-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, ItcZXHsgMBykG7FHjru7qEkdM7dxTpHrFD9xMaB6NUrY5zaycntyuADemuyoEN0k CamiAZuFpwcpIO7JHp+RWQ== 0000950116-99-002316.txt : 19991224 0000950116-99-002316.hdr.sgml : 19991224 ACCESSION NUMBER: 0000950116-99-002316 CONFORMED SUBMISSION TYPE: 10KSB PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 19990930 FILED AS OF DATE: 19991223 FILER: COMPANY DATA: COMPANY CONFORMED NAME: ASTA FUNDING INC CENTRAL INDEX KEY: 0001001258 STANDARD INDUSTRIAL CLASSIFICATION: PERSONAL CREDIT INSTITUTIONS [6141] IRS NUMBER: 223388607 STATE OF INCORPORATION: DE FISCAL YEAR END: 0930 FILING VALUES: FORM TYPE: 10KSB SEC ACT: SEC FILE NUMBER: 000-26906 FILM NUMBER: 99779831 BUSINESS ADDRESS: STREET 1: 210 SYLVAN AVE CITY: ENGLEWOOD CLIFFS STATE: NJ ZIP: 07632 BUSINESS PHONE: 2015675648 MAIL ADDRESS: STREET 1: 210 SYLVAN AVE CITY: ENGLEWOOD CLIFFS STATE: NJ ZIP: 07632 10KSB 1 10KSB SECURITIES AND EXCHANGE COMMISSION Washington, D. C. 20549 FORM 10-KSB (X) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended September 30, 1999 OR ( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to Commission file number: 0-26906 ASTA FUNDING, INC.
- --------------------------------------------------------------------------------------------------------------------- (NAME OF SMALL BUSINESS ISSUER IN ITS CHARTER) Delaware 22-3388607 - -------------------------------------------------------------------------- ------------------------------------ (STATE OR OTHER JURISDICTION OF INCORPORATION OR ORGANIZATION) (I.R.S. EMPLOYER IDENTIFICATION NO.) 210 Sylvan Avenue, Englewood Cliffs, NJ 07632 - -------------------------------------------------------------------------- ------------------------------------ (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
Issuer's 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) Check whether the issuer: (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 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 X No Check if there is no disclosure of delinquent filers in response to Item 405 of Regulation S-Bcontained in this form, and no disclosure will be contained, to the best of the Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-KSB or any amendment to this Form 10-KSB. X The Registrant's revenues for the fiscal year ended September 30, 1999 were $11,603,000. As of December 21, 1999, the aggregate market value of the Registrant's Common Stock (based upon the closing sales price for the Common Stock as reported by NASDAQ on such date) held by non-affiliates of the Registrant was approximately $7,833,678. (Aggregate market value has been estimated solely for the purpose of this report. For the purpose of this report it has been assumed that all officers and directors are affiliates of the Registrant. The statements made herein shall not be construed as an admission for the purposes of determining the affiliate status of any person.) As of December 21, 1999, the Registrant had 3,945,000 shares of Common Stock issued and outstanding. Transitional Small Business Disclosure Format (check one): Yes No X Documents Incorporated by Reference: The information called for by Part III of this Form 10-KSB is incorporated by reference from the Company's Proxy Statement to be filed with the Commission on or before January 27, 2000. Part I Item 1. Description of Business. General Asta Funding, Inc. (the "Company" or "Asta") is a diversified consumer finance company that is engaged in the business of purchasing, managing, servicing and selling distressed consumer receivables. Distressed consumer receivables are the unpaid debts of individuals that are owed to banks, finance companies and other credit providers. Most of Company's receivables are MasterCard and Visa credit card accounts which were charged-off by the issuing banks for non-payment. During the fiscal year ended September 30, 1999, the Company purchased approximately $1.4 billion of consumer receivables at a cost of approximately $55.0 million and sold approximately $497.0 million of receivables for a total sales price of approximately $16.3 million. Prior to May 1, 1999, the Company's business was focused on purchasing, servicing and selling retail automobile installment contracts ("Contracts") originated by dealers ("Dealers") in the sale primarily of used automobiles. Through its purchases, the Company provided indirect financing to borrowers with limited credit histories, lower than average incomes or past credit problems ("Sub-Prime Borrowers"). The Company ceased accepting new automobile Contracts for funding on May 1, 1999 and anticipates liquidating all remaining Contracts. The Company is a Delaware corporation whose principal executive offices are located at 210 Sylvan Avenue, Englewood Cliffs, New Jersey 07632. The Company was incorporated in New Jersey on July 7, 1994 and was reincorporated in Delaware on October 12, 1995 as a result of a merger with a Delaware corporation. Unless the context otherwise requires, the terms "Company" or "Registrant" as used herein refer to Asta Funding, Inc. This Annual Report on Form 10-KSB contains certain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Such statements are subject to risks and uncertainties that could cause actual results to differ materially from those projected in such forward-looking statements. Certain factors which could materially affect such results and the future performance of the Company are described below under "Risk Factors." See "Forward-Looking Statements." Business Strategy The Company's primary objective is to increase revenues through the expansion