million
for fiscal period 2008 came from zero basis portfolios (whose
carrying value has been reduced to zero). Our decreased level of
buying new portfolios during 2010, 2009 and 2008 will likely
result in future reduced net cash collections in 2011 and slow
the growth of our future revenues and operating results.
Furthermore, we cannot predict how our ability to identify and
purchase receivables, and evaluate the quality of those
receivables, would be affected if there is a shift in consumer
lending practices whether caused by changes in regulations or by
a sustained economic downturn.
Our
inability to purchase sufficient quantities of receivables
portfolios may necessitate workforce reductions, which may harm
our business.
Because fixed costs, such as personnel costs, constitute a
significant portion of our overhead, we may be required to
reduce the number of employees if we do not continually purchase
receivables acquired for liquidation. Reducing the number of
employees can affect our business adversely and lead to:
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lower employee morale, higher employee attrition rates, and
fewer experienced employees;
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disruptions in our operations and loss of efficiency in
collection functions;
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excess costs associated with unused space in collection
facilities; and
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further reliance on our third party collection agencies and
attorneys.
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We
have seen at certain times that the market for acquiring
consumer receivable portfolios has become more competitive,
thereby diminishing from time to time our ability to acquire
such receivables at prices we are willing to pay.
The growth in consumer debt may also be affected by:
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the continuation of a slowdown in the economy;
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continuation of the problems in the credit and housing markets;
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reductions in consumer spending;
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changes in the underwriting criteria by originators; and
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changes in laws and regulations governing consumer lending.
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Any slowing of the consumer debt growth trend could result in a
decrease in the availability of consumer receivable portfolios
for purchase that could affect the purchase prices of such
portfolios. Any increase in the prices we are required to pay
for such portfolios, in turn, will reduce the profit we generate
from such portfolios.
We
have risks associated with our purchase of $6.9 billion in
face value of receivables purchased for $300 million in
March 2007 (the Portfolio Purchase) which has not
met our expectations and has and may continue to adversely
impact our financial position and results of
operations.
Since the inception of the Portfolio Purchase financed by the
Receivables Financing Agreement, the Receivables Financing
Agreement has been modified four times due to collections not
meeting our expectations. The Portfolio Purchase has not met our
expectations, and the shortfall has been exacerbated by the
general economic down turn. We have recorded impairments on the
Portfolio Purchase totaling $97.2 million
($30.3 million in fiscal year 2008, $53.9 million in
fiscal year 2009, and $13.0 million in fiscal year 2010).
The Portfolio Purchase was transferred to the cost recovery
method effective with the third quarter of fiscal year 2008, as
collections became increasingly more difficult to predict.
Accordingly, we will recognize finance income only after we
recover the carrying value of the asset. As a result, finance
income since April 1, 2008 has been and will continue to be
negatively impacted. There can be no assurance as to when or if
the current carrying value will be recovered. Further, all cash
collections from the Portfolio Purchase are used to repay our
loan under the Receivable Financing Agreement.
There
is no assurance that we will realize the full value of the
deferred tax asset.
Although the carry forward period for income taxes is up to
twenty years, such allowance period is outside a reasonable
period to forecast full realization of the deferred tax asset.
We continually monitor forecast information to ensure the
valuation allowance is appropriate.
With
portfolios classified under the interest method, our projections
of future cash flows from our portfolio purchases may prove to
be inaccurate, which could result in reduced revenues or the
recording of impairment charges if we do not achieve the
collections forecasted by our model.
We use qualitative and quantitative analyses to project future
cash flows from our portfolio purchases. There can be no
assurance, however, that we will be able to achieve the
collections forecasted by our analysis. If we are not able to
achieve these levels of forecasted collections, our revenues
will be reduced and we may be required to record additional
impairment charges, which would result in a reduction of our
earnings. We recorded impairment charges of $13.0 million,
$183.5 million, and $53.2 for the years ended
September 30, 2010, 2009 and 2008, respectively.
16
We use
estimates for recognizing finance income on a portion of our
consumer receivables acquired for liquidation and our earnings
would be reduced if actual results are less than
estimated.
We utilize the interest method of revenue recognition for
determining a portion of our finance income recognized, which is
based on projected cash flows that may prove to be less than
anticipated and could lead to reductions in revenue or
additional impairment charges under Financial Accounting
Standards Board (FASB) Accounting Standard
Codification (ASC) 310, Receivables
Loans and Debt Securities Acquired with Deteriorated Credit
Quality (ASC 310). Static pools of accounts are
established. These pools are aggregated based on certain common
risk criteria. Each static pool is recorded at cost and is
accounted for as a single unit for the recognition of income,
principal payments, and loss provision. Once a static pool is
established for a quarter, individual receivable accounts are
not added to the pool (unless replaced by the seller) or removed
from the pool (unless sold or returned to the seller).
ASC 310 requires that the excess of the contractual cash
flows over expected cash flows not be recognized as an
adjustment of revenue or expense or on the balance sheet.
ASC 310 initially freezes the internal rate of return
(IRR), estimated when the accounts receivable are
purchased, as the basis for subsequent impairment testing.
Significant increases in actual, or expected future cash flows
may be recognized prospectively through an upward adjustment of
the IRR over a portfolios remaining life. Any increase to
the IRR then becomes the new benchmark for impairment testing.
Rather than lowering the estimated IRR, if the collection
estimates are not received or projected to be received, the
carrying value of a pool would be written down to maintain the
then current IRR. Any reduction in our earnings resulting from
such a write down could materially adversely affect our stock
price.
As the
mix of our portfolios has shifted to the cost recovery method,
there is a negative impact on finance income as no finance
income is recognized on the cost recovery portfolios until the
carrying value has been recovered.
Historically, we have utilized the interest method to recognize
finance income on most consumer receivable portfolios purchased.
As the economy has impacted our business, making collections
more unpredictable, we have transferred portfolios from the
interest method to the cost recovery method, which delays the
recognition of finance income until the carrying value has been
fully recovered.
We may
not be able to collect sufficient amounts on our consumer
receivable portfolios to recover the costs associated with the
purchase of those portfolios and to fund our
operations.
We acquire and collect on consumer receivable portfolios that
contain charged-off, semi-performing, and performing
receivables. In order to operate profitably over the long term,
we must continually purchase and collect on a sufficient volume
of receivables to generate revenue that exceeds our purchase
costs. For accounts that are charged-off or semi-performing, the
originators or interim owners of the receivables generally have:
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made numerous attempts to collect on these obligations, often
using both their in-house collection staff and third-party
collection agencies; and
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subsequently deemed these obligations as uncollectible
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These receivable portfolios are purchased at significant
discounts to the amount the consumers owe. These receivables are
difficult to collect and actual recoveries may vary and be less
than the amount expected. In addition, our collections may
worsen in a weak economic cycle. We may not recover amounts in
excess of our acquisition and servicing costs.
Our ability to recover the purchase costs on our portfolios and
produce sufficient returns can be negatively impacted by the
quality of the purchased receivables. In the normal course of
our portfolio acquisitions, some receivables may be included in
the portfolios that fail to conform to certain terms of the
purchase agreements and we may seek to return these receivables
to the seller for payment or replacement receivables. However,
we cannot guarantee that any of such sellers will be able to
meet their payment obligations to us. Accounts that we are
unable to return to sellers may yield no return. If cash flows
from operations are less than anticipated as a result of our
inability to collect sufficient amounts on our receivables, our
ability to satisfy our debt obligations, purchase new
portfolios, and achieve future growth and profitability may be
materially adversely affected.
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We are
subject to competition for the purchase of consumer receivable
portfolios which could result in an increase in the prices of
such 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 who we do not control to service a
significant portion of our consumer receivable portfolios. The
loss of certain servicers could have a material adverse effect
on our financial position and results of
operation.
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. 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 five organizations, we are
dependent on their efforts to maximize collections.
The
current economic environment has had adverse effects on others
in this industry; certain third parties providing services to us
have filed for bankruptcy protection which has delayed
collections.
The current economic environment has had an adverse effect on
others in our industry. One of our five most significant third
party servicers filed a bankruptcy proceeding and has been
liquidated. We took decisive steps in that servicers
bankruptcy proceeding and with permission of the bankruptcy
courts, moved all debtor accounts to other third party
collection unit. with whom we have experience. In addition, a
law firm used by the bankrupt servicer also filed for bankruptcy
and has closed. All accounts serviced by this law firm have also
been transferred to similar third party collection units. The
replacement servicer will be taking steps to arrange for the
substitution of counsel. Notwithstanding the efforts of various
parties to provide for a conversion of the accounts to the new
servicer, these occurrences could interfere with the collection
of certain of our portfolios including the ability of judgment
debtors to identify the Company, the new servicer or new counsel
as the parties to whom they should direct payments. In addition,
representatives of creditors of the insolvent servicer and
troubled law firm may endeavor to assert claims with respect to
portfolios that those companies relinquish including our
accounts.
We
rely on our third party collectors to comply with all rules and
regulations and maintain proper internal controls over their
accounting and operations.
Because the receivables were originated and serviced pursuant to
a variety of federal
and/or state
laws by a variety of entities and involved consumers in all
50 states, the District of Columbia, Puerto Rico and South
America, there can be no assurance that all original servicing
entities have, at all times, been in substantial compliance with
applicable law. Additionally, there can be no assurance that we
or our third-party collection agencies and attorneys have been
or will continue to be at all times in substantial compliance
with applicable law. The failure to comply with applicable law
and not maintain proper controls in their accounting and
operations could materially adversely affect our ability to
collect our receivables and could subject us to increased costs,
fines and penalties.
18
We may
rely on third parties to locate, identify and evaluate consumer
receivable portfolios available for purchase.
We may rely on third parties, including brokers and third-party
collection agencies and attorneys, to identify consumer
receivable portfolios and, in some instances, to assist us in
our evaluation and purchase of these portfolios. As a result, if
such third parties fail to identify receivable portfolios or if
our relationships with such third parties are not maintained,
our ability to identify and purchase additional receivable
portfolios could be materially adversely affected. In addition,
if we, or such parties, fail to correctly or adequately evaluate
the value or collectability of these consumer receivable
portfolios, we may pay too much for such portfolios and suffer
an impairment, which would negatively impact our earnings.
We
have an ongoing dispute with a significant servicer for which we
are currently negotiating a settlement.
We have an ongoing dispute with one of our significant third
party servicers regarding certain provisions in the servicing
agreement. We contend that there are amounts due to us under a
profit-sharing arrangement. The servicer has acknowledged the
profit sharing arrangement but disagrees with the calculation of
the amount owed. Additionally, the servicer has asserted that we
owe the servicer certain amounts with regard to a portfolio sale
and court costs allegedly incurred by the servicer and not paid
to the servicer by us. We continue to negotiate a settlement for
these items and we continue to work with this servicer and
receive collections from them. We do not believe the final
settlement will have an adverse material effect on the Company.
Our
collections may decrease if bankruptcy filings
increase.
During times of economic recession, the amount of defaulted
consumer receivables generally increases, which contributes to
an increase in the amount of personal bankruptcy filings. Under
certain bankruptcy filings, a debtors assets are sold to
repay credit originators, but since the defaulted consumer
receivables we purchase are generally unsecured, we may not be
able to collect on those receivables. We cannot assure you that
our collection experience would not decline with an increase in
bankruptcy filings. If our actual collection experience with
respect to a defaulted consumer receivable portfolio is
significantly lower than we projected when we purchased the
portfolio, our earnings could be negatively affected.
The
loss of any of our executive officers may adversely affect our
operations and our ability to successfully acquire receivable
portfolios.
Gary Stern, our Chairman, President and Chief Executive Officer,
Robert J. Michel, our Chief Financial Officer, and Mary Curtin,
our Senior Vice President, are 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. As of January
2009, Arthur Stern, former Chairman of the Board of Directors,
now Chairman Emeritus, stepped down as an employee of the
Company. Mr. Stern continues to serve on the Board and
consults with our executives. Significant losses of the services
of our executive officers or the inability to replace our
officers with individuals who have experience in the industry or
with the Company could disrupt our operations and adversely
affect our ability to successfully acquire receivable portfolios.
The
Stern family effectively controls the Company, 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 a
minor child of 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
19
economic interests, own, in the aggregate, approximately 26.7%
of our outstanding shares of common stock. 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.
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 2010 and 2009 and may be limited in the future. Net
collections represented by account sales for 2010 were only
$3.5 million, compared to $8.7 million and
$20.4 million in 2009 and 2008, respectively. Collections
represented by account sales as a percentage of total
collections were 3.4% in 2010, compared to 5.9% and 9.8% in 2009
and 2008, respectively. We had launched a sales effort to
enhance cash flow and pay debt, particularly from the Portfolio
Purchase, but sales have been slower than expected due to a
variety of factors, including a slow resale market, similar to
the decrease in pricing we are seeing in general, as well as
lack of supporting documentation (media) and validation of the
Portfolio Purchase accounts.
An
unfavorable government review of our tax returns could adversely
affect our operating results.
Our tax filings are subject to review or audit by the IRS and
state and local taxing authorities. In April 2010, we received
notification from the IRS that our 2008 and 2009 federal income
tax returns will be audited. This audit is currently in
progress. The IRS examinations of our federal tax returns could
result in significant proposed adjustments. Although we believe
our tax estimates are reasonable, we can provide no assurance
that any final determination in an audit will not be materially
different than the treatment reflected in our historical income
tax provisions and accruals. An assessment of additional taxes
as a result of an audit could adversely affect our income tax
provision and net income in the period or periods for which that
determination is made.
Negative
press regarding the debt collection industry may have a negative
impact on a debtors willingness to pay the debt we
acquire.
Consumers are exposed to information from a number of sources
that may cause them to be more reluctant to pay their debts or
to pursue legal actions against us. On-line, print and other
media publish stories about the debt collection industry which
cite specific examples of abusive collection practices. These
stories can lead to the rapid dissemination of the story, adding
to the level of exposure to negative publicity about our
industry. Various Internet sites are maintained where consumers
can list their concerns about the activities of debt collectors
and seek guidance from other website posters on how to handle
the situation. Advertisements by debt relief attorneys and
credit counseling centers are becoming more common, adding to
the negative attention given to our industry. As a result of
this negative publicity, debtors may be more reluctant to pay
their debts or could pursue legal action against us regardless
of whether those actions are warranted. These actions could
impact our ability to collect on the receivables we acquire and
affect our revenues and profitability.
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.
20
We may
seek to make acquisitions that prove unsuccessful or strain or
divert our resources.
We may seek to grow the Company 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 or telecommunications systems, through casualty,
operating malfunction or service provider failure, could disrupt
our operations. In addition, we must record and process
significant amounts of data quickly and accurately to properly
bid on prospective acquisitions of receivable portfolios and to
access, maintain and expand the databases we use for our
collection and monitoring activities. Any failure of our
information systems and their backup systems would interrupt our
operations. We may not have adequate backup arrangements for all
of our operations and we may incur significant losses if an
outage occurs. In addition, we rely on third-party collection
agencies and attorneys who also may be adversely affected in the
event of an outage in which the third-party collection agencies
and attorneys do not have adequate backup arrangements. Any
interruption in our operations or our third-party collection
agencies and attorneys operations could have an
adverse effect on our results of operations and financial
condition. However, we are in the process of implementing a
disaster recovery program which would mitigate this risk.
21
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 by members of the Stern Family or
other shareholders 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 14,600,423 shares of common stock
issued and outstanding as of December 3, 2010. Of these
shares, 3,897,322 are held by our affiliates and are saleable
under Rule 144 of the Securities Act of 1933, as amended,
subject to the volume limitations set forth in Rule 144.
The remainder of our outstanding shares are freely tradable. In
addition, options to purchase approximately 922,039 shares
of our common stock were outstanding as of September 30,
2010, of which 792,377 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, 2010, there were
1,041,468 shares available for such purpose with such
shares available under the Equity Compensation Plan and the 2002
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.
In the past, the Companys Chairman Emeritus, Arthur Stern
and President and Chief Executive Officer, Gary Stern have
adopted prearranged stock trading plans in accordance with
guidelines specified by
Rule 10b5-1
under the Securities Exchange Act of 1934, as amended. While no
such plans are in effect at present, significant sales by the
Stern family could have an adverse effect on market price for
our common stock.
We
have the ability to issue preferred shares, warrants,
convertible debt and other securities without shareholder
approval which could dilute the relative ownership interest of
current shareholders and adversely effect our share
price.
Future sales of our equity-related securities in the public
market, including sales of our common stock pursuant to our
shelf-registration statement, could adversely affect the trading
price of our common stock and our ability to raise funds in new
stock offerings. Our common shares may be subordinate to classes
of preferred shares issued in the future in the payment of
dividends and other distributions made with respect to common
shares, including distributions upon liquidation or dissolution.
Our articles of incorporation permit our Board of Directors to
issue preferred shares without first obtaining shareholder
approval. If we issued preferred shares, these additional
securities may have dividend or liquidation preferences senior
to the common shares. If we issue convertible preferred shares,
a subsequent conversion may dilute the current common
shareholders interest. We have similar abilities to issue
convertible debt, warrants and other equity securities.
Climate
change and related regulatory responses may impact our
business.
Climate change as a result of emissions of greenhouse gases is a
significant topic of discussion and may generate federal and
other regulatory responses in the near future, including the
imposition of a so-called cap and trade system. It
is impracticable to predict with any certainty the impact on our
business of climate change or the regulatory responses to it,
although we recognize that they could be significant. The most
direct impact is likely to be an increase in energy costs, which
would increase slightly our operating costs, primarily through
increased utility
22
costs. In addition, increased energy costs could impact
consumers and their ability to incur and repay indebtedness.
However, it is too soon for us to predict with any certainty the
ultimate impact, either directionally or quantitatively, of
climate change and related regulatory responses.
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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We have not received any written comments regarding our periodic
or current reports from the staff of the Securities and Exchange
Commission which were issued 180 days or more preceding
September 30, 2010 and that remain unresolved.
Our executive and administrative offices are located in
Englewood Cliffs, New Jersey, where we lease approximately
14,700 square feet of general office space for
approximately $20,000 per month, plus utilities. The lease
expires on July 31, 2015, with a two-year renewal option.
Our office in Sugar Land, Texas occupies approximately
3,600 square feet of general office space for approximately
$7,000 per month. The lease expires February 28, 2011. The
Company is currently exploring leasing options beyond that date.
We believe that our existing facilities are adequate for our
current needs.
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Item 3.
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Legal
Proceedings.
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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 report, we were not
involved in any material litigation.
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Item 4.
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(Removed
and Reserved).
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23
PART II
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Item 5.
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Market
for Registrants Common Equity, Related Stockholder Matters
and Issuer Purchases of Equity Securities.
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Since August 15, 2000, our common stock has been quoted on
the NASDAQ National Market system under the symbol
ASFI. On November 30, 2010 there were 28
holders of record of our common stock. High and low sales prices
of our common stock since October 1, 2008 as reported by
NASDAQ are set forth below (such quotations reflect inter-dealer
prices without retail markup, markdown, or commission, and may
not necessarily represent actual transactions):
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High
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Low
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2009
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October 1, 2008 to December 31, 2008
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$
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10.08
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$
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1.79
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January 1, 2009 to March 31, 2009
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2.75
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1.00
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April 1, 2009 to June 30, 2009
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6.36
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2.45
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July 1, 2009 to September 30, 2009
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9.24
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4.90
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2010
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October 1, 2009 to December 31, 2009
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$
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8.49
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$
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6.53
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January 1, 2010 to March 31, 2010
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8.10
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6.00
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April 1, 2010 to June 30, 2010
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10.03
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7.05
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July 1, 2010 to September 30, 2010
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10.02
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7.07
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Dividends
During the year ended September 30, 2010, we declared
quarterly cash dividends aggregating $1,161,000 ($0.02 per
share, per quarter). During the year ended September 30,
2009, we declared quarterly cash dividends aggregating
$1,142,000 ($0.02 per share, per quarter). Future dividend
payments will be at the discretion of our board of directors and
will depend upon our financial condition, operating results,
capital requirements and any other factors our board of
directors deems relevant. In addition, our agreements with our
lender may, from time to time, restrict our ability to pay
dividends. Currently there are no restrictions in place.
24
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,
in whole or in part, the following Performance Graph shall not
be incorporated by reference into any such filings.
COMPARISON
OF CUMULATIVE TOTAL RETURN
ASSUMES $100
INVESTED ON OCT. 1, 2005
ASSUMES DIVIDEND REINVESTED
FISCAL YEAR ENDING SEPT. 30, 2010
Comparison
of cumulative total return of one or more companies, peer
groups, industry
indexes, and/or broad markets
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Period Ending
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Company/Index/Market
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9/30/2005
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9/30/2006
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9/30/2007
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9/30/2008
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9/30/2009
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9/30/2010
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ASTA FUNDING, INC.