of its consumer receivables business, by among other things: o Increasing receivable portfolio acquisitions; o Increasing the Company's financing sources and improving the terms of its financing sources; o Enhancing the Company's computer systems to facilitate an increase in collections; and o The possible expansion into other consumer financing businesses. -2- Consumer Receivable Business In May 1999, the Company ceased accepting new automobile contracts and changed its business focus to the purchasing, managing, selling and servicing distressed consumer receivables. Industry Overview The distressed consumer receivable market is a growing industry, which is driven by increasing levels of consumer debt. Credit card debt is the fastest growing component of consumer debt. Despite generally good economic conditions over the past few years, credit card charge-offs have increased as overall consumer debt has increased. Historically, originating institutions have sought to limit credit losses by performing recovery efforts in-house, outsourcing recovery activities to third-party collection agencies and selling their charged-off receivables for immediate cash. From the originating institution's perspective, selling receivables at the time of charge-off or shortly thereafter yields immediate cash proceeds and represents a substantial reduction in the two to five year period typically required for traditional recovery efforts. Receivables are sold by originating institutions at substantial discounts to the balances owed on the receivables, with the purchase price varying depending on the amount that both the purchaser and seller anticipate recovering and the costs associated with recovering these receivables. Sales of receivables include published auction type sales, private brokered sales or directly negotiated sales between the seller and the purchaser. Receivable Purchase Program The Company purchases distressed consumer receivables that have typically been either charged-off by the credit grantors or not considered to be prime receivables. These receivables include MasterCard and Visa accounts issued by banks, and other consumer loans issued by credit grantors. The Company may also purchase bulk receivable portfolios that include both distressed and performing loans. During the fiscal year ended September 30, 1999, the Company purchased approximately $1.4 billion of consumer receivables at a cost of approximately $55.0 million and sold approximately $497.0 million of such receivables for a total sales price of approximately $16.3 million. Receivables are purchased by the Company at a discount from their charged-off amount, typically the aggregate unpaid balance at the time of charge-off. The Company purchases receivables directly from credit grantors through privately negotiated direct sales and through auction type sales in which sellers of receivables seek bids from several pre-qualified debt purchasers. In order for the Company to consider a potential seller of receivables, a variety of factors are considered. Sellers must demonstrate that they have adequate internal controls to detect fraud and have the ability to provide post sale support and to honor buy-back warranty requests. The Company pursues new acquisitions on an ongoing basis by means of industry newsletters, brokers who specialize in these assets and other professionals that the Company has relationships with. The Company's senior management locates the portfolios for purchase and is responsible for performing due diligence, including on site visits of the seller. The seller or broker usually sends either a sample listing or the actual portfolio for sale to the Company on a diskette or other form of media. The Company analyzes the portfolio to determine if it meets the Company's buying criteria. If a portfolio meets the Company's buying criteria, a purchase price is determined and the seller or broker is notified. After a purchase is completed, senior management monitors the portfolios performance and uses this information in determining future buying criteria and pricing. -3- Receivable Servicing The Company's objective is to maximize the amount that it recovers on receivables that are acquired. Unlike third party collection agencies that are given specific time periods to recover on receivables, the Company has significantly more flexibility in establishing payment programs. The Company has four main-servicing department's which consist of the following: collection/skiptrace, legal, customer service and accounting departments. The collection/skiptrace department is responsible for making contact with the obligors and collecting the receivables. This department uses a friendly, customer service approach to collect on receivables. Through the use of the Company's collection software and telephone system, each collector is responsible for contacting customers and explaining the benefits of paying the Company and working with the customers to develop acceptable means to satisfy their obligations. The Company also uses a series of automated collection letters, late payment reminders, and settlement offers that are sent out at specific intervals or at the request of a collection department employee. When the collection department cannot contact the customer by either telephone or mail, the account is referred to the skiptrace department. If the collection department determines that the customer has the ability to resolve its obligation but the Company's normal collection activities have not resulted in any resolution of the customer's obligations, the account is referred to the