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$
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100.00
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$
|
125.36
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$
|
128.70
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$
|
23.88
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$
|
26.35
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$
|
26.87
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NASDAQ MARKET INDEX
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$
|
100.00
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$
|
105.83
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$
|
127.44
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|
$
|
99.42
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|
|
$
|
101.93
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|
$
|
114.78
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PEER GROUP INDEX
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$
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100.00
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$
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84.28
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$
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72.59
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$
|
42.45
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|
$
|
41.84
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$
|
56.39
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The customer selected stock group is currently comprised
of:
CompuCredit Corporation
Encore Capital Group, Inc.
NCO Group, Inc. (through 2006)
Portfolio Recovery Associates, Inc.
25
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Item 6.
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Selected
Financial Data.
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The following tables set forth a summary of our consolidated
financial data as of and for the five fiscal years ended
September 30, 2010. The selected financial data for the
five fiscal years ended September 30, 2010, 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
report. Certain items in prior years information have been
reclassified to conform to the current years presentation.
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Year Ended September 30,
|
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2010
|
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2009
|
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2008
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2007
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2006
|
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(In thousands, except per share data)
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Operations Statement Data:
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Finance income
|
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$
|
45,631
|
|
|
$
|
70,156
|
|
|
$
|
115,295
|
|
|
$
|
138,356
|
|
|
$
|
101,024
|
|
Other income
|
|
|
218
|
|
|
|
199
|
|
|
|
255
|
|
|
|
2,406
|
|
|
|
955
|
|
|
|
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|
|
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|
|
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|
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Total revenue
|
|
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45,849
|
|
|
|
70,355
|
|
|
|
115,550
|
|
|
|
140,762
|
|
|
|
101,979
|
|
|
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Costs and expenses:
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General and administrative
|
|
|
23,211
|
|
|
|
25,915
|
|
|
|
29,561
|
|
|
|
25,450
|
|
|
|
18,268
|
|
Interest expense
|
|
|
4,368
|
|
|
|
8,452
|
|
|
|
17,881
|
|
|
|
18,246
|
|
|
|
4,641
|
|
Impairments
|
|
|
13,029
|
|
|
|
183,500
|
|
|
|
53,160
|
|
|
|
9,097
|
|
|
|
2,245
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total expenses
|
|
|
40,608
|
|
|
|
217,867
|
|
|
|
100,602
|
|
|
|
52,793
|
|
|
|
25,154
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes
|
|
|
5,241
|
|
|
|
(147,512
|
)
|
|
|
14,948
|
|
|
|
87,969
|
|
|
|
76,825
|
|
Provisions (benefit) for income taxes
|
|
|
2,112
|
|
|
|
(56,787
|
)
|
|
|
6,119
|
|
|
|
35,703
|
|
|
|
31,060
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
3,129
|
|
|
$
|
(90,725
|
)
|
|
$
|
8,829
|
|
|
$
|
52,266
|
|
|
$
|
45,765
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic net income (loss) per share
|
|
$
|
0.22
|
|
|
$
|
(6.36
|
)
|
|
$
|
0.62
|
|
|
$
|
3.79
|
|
|
$
|
3.36
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted net income (loss) per share
|
|
$
|
0.22
|
|
|
$
|
(6.36
|
)
|
|
$
|
0.61
|
|
|
$
|
3.56
|
|
|
$
|
3.13
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
(In millions)
|
|
Other Financial Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year ended September 30,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash collections
|
|
$
|
101.9
|
|
|
$
|
147.4
|
|
|
$
|
208.0
|
|
|
$
|
281.8
|
|
|
$
|
214.5
|
|
Portfolio purchases, at cost
|
|
|
8.0
|
|
|
|
19.6
|
|
|
|
49.9
|
|
|
|
440.9
|
|
|
|
200.2
|
|
Portfolio purchases, at face
|
|
|
269.1
|
|
|
|
577.0
|
|
|
|
1,456.1
|
|
|
|
10,891.9
|
|
|
|
5,194.0
|
|
Return on average assets(1)
|
|
|
1.1
|
%
|
|
|
(23.5
|
)%
|
|
|
1.7
|
%
|
|
|
12.0
|
%
|
|
|
19.6
|
%
|
Return on average stockholders equity(1)
|
|
|
2.0
|
%
|
|
|
(44.8
|
)%
|
|
|
3.6
|
%
|
|
|
24.8
|
%
|
|
|
27.8
|
%
|
Dividends declared per share(2)
|
|
$
|
0.08
|
|
|
$
|
0.08
|
|
|
$
|
0.16
|
|
|
$
|
0.16
|
|
|
$
|
0.56
|
|
At September 30,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
|
259.2
|
|
|
|
290.8
|
|
|
|
481.1
|
|
|
|
580.3
|
|
|
|
287.8
|
|
Total debt
|
|
|
94.9
|
|
|
|
130.9
|
|
|
|
221.7
|
|
|
|
326.5
|
|
|
|
82.8
|
|
Total stockholders equity
|
|
|
161.9
|
|
|
|
157.4
|
|
|
|
247.9
|
|
|
|
237.5
|
|
|
|
184.3
|
|
Inception to date September 30,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cumulative aggregate purchases, at face
|
|
|
31,896.0
|
|
|
|
31,626.9
|
|
|
|
31,049.9
|
|
|
|
29,593.8
|
|
|
|
18,701.9
|
|
|
|
|
(1) |
|
The return on average assets is computed by dividing net income
by average total assets for the fiscal year. The return on
average stockholders equity is computed by dividing net
income by the average stockholders equity for the fiscal
year. Both ratios have been computed using beginning and
period-end balances. |
|
(2) |
|
Includes a special dividend of $0.40 per share in 2006. |
26
|
|
Item 7.
|
Managements
Discussion and Analysis of Financial Condition and Results of
Operation.
|
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 and adversely 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 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. Unless the context otherwise
requires, the terms we, us, the
Company, or our as used herein refer to Asta
Funding, Inc. and our subsidiaries.
Overview
We are primarily engaged in the business of acquiring, managing
for our own account, servicing and recovering on portfolios of
consumer receivables. These portfolios generally consist of one
or more of the following types of consumer receivables:
|
|
|
|
|
charged-off receivables accounts that have
been written-off by the originators and may have been previously
serviced by collection agencies;
|
|
|
|
semi-performing receivables accounts where
the debtor is making partial or irregular monthly payments, but
the accounts may have been written-off by the originators; and
in limited circumstances,
|
|
|
|
performing receivables accounts where the
debtor is making regular monthly payments that may or may not
have been delinquent in the past.
|
We acquire these consumer receivable portfolios at a significant
discount to the amount actually owed by the borrowers. We
acquire these portfolios after a qualitative and quantitative
analysis of the underlying receivables and calculate the
purchase price so that our estimated cash flow offers us an
adequate return on our investment after servicing expenses.
After purchasing a portfolio, we actively monitor its
performance and review and adjust our collection and servicing
strategies accordingly.
We purchase receivables from credit grantors and others through
privately negotiated direct sales, brokered transactions and
auctions in which sellers of receivables seek bids from several
pre-qualified debt purchasers. We pursue new acquisitions of
consumer receivable portfolios on an ongoing basis through:
|
|
|
|
|
our relationships with industry participants, financial
institutions, collection agencies, investors and our financing
sources;
|
|
|
|
brokers who specialize in the sale of consumer receivable
portfolios; and
|
|
|
|
other sources.
|
Critical
Accounting Policies
We account for our investments in consumer receivable
portfolios, using either:
|
|
|
|
|
The interest method; or
|
|
|
|
The cost recovery method.
|
27
As we believe our extensive liquidating experience in certain
asset classes such as distressed credit card receivables,
consumer loan receivables and mixed consumer receivables has
matured, we use the interest method when we believe we can
reasonably estimate the timing of the cash flows. In those
situations where we diversify our acquisitions into other asset
classes in which we do not possess the same expertise or
history, or we cannot reasonably estimate the timing of the cash
flows, we utilize the cost recovery method of accounting for
those portfolios of receivables.
We account for our investment in finance receivables using the
interest method under the guidance of ASC 310. Static pools of
accounts are established. These pools are aggregated based on
certain common risk criteria. Each static pool is recorded at
cost and is accounted for as a single unit for the recognition
of income, principal payments and loss provision. We currently
consider for aggregation portfolios of accounts, purchased
within the same fiscal quarter, that generally have the
following characteristics:
|
|
|
|
|
same issuer/originator
|
|
|
|
same underlying credit quality
|
|
|
|
similar geographic distribution of the accounts
|
|
|
|
similar age of the receivable and
|
|
|
|
same type of asset class (credit cards, telecommunications, etc.)
|
After determining that an investment will yield an adequate
return on our acquisition cost after servicing fees, including
court costs, which are expensed as incurred, we use a variety of
qualitative and quantitative factors to determine the estimated
cash flows. As previously mentioned, included in our analysis
for purchasing a portfolio of receivables and determining a
reasonable estimate of collections and the timing thereof, the
following variables are analyzed and factored into our original
estimates:
|
|
|
|
|
the number of collection agencies previously attempting to
collect the receivables in the portfolio;
|
|
|
|
the average balance of the receivables;
|
|
|
|
the age of the receivables (as older receivables might be more
difficult to collect or might be less cost effective);
|
|
|
|
past history of performance of similar assets as we
purchase portfolios of similar assets, we believe we have built
significant history on how these receivables will liquidate and
cash flow;
|
|
|
|
number of months since charge-off;
|
|
|
|
payments made since charge-off;
|
|
|
|
the credit originator and their credit guidelines;
|
|
|
|
the locations of the debtors as there are better states to
attempt to collect in and ultimately we have better
predictability of the liquidations and the expected cash flows.
Conversely, there are also states where the liquidation rates
are not as good and that is factored into our cash flow analysis;
|
|
|
|
financial wherewithal of the seller;
|
|
|
|
jobs or property of the debtors found within portfolios-with our
business model, this is of particular importance. Debtors with
jobs or property are more likely to repay their obligation and
conversely, debtors without jobs or property are less likely to
repay their obligation; and
|
|
|
|
the ability to obtain customer statements from the original
issuer.
|
We will obtain and utilize as appropriate input including, but
not limited to, monthly collection projections and liquidation
rates, from our third party collection agencies and attorneys,
as further evidentiary matter, to assist us in developing
collection strategies and in modeling the expected cash flows
for a given portfolio.
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
28
probable we will be unable to collect all amounts due according
to the portfolio of accounts contractual terms. We
consider the expected payments and estimate the amount and
timing of undiscounted expected principal, interest and other
cash flows for each acquired portfolio coupled with expected
cash flows from accounts available for sales. The excess of this
amount over the cost of the portfolio, representing the excess
of the accounts cash flows expected to be collected over
the amount paid, is accreted into income recognized on finance
receivables over the expected remaining life of the portfolio.
We believe we have significant experience in acquiring certain
distressed consumer receivable portfolios at a significant
discount to the amount actually owed by underlying debtors. We
acquire these portfolios only after both qualitative and
quantitative analyses of the underlying receivables are
performed and a calculated purchase price is paid so that we
believe our estimated cash flow offers us an adequate return on
our acquisition costs including servicing expenses.
Additionally, when considering larger portfolio purchases of
accounts, or portfolios from issuers from whom we have little or
limited experience, we have the added benefit of soliciting our
third party collection agencies and attorneys for their input on
liquidation rates and at times incorporate such input into the
price we offer for a given portfolio and the estimates we use
for our expected cash flows.
As a result of the a challenging economic environment and the
impact it has had on collections, for portfolio purchases
acquired in fiscal year 2009 we extended our time frame of the
expectation of recovering 100% of our invested capital to a 24
-39 month period from an
18-28 month
period, and the expectation of recovering
130-140%
over 7 years from the previous 5 year expectation. The
2009 time frame of expectations has remained in force for fiscal
year 2010. We routinely monitor these expectations against the
actual cash flows and, in the event the cash flows are below our
expectations and we believe there are no reasons relating to
mere timing differences or explainable delays (such as can occur
particularly when the court system is involved) for the reduced
collections, an impairment is recorded on portfolios accounted
for on the interest method. Conversely, in the event the cash
flows are in excess of our expectations and the reason is due to
timing, we would defer the excess collection as
deferred revenue.
We use the cost recovery method when collections on a particular
pool of accounts cannot be reasonably predicted. Under the cost
recovery method, no finance 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 finance income when received.
Results
of Operations
The following discussion of our operations and financial
condition should be read in conjunction with our financial
statements and notes thereto included elsewhere in this report.
In these discussions, most percentages and dollar amounts have
been rounded to aid presentation. As a result, all such figures
are approximations.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended September 30,
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
Finance income
|
|
|
99.5
|
%
|
|
|
99.7
|
%
|
|
|
99.8
|
%
|
Other income
|
|
|
0.5
|
%
|
|
|
0.3
|
%
|
|
|
0.2
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
General and administrative expenses
|
|
|
50.7
|
%
|
|
|
36.8
|
%
|
|
|
25.6
|
%
|
Interest expense
|
|
|
9.5
|
%
|
|
|
12.0
|
%
|
|
|
15.5
|
%
|
Impairments
|
|
|
28.4
|
%
|
|
|
261.1
|
%
|
|
|
46.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes
|
|
|
11.4
|
%
|
|
|
(209.9
|
)%
|
|
|
12.9
|
%
|
Provision (benefit) for income taxes
|
|
|
4.6
|
%
|
|
|
(80.8
|
)%
|
|
|
5.3
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
|
6.8.
|
%
|
|
|
(129.1
|
)%
|
|
|
7.6
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
29
Year
Ended September 30, 2010 Compared to the Year Ended
September 30, 2009
Finance income. For the year ended
September 30, 2010, finance income decreased
$24.6 million or 35.0% to $45.6 million from
$70.2 million for the year ended September 30, 2009.
Finance income has decreased primarily due to the lower level of
portfolio purchases over the last two years and, as a result, an
increased percentage of our portfolio balances are in the later
stages of their yield curves. The average outstanding level of
consumer receivable accounts acquired for liquidation decreased
from $328.6 million for the fiscal year ended
September 30, 2009 to $177.6 million for fiscal year
ended September 30, 2010, reflecting a reduced level of
portfolio purchases and the recognition of impairments in the
fourth quarter of fiscal year 2010 of approximately
$13.0 million. In addition, we recorded $143.7 million
in impairments in the second half of fiscal year 2009. During
the fiscal year ended September 30, 2010, we acquired
$269.1 million in face value of new portfolios at a cost of
$8.0 million as compared to $577.0 million of face
value portfolios at a cost $19.6 million, during the fiscal
year ended September 30, 2009. Finance income recognized
from fully amortized portfolios (zero basis revenue) was
$34.3 million and $40.7 million for the years ended
September 30, 2010 and 2009, respectively.
Net collections decreased $45.5 million or 30.9% to
$101.9 million for the fiscal year ended September 30,
2010, from $147.4 million for the fiscal year ended
September 30, 2009. During fiscal year 2010, gross
collections decreased 29.8% to $157.6 million from
$224.5 million for fiscal year 2009, reflecting the lower
level of purchases, the age of our portfolios and the slowdown
in the economy. Commissions and fees associated with gross
collections from our third party collection agencies and
attorneys decreased $21.5 million or 27.8% as compared to
the same period in the prior year and averaged 35.3% of
collections for the fiscal year ended September 30, 2010 as
compared to 34.3% in the same prior year period.
Further, as we have curtailed our purchases of new portfolios of
consumer receivables in the last three fiscal years, finance
income was negatively impacted and we expect will continue to be
negatively impacted going forward since we have not been
replacing our receivables acquired for liquidation. Instead, we
have focused 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. There were no accretable yield adjustments recorded
during the fiscal years ended September 30, 2010 and 2009.
Other income. Other income of $218,000 and
$199,000 for the fiscal year ended September 30, 2010 and
2009, respectively, consisted primarily of service fee income
and interest income from banks.
General and administrative expenses. For the
year ended September 30, 2010, general and administrative
expenses decreased $2.7 million or 10.4% to
$23.2 million from $25.9 million for the year ended
September 30, 2009. Lower general and administrative
expenses is due primarily to the closing of the Pennsylvania
call center in February 2009, lower collection expenses,
primarily the discontinuation in May 2009 of the
$275,000 monthly management fee paid to a significant
servicer relative to the Portfolio Purchase, and lower telephone
expense and professional fees. We have improved the efficiency
of the telephone collection management system , which reduced
costs without a significant impact on the results from the
volume of calls.
Interest expense. For the year ended
September 30, 2010, interest expense decreased
$4.1 million or 48.3% to $4.4 million from
$8.5 million during the year ended September 30, 2009.
The decrease was due to the repayment of the outstanding
borrowings under our line of credit and the reduction of our
Receivables Financing Agreement (described below under the
caption Receivables Financing Agreement) loan
balance during the year ended September 30, 2010, as
compared to the year ended September 30, 2009.
Additionally, the average interest rate during the year ended
September 30, 2010 on the Receivable Financing Agreement
was 3.77% as compared to 4.82% during the year ended
September 30, 2009. The rate on the subordinated
debt related party was increased from 6.25% to 10.0%
during fiscal year 2010; however, the principal balance was paid
down to $4.4 million during fiscal year 2010 from
$8.2 million at September 30, 2009. The average
outstanding borrowings decreased from $168.1 million to
$112.9 million for the years ended September 30, 2009
and 2010, respectively.
Impairments. Impairments of $13.0 million
were recorded by us during the year ended September 30,
2010 as compared to $183.5 million for the year ended
September 30, 2009. The impairment recorded in fiscal year
2010 was related to the Portfolio Purchase. During fiscal year
2010 a significant servicer of accounts of the Portfolio
30
Purchase declared bankruptcy which caused a delay in collections
as accounts were transferred to other servicers. Although we
believe value remains in the Portfolio Purchase, the delay has
impacted projections of collections of the Portfolio Purchase.
Included in the fiscal year 2009 impairments is approximately
$108.5 million related to the interest method portfolios
and $75.0 million related to cost recovery method
portfolios, including $53.9 applied to the Portfolio Purchase.
For the interest method portfolios, relative collections with
respect to our expectations were deteriorating and this
deterioration was confirmed by our third party collection
agencies and attorneys. The deterioration, which had impacted us
throughout the year, became more significant during the fourth
quarter of the fiscal year ended September 30, 2009. In
fiscal year 2010, the entire impairment which was determined by
us in connection the preparation of our year end financial
statements, was taken in the fourth quarter and related to the
Portfolio Purchase resulting in a write down to net realizable
value of $91.8 million at September 30, 2010.
Income tax expense (benefit) Income tax
expense for fiscal year 2010 of $2.1 million consists of a
current tax benefit of $3.2 million and a deferred tax
expense of $5.3 million. Included in the deferred tax
expense is a $5.6 million true up of federal income taxes
from fiscal year 2009. Upon the completion of our Federal tax
return for fiscal year 2009 and the application for the tax
refund completed earlier in the second quarter, the Federal tax
refund estimate of $46 million was revised upward to
approximately $52 million which caused the
$5.6 million true up in the current year. This change was
due to a combination of applying the Federal tax net operating
loss carryback and the recognition of the benefit of the state
net operating loss carryforwards for federal tax purposes, and
other timing differences applied to the current year tax return.
These adjustments did not affect the statement of operations and
yielded a net adjustment between the federal income tax
receivable and the deferred tax asset.
Income tax benefit for fiscal year 2009 of $56.8 million
consists of a federal tax benefit of $46.0 million and a
state tax benefit of $10.8 million. The state deferred tax
benefit is inclusive of a $4.4 million valuation allowance.
Although the carryforward period for state income tax purposes
is up to twenty years, given the economic conditions, such
economic environment could limit growth over a reasonable time
period to realize the deferred tax asset. The Company determined
the time period allowance for carryforward is outside a
reasonable period to forecast full realization of the deferred
tax asset, therefore recognized the deferred tax asset valuation
allowance.
Net income (loss). For the year ended
September 30, 2010, net income increased $93.9 million
to $3.1 million from a $90.7 million loss for the year
ended September 30, 2009, primarily reflecting decreased
impairments and other expenses, partially offset by reduced
finance income and higher income taxes. Net income per diluted
share for the year ended September 30, 2010 increased $6.58
per diluted share to $0.22 per diluted share from ($6.36) per
diluted share for the year ended September 30, 2009.
Year
Ended September 30, 2009 Compared to the Year Ended
September 30, 2008
Finance income. For the year ended
September 30, 2009, finance income decreased
$45.1 million or 39.2% to $70.2 million from
$115.3 million for the year ended September 30, 2008.