legal department. The legal department determines the criteria for instituting legal proceedings, determines jurisdiction, places cases for suit, obtains judgments, institutes wage garnishments and assists both in-house and outside counsel in legal case management. The legal department also refers accounts to the skip trace department in order to obtain a current phone number, address or to locate assets or the identity of the customer's employer. The Company employs one full-time in-house attorney, one paralegal and a dedicated support staff to process numerous court cases each year. The legal department has the ability to internally prepare and file collection proceedings in New York and New Jersey. This department also coordinates legal collection activity nationwide using a network of collection attorneys. At September 30, 1999, the Company had approximately 65,000 accounts that were in legal status. The skiptrace department is responsible for locating and contacting customers who could not be contacted by either the collection or legal departments. The skip trace employees use a variety of public and private third party databases to locate customers. Once an account is located and contact is made by a skiptracer, the account is then referred back to the collection or legal department for follow-up. The skiptrace department is also responsible for finding current employers and assets of customers when this information is deemed necessary. At September 30, 1999, the Company was directly performing collection activity on approximately 18,000 accounts. In addition to directly performing collection activity, the Company utilizes the services of third party collection agencies to perform collection activities on accounts that were with such agency at the time the Company purchased the account. At September 30, 1999, in addition to the 18,000 accounts that the Company is servicing, there were approximately 64,000 accounts that are being serviced by third party collection agencies. -4- The customer service department is responsible for handling incoming calls from customers and collection agencies who are responsible for collection of accounts. The customer service department coordinates customer inquiries on accounts and will also assist the collection agencies in the collection process. The customer service department is also responsible for handling buy-back and media requests from companies who have purchased accounts from the Company. They work with the buyers during the transition period and post sale process and handle any issues that may arise once an account has been sold. The accounting department is responsible for making daily deposits of customer payments, posting these payments to the customers account, mailing of monthly statements and providing senior management with daily and monthly receivable activity and performance reports. Employees also assist collection department employees in handling customer disputes with regard to payment and balance information. The accounting department will also assist the customer service department in the handling of buy-back requests from companies who have purchased receivables. In addition, the accounting department monitors the performance on accounts that are being serviced by third party collection agencies. Portfolio Sales The Company will occasionally sell to other debt buyers certain receivables that it decides not to service directly or have a third party collection agency service. There are many factors that contribute to the decision of which receivables to sell and which to service. During the fiscal year ended September 30, 1999, the Company sold approximately $497 million of receivables for a total purchase price of approximately $16 million. In June 1999, the Company formed a wholly owned subsidiary Asta Funding.Com that developed a web-site for selling distressed consumer receivables to qualified customers over the Internet. The Company's program allows pre-qualified potential debt purchasers the opportunity to select, review and purchase in a more cost efficient manner receivables that meet their individual buying criteria. At September 30, 1999, the Company had approximately 32,000 accounts that were being serviced by third party collection agencies that meet the Company's sale criteria and were being marketed for sale. Automobile Financing Business The Company ceased accepting new automobile Contracts for funding on May 1, 1999 and intends to liquidate all remaining Contracts. The following is a description of the Company's former business. The Company typically purchased Contracts from new-car franchise Dealers who sold both new and used automobiles as well as independent used car Dealers. The Company entered into Dealer Agreements and solicited Contracts from Dealers primarily through the efforts of sales representatives and the Company's staff. The Company currently services all of the Contracts it has purchased for its own account as well as those Contracts it purchased and subsequently sold. Servicing consists of the collection of principal, interest and other payments on the Contracts, providing related accounting and reporting services and, when necessary, the repossession and sale of collateral upon an event of default. -5- Dealer Contract Purchase Program As of September 30, 1999, the Company was a party to Dealer Agreements with more than 750 Dealers, all of which are located in the states of New York, New Jersey, Connecticut, Delaware, Maryland, Pennsylvania, Virginia and Maine. Approximately 70% of these Dealers are independent used car dealers and the remainder