The average outstanding level of consumer receivable accounts
acquired for liquidation decreased from $497.3 million for
the fiscal year ended September 30, 2008 to
$394.6 million for fiscal year ended September 30,
2009, reflecting a combination of lower collections and lower
portfolio purchases in 2009 compared to the prior period. A
significant reason for the decrease in finance income is the
impact of the Portfolio Purchase being transferred from the
interest method to the cost recovery method effective in the
third quarter of fiscal year 2008. The finance income recorded
on the Portfolio Purchase in fiscal year 2008, prior to the
transfer to cost recovery, was $17.7 million, as compared
to zero finance income recorded in fiscal year 2009. No finance
income will be recognized on the Portfolio Purchase until after
the entire carrying value of $121.5 million, as of
September 30, 2009, is collected.
During the fiscal year ended September 30, 2009, we
acquired consumer receivable portfolios at a cost of
$19.6 million as compared to $49.9 million during the
fiscal year ended September 30, 2008. The portfolios
purchased in fiscal year 2008 include a portfolio purchased that
is domiciled in South America at a cost of $8.6 million.
Further, as we have curtailed our purchases of new portfolios of
consumer receivables during the second, third and fourth
quarters of 2008 and into 2009, finance income was negatively
impacted and will continue to be negatively impacted going
forward since we are not replacing our receivables acquired for
liquidation. Instead, we are focusing, in the short-term, on
reducing our debt and being highly disciplined in our portfolio
purchases. We continue to review potential portfolio
acquisitions regularly and will be buyers at the right price,
where we believe
31
the purchase will yield our desired rate of return. Finance
income recognized from fully amortized portfolios (zero basis
revenue) was $40.7 million and
$45.3 million for the years ended September 30,
2009 and 2008, respectively. There were no accretable yield
adjustments recorded during the fiscal years ended
September 30, 2009 and 2008.
Other income. Other income of $199,000 and
$255,000 for the fiscal year ended September 30, 2009 and
2008, respectively, consisted primarily of service fee income
and interest income from banks.
General and administrative expenses. For the
year ended September 30, 2009, general and administrative
expenses decreased $3.7 million or 12.3% to
$25.9 million from $29.6 million for the year ended
September 30, 2008. Lower general and administrative
expenses is due primarily to lower staffing levels as
collections and purchase of accounts acquired for liquidation
decreased significantly from the prior year. Staffing levels
have decreased, from 158 full time employees as of
September 30, 2008 to 105 full time employees as of
September 30, 2009. Approximately 38 employees were
eliminated in February 2009 as a result of the closing of the
Pennsylvania call center, with a salary cost savings of
approximately $0.8 million during the year ended
September 30, 2009. Lower postage expense in the current
fiscal year is a reflection of fewer mailings resulting from
lower portfolio purchases.
Interest expense. For the year ended
September 30, 2009, interest expense decreased
$9.4 million or 52.7% to $8.5 million from
$17.9 million during the year ended September 30,
2008. The decrease was due to a decrease in our outstanding
borrowings under our line of credit and our Receivables
Financing Agreement, during the year ended September 30,
2009, as compared to the outstanding borrowings during the year
ended September 30, 2008, coupled with lower interest rates
during the year ended September 30, 2009. The average
interest rate (excluding unused credit line fees) for the year
ended September 30, 2009 on the line of credit and the
Receivable Financing Agreement was 4.72% as compared to 6.11%
during the year ended September 30, 2008. The rate on the
subordinated debt related party is fixed at 6.25%.
The average outstanding borrowings decreased from
$274.1 million to $168.1 million for the years ended
September 30, 2008 and 2009, respectively, reflecting the
Companys continuing effort to pay down its debt.
Impairments. Impairments of
$183.5 million were recorded by the Company during the year
ended September 30, 2009 as compared to $53.2 million
for the year ended September 30, 2008. Included in the
current years impairments is approximately
$108.5 million related to the interest method portfolios
and $75.0 million related to cost recovery method
portfolios, including $53.9 applied to the Portfolio Purchase.
For the interest method portfolios, relative collections with
respect to our expectations were deteriorating and this
deterioration was confirmed by our third party collection
agencies and attorneys. The deterioration, which has impacted us
throughout the year, became more significant during the fourth
quarter of the fiscal year ended September 30, 2009.
Historically, moving through the year and into the fourth
quarter, collections tend to be stable or perhaps increase in
performance. For cost recovery portfolios the impairments
recorded wrote down the cost recovery portfolios to their net
realizable value. As with the interest method portfolios, our
third party collection agencies and attorneys confirmed during
the fourth quarter of fiscal year 2009, the recent trend of the
deterioration of collections. Although collections on the cost
recovery method portfolios are expected to continue, we have
determined the final estimated collections will not be enough to
recover the original cost of or current carrying value of the
portfolio. The impairment charge for the Portfolio Purchase
wrote down the value of the portfolio to $121.9 million.
Impairment charges in 2008 included $30.3 million on the
Portfolio Purchase prior to its transfer to the cost recovery
method.
Income tax (benefit) expense Income tax
benefit for fiscal year 2009 of $56.8 million consists of a
federal tax benefit of $46.0 million and a state tax
benefit of $10.8 million. The state deferred tax benefit is
inclusive of a $4.4 million valuation allowance. Although
the carryforward period for state income tax purposes is up to
twenty years, given the economic conditions, such economic
environment could limit growth over a reasonable time period to
realize the deferred tax asset. The Company determined the time
period allowance for carryforward is outside a reasonable period
to forecast full realization of the deferred tax asset,
therefore recognized the deferred tax asset valuation allowance.
The Company continually monitors forecast information to ensure
the valuation allowance is at the appropriate value. In fiscal
year 2008 the income tax expense of $6.1 million was
comprised of a net federal tax of $4.6 million (including
$6.6 million current) and a net state tax of
$1.5 million (including $2.1 million current). The
current year tax benefit is driven primarily by the impairment
charges recorded during the fiscal year 2009.
32
Net (loss) income. For the year ended
September 30, 2009, net income decreased $99.5 million
to $(90.7) million from $8.8 million for the year
ended September 30, 2008, primarily reflecting increased
impairments and reduced finance income in fiscal year 2009,
partially offset by lower income taxes and expenses. Net income
per diluted share for the year ended September 30, 2009
decreased $6.96 per diluted share to $(6.36) per diluted share,
from $0.61 per diluted share for the year ended
September 30, 2008.
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 of debt, purchases of consumer receivable
portfolios, interest payments, costs involved in the collections
of consumer receivables, taxes and dividends, if approved. In
the past, we have relied significantly upon our lenders to
provide the funds necessary for the purchase of consumer
receivables acquired for liquidation.
Leumi
Credit Agreement
On December 14, 2009 Asta Funding, Inc. and its
subsidiaries other than Palisades XVI, entered into the Leumi
Credit Agreement which permits maximum principal advances of up
to $6 million. The term of the agreement is through
December 31, 2010. The interest rate is a floating rate
equal to the Bank Leumi Reference Rate plus 2%, with a floor of
4.5%. The loan is secured by collateral consisting of all of the
assets of the Company other than those of Palisades XVI and a
pledge by GMS Family Investors, LLC, an investment company owned
by members of the Stern family, of cash and securities with a
value of 133% of the loan commitment. There are no financial
covenant restrictions in the Leumi Credit Agreement. On
December 14, 2009, approximately $3.6 million of the
Bank Leumi credit line was used to reduce to zero the remaining
balance of the IDB Credit Facility described below. The Leumi
Credit Agreement is the current senior facility of the Company.
The Leumi Credit Agreement balance was reduced to zero in
January 2010; however, the $6 million of availability
remains. We are currently working with our bank on a new credit
facility with a larger credit limit.
Receivables
Financing Agreement
In March 2007, Palisades XVI borrowed approximately
$227 million under the Receivables Financing Agreement, as
amended in July 2007, December 2007, May 2008 and February 2009,
with the Bank of Montreal (BMO) in order to finance
the Portfolio Purchase. The Portfolio Purchase had a purchase
price of $300 million (plus 20% of net payments after
Palisades XVI recovers 150% of its purchase price plus cost of
funds, which recovery has not yet occurred). Prior to the
modification, discussed below, the debt was full recourse only
to Palisades XVI and provided for an interest rate of
approximately 170 basis points over LIBOR. The original
term of the agreement was three years. This term was extended by
each of the Second, Third, Fourth and Fifth Amendments to the
Receivables Financing Agreement as discussed below. The
Receivables Financing Agreement contained cross default
provisions related to the IDB Credit Facility. This cross
default could only occur in the event of a non-payment in excess
of $2.5 million of the IDB Credit Facility. Proceeds
received as a result of the net collections from the Portfolio
Purchase are applied to interest and principal of the underlying
loan. The Portfolio Purchase is serviced by Palisades Collection
LLC, a wholly owned subsidiary of the Company, which has engaged
unaffiliated subservicers for a majority of the Portfolio
Purchase.
Since the inception of the Receivables Financing Agreement
amendments have been signed to revise various terms of the
Receivables Financing Agreement. The following is a summary of
the material amendments:
Second Amendment Receivables Financing Agreement,
dated December 27, 2007 revised the amortization schedule
of the loan from 25 months to approximately 31 months.
BMO charged Palisades XVI a fee of $475,000 which was paid on
January 10, 2008. The fee was capitalized and is being
amortized over the remaining life of the Receivables Financing
Agreement.
Third Amendment Receivables Financing Agreement,
dated May 19, 2008 extended the payments of the loan
through December 2010. The lender also increased the interest
rate from 170 basis points over LIBOR to approximately
320 basis points over LIBOR, subject to automatic reduction
in the future if additional capital contributions are made by
the parent of Palisades XVI.
33
Fourth Amendment Receivables Financing Agreement,
dated February 20, 2009, among other things,
(i) lowered the collection rate minimum to $1 million
per month (plus interest and fees) as an average for each period
of three consecutive months, (ii) provided for an automatic
extension of the maturity date from April 30, 2011 to
April 30, 2012 should the outstanding balance be reduced to
$25 million or less by April 30, 2011 and
(iii) permanently waived the previous termination events.
The interest rate remained unchanged at approximately
320 basis points over LIBOR, subject to automatic reduction
in the future should certain collection milestones be attained.
As additional credit support for repayment by Palisades XVI of
its obligations under the Receivables Financing Agreement and as
an inducement for BMO to enter into the Fourth Amendment, the
Company provided BMO a limited recourse, subordinated guaranty,
secured by the assets of the Company, in an amount not to exceed
$8.0 million plus reasonable costs of enforcement and
collection. Under the terms of the guaranty, BMO cannot exercise
any recourse against the Company until the earlier of
(i) five years from the date of the Fourth Amendment and
(ii) the termination of the Companys existing senior
lending facility or any successor senior facility.
On October 26, 2010, Palisades XVI entered into the Fifth
Amendment to the Receivables Financing Agreement (the
Fifth Amendment). The effective date of the Fifth
Amendment was October 14, 2010. The Fifth Amendment
(i) extends the expiration date of the Receivables
Financing Agreement to April 30, 2014, (ii) reduces
the minimum monthly total payment to $750,000,
(iii) accelerates the Companys guarantee credit
enhancement of $8,700,000, which was paid upon execution of the
Fifth Amendment, (iv) eliminates the Companys limited
guarantee of repayment of the loans outstanding by Palisades
XVI, and (v) revises the definition of Borrowing Base
Deficit, as defined in the Receivables Financing
Agreement, to mean the excess, if any, of 105% of the loans
outstanding over the borrowing base.
In connection with the Fifth Amendment, on October 26,
2010, the Company entered into the Omnibus Termination Agreement
(the Termination Agreement). The limited recourse
subordinated guaranty discussed under the Fourth Amendment, was
eliminated upon signing the Termination Agreement.
On September 30, 2010 and 2009, the outstanding balance on
the Receivable Financing Agreement loan was approximately
$90.5 million and $104.3 million, respectively. The
average interest rate of the Receivable Financing Agreement was
3.77% and 4.82% for the twelve month periods ended
September 30, 2010 and 2009, respectively. We were in
compliance with all covenants at September 30, 2010 and
through all reporting periods through the date of this report.
IDB
Credit Facility
The Eighth Amendment to the IDB Credit Facility entered into on
July 10, 2009 provided for an initial $40 million line
of credit from the Bank Group for portfolio purchases and
working capital and was scheduled to reduce to zero by
December 31, 2009. The IDB Credit Facility provided for
interest at the lesser of LIBOR plus an applicable margin, or
the prime rate minus an applicable margin based on certain
leverage ratios, with a minimum rate of 5.5%. The IDB Credit
Facility was collateralized by all assets of the Company other
than the assets of Palisades XVI and contained financial and
other covenants. The IDB Credit Facilitys commitment
termination date was December 31, 2009. This IDB Credit
Facility was repaid on December 14, 2009. The balance of
IDB Credit Facility was $18.3 million on September 30,
2009.
Subordinated
Debt Related Party
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
and is beneficially owned and controlled by Arthur Stern, a
director of the Company, Gary Stern, the President, Chairman and
Chief Executive Officer of the Company, and members of their
families. The loan, originally in the aggregate principal amount
of $8,246,000, currently accrues interest at a rate of 10.0% per
annum, is payable interest only each quarter until maturity on
December 31, 2010, subject to repayment in full of the
Companys loan facility.
The Family Entity loan was extended in December 2009 to
December 31, 2010 with a new interest rate (effective
January 2010) of 10.0% per annum (formerly the rate was
6.25%). On January 27, 2010, the Company
34
repaid approximately $860,740 of the subordinated loan,
delivering approximately $787,500 to the Family Entity, which,
the Family Entity delivered its portion of the loan payment to
Gary Stern, who used the proceeds to exercise the 300,000 stock
options awarded him in 2000. We made additional loan repayments
of $1.5 million each on February 17, 2010 and
March 26, 2010. The subordinated loan balance was
approximately $4.4 million and $8.2 million as of
September 30, 2010 and 2009, respectively. On
November 16, 2010, we made an additional $2.0 million
loan repayment to the Family Entity, reducing the loan balance
to $2.4 million.
The subordinated loan was incurred by us to resolve certain
issues with a significant servicer. Proceeds of the subordinated
loan were used to reduce the balance due on our line of credit
with the IDB Bank Group on June 13, 2008. This facility was
secured by substantially all of the assets of the Company and
its subsidiaries, other than the assets of Palisades XVI.
Cash
Flow
As of September 30, 2010, our cash increased
$81.8 million to $84.2 million from $2.4 million
at September 30, 2009. The increase in cash was primarily
the result of receiving a $52.7 million tax refund paying
off the senior debt and reduced portfolio purchases.
Net cash provided by operating activities was $68.7 million
during the fiscal year ended September 30, 2010, compared
to net cash provided by operating activities of
$32.9 million for the fiscal year ended September 30,
2009. The increase was primarily due to receipt of a
$52.7 million tax refund in June 2010, partially offset by
lower net income, adjusted for non-cash items. Net cash provided
by investing activities was $48.1 million during the fiscal
year ended September 30, 2010, as compared to net cash
provided by investing activities of $57.0 million during
the fiscal year ended September 30, 2009. The decrease was
primarily due to lower collections of consumer receivables
acquired for liquidation, partially offset by the decrease in
the purchase of consumer receivables acquired for liquidation
during the year ended September 30, 2010 as compared to the
same period. Net cash used in financing activities was
$35.0 million during the fiscal year ended
September 30, 2010, as compared to cash used in financing
activities of $91.1 million in the prior period. The
increase was primarily due to a smaller pay down of debt during
the fiscal year ended September 30, 2010 compared to the
prior period. The IDB credit facility was paid down
$66.6 million during the fiscal year ended
September 30, 2009; however, only $18.3 million
remained to be paid off in the current fiscal year.
Our cash requirements have been and will continue to be
significant and have, in the past, depended on external
financing to acquire consumer receivables and operate the
business. Significant requirements include repayments under our
debt facilities, purchase of consumer receivable portfolios,
interest payments, costs involved in the collections of consumer
receivables, and taxes. In addition, dividends are paid if
approved by the Board of Directors. Acquisitions have been
financed primarily through cash flows from operating activities
and a credit facility. We believe we will be less dependent on a
credit facility in the short-term as our cash flow from
operations will be sufficient to purchase portfolios and operate
the business. However, as the collection environment remains
challenging, we may seek additional funding.
We are cognizant of the current market fundamentals in the debt
purchase and company acquisition markets which, because of
significant supply and tight capital availability, could result
in increased buying opportunities. Accordingly, we filed a
$100 million shelf registration statement with the SEC
which was declared effective during the third quarter of 2010.
As of the date of this report, we have not issued any securities
under this registration statement. The outcome of any future
transaction(s) is subject to market conditions. In addition, due
to these opportunities, we continue to work with our current
bank group and others on a new and expanded loan facility.
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.
35
Contractual
Obligations
The following table summarizes our contractual obligations in
future fiscal years:
Payments
Due By Period
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less Than
|
|
|
|
|
|
|
|
|
More Than
|
|
|
|
Total
|
|
|
1 Year
|
|
|
1-3 Years
|
|
|
3-5 Years
|
|
|
5 Years
|
|
|
Long Term Debt Obligations
|
|
$
|
90,483,000
|
|
|
$
|
17,950,000
|
|
|
$
|
27,000,000
|
|
|
$
|
45,533,000
|
|
|
$
|
|
|
Operating Lease Obligations
|
|
$
|
1,176,000
|
|
|
$
|
270,000
|
|
|
$
|
709,000
|
|
|
$
|
197,000
|
|
|
|
|
|
Subordinated Debt
|
|
$
|
4,386,000
|
|
|
$
|
4,386,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
96,045,000
|
|
|
$
|
22,606,000
|
|
|
$
|
27,709,000
|
|
|
$
|
45,730,000
|
|
|
|
|
|
Off-Balance
Sheet Arrangements
As of September 30, 2010, we did not have any relationships
with unconsolidated entities or financial partners, such as
entities often referred to as structured finance or special
purpose entities, established for the purpose of facilitating
off-balance sheet arrangements or other contractually narrow or
limited purposes. As such, we are not materially exposed to any
financing, liquidity, market or credit risk that could arise if
we had engaged in such relationships.
The following table shows the changes in finance receivables,
including amounts paid to acquire new portfolios:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended September 30,
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
(In millions)
|
|
|
Balance at beginning of period
|
|
$
|
208.3
|
|
|
$
|
449.0
|
|
|
$
|
545.6
|
|
|
$
|
257.3
|
|
|
$
|
172.7
|
|
Acquisitions of finance receivables, net of buybacks
|
|
|
8.0
|
|
|
|
19.6
|
|
|
|
49.9
|
|
|
|
440.9
|
|
|
|
200.2
|
|
Cash collections from debtors applied to principal(1)(2)
|
|
|
(55.1
|
)
|
|
|
(69.1
|
)
|
|
|
(81.7
|
)
|
|
|
(114.4
|
)
|
|
|
(90.4
|
)
|
Cash collections represented by account sales applied to
principal(1)
|
|
|
(1.2
|
)
|
|
|
(8.1
|
)
|
|
|
(11.0
|
)
|
|
|
(29.1
|
)
|
|
|
(23.0
|
)
|
Impairments/Portfolio write down
|
|
|
(13.0
|
)
|
|
|
(183.5
|
)
|
|
|
(53.2
|
)
|
|
|
(9.1
|
)
|
|
|
(2.2
|
)
|
Effect of foreign exchange
|
|
|
|
|
|
|
0.4
|
|
|
|
(0.6
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at end of period
|
|
$
|
147.0
|
|
|
$
|
208.3
|
|
|
$
|
449.0
|
|
|
$
|
545.6
|
|
|
$
|
257.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(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. Put backs are considered
not material for all other years presented. |
Supplementary Information on Consumer Receivables Portfolios:
Portfolio
Purchases
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended September 30,
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
|
(In millions)
|
|
|
Aggregate Purchase Price
|
|
|
8.0
|
|
|
$
|
19.6
|
|
|
$
|
49.9
|
|
Aggregate Portfolio Face Amount
|
|
|
269.1
|
|
|
|
577.0
|
|
|
|
1,605.1
|
|
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
36
process and the geographical distribution of the portfolio. When
we pay higher prices for portfolios which are performing or
fresher, we believe it is not at the sacrifice of our expected
returns. Price fluctuations for portfolio purchases from quarter
to quarter or year to year are primarily indicative of the
overall mix of the types of portfolios we are purchasing.