are franchised new car dealers selling both new and used automobiles. For the period October 1, 1998 to April 30, 1999, approximately 99% of the Contracts purchased by the Company consisted of financing for used cars and the remaining approximately 1% for new cars. Dealers generated applications from retail automobile buyers who indicated an interest in obtaining financing from a Dealer to purchase an automobile, light truck or passenger van. Typically, a Dealer would submit the buyer's application to more than one financing source for review. The Company believes that the Dealer's decision to finance the automobile purchase with the Company or other financing source was based primarily upon an analysis of the discounted purchase price offered for the Contract, the promptness of the financing source in approving or disapproving loan applications, the ability of the financing source to promptly consummate the purchase and any purchase conditions. Based upon the Company's underwriting criteria and its review of the information contained in a credit bureau report ordered by the Company, the application, the proposed transaction structure and a verification of the value of the automobile securing the Contract, the Company may have approved the application as submitted, approved the application upon modified terms or rejected the application. The Company's credit analysts then documented their decision and notified the Dealers by facsimile transmission and/or telephone. The Company did not purchase all of the Contracts approved for purchase because Dealers typically offered to sell Contracts to more than one finance source and applicants often decided not to purchase a vehicle from Dealers to whom they have submitted a credit application. The Company purchased Contracts directly from Dealers and did not make loans directly to purchasers of automobiles. The Company purchased Contracts from Dealers at a discount. In addition, the Company charged an acquisition fee for each Contract purchased. The Company believes that the level of discounts and fees was a significant factor in the Dealer's decision to submit a Contract to the Company for purchase. The Company attempted to control Dealer misrepresentation by carefully screening the Dealers and the Contracts it purchased. The Company's efforts included establishing and maintaining sound professional business relationships with Dealers and obtaining certain representations and warranties regarding the nature and enforceability of the Dealer Agreement and the corresponding Contracts. In addition, if a Dealer breached its representations or warranties, pursuant to the Dealer Agreement, the Company has the right to require the Dealer to repurchase any Contract. There can be no assurance, however, that any Dealer will have the financial resources to satisfy its repurchase obligations to the Company. -6- Contract Purchase Criteria To be eligible for purchase by the Company, a Contract must have been originated by a Dealer that has entered into a Dealer Agreement to sell Contracts to the Company. The Contracts must have been secured by a first priority security interest in the purchased vehicle and must have met the Company's underwriting criteria. In addition, each Contract requires the borrower to maintain physical damage insurance covering the financed vehicle and naming the Company as a loss payee. Although each borrower is required to maintain insurance, losses may occur upon theft or physical damage of any financed vehicle if the borrower fails to maintain insurance as required and is unable to pay for repairs to or replacement of the vehicle or is otherwise unable to payoff the Contract in full. All of the Contracts purchased by the Company are fully amortizing and provide for equal payments over the term of the Contract. The Contracts may be prepaid at any time without premium or penalty. In the event a borrower elects to prepay a Contract in full, the payoff amount is calculated by deducting the unearned interest (as determined by the actuarial or the simple interest method or such other interest amortization method as is submitted by applicable state law) from the Contract balance. Each Contract purchased by the Company prohibits the sale or transfer of the financed vehicle without the secured party's consent and provides for the acceleration of the maturity of the Contract upon a sale or transfer without such consent. In most circumstances, the Company will not consent to a sale or transfer of a financed vehicle unless the Contract is prepaid in full. The Company seeked to control loss exposure on Contracts by: (i) requiring that the applicant pay a substantial portion of the purchase price (usually 15% to 20%) for the vehicle with funds not borrowed from the Company or Dealer; (ii) verifying the credibility of the applicant and determining whether the applicant meets the Company's underwriting criteria, particularly whether the applicant has sufficient disposable income to meet such applicant's existing obligations and the obligations resulting from the proposed transaction; (iii) limiting the credit the Company is willing to extend based upon its assessment of the applicant's ability to meet payment obligations and the value of the underlying collateral; (iv) requiring physical damage insurance, under which the Company is a loss payee, to be maintained on all vehicles at all times by the obligor to protect the Company's financial interest; (v) purchasing insurance to cover the risk of the borrower's failure to maintain insurance and certain other risks; and (vi) acquiring a first priority