Schedule
of Portfolios by Income Recognition Category
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2010
|
|
|
September 30, 2009
|
|
|
September 30, 2008
|
|
|
|
Cost
|
|
|
Interest
|
|
|
Cost
|
|
|
Interest
|
|
|
Cost
|
|
|
Interest
|
|
|
|
Recovery
|
|
|
Method
|
|
|
Recovery
|
|
|
Method
|
|
|
Recovery
|
|
|
Method
|
|
|
|
Portfolios
|
|
|
Portfolios
|
|
|
Portfolios
|
|
|
Portfolios
|
|
|
Portfolios
|
|
|
Portfolios
|
|
|
|
(In millions)
|
|
|
Original Purchase Price (at period end)
|
|
$
|
442.5
|
|
|
$
|
780.5
|
|
|
$
|
442.2
|
|
|
$
|
772.8
|
|
|
$
|
405.9
|
|
|
$
|
789.5
|
|
Cumulative Aggregate Managed Portfolios (at period end)
|
|
|
13,913.3
|
|
|
|
17,966.2
|
|
|
|
13,884.5
|
|
|
|
17,725.9
|
|
|
|
12,053.4
|
|
|
|
18,980.0
|
|
Receivable Carrying Value (at period end)
|
|
|
100.7
|
|
|
|
46.3
|
|
|
|
137.6
|
|
|
|
70.6
|
|
|
|
245.5
|
|
|
|
203.5
|
|
Finance Income Earned (for the respective period)
|
|
|
1.7
|
|
|
|
43.9
|
|
|
|
2.5
|
|
|
|
67.7
|
|
|
|
1.2
|
|
|
|
114.0
|
|
Total Cash Flows (for the respective period)
|
|
|
26.0
|
|
|
|
75.9
|
|
|
|
47.0
|
|
|
|
100.4
|
|
|
|
24.9
|
|
|
|
183.0
|
|
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
|
|
|
2010
|
|
$
|
3,485,000
|
|
|
$
|
2,272,000
|
|
2009
|
|
|
8,662,000
|
|
|
|
3,085,000
|
|
2008
|
|
|
20,395,000
|
|
|
|
9,361,000
|
|
37
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, 2010.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
|
$
|
105,549,000
|
|
|
|
|
|
|
|
105,549,000
|
|
|
|
162
|
%
|
2002
|
|
|
36,557,000
|
|
|
|
48,149,000
|
|
|
|
|
|
|
|
48,149,000
|
|
|
|
132
|
%
|
2003
|
|
|
115,626,000
|
|
|
|
215,257,000
|
|
|
|
434,000
|
|
|
|
215,691,000
|
|
|
|
187
|
%
|
2004
|
|
|
103,743,000
|
|
|
|
184,220,000
|
|
|
|
270,000
|
|
|
|
184,490,000
|
|
|
|
178
|
%
|
2005
|
|
|
126,023,000
|
|
|
|
212,299,000
|
|
|
|
5,675,000
|
|
|
|
217,974,000
|
|
|
|
173
|
%
|
2006
|
|
|
163,392,000
|
|
|
|
246,740,000
|
|
|
|
11,686,000
|
|
|
|
258,426,000
|
|
|
|
158
|
%
|
2007
|
|
|
109,235,000
|
|
|
|
90,252,000
|
|
|
|
25,331,000
|
|
|
|
115,583,000
|
|
|
|
106
|
%
|
2008
|
|
|
26,626,000
|
|
|
|
38,572,000
|
|
|
|
1,753,000
|
|
|
|
40,325,000
|
|
|
|
151
|
%
|
2009
|
|
|
19,127,000
|
|
|
|
19,461,000
|
|
|
|
9,466,000
|
|
|
|
28,927,000
|
|
|
|
151
|
%
|
2010
|
|
|
7,698,000
|
|
|
|
3,690,000
|
|
|
|
6,987,000
|
|
|
|
10,677,000
|
|
|
|
139
|
%
|
|
|
|
(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. |
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, 2010, we recognized
finance income of $1.7 million under the cost recovery
method because we collected $1.7 million in excess of our
purchase price on certain of these portfolios. In addition, we
earned $43.9 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, 2010, we purchased portfolios with an
aggregate purchase price of $8.0 million with a face value
(gross contracted amount) of $269.1 million.
Recent
Accounting Pronouncements
In February 2010, the FASB issued ASU
2010-09,
Subsequent Events (Topic 855): Amendments to Certain
Recognition and Disclosure Requirements. The amendments remove
the requirement for an SEC registrant to disclose the date
through which subsequent events were evaluated as this
requirement would have potentially conflicted with SEC reporting
requirements. Removal of the disclosure requirement is not
expected to affect the nature or timing of subsequent events
evaluations performed by the Company. This ASU became effective
upon issuance.
In December 2009, the FASB issued ASU
2009-17,
Consolidations (Topic 810) Improvements to
Financial Reporting by Enterprises Involved with Variable
Interest Entities. ASU
2009-17
generally represents a revision to former FASB Interpretation
No. 46 (Revised December 2003), Consolidation of
Variable Interest Entities, and changes how a reporting
entity determines when an entity that is insufficiently
capitalized or is not
38
controlled through voting (or similar rights) should be
consolidated. ASU
2009-17 also
requires a reporting entity to provide additional disclosures
about its involvement with variable interest entities and any
significant changes in risk exposure due to that involvement.
ASU 2009-17
is effective for fiscal years beginning after November 15,
2009 and for interim periods within the first annual reporting
period. The Company does not believe that the adoption of ASU
2009-17 will
have a significant effect on its consolidated financial
statements.
Inflation
We believe that inflation has not had a material impact on our
results of operations for the years ended September 30,
2010, 2009 and 2008.
|
|
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, 2010, our Receivables
Financing Agreement, all of which is variable rate debt, had an
outstanding balance of $90.5 million. A 25 basis-point
increase in interest rates would have increased our annual
interest expense by approximately $250,000 based on the average
debt obligation outstanding during the fiscal year. We do not
currently invest in derivative, financial or commodity
instruments.
39
|
|
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
|
|
|
|
|
F-2
|
|
|
|
|
F-3
|
|
|
|
|
F-4
|
|
|
|
|
F-5
|
|
|
|
|
F-6
|
|
|
|
|
F-7
|
|
|
|
Item 9.
|
Changes
in and Disagreements With Accountants on Accounting and
Financial Disclosure.
|
None
|
|
Item 9A.
|
Controls
and Procedures.
|
Disclosure
Controls and Procedures
An evaluation of the effectiveness of the Companys
disclosure controls and procedures (as defined in Exchange Act
Rules 13a-15(e)
and
15d-15(e))
as of the end of the period ended September 30, 2010 was
carried out by us under the supervision and with the
participation of our chief executive officer and chief financial
officer. Based upon that evaluation, our chief executive officer
and chief financial officer concluded that as of
September 30, 2010, our disclosure controls and procedures
were effective to ensure (i) that information we are
required to disclose in reports that we file or submit under the
Securities Exchange Act of 1934 is recorded, processed,
summarized and reported within the time periods specified in the
SECs rules and forms and (ii) that such information
is accumulated and communicated to management, including our
president, in order to allow timely decisions regarding required
disclosure.
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
(COSO) in Internal Control Integrated
Framework. Based on managements assessment based on the
criteria of the COSO, the Company concluded that, as of
September 30, 2010, the Companys internal control
over financial reporting is effective at the reasonable
assurance level.
The Companys internal control system was designed to
provide reasonable assurance regarding the reliability of
financial reporting and the preparation of financial statements
for external purposes in accordance with generally accepted
accounting principles in the U.S. The Companys
internal control over financial reporting includes those
policies and procedures that:
(i) pertain to the maintenance of records that, in
reasonable detail, accurately and fairly reflect the
transactions and dispositions of the assets of the Company;
(ii) provide reasonable assurance that transactions are
recorded as necessary to permit preparation of financial
statements in accordance with accounting principles generally
accepted in the U.S., and that receipts and expenditures of the
Company are being made only in accordance with authorization of
management and directors of the Company; and
40
(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.
Our independent registered public accounting firm, Grant
Thornton LLP, audited the Companys internal control over
financial reporting as of September 30, 2010 and their
report dated December 14, 2010 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 (as defined in Exchange Act
Rules 13a-15(f)
and
15d-15(f))
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.
41
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, 2010, 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, 2010, based on
criteria established in Internal Control-Integrated Framework
issued by COSO.
We also have audited, in accordance with the standards of the
Public Company Accounting Oversight Board (United States), the
consolidated balance sheets of Asta Funding, Inc. and
subsidiaries as of September 30, 2010 and 2009 and the
related consolidated statements of operations,
stockholders equity and comprehensive income, and cash
flows for each of the years in the three-year period ended
September 30, 2010, and our report dated December 14,
2010, expressed an unqualified opinion.
/s/ Grant Thornton LLP
New York, New York
December 14, 2010
42
|
|
Item 9B.
|
Other
Information.
|
None.
PART III
|
|
Item 10.
|
Directors,
Executive Officers and Corporate Governance.
|
Directors
and Executive Officers
Information contained under the caption Directors,
Executive Officers, and Corporate Governance in our
definitive Proxy Statement, to be filed with the Commission on
or before January 28, 2011, is incorporated by reference in
response to this Item 10.
|
|
Item 11.
|
Executive
Compensation.
|
Information contained under the caption Executive
Compensation in our definitive Proxy Statement, to be
filed with the Commission on or before January 28, 2011, is
incorporated by reference in response to this Item 11.
|
|
Item 12.
|
Security
Ownership of Certain Beneficial Owners and Management and
Related Stockholder Matters.
|
Information contained under the caption Security Ownership
of Certain Beneficial Owners and Management in our
definitive Proxy Statement, to be filed with the Commission on
or before January 28, 2011, is incorporated by reference in
response to this Item 12.
|
|
Item 13.
|
Certain
Relationships and Related Transactions, and Director
Independence.
|
Information contained under the caption Certain
Relationships and Related Transactions in our definitive
Proxy Statement, to be filed with the Commission on or before
January 28, 2011, is incorporated by reference in response
to this Item 13.
|
|
Item 14.
|
Principal
Accounting Fees and Services.
|
Information contained under the caption Principal
Accounting Fees and Services in our definitive Proxy
Statement to be filed with the Commission on or before
January 28, 2011 is incorporated by reference in response
to this Item 14.
Part IV
|
|
Item 15.
|
Exhibits,
Financial Statement Schedules.
|
(a) The following documents are filed as part of this report
|
|
|
|
|
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
|
|
Reserved
|
43
|
|
|
|
|
Exhibit
|
|
|
Number
|
|
|
|
|
10
|
.7
|
|
Receivables Finance Agreement dated March 2, 2007 between
the Company and the Bank of Montreal(10)
|
|
10
|
.8
|
|
Subservicing Agreement between the Company and the Subservicer
dated March 2, 2007(17)
|
|
10
|
.9
|
|
Purchase and Sale Agreement dated February 5, 2007(11)
|
|
10
|
.10
|
|
Third Amendment to the Fourth Amended and Restated Loan and
Security Agreement dated March 30, 2007, between the
Company and Israel Discount Bank(12)
|
|
10
|
.11
|
|
Fourth Amendment to the Fourth Amended and Restated Loan and
Security Agreement dated May 10, 2007, between the Company
and Israel Discount Bank(13)
|
|
10
|
.12
|
|
Fifth Amendment to the Fourth Amended and Restated Loan and
Security Agreement dated June 27, 2007, between the Company
and Israel Discount Bank(14)
|
|
10
|
.13
|
|
First Amendment to the Receivables Finance Agreement dated
July 1, 2007 between the Company and Bank of Montreal(15)
|
|
10
|
.14
|
|
Sixth Amendment to the Fourth Amended and Restated Loan and
Security Agreement dated December 4, 2007, between the
Company and Israel Discount Bank(16)
|
|
10
|
.15
|
|
Second Amendment to the Receivables Financing Agreement dated
December 27, 2007(18)
|
|
10
|
.16
|
|
Third Amendment to the Receivables Financing Agreement dated
May 19, 2008(19)
|
|
10
|
.17
|
|
Amended and Restated Servicing Agreement dated May 19, 2008
between the Company and The Bank of Montreal(19)
|
|
10
|
.18
|
|
Subordinated Promissory Note between Asta Funding, Inc and Asta
Group, Inc. dated April 29, 2008(20)
|
|
10
|
.19
|
|
Seventh Amendment to the Fourth Amended and Restated Loan
Agreement, Dated February 20, 2009 between the Company and
IDB(21)
|
|
10
|
.20
|
|
Form of Amended and Restated Revolving Note between Asta Funding
and IDB, as lending agent(22)
|
|
10
|
.21
|
|
Fourth Amendment to the Receivables Financing Agreement dated
February 20, 2009 between the Company and Bank of
Montreal(23)
|
|
10
|
.22
|
|
Subordinated Guarantor Security Agreement dated
February 20, 2009 to Bank of Montreal(24)
|
|
10
|
.23
|
|
Subordinated Limited Recourse Guaranty Agreement dated
February 20, 2009(25)
|
|
10
|
.24
|
|
Subordinated Guarantor Security Agreement dated
February 20, 2009 to Asta Group, Inc.(26)
|
|
10
|
.25
|
|
Subordinated Limited Recourse Guaranty Agreement dated
February 20, 2009 to Asta Group.(27)
|
|
10
|
.26
|
|
Form of Intercreditor Agreement between Asta Funding and IDB as
lending agent(28)
|
|
10
|
.27
|
|
Amended and Restated Management Agreement, dated as of
January 16, 2009, between Palisades Collection, L.L.C., and
[*].(29)
|
|
10
|
.28
|
|
Amended and Restated Master Servicing Agreement, dated as of
January 16, 2009, between Palisades Collection, L.L.C., and
[*](30)
|
|
10
|
.29
|
|
First Amendment to Amended and Restated Master Servicing
Agreement, dated as of September 16, 2007, by and among
Palisades Collection, L.L.C., and [*], and [*](31)
|
|
10
|
.30
|
|
Consulting Services Agreement dated November 30, 2009
between Cameron E. Williams and the Company.(32)
|
|
10
|
.31
|
|
Loan Agreement Between Asta Funding and Bank Leumi dated
December 14, 2009.(33)
|
|
10
|
.32
|
|
Indemnification agreement between Asta Funding and GMS Family
Investors LLC.(34)
|
|
10
|
.33
|
|
Fifth Amendment to the Receivables Financing Agreement dated
October 26, 2010 between the Company and Bank of
Montreal(35)
|
|
10
|
.34
|
|
Omnibus Termination Agreement, by and among Palisades
Acquisition XVI, LLC, BMO Capital Markets Corp., as collateral
agent, Asta Group, Incorporated, and each guarantor set forth
therein.(36)
|
|
10
|
.35
|
|
Lease agreement between the Company and ESL 200 LLC
dated August 2, 2010(37)
|
|
14
|
.1
|
|
Code of Ethics for Senior Financial Officers(38)
|
|
21
|
.1
|
|
Subsidiaries of the Registrant*
|
|
23
|
.1
|
|
Consent of Independent Registered Public Accounting Firm*
|
44
|
|
|
|
|
Exhibit
|
|
|
Number
|
|
|
|
|
31
|
.1
|
|
Certification of Registrants Chief Executive Officer, Gary
Stern, pursuant to Section 302 of the Sarbanes-Oxley Act of
2002.*
|
|
31
|
.2
|
|
Certification of Registrants Chief Financial Officer,
Robert J. Michel, pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.*
|
|
32
|
.1
|
|
Certification of the Registrants Chief Executive Officer,
Gary Stern, pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002.*
|
|
32
|
.2
|
|
Certification of the Registrants Chief Financial Officer,
Robert J. Michel, pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.*
|
|
|
|
* |
|
Filed herewith |
|
(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) |
|
Not used |
|
(9) |
|
Not used |
|
(10) |
|
Incorporated by reference to Exhibit 10.1 to Asta
Fundings Quarterly Report on
Form 10-Q
for the three months ended March 31, 2007. |
|
(11) |
|
Incorporated by reference to Exhibit 10.1 to Asta
Fundings Current Report on
Form 8-K
filed February 9, 2007 |
|
(12) |
|
Incorporated by reference to Exhibit 10.2 to Asta
Fundings Quarterly Report on
Form 10-Q
for the Three Months Ended March 31, 2007 |
|
(13) |
|
Incorporated by reference to Exhibit 10.3 to Asta
Fundings Quarterly Report on
Form 10-Q
for the Three Months Ended March 31, 2007 |
|
(14) |
|
Incorporated by reference to Exhibit 10.1 to Asta
Fundings Quarterly Report on
Form 10-Q
for the Three Months Ended June 30, 2007 |
|
(15) |
|
Incorporated by reference to Exhibit 10.2 to Asta
Fundings Quarterly Report on
Form 10-Q
for the Three Months Ended June 30, 2007. |
|
(16) |
|
Incorporated by reference to Exhibit 10.1 to Asta
Fundings Current Report on
Form 8-K
filed December 10, 2007 |
|
(17) |
|
Incorporated by reference to Exhibit 10.4 to Asta
Fundings Quarterly Report on
Form 10-Q
for the Three Months Ended March 31, 2007 |
|
(18) |
|
Incorporated by reference to Exhibit 10.15 to Asta
Fundings Annual Report on
Form 10-K
for the year ended September 30, 2007 |
|
(19) |
|
Incorporated by reference to Exhibit 10.15 to Asta
Fundings Quarterly Report on
Form 10-Q
for the three months ended March 31, 2008 |
|
(20) |
|
Incorporated by reference to Exhibit 10.18 to Asta
Fundings Current Report on
Form 8-K
filed May 1, 2008 |
|
(21) |
|
Incorporated by reference to Exhibit 10.19 to Asta
Fundings Annual Report on
Form 10-K
for the year ended September 30, 2008 |
45
|
|
|
(22) |
|
Incorporated by reference to Exhibit 10.20 to Asta
Fundings Annual Report on
Form 10-K
for the year ended September 30, 2008 |
|
(23) |
|
Incorporated by reference to Exhibit 10.21 to Asta
Fundings Annual Report on
Form 10-K
for the year ended September 30, 2008 |
|
(24) |
|
Incorporated by reference to Exhibit 10.22 to Asta
Fundings Annual Report on
Form 10-K
for the year ended September 30, 2008 |
|
(25) |
|
Incorporated by reference to Exhibit 10.23 to Asta
Fundings Annual Report on
Form 10-K
for the year ended September 30, 2008 |
|
(26) |
|
Incorporated by reference to Exhibit 10.24 to Asta
Fundings Annual Report on
Form 10-K
for the year ended September 30, 2008 |
|
(27) |
|
Incorporated by reference to Exhibit 10.25 to Asta
Fundings Annual Report on
Form 10-K
for the year ended September 30, 2008 |
|
(28) |
|
Incorporated by reference to Exhibit 10.26 to Asta
Fundings Annual Report on
Form 10-K
for the year ended September 30, 2008 |
|
(29) |
|
Incorporated by reference to Exhibit 10.27 to Asta
Fundings Annual Report on
Form 10-K
for the year ended September 30, 2008 |
|
(30) |
|
Incorporated by reference to Exhibit 10.28 to Asta
Fundings Annual Report on
Form 10-K
for the year ended September 30, 2008 |
|
(31) |
|
Incorporated by reference to Exhibit 10.29 to Asta
Fundings Annual Report on
Form 10-K
for the year ended September 30, 2008 |
|
(32) |
|
Incorporated by reference to Exhibit 99.1 to Asta
Fundings Current Report on
Form 8-K
filed December 4, 2009 |
|
(33) |
|
Incorporated by reference to Exhibit 10.1 to Asta
Fundings Current Report on
Form 8-K
filed December 18, 2009 |
|
(34) |
|
Incorporated by reference to Exhibit 10.32 to Asta
Fundings Annual Report on
Form 10-K
for the year ended September 30, 2009 |
|
(35) |
|
Incorporated by reference to Exhibit 10.1 to Asta
Fundings Current Report on
Form 8-K
filed November 1, 2010 |
|
(36) |
|
Incorporated by reference to Exhibit 10.2 to Asta
Fundings Current Report on
Form 8-K
filed November 22, 2010 |
|
(37) |
|
Incorporated by reference to Exhibit 10.2 to Asta
Fundings Current Report on
Form 8-K
filed August 5, 2010 |
|
(38) |
|
Incorporated by reference to Exhibit 14.1 to Asta
Fundings Annual Report on
Form 10-K
for the year ended September 30, 2009 |
46
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Exchange Act, the Registrant caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
ASTA FUNDING, INC.