security interest in the financed vehicle. There can be no assurances, however, that these methods have afforded adequate protection against risk of loss exposure. The degree of exposure in any transaction is a function of: (a) the creditworthiness of the applicant, (b) the extent of credit granted compared to the value of the underlying collateral, (c) the possibility of physical damage to, or the loss of the collateral, and (d) the potential for any legal impediment to the collection of the obligation or the repossession of the collateral. The Company generally determined the value of collateral based upon national recognized pricing services. -7- The Company had implemented specific procedures to control borrower misrepresentation at the point of origination. The Company required each Dealer submitting a potential Contract to provide certain information to the Company, including a completed signed loan application which listed the applicant's income, credit and employment history as well as other personal information. The Company verified the employment and certain other information provided by the borrower by contacting the related references noted on the borrower's application. The Company also evaluated the applicants credit history as provided by at least one independent credit bureau. The credit report typically contained information on matters such as historical payment experience, credit history with merchants and lenders, installment debt payments, defaults and bankruptcies, if any. The Company also may have required verification of certain other information provided by the applicant or the Dealer prior to making its credit decision. This verification process in many instances required submission of supporting documentation and is performed solely by Company personnel. The Company evaluated applicants by considering the relationship of the applicant's monthly income to monthly expenses, including expenses relating to the Contract and ownership of the financed vehicle. There can be no assurances, however, that these procedures have afforded adequate protection against borrower misrepresentation. The Company believes that its objective underwriting criteria did enable it to evaluate effectively the creditworthiness of Sub-Prime Borrowers. These criteria included standards for price, term, installment payment and interest rate, mileage, age and type of vehicle, amount of the loan in relation to the value of the vehicle and the amount of the down payment, the borrower's income level, job and residence stability, credit history and debt serviceability and other factors. If a Dealer sold a Contract to the Company, the requisite financing documents were generated by the Dealer on a standardized form of Contract supplied by the Company. The Dealer and the borrower signed the Contract, the Dealer assigned the Contract to the Company and the Dealer forwarded the signed Contract to the Company along with other items, including the vehicle title information indicating the Company's security interest. The Company thereupon forwarded payment to the Dealer for the Contract upon completion of all loan-funding procedures. Securitization of Contracts In May 1996, the Company entered into an agreement with Greenwich Capital Markets, Inc. ("Greenwich Capital") that provided the Company with a committed forty-eight month securitization Contract program totaling $200 million. As of September 30, 1999, the Company had completed two securitizations aggregating approximately $44 million in Contracts pursuant to this agreement. In May 1999, the Company ceased accepting new Contracts for funding and decided to liquidate all remaining Contracts; therefore the Company will not securitize any more Contracts under this program. In addition, negative market conditions in this industry would have prevented the Company from completing any further securitizations under this program. For the years prior to September 30, 1998, the Company purchased Contracts with the intention of reselling them to institutional investors as asset backed securities ("ABS"). The structure of these securitizations with Greenwich Capital (and the general structure the Company intends to utilize with future securitizations) included the following steps. First, the Company sells a portfolio of Contracts to a wholly owned subsidiary, which had been established for the limited purpose of buying and reselling the Company's Contracts. The wholly-owned subsidiary then sells the portfolio of Contracts to a grantor trust and the grantor trust in turn issues interest-bearing ABS in an amount equal to the aggregate principal balance of the Contracts. Institutional investors purchase these ABS, the proceeds of which are used by the grantor trust to purchase the Contracts from the subsidiary. The wholly owned subsidiary uses the proceeds to purchase the Contracts from the Company. The Company also provides a credit enhancement for the benefit of the trust investors through the use of an initial cash deposits to a specified trust account ("Spread Account") and agrees to deposit certain residual interest cash flows which may be received in the future. Purchasers of the ABS received a particular coupon rate (the "Pass-Through Rate") established at the time of the sale. -8- The Company receives periodic base servicing fees for its duties relating to the accounting for and collection of the Contracts. In addition, the Company is entitled to certain residual interest cash flows that represent collections on the Contracts in excess of the amounts required to pay the investors principal and interest, the base servicing fees and certain other fees such as trustee and custodial fees. The company sells the Contracts in the portfolio at face value and without recourse except that certain of the representations and warranties made by the Dealer to the Company in the Dealer Agreement were similarly made by the Company to the ABS investors. At the end of the month, the aggregate cash collections relating to the portfolio of Contracts are allocated first to the base servicing fees and certain fees such as trustee and custodial fees for the period, then to the ABS certificate holder in an amount equal to the interest accrued at the Pass-Through Rate on the portfolio plus the amount by which the portfolio balance decreased (due to payments, payoffs or charge offs) during the period. If the amount of cash required for the above allocations exceeds the amount collected during the monthly period, the shortfall is drawn from the Spread Accounts. If the cash collected during the period exceeds the amount necessary for the above allocations, and there is no shortfall in the related Spread Accounts from prior periods, the excess is returned to the Company. The excess cash flows are considered by the Company to be cash receipts from the residual interest, part of which the Company recognizes as a gain on sale bases on an estimate of the discounted present value of the excess cash flows. Because the annual percentage rate on the Contracts received by the Company is relatively high in comparison to the Pass-Through Rate paid to investors; the net present value described above can be significant. In calculating the net gain on the sales described above, the Company must estimate the future rates of prepayments, delinquencies, defaults and default loss severity as they impact the amount and timing of the cash flows in the net present value calculation. The cash flows received by the Company are then discounted at an interest rate that the Company believes a third-party purchaser would require as a rate of return. Expected losses are discounted using a rate equivalent to the risk free rate for securities with duration similar to that estimated for the underlying Contracts. In connection with the sale of the Contracts, the Company is required to make certain representations and warranties, which generally duplicate the substance of the representations and warranties made by Dealers in connection with the Company's purchase of the Contracts. If the Company breaches any of its representations or warranties to a purchaser of the Contracts, the Company will be obligated to repurchase the Contract from such purchaser at a price equal to such purchaser's purchase price less the related cash securitization reserve and any payments received by such purchaser of the Contract. In most cases, the Company would then be entitled under the terms of its Dealer Agreement to require the selling Dealer to repurchase the Contracts at a price equal to the Company's purchase price, less any payments made by the borrower. Subject to any recourse against Dealers, the Company will bear the risk of loss on repossession and resale of vehicles under Contracts repurchased by it. For the years ended September 30, 1999 and 1998, the Company did not complete any sales of Contracts under its securitization agreement. -9- Terms of Servicing Agreement The Company currently services all Contracts it has purchased, including those it has subsequently sold. The Company currently has a servicing agreement with a trustee ( the "Servicing Agreement") relating to a securitization with Greenwich Capital pursuant to which the Company is obligated to service all Contracts sold to the trust in accordance with the Company's standard procedures. The Servicing Agreement provides that the Company will bear all costs and expenses incurred in connection with the management, administration and collection of the Contracts serviced. The Servicing Agreement also provides that the Company will take all actions necessary or reasonably requested by the investor to maintain perfection and priority of the investors' or the trust's security interest in the financed vehicles. Pursuant to the Servicing Agreement, the Company mails to borrowers monthly invoices directing them to mail payments on the Contracts to a lock-box-account. The Company engages an independent lock-box-processing agent to retrieve and process payments received in the lock-box account. This results in a daily deposit to the trust's bank account of the entire amount of each day's lock-box receipts. In addition, the agent prepares a listing of all payments received and sends a photo copy of each payment along with the envelope in which the payment was received to the Company for posting to the borrowers account on a daily basis. Pursuant to the Servicing Agreement, the Company is required to deliver to the trustee monthly information of all transaction activity with respect to the Contracts. The Company is entitled under the Servicing Agreement to receive a base monthly servicing fee of 3.0% per annum computed as a percentage of the declining outstanding principal balance of each Contract in the portfolio that is not in default as of the beginning of the month. Each month, after payment of the Company's base monthly servicing fee and certain other fees, the investors receive the paid principal reduction of the Contracts in their portfolio and interest at the Pass-Through Rate. If, in any month, collections on the Contracts are insufficient to pay such amounts and any principal reduction due to charge-off, the shortfall is satisfied from the cash