Gary Stern
President and Chief Executive Officer
(Principal Executive Officer)
Dated: December 14, 2010
Pursuant to the requirements of the Exchange Act, this report
has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated:
|
|
|
|
|
|
|
Signature
|
|
Title
|
|
Date
|
|
|
|
|
|
|
/s/ Gary
Stern
Gary
Stern
|
|
Chairman of the Board, President, and Chief Executive Officer
|
|
December 14, 2010
|
|
|
|
|
|
/s/ Robert
J. Michel
Robert
J. Michel
|
|
Chief Financial Officer Principal Financial Officer and
Accounting Officer
|
|
December 14, 2010
|
|
|
|
|
|
/s/ Arthur
Stern
Arthur
Stern
|
|
Chairman Emeritus and Director
|
|
December 14, 2010
|
|
|
|
|
|
/s/ Herman
Badillo
Herman
Badillo
|
|
Director
|
|
December 14, 2010
|
|
|
|
|
|
/s/ Edward
Celano
Edward
Celano
|
|
Director
|
|
December 14, 2010
|
|
|
|
|
|
/s/ Harvey
Leibowitz
Harvey
Leibowitz
|
|
Director
|
|
December 14, 2010
|
|
|
|
|
|
/s/ David
Slackman
David
Slackman
|
|
Director
|
|
December 14, 2010
|
|
|
|
|
|
/s/ Louis
A. Piccolo
Louis
A. Piccolo
|
|
Director
|
|
December 14, 2010
|
47
ASTA
FUNDING, INC. AND SUBSIDIARIES
CONSOLIDATED
FINANCIAL STATEMENTS
SEPTEMBER 30, 2010, 2009 and 2008
ASTA
FUNDING, INC. AND SUBSIDIARIES
Contents
|
|
|
|
|
|
|
Page
|
|
|
|
|
|
F-2
|
|
|
|
|
F-3
|
|
|
|
|
F-4
|
|
|
|
|
F-5
|
|
|
|
|
F-6
|
|
|
|
|
F-7
|
|
REPORT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors and Stockholders
Asta Funding, Inc.
We have audited the accompanying consolidated balance sheets of
Asta Funding, Inc. and subsidiaries (the Company) as
of September 30, 2010 and 2009 and the related consolidated
statements of operations, stockholders equity and
comprehensive income, and cash flows for each of the years in
the three-year period ended September 30, 2010. These
consolidated financial statements are the responsibility of the
Companys management. Our responsibility is to express an
opinion on these consolidated financial statements based on our
audits.
We conducted our audits in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by
management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred
to above present fairly, in all material respects, the financial
position of Asta Funding, Inc. and subsidiaries as of
September 30, 2010 and 2009 and the results of their
operations and their cash flows for each of the three years
ended September 30, 2010, 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, 2010, based on
criteria established in Internal Control-Integrated
Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO) and our report
dated December 14, 2010 expressed an unqualified opinion.
New York, New York
December 14, 2010
F-2
ASTA
FUNDING, INC. AND SUBSIDIARIES
Consolidated
Balance Sheets
|
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
|
|
2010
|
|
|
2009
|
|
|
ASSETS
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
84,235,000
|
|
|
$
|
2,385,000
|
|
Restricted cash
|
|
|
1,304,000
|
|
|
|
2,130,000
|
|
Consumer receivables acquired for liquidation (at net realizable
value)
|
|
|
147,031,000
|
|
|
|
208,261,000
|
|
Due from third party collection agencies and attorneys
|
|
|
3,528,000
|
|
|
|
2,573,000
|
|
Prepaid and income taxes receivable
|
|
|
196,000
|
|
|
|
47,727,000
|
|
Furniture and equipment (net of accumulated depreciation of
$3,006,000 in 2010 and $2,758,000 in 2009)
|
|
|
338,000
|
|
|
|
538,000
|
|
Deferred income taxes
|
|
|
18,762,000
|
|
|
|
24,072,000
|
|
Other assets
|
|
|
3,770,000
|
|
|
|
3,070,000
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
259,164,000
|
|
|
$
|
290,756,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS EQUITY
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
Debt
|
|
$
|
90,483,000
|
|
|
$
|
122,622,000
|
|
Subordinated debt related party
|
|
|
4,386,000
|
|
|
|
8,246,000
|
|
Other liabilities
|
|
|
2,105,000
|
|
|
|
2,166,000
|
|
Dividends payable
|
|
|
292,000
|
|
|
|
286,000
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
97,266,000
|
|
|
|
133,320,000
|
|
|
|
|
|
|
|
|
|
|
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
14,600,423 shares in 2010 and 14,272,357 shares in 2009
|
|
|
146,000
|
|
|
|
143,000
|
|
Additional paid-in capital
|
|
|
72,717,000
|
|
|
|
70,189,000
|
|
Retained earnings
|
|
|
89,026,000
|
|
|
|
87,058,000
|
|
Accumulated other comprehensive income, net of income taxes
|
|
|
9,000
|
|
|
|
46,000
|
|
|
|
|
|
|
|
|
|
|
Total stockholders equity
|
|
|
161,898,000
|
|
|
|
157,436,000
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders equity
|
|
$
|
259,164,000
|
|
|
$
|
290,756,000
|
|
|
|
|
|
|
|
|
|
|
See Notes to Consolidated Financial Statements
F-3
ASTA
FUNDING, INC. AND SUBSIDIARIES
Consolidated
Statements of Operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended September 30,
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
Finance income, net
|
|
$
|
45,631,000
|
|
|
$
|
70,156,000
|
|
|
$
|
115,295,000
|
|
Other income
|
|
|
218,000
|
|
|
|
199,000
|
|
|
|
255,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
45,849,000
|
|
|
|
70,355,000
|
|
|
|
115,550,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
General and administrative expenses
|
|
|
23,211,000
|
|
|
|
25,915,000
|
|
|
|
29,561,000
|
|
Interest expense (Related Party 2010, $518,000;
2009, $515,000; 2008, $154,000)
|
|
|
4,368,000
|
|
|
|
8,452,000
|
|
|
|
17,881,000
|
|
Impairments of consumer receivables acquired for liquidation
|
|
|
13,029,000
|
|
|
|
183,500,000
|
|
|
|
53,160,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
40,608,000
|
|
|
|
217,867,000
|
|
|
|
100,602,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes
|
|
|
5,241,000
|
|
|
|
(147,512,000
|
)
|
|
|
14,948,000
|
|
Income tax expense (benefit)
|
|
|
2,112,000
|
|
|
|
(56,787,000
|
)
|
|
|
6,119,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
3,129,000
|
|
|
$
|
(90,725,000
|
)
|
|
$
|
8,829,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic net income (loss) per share
|
|
$
|
0.22
|
|
|
$
|
(6.36
|
)
|
|
$
|
0.62
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted net income (loss) per share
|
|
$
|
0.22
|
|
|
$
|
(6.36
|
)
|
|
$
|
0.61
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
14,492,215
|
|
|
|
14,272,425
|
|
|
|
14,138,650
|
|
Diluted
|
|
|
14,534,982
|
|
|
|
14,272,425
|
|
|
|
14,553,346
|
|
See Notes to Consolidated Financial Statements
F-4
ASTA
FUNDING, INC. AND SUBSIDIARIES
Consolidated
Statements of Stockholders Equity
For the
years ended September 30, 2010, 2009 and 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional
|
|
|
|
|
|
Other
|
|
|
|
|
|
|
Common Stock
|
|
|
Paid-in
|
|
|
Retained
|
|
|
Comprehensive
|
|
|
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Capital
|
|
|
Earnings
|
|
|
Income (Loss)
|
|
|
Total
|
|
|
Balance, September 30, 2007
|
|
|
13,918,158
|
|
|
$
|
139,000
|
|
|
$
|
65,030,000
|
|
|
$
|
172,366,000
|
|
|
$
|
|
|
|
$
|
237,535,000
|
|
Exercise of options
|
|
|
300,000
|
|
|
|
3,000
|
|
|
|
422,000
|
|
|
|
|
|
|
|
|
|
|
|
425,000
|
|
Restricted stock granted
|
|
|
58,000
|
|
|
|
1,000
|
|
|
|
(1,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock based compensation expense
|
|
|
|
|
|
|
|
|
|
|
1,013,000
|
|
|
|
|
|
|
|
|
|
|
|
1,013,000
|
|
Tax benefit arising from exercise of non qualified stock options
and vesting of restricted stock
|
|
|
|
|
|
|
|
|
|
|
2,666,000
|
|
|
|
|
|
|
|
|
|
|
|
2,666,000
|
|
Dividends
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2,270,000
|
)
|
|
|
|
|
|
|
(2,270,000
|
)
|
Other comprehensive loss(net of tax benefit of $202,000)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(297,000
|
)
|
|
|
(297,000
|
)
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8,829,000
|
|
|
|
|
|
|
|
8,829,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, September 30, 2008
|
|
|
14,276,158
|
|
|
|
143,000
|
|
|
|
69,130,000
|
|
|
|
178,925,000
|
|
|
|
(297,000
|
)
|
|
|
247,901,000
|
|
Exercise of options
|
|
|
533
|
|
|
|
|
|
|
|
1,000
|
|
|
|
|
|
|
|
|
|
|
|
1,000
|
|
Restricted stock forfeited
|
|
|
(4,334
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock based compensation expense
|
|
|
|
|
|
|
|
|
|
|
984,000
|
|
|
|
|
|
|
|
|
|
|
|
984,000
|
|
Tax benefit arising from exercise of non-qualified stock options
and vesting of restricted stock
|
|
|
|
|
|
|
|
|
|
|
74,000
|
|
|
|
|
|
|
|
|
|
|
|
74,000
|
|
Dividends
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,142,000
|
)
|
|
|
|
|
|
|
(1,142,000
|
)
|
Other comprehensive income (net of tax of $233,000)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
343,000
|
|
|
|
343,000
|
|
Net (loss)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(90,725,000
|
)
|
|
|
|
|
|
|
(90,725,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, September 30, 2009
|
|
|
14,272,357
|
|
|
|
143,000
|
|
|
|
70,189,000
|
|
|
|
87,058,000
|
|
|
|
46,000
|
|
|
|
157,436,000
|
|
Exercise of options
|
|
|
328,066
|
|
|
|
3,000
|
|
|
|
867,000
|
|
|
|
|
|
|
|
|
|
|
|
870,0000
|
|
Stock based compensation expense
|
|
|
|
|
|
|
|
|
|
|
1,189,000
|
|
|
|
|
|
|
|
|
|
|
|
1,189,000
|
|
Tax benefit arising from exercise of non-qualified stock options
and vesting of restricted stock
|
|
|
|
|
|
|
|
|
|
|
472,000
|
|
|
|
|
|
|
|
|
|
|
|
472,000
|
|
Dividends
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,161,000
|
)
|
|
|
|
|
|
|
(1,161,000
|
)
|
Other comprehensive loss (net of tax benefit of $24,000)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(37,000
|
)
|
|
|
(37,000
|
)
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,129,000
|
|
|
|
|
|
|
|
3,129,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, September 30, 2010
|
|
|
14,600,423
|
|
|
$
|
146,000
|
|
|
$
|
72,717,000
|
|
|
$
|
89,026,000
|
|
|
$
|
9,000
|
|
|
$
|
161,898,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive
income (loss) is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
Net income (loss)
|
|
$
|
3,129,000
|
|
|
$
|
(90,725,000
|
)
|
|
$
|
8,829,000
|
|
Other comprehensive (loss) income, net of tax-foreign currency
translation
|
|
|
(37,000
|
)
|
|
|
343,000
|
|
|
|
(297,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income (loss)
|
|
$
|
3,092,000
|
|
|
$
|
(90,382,000
|
)
|
|
$
|
8,532,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated other comprehensive income (loss)
|
|
$
|
9,000
|
|
|
$
|
46,000
|
|
|
$
|
(297,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See Notes to Consolidated Financial Statements
F-5
ASTA
FUNDING, INC. AND SUBSIDIARIES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended September 30,
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
Cash flows from operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
3,129,000
|
|
|
$
|
(90,725,000
|
)
|
|
$
|
8,829,000
|
|
Adjustments to reconcile net income to net cash provided by
operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
1,291,000
|
|
|
|
1,664,000
|
|
|
|
1,278,000
|
|
Deferred income taxes
|
|
|
5,310,000
|
|
|
|
(8,505,000
|
)
|
|
|
(2,634,000
|
)
|
Impairments of consumer receivables acquired for liquidation
|
|
|
13,029,000
|
|
|
|
183,500,000
|
|
|
|
53,160,000
|
|
Stock based compensation
|
|
|
1,189,000
|
|
|
|
984,000
|
|
|
|
1,013,000
|
|
Changes in:
|
|
|
|
|
|
|
|
|
|
|
|
|
Income taxes payable and receivable
|
|
|
47,531,000
|
|
|
|
(54,042,000
|
)
|
|
|
(1,846,000
|
)
|
Due from third party collection agencies and attorneys
|
|
|
(955,000
|
)
|
|
|
2,497,000
|
|
|
|
(161,000
|
)
|
Other assets
|
|
|
(1,683,000
|
)
|
|
|
(268,000
|
)
|
|
|
1,349,000
|
|
Other liabilities
|
|
|
(79,000
|
)
|
|
|
(2,193,000
|
)
|
|
|
(3,725,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities
|
|
|
68,762,000
|
|
|
|
32,912,000
|
|
|
|
57,263,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchase of consumer receivables acquired for liquidation
|
|
|
(7,989,000
|
)
|
|
|
(19,552,000
|
)
|
|
|
(49,886,000
|
)
|
Principal payments received from collection of consumer
receivables acquired for liquidation
|
|
|
54,211,000
|
|
|
|
71,936,000
|
|
|
|
81,645,000
|
|
Principal payments received from collections represented by
sales of consumer receivables acquired for liquidation
|
|
|
2,076,000
|
|
|
|
5,317,000
|
|
|
|
11,034,000
|
|
Effect of foreign exchange on consumer receivables acquired for
liquidation
|
|
|
(85,000
|
)
|
|
|
(542,000
|
)
|
|
|
658,000
|
|
Capital expenditures
|
|
|
(108,000
|
)
|
|
|
(187,000
|
)
|
|
|
(361,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by investing activities
|
|
|
48,105,000
|
|
|
|
56,972,000
|
|
|
|
43,090,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from exercise of stock options
|
|
|
870,000
|
|
|
|
1,000
|
|
|
|
425,000
|
|
Tax benefit arising from exercise of non-qualified stock options
|
|
|
472,000
|
|
|
|
74,000
|
|
|
|
2,666,000
|
|
Change in restricted cash
|
|
|
826,000
|
|
|
|
917,000
|
|
|
|
2,647,000
|
|
Dividends paid
|
|
|
(1,155,000
|
)
|
|
|
(1,427,000
|
)
|
|
|
(2,256,000
|
)
|
Repayments of debt, net
|
|
|
(32,166,000
|
)
|
|
|
(90,695,000
|
)
|
|
|
(113,001,000
|
)
|
(Repayments) advance under subordinated debt related
party
|
|
|
(3,860,000
|
)
|
|
|
|
|
|
|
8,246,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in financing activities
|
|
|
(35,013,000
|
)
|
|
|
(91,130,000
|
)
|
|
|
(101,273,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in cash and cash equivalents
|
|
|
81,854,000
|
|
|
|
(1,246,000
|
)
|
|
|
(920,000
|
)
|
Effect of foreign exchange on cash
|
|
|
(4,000
|
)
|
|
|
8,000
|
|
|
|
18,000
|
|
Cash and cash equivalents at beginning of year
|
|
|
2,385,000
|
|
|
|
3,623,000
|
|
|
|
4,525,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of year
|
|
$
|
84,235,000
|
|
|
$
|
2,385,000
|
|
|
$
|
3,623,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosure of cash flow information:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash paid for:
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest (Related Party: 2010 $568,000;
2009 $472,000; 2008 $112,000)
|
|
$
|
4,542,000
|
|
|
$
|
9,082,000
|
|
|
$
|
19,784,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income taxes
|
|
$
|
2,052,000
|
|
|
$
|
5,887,000
|
|
|
$
|
8,282,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See notes to consolidated financial statements
F-6
ASTA
FUNDING, INC. AND SUBSIDIARIES
September 30,
2010 and 2009
|
|
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®,
Visa®,
and other credit card accounts which were charged-off by the
issuers for non-payment. The Company acquires these portfolios
at substantial discounts from their face values. The discounts
are based on the characteristics (issuer, account size, debtor
location and age of debt) of the underlying accounts of each
portfolio.
The consolidated financial statements are prepared in accordance
with accounting principles generally accepted in the United
States (U.S. GAAP) and industry practices.
[1A]
Liquidity:
The Companys cash requirements have been and will continue
to be significant. In the past we have depended upon external
financing to acquire consumer receivables, fund operating
expenses, interest and income taxes. If approved, dividends paid
is also a significant use of cash. As our revolving debt level
has decreased, our dependency on external sources to fund the
acquisition of portfolios debt, pay operating expenses,
dividends, interest and taxes, is greatly reduced. On
December 14, 2009, the Eighth Amendment to the Fourth
Amended and Restated Loan Agreement (the IDB Credit
Facility) with a consortium of banks (The IDB Bank
Group) was repaid and replaced with a short-term credit
facility (the Short-Term Credit Facility) with
another lending institution. In June 2010, the Company received
an aggregate tax refund of approximately $52.7 million. As
of November 30, 2010, the outstanding amount on the Bank of
Montreal (BMO) facility (Receivables Financing
Agreement) that financed the $6.9 billion in face
value receivables for a purchase price of $300 million,
(the Portfolio Purchase) is $80.0 million. We
continue to pay down the balance from the collections of the
Portfolio Purchase.
Net collections decreased $45.5 million or 30.9% from
$147.4 million in fiscal year 2009 to $101.9 million
in fiscal year 2010. Although the Companys collections
deteriorated from the prior year, the Company believes its net
cash collections over the next twelve months, coupled with its
current liquid cash balances, will be sufficient to cover its
operating expenses, service debt and pay interest. See
Note D Debt and Subordinated Debt-related
party, for further information.
[2]
Principles of consolidation:
The consolidated financial statements include the accounts of
the Company and its wholly owned subsidiaries. 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.
F-7
ASTA
FUNDING, INC. AND SUBSIDIARIES
Notes to
Consolidated Financial Statements
September 30,
2010 and 2009
|
|
Note A
|
The
Company and its Significant Accounting
Policies (Continued)
|
[3]
Cash and cash equivalents and restricted
cash: (Continued)
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. Cash balances at
September 30, 2010 were substantially in excess of these
limits.
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) , under which we agreed to acquire the
Portfolio Purchase for a purchase price of $300 million. To
finance this purchase, now owned by Palisades XVI, the Company
entered into a Receivables Financing Agreement with BMO as the
funding source, consisting of debt with full recourse only to
Palisades XVI. 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 until the loan is fully paid.
The restricted cash at September 30, 2010 represents cash
on hand, substantially all of which is designated to be paid to
our lender subsequent to September 30, 2010. The lender has
mandated in which depository institutions the cash is to be
maintained.
[4]
Income recognition, Impairments and Accretable yield
adjustments:
Income
Recognition
The Company accounts for its investment in consumer receivables
acquired for liquidation using the interest method under the
guidance of Financial Accounting Standards Board
(FASB) Accounting Standards Codification
(ASC) 310, Receivables Loans and Debt
Securities Acquired with Deteriorated Credit Quality, (ASC
310). In ASC 310 static pools of accounts are
established. These pools are aggregated based on certain common
risk criteria. Each static pool is recorded at cost and is
accounted for as a single unit for the recognition of income,
principal payments and loss provision.
Once a static pool is established for a quarter, individual
receivable accounts are not added to the pool (unless replaced
by the seller) or removed from the pool (unless sold or returned
to the seller). ASC 310 requires that the excess of the
contractual cash flows over expected cash flows not be
recognized as an adjustment of revenue or expense or on the
balance sheet. ASC 310 initially freezes the internal rate
of return (IRR), estimated when the accounts
receivable are purchased, as the basis for subsequent impairment
testing. Significant increases in actual, or expected future
cash flows are recognized prospectively through an upward
adjustment of the IRR over a portfolios remaining life.
Any increase to the IRR then becomes the new benchmark for
impairment testing. Under ASC 310, rather than lowering the
estimated IRR if the collection estimates are not received or
projected to be received, the carrying value of a pool would be
written down to maintain the then current IRR.
Finance income is recognized on cost recovery portfolios after
the carrying value has been fully recovered through collections
or amounts written down.
Impairments
and accretable yield adjustments
The Company accounts for its impairments in accordance with
ASC 310, which provides guidance on how to account for
differences between contractual and expected cash flows from an
investors initial investment in loans or debt securities
acquired in a transfer if those differences are attributable, at
least in part, to credit quality. Increases in expected cash
flows are recognized prospectively through an adjustment of the
internal rate of return while decreases in expected cash flows
are recognized as impairments. An impairment of approximately
$13 million was recorded in the fiscal year ended
September 30, 2010, all related to the Portfolio Purchase,
which became a cost
F-8
ASTA
FUNDING, INC. AND SUBSIDIARIES
Notes to
Consolidated Financial Statements
September 30,
2010 and 2009
|
|
Note A
|
The
Company and its Significant Accounting
Policies (Continued)
|
[4]
Income recognition, Impairments and Accretable yield
adjustments: (Continued)
recovery portfolio in the quarter ended June 30, 2008. As a
result of the slower economy and other factors that resulted in
slower collections on certain portfolios, impairments of
$183.5 million were recorded in fiscal year 2009, of which
$108.5 million related to the interest method portfolios
and $75.0 million related to cost recovery method
portfolios. During fiscal year 2008, all of the
$53.2 million in impairment charges were recorded to
interest method portfolios. Finance income is not recognized on
cost recovery method portfolios until the cost of the portfolio
is fully recovered. Collection projections are performed on both
interest method and cost recovery method portfolios. With regard
to the cost recovery portfolios, if collection projections
indicate the carrying value will not be recovered a write down
in value is required. There were no accretable yield adjustments
recorded in the fiscal years ended September 30, 2010, 2009
and 2008.
The recognition of income under ASC 310 is dependent on the
Company having the ability to develop reasonable expectations of
both the timing and amount of cash flows to be collected. In the
event the Company cannot develop a reasonable expectation as to
both the timing and amount of cash flows expected to be
collected, ASC 310 permits the change to the cost recovery
method. Due to uncertainties related to the timing of the
collections of the older judgments purchased in this portfolio
as a result of the economic environment, the lack of reasonable
delivery of media requests, the lack of validation of certain
account components, and the sale of the primary servicer (which
was commonly owned by the seller), the Company determined that
it no longer had the ability to develop a reasonable expectation
of the timing of the cash flows to be collected and therefore,
transferred the Portfolio Purchase to the cost recovery method
in the quarter ended June 30, 2008. The Company will
recognize income only after it has recovered its carrying value,
which, as of September 30, 2010 was approximately
$91.8 million. There can be no assurance as to when or if
the carrying value will be recovered.
The Companys analysis of the timing and amount of cash
flows to be generated by its 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. The Company has found that
there are better states to try to collect receivables and the
Company factors in both better and worse states when
establishing their initial cash flow expectations.
|
|
|
|
the average balance of the receivables influences our analysis
in that lower average balance portfolios tend to be more
collectible in the short-term and higher average balance
portfolios are more appropriate for the Companys law suit
strategy and thus yield better results over the longer term. As
the Company has significant experience with both types of
balances, it is able to factor these variables into its initial
expected cash flows;
|
|
|
|
the age of the receivables, the number of days since charge-off,
any payments since charge-off, and the credit guidelines of the
credit originator also represent factors taken into
consideration in our estimation process . For example, older
receivables might be more difficult
and/or
require more time and effort to collect;
|
|
|
|
past history and performance of similar assets acquired. As the
Company purchases portfolios of like assets, it accumulates a
significant historical data base on the tendencies of debtor
repayments and factor this into its initial expected cash flows;
|
|
|
|
the Companys ability to analyze accounts and resell
accounts that meet its criteria;
|
|
|
|
jobs or property of the debtors found within portfolios. With
our business model, this is of particular importance. Debtors
with jobs or property are more likely to repay their obligation
through the lawsuit strategy and, conversely, debtors without
jobs or property are less likely to repay their obligation. The
|
F-9
ASTA
FUNDING, INC. AND SUBSIDIARIES
Notes to
Consolidated Financial Statements
September 30,
2010 and 2009
|
|
Note A
|
The
Company and its Significant Accounting
Policies (Continued)
|
[4]
Income recognition, Impairments and Accretable yield
adjustments: (Continued)
|
|
|
|
|
Company believes that debtors with jobs or property are more
likely to repay because courts have mandated the debtor must pay
the debt. Ultimately, the debtor with property will pay to clear
title or release a lien. The Company also believes that these
debtors generally might take longer to repay and that is
factored into its initial expected cash flows; and
|
|
|
|
|
|
credit standards of issuer.
|
The Company acquires accounts that have experienced
deterioration of credit quality between origination and the date
of its 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. The
Company considers the expected payments and estimate the amount
and timing of undiscounted expected principal, interest and
other cash flows for each acquired portfolio coupled with
expected cash flows from accounts available for sales. The
excess of this amount over the cost of the portfolio,
representing the excess of the accounts cash flows
expected to be collected over the amount paid, is accreted into
income recognized on finance receivables accounted for on the
interest method over the expected remaining life of the
portfolio.
The Company believes we have significant experience in acquiring
certain distressed consumer receivable portfolios at a
significant discount to the amount actually owed by underlying
debtors. The Company acquires these portfolios only after both
qualitative and quantitative analyses of the underlying
receivables are performed and a calculated purchase price is
paid so that it believes its estimated cash flow offers an
adequate return on acquisition costs after servicing expenses.
Additionally, when considering larger portfolio purchases of
accounts, or portfolios from issuers with whom the Company has
limited experience, it has the added benefit of soliciting its
third party collection agencies and attorneys for their input on
liquidation rates and, at times, incorporate such input into the
estimates it uses for its expected cash flows.
As a result of the a challenging economic environment and the
impact it has had on collections, for portfolio purchases
acquired in fiscal year 2009 the Company extended our time frame
of the expectation of recovering 100% of its invested capital
within a 24-39 month period from an
18-28 month
period, and the expectation of recovering
130-140%
over 7 years which from the previous 5 year
expectation. The 2009 time frame of expectations have remained
in force for fiscal year 2010. The Company routinely monitors
these expectations against the actual cash flows and, in the
event the cash flows are below expectations and the Company
believes there are no reasons relating to mere timing
differences or explainable delays (such as can occur
particularly when the court system is involved) for the reduced
collections, an impairment is recorded on portfolios accounted
for on the interest method. Conversely, in the event the cash
flows are in excess of its expectations and the reason is due to
timing, the Company would defer the excess
collection as deferred revenue.
[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.
F-10
ASTA
FUNDING, INC. AND SUBSIDIARIES
Notes to
Consolidated Financial Statements
September 30,
2010 and 2009
|
|
Note A
|
The
Company and its Significant Accounting
Policies (Continued)
|
[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 (loss) 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,
2010, 2009 and 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
|
|
|
|
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
|
|
$
|
3,129,000
|
|
|
|
14,492,215
|
|
|
$
|
0.22
|
|
|
$
|
(90,725,000
|
)
|
|
|
14,272,425
|
|
|
$
|
(6.36
|
)
|
|
$
|
8,829,000
|
|
|
|
14,138,650
|
|
|
$
|
0.62
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dilutive effect of stock Options
|
|
|
|
|
|
|
42,767
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
414,696
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
$
|
3,129,000
|
|
|
|
14,534,982
|
|
|
$
|
0.22
|
|
|
$
|
(90,725,000
|
)
|
|
|
14,272,425
|
|
|
$
|
(6.36
|
)
|
|
$
|
8,829,000
|
|
|
|
14,553,346
|
|
|
$
|
0.61
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At September 30, 2010, 680,795 options at a weighted
average exercise price of $15.59 were not included in the
diluted earnings per share calculation as they were
anti-dilutive. At September 30, 2009, 133,250 options at a
weighted average exercise price of $8.30 were not included in
the diluted earnings per share calculation as they were
anti-dilutive. At September 30, 2008, 400,160 options at a
weighted average exercise price of $18.70 were not included in
the diluted earnings per share calculation as they were
anti-dilutive.
[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
receivables constituting the portfolio acquired, the strategy
involved to maximize the collections thereof, the time required
to implement the collection strategy as well as other factors to
estimate the anticipated cash flows. Actual results could differ
from those estimates including managements estimates of
future cash flows and the resultant allocation of collections
between principal and interest resulting therefrom. Downward
revisions to estimated cash flows will result in impairments.
[10]
Stock-based compensation:
The Company accounts for stock-based employee compensation under
FASB ASC 718, Compensation Stock Compensation,
(ASC 718). ASC 718 requires that compensation
expense associated with stock options and vesting of restricted
stock awards be recognized in the statement of operations.
F-11
ASTA
FUNDING, INC. AND SUBSIDIARIES
Notes to
Consolidated Financial Statements
September 30,
2010 and 2009
|
|
Note A
|
The
Company and its Significant Accounting
Policies (Continued)
|
[11]
Impact of Recently Issued Accounting Standards:
In February 2010, the Financial Accounting Standards Board
(FASB) issued ASU
2010-09,
Subsequent Events (Topic 855): Amendments to Certain
Recognition and Disclosure Requirements. The amendments remove
the requirement for an SEC registrant to disclose the date
through which subsequent events were evaluated as this
requirement would have potentially conflicted with SEC reporting
requirements. Removal of the disclosure requirement is not
expected to affect the nature or timing of subsequent events
evaluations performed by the Company. This ASU became effective
upon issuance.
In December 2009, the FASB issued ASU
2009-17,
Consolidations (Topic 810) Improvements to
Financial Reporting by Enterprises Involved with Variable
Interest Entities. ASU
2009-17
generally represents a revision to former FASB Interpretation
No. 46 (Revised December 2003), Consolidation of
Variable Interest Entities, and changes how a reporting
entity determines when an entity that is insufficiently
capitalized or is not controlled through voting (or similar
rights) should be consolidated. ASU
2009-17 also
requires a reporting entity to provide additional disclosures
about its involvement with variable interest entities and any
significant changes in risk exposure due to that involvement.
ASU 2009-17
is effective for fiscal years beginning after November 15,
2009 and for interim periods within the first annual reporting
period. The Company does not believe that the adoption of ASU
2009-17 will
have a significant effect on its consolidated financial
statements.
[12]
Reclassifications:
Certain items in prior years financial statements have
been reclassified to conform to the current years
presentation.
|
|
Note B
|
Consumer
Receivables Acquired For Liquidation
|
Accounts acquired for liquidation are stated at their net
estimated realizable value and consist primarily of defaulted
consumer loans to individuals throughout the country and in
Central and South America.
The Company accounts for its investments in consumer receivable
portfolios, using either:
|
|
|
|
|
the interest method; or
|
|
|
|
the cost recovery method.
|
The Company accounts for its investment in finance receivables
using the interest method under the guidance of ASC 310.
Under the guidance of ASC 310, static pools of accounts are
established. These pools are aggregated based on certain common
risk criteria. Each static pool is recorded at cost and is
accounted for as a single unit for the recognition of income,
principal payments and loss provision.
Once a static pool is established for a quarter, individual
receivable accounts are not added to the pool (unless replaced
by the seller) or removed from the pool (unless sold or returned
to the seller). ASC310 requires that the excess of the
contractual cash flows over expected cash flows not be
recognized as an adjustment of revenue or expense or on the
balance sheet. ASC310 initially freezes the internal rate of
return, referred to as IRR, estimated when the accounts
receivable are purchased, as the basis for subsequent impairment
testing. Significant increases in actual or expected future cash
flows may be recognized prospectively through an upward
adjustment of the IRR over a portfolios remaining life.
Any increase to the IRR then becomes the new benchmark for
impairment testing. Rather than lowering the estimated IRR if
the collection estimates are not received or projected to be
received, the carrying value of a pool would be impaired, or
written down to maintain the then current IRR. Under the
interest method, income is recognized on the effective yield
method based on the actual cash collected during a period and
future estimated cash flows and timing of such collections and
the portfolios cost. Revenue arising from collections
F-12
ASTA
FUNDING, INC. AND SUBSIDIARIES
Notes to
Consolidated Financial Statements
September 30,
2010 and 2009
|
|
Note B
|
Consumer
Receivables Acquired For
Liquidation (Continued)
|
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.
The Company uses the cost recovery method when collections on a
particular pool of accounts cannot be reasonably predicted.
Under the cost recovery method, no income is recognized until
the cost of the portfolio has been fully recovered. A pool can
become fully amortized (zero carrying balance on the balance
sheet) while still generating cash collections. In this case,
all cash collections are recognized as revenue when received.
The Companys extensive liquidating experience is in the
field of distressed credit card receivables, telecommunication
receivables, consumer loan receivables, retail installment
contracts, consumer receivables, and auto deficiency
receivables. The Company uses the interest method for accounting
for asset acquisitions within these classes of receivables when
it believes it can reasonably estimate the timing of the cash
flows. In those situations where the Company diversifies its
acquisitions into other asset classes where the Company does not
possess the same expertise or history, or the Company cannot
reasonably estimate the timing of the cash flows, the Company
utilizes the cost recovery method of accounting for those
portfolios of receivables. At September 30, 2010,
approximately $46.3 million of the consumer receivables
acquired for liquidation are accounted for using the interest
method, while approximately $100.7 million are accounted
for using the cost recovery method, of which $91.8 million
is concentrated in one portfolio, the Portfolio Purchase.
The Company aggregates portfolios of receivables acquired
sharing specific common characteristics which were acquired
within a given quarter. The Company currently considers for
aggregation portfolios of accounts, purchased within the same
fiscal quarter, that generally meet the following
characteristics:
|
|
|
|
|
Same issuer/originator;
|
|
|
|
Same underlying credit quality;
|
|
|
|
similar geographic distribution of the accounts;
|
|
|
|
similar age of the receivable; and
|
|
|
|
Same type of asset class (credit cards, telecommunication, etc.)
|
The Company uses a variety of qualitative and quantitative
factors to estimate collections and the timing thereof. This
analysis includes the following variables:
|
|
|
|
|
the number of collection agencies previously attempting to
collect the receivables in the portfolio;
|
|
|
|
the average balance of the receivables, as higher balances might
be more difficult to collect while low balances might not be
cost effective to collect;
|
|
|
|
the age of the receivables, as older receivables might be more
difficult to collect or might be less cost effective. On the
other hand, the passage of time, in certain circumstances, might
result in higher collections due to changing life events of some
individual debtors;
|
|
|
|
past history of performance of similar assets;
|
|
|
|
time since charge-off;
|
|
|
|
payments made since charge-off;
|
|
|
|
the credit originator and its credit guidelines;
|
|
|
|
our ability to analyze accounts and resell accounts that meet
our criteria for resale;
|
F-13
ASTA
FUNDING, INC. AND SUBSIDIARIES
Notes to
Consolidated Financial Statements
September 30,
2010 and 2009
|
|
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, 2010
|
|
|
|
Interest
|
|
|
Cost
|
|
|
|
|
|
|
Method
|
|
|
Recovery
|
|
|
|
|
|
|
Portfolios
|
|
|
Portfolios
|
|
|
Total
|
|
|
Balance, beginning of period
|
|
$
|
70,650,000
|
|
|
$
|
137,611,000
|
|
|
$
|
208,261,000
|
|
Acquisitions of receivable portfolios, net
|
|
|
7,698,000
|
|
|
|
291,000
|
|
|
|
7,989,000
|
|
Net cash collections from collection of consumer receivables
acquired for liquidation
|
|
|
(72,398,000
|
)
|
|
|
(26,036,000
|
)
|
|
|
(98,434,000
|
)
|
Net cash collections represented by account sales of consumer
receivables acquired for liquidation
|
|
|
(3,481,000
|
)
|
|
|
(4,000
|
)
|
|
|
(3,485,000
|
)
|
Impairments
|
|
|
|
|
|
|
(13,029,000
|
)
|
|
|
(13,029,000
|
)
|
Effect of foreign currency translation
|
|
|
|
|
|
|
97,000
|
|
|
|
97,000
|
|
Finance income recognized(1)
|
|
|
43,879,000
|
|
|
|
1,753,000
|
|
|
|
45,632,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, end of period
|
|
$
|
46,348,000
|
|
|
$
|
100,683,000
|
|
|
$
|
147,031,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue as a percentage of collections
|
|
|
57.8
|
%
|
|
|
6.73
|
%
|
|
|
44.8
|
%
|
|
|
|
(1) |
|
Includes $34.3 million derived from fully amortized pools. |
F-14
ASTA
FUNDING, INC. AND SUBSIDIARIES
Notes to
Consolidated Financial Statements
September 30,
2010 and 2009
|
|
Note B
|
Consumer
Receivables Acquired For
Liquidation (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended September 30, 2009
|
|
|
|
Interest
|
|
|
Cost
|
|
|
|
|
|
|
Method
|
|
|
Recovery
|
|
|
|
|
|
|
Portfolios
|
|
|
Portfolios
|
|
|
Total
|
|
|
Balance, beginning of period
|
|
$
|
203,470,000
|
|
|
$
|
245,542,000
|
|
|
$
|
449,012,000
|
|
Acquisitions of receivable portfolios, net
|
|
|
19,129,000
|
|
|
|
423,000
|
|
|
|
19,552,000
|
|
Net cash collections from collection of consumer receivables
acquired for liquidation(1)
|
|
|
(96,543,000
|
)
|
|
|
(42,204,000
|
)
|
|
|
(138,747,000
|
)
|
Net cash collections represented by account sales of consumer
receivables acquired for liquidation
|
|
|
(4,963,000
|
)
|
|
|
(3,699,000
|
)
|
|
|
(8,662,000
|
)
|
Transfer to cost recovery(1)
|
|
|
(10,128,000
|
)
|
|
|
10,128,000
|
|
|
|
|
|
Impairments
|
|
|
(108,534,000
|
)
|
|
|
(74,966,000
|
)
|
|
|
(183,500,000
|
)
|
Effect of foreign currency translation
|
|
|
|
|
|
|
450,000
|
|
|
|
450,000
|
|
Finance income recognized(2)
|
|
|
68,219,000
|
|
|
|
1,937,000
|
|
|
|
70,156,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, end of period
|
|
$
|
70,650,000
|
|
|
$
|
137,611,000
|
|
|
$
|
208,261,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue as a percentage of collections
|
|
|
67.2
|
%
|
|
|
4.2
|
%
|
|
|
47.6
|
%
|
|
|
|
(1) |
|
During the 12 months ended September 30, 2009, three
portfolios were transferred from the interest method to the cost
recovery method. Based on the nature of these portfolios and the
recent cash flows, our estimates of the timing of expected cash
flows became uncertain. |
|
(2) |
|
Includes $40.7 million derived from fully amortized pools. |
As of September 30, 2010, the Company had $147,031,000 in
consumer receivables acquired for liquidation, of which
$46,348,000 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, 2011
|
|
$
|
18,789,000
|
|
September 30, 2012
|
|
|
15,212,000
|
|
September 30, 2013
|
|
|
7,875,000
|
|
September 30, 2014
|
|
|
4,059,000
|
|
September 30, 2015
|
|
|
1,030,000
|
|
September 30, 2016
|
|
|
777,000
|
|
September 30, 2017
|
|
|
180,000
|
|
Deferred revenue
|
|
|
(1,574,000
|
)
|
|
|
|
|
|
Total
|
|
$
|
46,348,000
|
|
|
|
|
|
|
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, 2010. The Company adjusts the accretable
yield upward when it believes, based on available evidence, that
portfolio
F-15
ASTA
FUNDING, INC. AND SUBSIDIARIES
Notes to
Consolidated Financial Statements
September 30,
2010 and 2009
|
|
Note B
|
Consumer
Receivables Acquired For
Liquidation (Continued)
|
collections will exceed amounts previously estimated. Projected
accretable yield for the fiscal years ended September 30,
2010 and 2009 are as follows:
|
|
|
|
|
|
|
Year Ended
|
|
|
|
September 30,
|
|
|
|
2010
|
|
|
Balance at beginning of period, October 1, 2009
|
|
$
|
25,875,000
|
|
Income recognized on finance receivables, net
|
|
|
(43,208,000
|
)
|
Additions representing expected revenue from purchases
|
|
|
2,424,000
|
|
Reclassifications from non-accretable difference(1)
|
|
|
30,164,000
|
|
|
|
|
|
|
Balance at end of period, September 30, 2010
|
|
$
|
15,255,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
|
September 30,
|
|
|
|
2009
|
|
|
Balance at beginning of period, October 1, 2008
|
|
$
|
58,134,000
|
|
Income recognized on finance receivables, net
|
|
|
(68,219,000
|
)
|
Additions representing expected revenue from purchases
|
|
|
5,980,000
|
|
Transfer to cost recovery
|
|
|
(3,372,000
|
)
|
Reclassifications from non-accretable difference(1)
|
|
|
33,352,000
|
|
|
|
|
|
|
Balance at end of period, September 30, 2009
|
|
$
|
25,875,000
|
|
|
|
|
|
|
|
|
|
(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, 2010, the Company
purchased $269 million of face value charged-off consumer
receivables at a cost of approximately $8.0 million. During
the year ended September 30, 2009, the Company purchased
$577 million of face value charged-off consumer receivables
at a cost of approximately $19.6 million. The estimated
remaining net collections on the receivables purchased and
classified under the interest method ($7.7 million) during
the fiscal year ended September 30, 2010, are
$7.0 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, 2010, 2009 and 2008, respectively.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended, September 30,
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
Gross collections(1)
|
|
$
|
157,574,000
|
|
|
$
|
224,528,000
|
|
|
$
|
332,711,000
|
|
Commissions and fees(2)
|
|
|
55,654,000
|
|
|
|
77,119,000
|
|
|
|
124,737,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net collections
|
|
$
|
101,920,000
|
|
|
$
|
147,409,000
|
|
|
$
|
207,974,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Gross collections include: collections from third-party
collection agencies and attorneys, collections from in-house
efforts and collections represented by account sales. |
F-16
ASTA
FUNDING, INC. AND SUBSIDIARIES
Notes to
Consolidated Financial Statements
September 30,
2010 and 2009
|
|
Note B
|
Consumer
Receivables Acquired For
Liquidation (Continued)
|
|
|
|
(2) |
|
Commissions and fees are the contractual commissions earned by
third party collection agencies and attorneys, and direct costs
associated with the collection effort- generally court costs.