securitization reserve established in connection with the sale of the portfolio. (If the cash securitization reserve is not sufficient to satisfy a shortfall, then the trust may suffer a loss to the extent that the shortfall exceeds the cash securitization reserve.) If collections on the Contracts exceeds such amounts, the excess is utilized, first, to build up or replenish the cash securitization reserve to the extent required and the balance, if any, constitutes residual interest cash flows, which are distributed to the Company. If, in any month, the cash securitization reserve balances are in excess of that required under the Servicing Agreement, the Company is entitled to receive such excess. Pursuant to the Servicing Agreement, the Company is required to charge-off the balance of any Contract when the Contract becomes 120 days delinquent or, in the case of repossessions, the month that the proceeds from liquidation of the financed vehicle are received by the Company. In the case of repossession, the amount of the charge-off is the difference between the outstanding principal balance on the Contract and the repossession sale proceeds. In the event collections on the Contracts are not sufficient to pay the investors the entire principal balance of any Contracts charged-off during the month, the securitization reserve established in connection with the sale of the Contracts is reduced by the unpaid principal amount of such Contracts. Such amount would then have to be restored to the cash securitization reserve from future collections on the Contracts remaining in the portfolio before the Company would again be entitled to residual interest cash flows. In addition, the Company would not be entitled to receive any further base monthly servicing fees with respect to the defaulted Contracts. Subject to any recourse against the Company in the event of a breach of the Company's representations and warranties with respect to any Contracts, the ABS investors bear the risk of all charge-offs on the Contracts in excess of the cash securitization reserve. However, the Company would experience a reduction of residual interest cash flows in the event of greater than anticipated charge-offs or prepayments on Contracts sold and serviced by the Company which could result in losses on the residual interest and investments in Spread Accounts. -10- The Servicing Agreement is terminable by the ABS investors in the event of certain defaults by the Company and under certain other circumstances. Servicing of Contracts The Company's servicing activities have been tailored to the Sub-Prime Borrower market. Such activities consist of: (a) collection of payments; (b) accounting for and posting all payments received; (c) responding to borrower inquiries; (d) taking necessary action to maintain the security interest in the financed vehicle; (e) investigating delinquencies and communicating with the borrower to obtain timely payments; (f) monitoring the Contract and its related collateral; and (g) when necessary, repossessing and disposing of the financed vehicle. The Company believes that its ability to monitor performance and collect payments owed from Sub-Prime Borrowers with limited financial resources primarily is a function of its collection approach and support systems. The Company believes that if payment problems are identified early and the Company's collection staff works closely with borrowers to address these concerns, it is possible to correct a portion of these problems before they deteriorate further. To this end, the Company utilizes pro-active collection procedures, which include making early and frequent telephone contact with delinquent borrowers and educating borrowers as to the importance of maintaining good credit. The Company issues to each borrower a monthly invoice approximately two weeks before the due date of a payment. If a payment is not received on or before its due date, the Company typically contacts the borrower by telephone within five days after the due date. The Company's personnel attempt to stay in regular contact with the borrower until the delinquency is cured. If the borrower does not cure the delinquency within four to six weeks after the due date, the Company typically causes its licensed repossession agents to repossess the vehicle immediately. All such agents used by the Company are licensed and bonded against claims relating to improper repossessions. When a vehicle is repossessed, the Company gives the borrower written notice in accordance with applicable laws and the opportunity to redeem the repossessed vehicle upon payment to the Company of all past due obligations on the Contract, including the costs of repossession. If the borrower does not redeem the vehicle, the Company usually sells the vehicle at a public sale. Based upon the experience of the Company's management in the consumer finance industry, as well as the results of the Company's collection efforts during its limited operating history, the Company believes that its collection policies and procedures will be effective to minimize the incidence of borrower defaults and loss on default. However, there can be no assurance that such policies and procedures will afford adequate protection against the risks of borrower defaults. -11- The tables below document the delinquency, repossession and net credit loss experience of all Contracts originated and/or sold by the Company as of September 30, 1999 and 1998. All amounts and percentages are based on the principal amount to be paid on each Contract. The information in the tables represents all Contracts purchased by the Company including Contracts subsequently sold by the Company, which it continues to service. Management periodically evaluates the portfolio primarily by analyzing the trends in past due loans and repossessed vehicles and the portfolios historical performance. The percentage increase in delinquencies is due to a greater decrease in the number and amount of the gross servicing portfolio as compared to the decrease in the delinquencies. Delinquency Experience (1)