The Company expects to continue to purchase portfolios and
utilize third party collection agencies and attorney networks. |
Finance income recognized on net collections represented by
account sales was $1.2 million, $3.1 million and
$9.4 million for the fiscal years ended September 30,
2010, 2009 and 2008, respectively.
|
|
Note C
|
Furniture
and Equipment
|
Furniture and equipment as of September 30, 2010 and 2009
consist of the following:
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
|
2009
|
|
|
Furniture
|
|
$
|
310,000
|
|
|
$
|
310,000
|
|
Equipment
|
|
|
2,855,000
|
|
|
|
2,783,000
|
|
Software
|
|
|
153,000
|
|
|
|
117,000
|
|
Leasehold improvements
|
|
|
86,000
|
|
|
|
86,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,404,000
|
|
|
|
3,296,000
|
|
Less accumulated depreciation
|
|
|
3,066,000
|
|
|
|
2,758,000
|
|
|
|
|
|
|
|
|
|
|
Balance, end of period
|
|
$
|
338,000
|
|
|
$
|
538,000
|
|
|
|
|
|
|
|
|
|
|
Depreciation expense for the years ended September 30,
2010, 2009 and 2008 aggregated $308,000, $411,000 and $319,000,
respectively.
|
|
Note D
|
Debt
and Subordinated Debt Related Party
|
The Companys debt and subordinated debt
related party at September 30, 2010 and 2009 are summarized
as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
|
|
|
|
|
|
|
|
Stated
|
|
|
Average
|
|
|
|
|
|
|
|
|
|
Interest
|
|
|
Interest
|
|
|
|
2010
|
|
|
2009
|
|
|
Rate
|
|
|
Rate
|
|
|
Credit Facility IDB
|
|
$
|
|
|
|
$
|
18,301,000
|
|
|
|
|
%
|
|
|
5.5
|
%
|
Credit Agreement Bank Leumi
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4.5
|
%
|
Receivables Financing Agreement
|
|
|
90,483,000
|
|
|
|
104,321,000
|
|
|
|
3.76
|
%
|
|
|
3.77
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total debt
|
|
$
|
90,483,000
|
|
|
$
|
122,622,000
|
|
|
|
n/a
|
|
|
|
3.81
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subordinated debt related party
|
|
$
|
4,386,000
|
|
|
$
|
8,246,000
|
|
|
|
10.00
|
%
|
|
|
8.69
|
%
|
Leumi
Credit Agreement
On December 14, 2009 Asta Funding, Inc. and its
subsidiaries other than Palisades XVI, entered into the Leumi
Credit Agreement which permits maximum principal advances of up
to $6 million. The term of the agreement is through
December 31, 2010. The interest rate is a floating rate
equal to the Bank Leumi Reference Rate plus 2%, with a floor of
4.5%. The loan is secured by collateral consisting of all of the
assets of the Company other than those of Palisades XVI. In
addition, other collateral for the loan consists of a pledge by
GMS Family Investors, LLC, an investment company owned by
members of the Stern family in the form of cash and securities
with a value of 133% of the loan commitment. There are no
financial covenant restrictions for the Leumi Credit Agreement.
On December 14, 2009, approximately $3.6 million of
the Bank Leumi credit line was used to reduce to
F-17
ASTA
FUNDING, INC. AND SUBSIDIARIES
Notes to
Consolidated Financial Statements
September 30,
2010 and 2009
|
|
Note D
|
Debt
and Subordinated Debt Related
Party (Continued)
|
zero the remaining balance of the IDB Credit Facility described
below. The Leumi Credit Agreement is the current senior facility
of the Company. The Leumi Credit Agreement balance was reduced
to zero in January 2010; however, the $6 million of
availability remains. The Company is working with its bank on a
new credit facility with a larger credit limit.
Receivables
Financing Agreement
In March 2007, Palisades XVI borrowed approximately
$227 million under the Receivables Financing Agreement, as
amended in July 2007, December 2007, May 2008 and February 2009
with BMO, in order to finance the Portfolio Purchase. The
Portfolio Purchase had a purchase price of $300 million
(plus 20% of net payments after Palisades XVI recovers 150% of
its purchase price plus cost of funds, which recovery has not
yet occurred). Prior to the modification, discussed below, the
debt was full recourse only to Palisades XVI and bore an
interest rate of approximately 170 basis points over LIBOR.
The original term of the agreement was three years. This term
was extended by each of the Second, Third , Fourth and Fifth
Amendments to the Receivables Financing Agreement as discussed
below. The Receivables Financing Agreement contained cross
default provisions related to the IDB Credit Facility. This
cross default could only occur in the event of a non-payment in
excess of $2.5 million of the IDB Credit Facility. Proceeds
received as a result of the net collections from the Portfolio
Purchase are applied to interest and principal of the underlying
loan. The Portfolio Purchase is serviced by Palisades Collection
LLC, a wholly owned subsidiary of the Company, which has engaged
unaffiliated subservicers for a majority of the Portfolio
Purchase.
Since the inception of the Receivables Financing Agreement
amendments have been signed to revise various terms of the
Receivables Financing Agreement. The following is a summary of
the material amendments:
Second Amendment Receivables Financing Agreement,
dated December 27, 2007 revised the amortization schedule
of the loan from 25 months to approximately 31 months.
BMO charged Palisades XVI a fee of $475,000 which was paid on
January 10, 2008. The fee was capitalized and is being
amortized over the remaining life of the Receivables Financing
Agreement.
Third Amendment Receivables Financing Agreement,
dated May 19, 2008 extended the payments of the loan
through December 2010. The lender also increased the interest
rate from 170 basis points over LIBOR to approximately
320 basis points over LIBOR, subject to automatic reduction
in the future if additional capital contributions are made by
the parent of Palisades XVI.
Fourth Amendment Receivables Financing Agreement,
dated February 20, 2009, among other things,
(i) lowered the collection rate minimum to $1 million
per month (plus interest and fees) as an average for each period
of three consecutive months, (ii) provided for an automatic
extension of the maturity date from April 30, 2011 to
April 30, 2012 should the outstanding balance be reduced to
$25 million or less by April 30, 2011 and
(iii) permanently waived the previous termination events.
The interest rate remains unchanged at approximately
320 basis points over LIBOR, subject to automatic reduction
in the future should certain collection milestones be attained.
As additional credit support for repayment by Palisades XVI of
its obligations under the Receivables Financing Agreement and as
an inducement for BMO to enter into the Fourth Amendment, the
Company provided BMO a limited recourse, subordinated guaranty,
secured by the assets of the Company, in an amount not to exceed
$8.0 million plus reasonable costs of enforcement and
collection. Under the terms of the guaranty, BMO cannot exercise
any recourse against the Company until the earlier of
(i) five years from the date of the Fourth Amendment and
(ii) the termination of the Companys existing senior
lending facility or any successor senior facility.
F-18
ASTA
FUNDING, INC. AND SUBSIDIARIES
Notes to
Consolidated Financial Statements
September 30,
2010 and 2009
|
|
Note D
|
Debt
and Subordinated Debt Related
Party (Continued)
|
On October 26, 2010, Palisades XVI entered into the Fifth
Amendment to the Receivables Financing Agreement (the
Fifth Amendment). The effective date of the Fifth
Amendment is October 14, 2010. The Fifth Amendment
(i) extends the expiration date of the Receivables
Financing Agreement to April 30, 2014, (ii) reduces
the minimum monthly total payment to $750,000,
(iii) accelerates the Companys guarantee credit
enhancement of $8,700,000, which was paid upon execution of the
Fifth Amendment, (iv) eliminates the Companys limited
guarantee of repayment of the loans outstanding by Palisades
XVI, and (v) revises the definition of Borrowing Base
Deficit, as defined in the Receivables Financing
Agreement, to mean the excess, if any, of 105% of the loans
outstanding over the borrowing base.
In connection with the Fifth Amendment, on October 26,
2010, the Company entered into the Omnibus Termination Agreement
(the Termination Agreement). The limited recourse
subordinated guaranty discussed under the Fourth Amendment, was
eliminated upon signing the Termination Agreement. See
Subsequent Events Note O.
The aggregate minimum repayment obligations required under the
Fifth Amendment, including interest and principal, for fiscal
years ending September 30, 2011 through 2013 are
$9 million annually, and, for the fiscal year ended
September 30, 2014, is approximately $5 million (seven
months) .
On September 30, 2010 and 2009, the outstanding balance on
this loan was approximately $90.5 million, and
$104.3 million, respectively. The applicable interest rate
at September 30, 2010 and 2009 was 3.76% in both years. The
average interest rate of the Receivable Financing Agreement was
3.77% and 4.82% for the years ended September 30, 2010 and
2009, respectively.
The Companys average debt obligation (excluding the
subordinated debt related party) for the fiscal
years ended September 30, 2010 and 2009, was approximately
$99.0 million and $162.5 million, respectively. The
average interest rate was 3.81% and 4.72%, respectively, for the
years ended September 30, 2010 and 2009.
IDB
Credit Facility
The Eighth Amendment to the IDB Credit Facility entered into on
July 10, 2009, granted an initial $40 million line of
credit from the Bank Group for portfolio purchases and working
capital and was scheduled to reduce to zero by December 31,
2009. The IDB Credit Facility bore interest at the lesser of
LIBOR plus an applicable margin, or the prime rate minus an
applicable margin based on certain leverage ratios, with a
minimum rate of 5.5%. The IDB Credit Facility was collateralized
by all assets of the Company other than the assets of Palisades
XVI and contained financial and other covenants. The IDB Credit
Facilitys commitment termination date was
December 31, 2009. This IDB Credit Facility was repaid on
December 14, 2009. The balance of the IDB Credit Facility
was $18.3 million on September 30, 2009.
Subordinated
Debt Related Party
On April 29, 2008, the Company obtained a subordinated loan
pursuant to a subordinated promissory note from the Family
Entity. The Family Entity is a greater than 5% shareholder of
the Company beneficially owned and controlled by Arthur Stern, a
Director of the Company, Gary Stern, the Chairman, President and
Chief Executive Officer of the Company, and members of their
families. The loan was in the aggregate principal amount of
approximately $8.2 million, bore interest at a rate of
6.25% per annum, was payable interest only each quarter until
its maturity date of January 9, 2010, subject to prior
repayment in full of the Companys senior loan facility
with the Bank Group. The subordinated loan was incurred by the
Company to resolve certain issues related to the activities of
one of the subservicers utilized by Palisades Collection LLC
under the Receivables Financing Agreement. Proceeds from the
subordinated loan were used initially to further collateralize
the Companys revolving loan facility with the Bank Group
and was used to reduce the balance due on that facility as of
May 31, 2008. In
F-19
ASTA
FUNDING, INC. AND SUBSIDIARIES
Notes to
Consolidated Financial Statements
September 30,
2010 and 2009
|
|
Note D
|
Debt
and Subordinated Debt Related
Party (Continued)
|
December 2009, the subordinated debt-related party maturity date
was extended through December 31, 2010. In addition the
interest rate was changed to 10% per annum. In fiscal year 2010,
the subordinated loan was paid down to a balance of
approximately $4.4 million at September 30, 2010. On
November 16, 2010, the Company made an additional
$2.0 million loan repayment, reducing the loan balance to
$2.4 million (see Note O Subsequent
Events).
|
|
Note E
|
Other
Liabilities
|
Other liabilities as of September 30, 2010 and 2009 are as
follows:
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
|
2009
|
|
|
Accounts payable and accrued expenses
|
|
$
|
1,227,000
|
|
|
$
|
1,425,000
|
|
Accrued interest payable
|
|
|
321,000
|
|
|
|
504,000
|
|
Other
|
|
|
557,000
|
|
|
|
237,000
|
|
|
|
|
|
|
|
|
|
|
Total other liabilities
|
|
$
|
2,105,000
|
|
|
$
|
2,166,000
|
|
|
|
|
|
|
|
|
|
|
The components of the provision for income taxes (benefit) for
the years ended September 30, 2010, 2009 and 2008 are as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
Current:
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
2,215,000
|
|
|
$
|
(47,062,000
|
)
|
|
$
|
6,567,000
|
|
State
|
|
|
175,000
|
|
|
|
(1,220,000
|
)
|
|
|
2,152,000
|
|
Federal true up
|
|
|
(5,588,000
|
)
|
|
|
|
|
|
|
|
|
Foreign
|
|
|
|
|
|
|
|
|
|
|
34,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(3,198,000
|
)
|
|
|
(48,282,000
|
)
|
|
|
8,753,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred:
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
|
3,882,000
|
|
|
|
1,092,000
|
|
|
|
(1,987,000
|
)
|
State
|
|
|
1,428,000
|
|
|
|
(9,597,000
|
)
|
|
|
(647,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,310,000
|
|
|
|
(8,505,000
|
)
|
|
|
(2,634,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision for income taxes
|
|
$
|
2,112,000
|
|
|
$
|
(56,787,000
|
)
|
|
$
|
6,119,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The difference between the statutory federal income tax rate on
the Companys pre-tax income and the Companys
effective income tax rate is summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
Statutory federal income tax rate
|
|
|
35.0
|
%
|
|
|
35.0
|
%
|
|
|
35.0
|
%
|
State income tax, net of federal benefit
|
|
|
6.2
|
|
|
|
5.8
|
|
|
|
5.8
|
|
Deferred tax valuation allowance
|
|
|
15.8
|
|
|
|
(2.1
|
)
|
|
|
|
|
Permanent
book-tax
differences and true ups
|
|
|
(15.3
|
)
|
|
|
|
|
|
|
|
|
Other
|
|
|
(1.4
|
)
|
|
|
(0.2
|
)
|
|
|
0.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effective income tax rate
|
|
|
40.3
|
%
|
|
|
38.5
|
%
|
|
|
40.9
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-20
ASTA
FUNDING, INC. AND SUBSIDIARIES
Notes to
Consolidated Financial Statements
September 30,
2010 and 2009
|
|
Note
F
|
Income
Taxes (Continued)
|
The Company recognized a net deferred tax asset of $18,762,000
and $24,072,000 as of September 30, 2010 and 2009,
respectively. The components are as follows:
|
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2010
|
|
|
2009
|
|
|
Deferred revenue
|
|
$
|
638,000
|
|
|
$
|
221,000
|
|
Impairments
|
|
|
12,228,000
|
|
|
|
12,472,000
|
|
State tax net operating loss carryforward
|
|
|
10,768,000
|
|
|
|
14,488,000
|
|
Compensation expense
|
|
|
496,000
|
|
|
|
1,273,000
|
|
Other
|
|
|
(131,000
|
)
|
|
|
26,000
|
|
|
|
|
|
|
|
|
|
|
Deferred income taxes
|
|
|
23,999,000
|
|
|
|
28,480,000
|
|
Deferred tax valuation allowance
|
|
|
(5,237,000
|
)
|
|
|
(4,408,000
|
)
|
|
|
|
|
|
|
|
|
|
Deferred income taxes
|
|
$
|
18,762,000
|
|
|
$
|
24,072,000
|
|
|
|
|
|
|
|
|
|
|
The Company files consolidated Federal and state income tax
returns. The Companys subsidiaries are single member
limited liability companies (LLC) and, therefore, do not
file separate tax returns.
The Company accounts 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, the Company would adjust
deferred taxes to reflect estimated tax rate changes, if
applicable. The Company conducts periodic evaluations to
determine whether it is more likely than not that some or all of
its 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. The
Company is required to provide a valuation allowance for any
portion of our deferred tax assets that, more likely than not,
will not be realized at September 30, 2010. Based on this
evaluation, the Company has a deferred tax asset valuation
allowance of $5.3 million as of September 30, 2010.
Although the carryforward period for state income tax purposes
is up to twenty years, given the economic conditions, such
economic environment could limit growth over a reasonable time
period to realize the deferred tax asset. The Company determined
the time period allowance for carryforward is outside a
reasonable period to forecast full realization of the deferred
tax asset, therefore recognized the deferred tax asset valuation
allowance. The Company continually monitors forecast information
to ensure the valuation allowance is at the appropriate value.
As required by FASB ASC 740, Income Taxes, the Company
recognizes 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.
Upon the completion of the Companys Federal tax return for
fiscal year 2009 and the application for the tax refund
completed earlier in the second quarter, the Federal tax refund
estimate of $46 million was revised upward to approximately
$52 million which caused the $5.6 million true up in
the current year. This change was due to a combination of
applying the Federal tax net operating loss carryback and the
recognition of the benefit of the state net operating loss
carryforwards for federal tax purposes, and other timing
differences applied to the current year tax return. These
adjustments did not affect the statement of operations and
resulted in a net adjustment between the federal income tax
receivable and the deferred tax asset.
The Company received a Federal tax refund of approximately
$52.7 million based on the results of fiscal year 2009 and
recent tax law changes for net operating loss carryback. Income
tax benefits related to states where the Company files tax
returns only apply to future years. No loss carrybacks are
allowed.
F-21
ASTA
FUNDING, INC. AND SUBSIDIARIES
Notes to
Consolidated Financial Statements
September 30,
2010 and 2009
|
|
Note
F
|
Income
Taxes (Continued)
|
The Corporate federal income tax returns of the Company for
2006, 2007, 2008 and 2009 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.
In April 2010, the Company received notification from the IRS
that the Companys 2008 and 2009 federal income tax returns
will be audited. This audit is currently in progress.
|
|
Note G
|
Commitments
and Contingencies
|
Employment
Agreements
On January 25, 2007, the Company entered into an employment
agreement (the Employment Agreement) with the
Companys Chairman, President and Chief Executive Officer,
expiring on December 31, 2009, provided, however, that Gary
Stern is required to provide ninety days prior written notice if
he does not intend to seek an extension or renewal of the
Employment Agreement. The Company and Mr. Stern are in the
process of finalizing an extension of this agreement. In the
interim period Mr. Stern continues his duties as Chief
Executive Officer at the discretion of the Board of Directors of
the Company. In January 2008, the Company entered into a similar
two year employment agreement with Cameron Williams, the
Companys former Chief Operating Officer. The contract was
not renewed and expired December 31, 2009. On
November 30, 2009, the Company entered into a Consulting
Services Agreement with Mr. Williams for services through
December 31, 2010.
Leases
The Company leases its facilities in Englewood Cliffs, New
Jersey and Sugar Land, Texas. The leases are operating leases,
and the Company incurred related rent expense in the amounts of
$395,000, $611,000 and $553,000 during the years ended
September 30, 2010, 2009 and 2008, respectively. The future
minimum lease payments are as follows:
|
|
|
|
|
Year
|
|
|
|
Ending
|
|
|
|
September 30,
|
|
|
|
|
2011
|
|
$
|
270,000
|
|
2012
|
|
|
237,000
|
|
2013
|
|
|
236,000
|
|
2014
|
|
|
236,000
|
|
2015
|
|
|
197,000
|
|
|
|
|
|
|
|
|
$
|
1,176,000
|
|
|
|
|
|
|
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-22
ASTA
FUNDING, INC. AND SUBSIDIARIES
Notes to
Consolidated Financial Statements
September 30,
2010 and 2009
|
|
Note G
|
Commitments
and Contingencies (Continued)
|
The Company received subpoenas from three jurisdictions seeking
information
and/or
documentation regarding its business practices. The Company is
fully cooperating with the issuing agencies. The Company has not
made any provision with respect to these matters in the
financial statements because the Company does not believe that
they are material to its business and financial condition.
The Company has an ongoing dispute with one of its significant
third party servicers regarding certain provisions in the
servicing agreement between the companies. The Company contends
that there are amounts due the Company under a profit-sharing
arrangement. The servicer has acknowledged the profit sharing
arrangement but disagrees with the calculation of the amount
owed. Additionally, the servicer has asserted that the Company
owes the servicer certain amounts with regard to a portfolio
sale and court costs allegedly incurred by the servicer and not
paid to the servicer by the Company. The companies continue to
negotiate a settlement for these items. The Company does not
believe the final settlement will have an adverse material
effect on the Company.
At September 30, 2010, approximately 36% of our portfolios
were serviced by five collection organizations. We have
servicing agreements in place with these five collection
organizations as well as all of the Companys other third
party collection agencies and attorneys that cover standard
contingency fees and servicing of the accounts.
|
|
Note I
|
Stock
Option Plans
|
Equity
Compensation Plan
On December 1, 2005, the Board of Directors adopted the
Companys Equity Compensation Plan (the Equity
Compensation Plan), which was approved by the stockholders
of the Company on March 1, 2006. The Equity Compensation
Plan was adopted to supplement the Companys existing 2002
Stock Option Plan. In addition to permitting the grant of stock
options as are permitted under the 2002 Stock Option Plan, the
Equity Compensation Plan allows the Company flexibility with
respect to equity awards by also providing for grants of stock
awards (i.e. restricted or unrestricted), stock purchase rights
and stock appreciation rights.
The general purpose of the Equity Compensation Plan is to
provide an incentive to the Companys employees, directors
and consultants, including executive officers, employees and
consultants of any subsidiaries, by enabling them to share in
the future growth of the business. The Board of Directors
believes that the granting of stock options and other equity
awards promotes continuity of management and increases incentive
and personal interest in the welfare of the Company by those who
are primarily responsible for shaping and carrying out the long
range plans and securing growth and financial success.
The Board believes that the Equity Compensation Plan will
advance the Companys interests by enhancing its ability to
(a) attract and retain employees, directors and consultants
who are in a position to make significant contributions to the
Companys success; (b) reward employees, directors and
consultants for these contributions; and (c) encourage
employees, directors and consultants to take into account the
Companys long-term interests through ownership of the
Companys shares.
The Company has 1,000,000 shares of Common Stock authorized
for issuance under the Equity Compensation Plan and 878,334 were
available as of September 30, 2010. As of
September 30, 2010, approximately 102 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-23
ASTA
FUNDING, INC. AND SUBSIDIARIES
Notes to
Consolidated Financial Statements
September 30,
2010 and 2009
|
|
Note I
|
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 163,134 were available as
of September 30, 2010. As of September 30, 2010,
approximately 102 of the Companys employees were eligible
to participate in the 2002 Plan. On December 11, 2009, the
Compensation Committee of the Board of Directors of the Company,
granted 25,000 stock options to each director of the Company
other than the chief executive officer, for a total of 150,000
stock options and 8,900 stock options to employees of the
Company, who had been employed at the Company for at least six
months prior to December 11, 2009. The grants to employees
excluded officers of the Company. The exercise price of these
options was $8.07, the market price on the date of grant.
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.
F-24
ASTA
FUNDING, INC. AND SUBSIDIARIES
Notes to
Consolidated Financial Statements
September 30,
2010 and 2009
|
|
Note I
|
Stock
Option Plans (Continued)
|
The following table summarizes stock option transactions under
the plans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended September 30,
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
Average
|
|
|
|
|
|
Average
|
|
|
|
|
|
|
Exercise
|
|
|
|
|
|
Exercise
|
|
|
|
|
|
Exercise
|
|
|
|
Shares
|
|
|
Price
|
|
|
Shares
|
|
|
Price
|
|
|
Shares
|
|
|
Price
|
|
|
Outstanding options at the beginning of year
|
|
|
1,157,905
|
|
|
$
|
10.76
|
|
|
|
1,037,438
|
|
|
$
|
11.69
|
|
|
|
1,337,438
|
|
|
$
|
9.39
|
|
Options granted
|
|
|
158,900
|
|
|
|
8.07
|
|
|
|
122,000
|
|
|
|
2.95
|
|
|
|
|
|
|
|
|
|
Options cancelled
|
|
|
(66,700
|
)
|
|
|
17.48
|
|
|
|
(1,000
|
)
|
|
|
28.75
|
|
|
|
|
|
|
|
|
|
Options exercised
|
|
|
(328,066
|
)
|
|
|
2.65
|
|
|
|
(533
|
)
|
|
|
2.95
|
|
|
|
(300,000
|
)
|
|
|
1.42
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding options at the end of year
|
|
|
922,039
|
|
|
$
|
12.70
|
|
|
|
1,157,905
|
|
|
$
|
10.76
|
|
|
|
1,037,438
|
|
|
$
|
11.69
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable options at the end of year
|
|
|
792,377
|
|
|
$
|
13.65
|
|
|
|
1,081,912
|
|
|
$
|
11.31
|
|
|
|
1,031,438
|
|
|
$
|
11.59
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Company recognized $807,000 of compensation expense related
to stock options in the fiscal year ended September 30,
2010. As of September 30, 2010, there was $469,000 of
unrecognized compensation cost related to unvested stock
options. The Company recognized $164,000 and $92,000 of stock
based compensation expense related to stock option grants in
fiscal year 2009 and 2008, respectively.
The intrinsic value of the options exercised during fiscal year
2010 was $1.3 million. The intrinsic value of options
exercised during the fiscal year ended September 30, 2009
was not material, and for the same period in 2008 was
$6.3 million. There was no intrinsic value of the
outstanding and exercisable options as of September 30,
2010, 2009 and 2008.
On December 11, 2009, the Compensation Committee of the
Board of Directors of the Company granted 25,000 stock options
to each director of the Company other than the Chief Executive
Officer, for a total of 150,000 options, and 8,900 stock options
to full time employees of the Company who had been employed at
the Company for at least six months prior to the grant date. The
grants to employees excluded officers of the Company. The
exercise price of these options was $8.07, the market price on
the date of the grant. The Company determined the fair value of
the options to be $7.14. The weighted average assumptions used
in the option pricing model were as follows:
|
|
|
|
|
Risk-free interest rate
|
|
|
0.17
|
%
|
Expected term (years)
|
|
|
10.0
|
|
Expected volatility
|
|
|
110.2
|
%
|
Dividend yield
|
|
|
1.12
|
%
|
On May 5, 2009, the Compensation Committee awarded 122,000
stock options to employees of the Company, of which 45,673
vested immediately. The remaining shares vest in two equal
installments starting on May 5, 2010. The grant price of
these options was $2.95, the market price on the date of the
grant. The Company determined the
F-25
ASTA
FUNDING, INC. AND SUBSIDIARIES
Notes to
Consolidated Financial Statements
September 30,
2010 and 2009
|
|
Note I
|
Stock
Option Plans (Continued)
|
fair value of the options to be $2.34. The weighted average
assumptions used in the option pricing models were as follows:
|
|
|
|
|
Risk-free interest rate
|
|
|
0.18
|
%
|
Expected term (years)
|
|
|
10.0
|
|
Expected volatility
|
|
|
111.7
|
%
|
Dividend yield
|
|
|
1.145
|
%
|
The following table summarizes information about the plans
outstanding options as of September 30, 2010:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
|
$ 2.8751 - $ 5.7500
|
|
|
198,568
|
|
|
|
5.1
|
|
|
$
|
3.90
|
|
|
|
168,902
|
|
|
$
|
4.07
|
|
$ 5.7501 - $ 8.6250
|
|
|
169,700
|
|
|
|
8.6
|
|
|
|
7.92
|
|
|
|
69,704
|
|
|
|
7.71
|
|
$14.3751 - $17.2500
|
|
|
198,611
|
|
|
|
3.1
|
|
|
|
14.88
|
|
|
|
198,611
|
|
|
|
14.88
|
|
$17.2501 - $20.1250
|
|
|
340,160
|
|
|
|
4.1
|
|
|
|
18.23
|
|
|
|
340,160
|
|
|
|
18.23
|
|
$25.8751 - $28.7500
|
|
|
15,000
|
|
|
|
6.2
|
|
|
|
28.75
|
|
|
|
15,000
|
|
|
|
28.75
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
922,039
|
|
|
|
5.0
|
|
|
$
|
12.70
|
|
|
|
792,377
|
|
|
$
|
13.65
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table summarizes information about restricted
stock transactions:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
Weighted
|
|
|
|
Year Ended
|
|
|
Average
|
|
|
Year Ended
|
|
|
Average
|
|
|
|
September 30, 2010
|
|
|
Grant Date
|
|
|
September 30, 2009
|
|
|
Grant Date
|
|
|
|
Shares
|
|
|
Fair Value
|
|
|
Shares
|
|
|
Fair Value
|
|
|
Unvested at the beginning of period
|
|
|
35,338
|
|
|
$
|
19.73
|
|
|
|
80,667
|
|
|
$
|
22.26
|
|
Awards granted
|
|
|
|
|
|
|
0.00
|
|
|
|
|
|
|
|
0.00
|
|
Vested
|
|
|
(17,669
|
)
|
|
|
19.73
|
|
|
|
(40,995
|
)
|
|
|
24.29
|
|
Forfeited
|
|
|
|
|
|
|
0.00
|
|
|
|
(4,334
|
)
|
|
|
21.81
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unvested at the end of period
|
|
|
17,669
|
|
|
$
|
19.73
|
|
|
|
35,338
|
|
|
$
|
19.73
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Company recognized $382,000, $820,000 and $921,000 of
compensation expense during the fiscal years ended
September 30, 2010, 2009 and 2008, respectively, for
restricted stock. As of September 30, 2010, there was
$1,000 of unrecognized compensation cost related to unvested
restricted stock.
The Company recognized a total of $1,189,000, $984,000 and
$1,013,000 in compensation expense for the fiscal years ended
September 30, 2010, 2009 and 2008, respectively, for the
stock options and restricted stock grants. As of
September 30, 2010, there was a total of $470,000 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.
F-26
ASTA
FUNDING, INC. AND SUBSIDIARIES
Notes to
Consolidated Financial Statements
September 30,
2010 and 2009
|
|
Note J
|
Stockholders
Equity
|
During the year ended September 30, 2010, the Company
declared quarterly cash dividends aggregating $1,161,000, which
includes $0.02 per share, per quarter, of which $292,000 was
accrued as of September 30, 2010 and paid November 1,
2010.
During the year ended September 30, 2009, the Company
declared quarterly cash dividends aggregating $1,142,000, which
includes $0.02 per share, per quarter, of which $286,000 was
accrued as of September 30, 2009 and paid November 2,
2009.
The Company expects to pay a regular cash dividend in future
quarters, but the amount has not yet been determined. This will
be at the discretion of the board of directors and will depend
upon the Companys financial condition, operating results,
capital requirements and any other factors the board of
directors deems relevant. In addition, agreements with the
Companys lenders may, from time to time, restrict the
ability to pay dividends. As of September 30, 2010, there
were no such restrictions.
The Company maintains a 401(k) Retirement Plan covering all of
its eligible employees. Matching contributions made by the
employees to the plan are made at the discretion of the board of
directors each plan year. Contributions for the years ended
September 30, 2010, 2009 and 2008 were $95,000, $74,000 and
$121,000, respectively.
|
|
Note L
|
Fair
Value of Financial Instruments
|
FASB ASC 825, Financial Instruments, (ASC 825),
requires disclosure of fair value information about financial
instruments, whether or not recognized on the balance sheet, for
which it is practicable to estimate that value. Because there
are a limited number of market participants for certain of the
Companys assets and liabilities, fair value estimates are
based upon judgments regarding credit risk, investor expectation
of economic conditions, normal cost of administration and other
risk characteristics, including interest rate and prepayment
risk. These estimates are subjective in nature and involve
uncertainties and matters of judgment, which significantly
affect the estimates.
The carrying value of consumer receivables acquired for
liquidation was $147,031,000 at September 30, 2010. The
Company computed the fair value of the consumer receivables
acquired for liquidation using its forecasting model and the
fair value approximated $179,730,000 at September 30, 2010.
The Companys forecasting model utilizes a discounted cash
flow analysis. The Companys cash flows are an estimate of
collections for all of our consumer receivables based on
variables fully described in Note B: Consumer Receivables
Acquired for Liquidation. These cash flows are then discounted
to determine the fair value.
The carrying value of debt and subordinated debt (related party)
was $94,869,000 and $130,868,000 at September 30, 2010 and
2009, respectively. The majority of these loan balances are
variable rate and short-term, therefore, the carrying amounts
approximate fair value.
|
|
Note M
|
Related
Party Transactions
|
On April 29, 2008, the Company obtained a subordinated loan
pursuant to a subordinated promissory note from the Family
Entity. The loan is in the aggregate principal amount of
approximately $8.2 million, bears interest at a rate of
6.25% per annum, is payable interest only each quarter until its
maturity date of January 9, 2010, subject to prior
repayment in full of the Companys senior loan facility
with the Bank Group. In December 2009 the promissory notes
maturity date was extended to December 31, 2010, and the
interest rate was changed to 10% per annum.
F-27
ASTA
FUNDING, INC. AND SUBSIDIARIES
Notes to
Consolidated Financial Statements
September 30,
2010 and 2009
|
|
Note M
|
Related
Party Transactions (Continued)
|
On January 27, 2010, the Company re-paid approximately
$860,740 of the subordinated loan. The Company delivered
$787,500 to the Family Entity, and will deliver $73,240 to BMO
to hold as collateral, as approximately 8.5% of the loan to the
Family Entity secures the obligations due to BMO by Palisades
Acquisition XVI, LLC, the Companys wholly owned
subsidiary. The Family Entity then delivered its portion of the
loan payment to Gary Stern, who used it to exercise the stock
options awarded to him in 2000 (300,000 stock options under the
1995 Stock Option Plan of Asta Funding, Inc. with an exercise
price of $2.625 per share). On February 17, 2010, the
Company re-paid $1,500,000 of principal of the subordinated
loan. The Company delivered $1,372,365 to the Family Entity, and
delivered $127,635 to BMO to hold as collateral.
The Company paid GMS Family Investors, a related party, a 2%
collateral fee of $160,000, related to the assets pledged by GMS
Family Investors for the $6.0 million Bank Leumi Credit
Agreement.
On March 26, 2010, the Company re-paid $1,500,000 of
principal of the subordinated loan. The Company delivered
$1,372,365 to the Family Entity, and the remaining $127,635 to
BMO to hold as collateral.
On November 16, 2010, the Company repaid $1,970,000 of
principal on the Subordinated Loan with the Family entity. The
remaining balance due to the Family Entity under the
Subordinated Loan after this payment is approximately
$2,416,000. See Note O Subsequent Events.
|
|
Note N
|
Summarized
Quarterly Data (unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First
|
|
|
Second
|
|
|
Third
|
|
|
Fourth
|
|
|
Full
|
|
Quarter
|
|
Quarter
|
|
|
Quarter
|
|
|
Quarter
|
|
|
Quarter
|
|
|
Year
|
|
|
2010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue
|
|
$
|
11,053,000
|
|
|
$
|
11,200,000
|
|
|
$
|
12,097,000
|
|
|
$
|
11,499,000
|
|
|
$
|
45,849,000
|
|
Income (loss) before income taxes
|
|
|
4,165,000
|
|
|
|
4,839,000
|
|
|
|
5,242,000
|
|
|
|
(9,005,000
|
)
|
|
|
5,241,000
|
|
Net (loss) income
|
|
|
2,475,000
|
|
|
|
2,875,000
|
|
|
|
3,121,000
|
|
|
|
(5,342,000
|
)
|
|
|
3,129,000
|
|
Basic net (loss) income per share
|
|
$
|
0.17
|
|
|
$
|
0.20
|
|
|
$
|
0.21
|
|
|
$
|
(0.37
|
)
|
|
$
|
0.22
|
|
Diluted net (loss) income per share
|
|
$
|
0.17
|
|
|
$
|
0.20
|
|
|
$
|
0.21
|
|
|
$
|
(0.37
|
)
|
|
$
|
0.22
|
|
2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue
|
|
$
|
18,465,000
|
|
|
$
|
18,054,000
|
|
|
$
|
17,272,000
|
|
|
$
|
16,564,000
|
|
|
$
|
70,355,000
|
|
Income (loss) before income taxes
|
|
|
(13,147,000
|
)
|
|
|
(8,674,000
|
)
|
|
|
2,491,000
|
|
|
|
(128,182,000
|
)
|
|
|
(147,512,000
|
)
|
Net income (loss)
|
|
|
(7,837,000
|
)
|
|
|
(5,168,000
|
)
|
|
|
1,478,000
|
|
|
|
(79,198,000
|
)
|
|
|
(90,725,000
|
)
|
Basic net income (loss) per share
|
|
$
|
(0.55
|
)
|
|
$
|
(0.36
|
)
|
|
$
|
0.10
|
|
|
$
|
(5.55
|
)
|
|
$
|
(6.36
|
)
|
Diluted net income (loss) per share
|
|
$
|
(0.55
|
)
|
|
$
|
(0.36
|
)
|
|
$
|
0.10
|
|
|
$
|
(5.55
|
)
|
|
$
|
(6.36
|
)
|
|
|
|
* |
|
Due to rounding the sum of quarterly totals for earnings per
share may not add to the yearly total. |
A significant portion of the $183.5 million of impairments
recorded in fiscal year 2009, $137.0 million, were recorded
in the fourth quarter . Historically, moving through the year
and into the fourth quarter, collections tend to be stable or
perhaps increase in performance. During this fiscal year,
collections increased slightly from the second quarter to the
third quarter, and given historical trends, our expectation was
to have a stable fourth quarter with regard to collections.
However, we were not able to sustain that trend and fourth
quarter collections were lower by
F-28
ASTA
FUNDING, INC. AND SUBSIDIARIES
Notes to
Consolidated Financial Statements
September 30,
2010 and 2009
|
|
Note N
|
Summarized
Quarterly Data
(unaudited) (Continued)
|
approximately 20% as compared to the third quarter of fiscal
year 2009. Subsequent internal and external forecast models
confirmed the trend seen in the fourth quarter. Our impairment
analysis indicated the amortization schedules established at the
time of the acquisition of the impacted portfolios were not in
line with the economic conditions in which we currently operate.
Continued economic challenges in the fourth quarter, such as the
peaking of the unemployment rate and conditions at a significant
servicer, which ultimately led to a bankruptcy filing, have
impacted the Companys performance in the fourth quarter.
As such we concluded that the significant impairments were
properly recorded in the fourth quarter of fiscal year 2009.
|
|
Note O
|
Subsequent
Events
|
On October 26, 2010, Palisades XVI entered into the Fifth
Amendment. The effective date of the Fifth Amendment is
October 14, 2010. The Fifth Amendment (i) extends the
expiration date of the Receivables Financing Agreement to
April 30, 2014, (ii) reduces the minimum monthly total
payment to $750,000, (iii) accelerates the Companys
guarantee credit enhancement of $8,700,000, which was paid upon
execution of the Fifth Amendment, (iv) eliminates the
Companys limited guarantee of repayment of the loans
outstanding by Palisades XVI, and (v) revises the
definition of Borrowing Base Deficit, as defined in
the Receivables Financing Agreement, to mean the excess, if any,
of 105% of the loans outstanding over the borrowing base.
In connection with the Fifth Amendment, on October 26,
2010, we entered into the Termination Agreement. The Termination
Agreement provides that, upon payment of $8,700,000 to the
Lender and execution of the Fifth Amendment, the following
agreements, which were entered into by the Company and certain
of its affiliated entities in connection with the guaranty of
the outstanding loans under the Receivables Financing Agreement,
were terminated: (i) the Subordinated Limited Recourse
Guaranty Agreement, dated February 20, 2009, among us, our
subsidiaries, and BMO; (ii) the Subordinated Guarantor
Security Agreement, dated February 20, 2009; (iii) the
Limited Recourse Guaranty Agreement, dated as of
February 20, 2009; and (iv) the Intercreditor
Agreement, dated as of February 20, 2009. The Termination
Agreement is effective as of October 14, 2010.
On November 16, 2010, the Company repaid $1,970,000 of
principal on the Subordinated Loan with the Family entity. The
remaining balance due to the Family Entity under the
Subordinated Loan after this payment is approximately $2,416,000.
F-29