September 30, 1999 September 30, 1998 ------------------ ------------------ Number Number Of Loans Amount Of Loans Amount -------- ------ -------- ------ Gross Servicing Portfolio 2444 $13,859,326 3671 $26,363,424 Period of delinquency (2) 267 1,625,830 273 2,047,328 31-60 days 61-90 days 58 344,527 76 494,481 91- + days 30 129,529 38 256,233 ----------- ----------- ----------- ----------- Total delinquencies 355 2,099,886 387 2,798,042 Amount in repossession (3) 60 455,098 111 1,029,398 Total delinquencies and amount in 415 2,554,984 498 3,827,440 repossession Delinquencies as a percent of Gross 14.53% 15.15% 10.54% 10.61% Servicing Portfolio Total delinquencies and amount in 16.98% 18.44% 13.57% 14.52% Repossession as a percent of Gross Servicing Portfolio
(1) All amounts and percentages are based on the remaining unpaid principal balance on each Contract. The information in the table represents the principal amount of all Contracts purchased by the Company, including Contracts subsequently sold by the Company, which it continues to service. (2) The Company considers a Contract delinquent when an obligor fails to make at least 95% of a contractually due payment by the due date. The period of delinquency is based on the number of days payments are contractually past due. Amounts shown do not include Contracts, which are less than 31 days delinquent. (3) Amount in repossession represents vehicles, which have been repossessed but not yet liquidated. -12-
Net Charge-Off Experience (1) Year Ended Year Ended September 30, 1999 September 30, 1998 ------------------ ------------------ Average Servicing Portfolio Outstanding $20,882,996 $29,655,049 Net charge-offs as a percent of Average 14.90% 15.61% Servicing Portfolio
(1) Net charge-off includes the remaining principal balance, after the application of net proceeds from liquidation of the vehicle. Post-liquidation amounts received on previously charged-off Contracts are applied to the period in which the related Contract was originally charged-off. Marketing The Company has established relationships with brokers who market consumer receivable portfolios from banks, finance companies and other credit providers. In addition, the Company subscribes to national publications that list consumer receivable portfolios for sale. The Company will also directly contact a bank, finance company or other credit provider to solicit consumer receivables for sale. Competition The Company's business of purchasing distressed consumer receivables is highly competitive and fragmented, and it expects that competition from new and existing companies will increase. The Company competes with many other purchasers of distressed consumer receivables including third party collection companies and other financial services companies. Many of these competitors are larger and more established and may have substantially greater financial, technological, personnel and other resources than the Company. Moreover, the Company's future profitability will be directly related to the availability and cost of its capital in relation to availability and cost of capital to its competitors. The Company's existing and potential competitors also include larger, more established companies that have access or may have access to capital markets, including asset-backed securities, which may be unavailable to the Company. The Company believes that no individual competitor or group of competitors has a dominant presence in the market. The Company's strategy is designed to capitalize on the market's lack of a company with a dominant presence. The Company believes that it can obtain sufficient receivables for purchase at attractive prices by applying reasonable buying criteria and making timely purchases. There can be no assurances that the Company will be able to compete successfully against current or future competitors or that competition will not have material adverse effect on the Company's business, financial condition or results of operations. -13- Management Information Systems Management believes that a high degree of automation is necessary to enable the Company to grow and successfully compete with other finance companies. Accordingly, during the year ended September 30, 1999, the Company upgraded its computer hardware to support the Company's servicing, collecting and accounting processes. Due to its desire to increase productivity through automation, the Company intends to periodically review its systems for possible upgrades and enhancements. Regulation Several federal and state consumer protection laws including the Federal Fair Debt Collection Practices Act ("FDCPA") and comparable state statutes establish specific guidelines and procedures which debt collectors must follow to communicate with consumer debtors, including the time, place and manner of such communications. It is the Company's policy to comply with the provisions of the FDCPA and comparable state statutes in all of its collection activities, although it may not be specifically subject to such statutes. If these laws apply to some or all of the Company's collection activities, the Company's failure to comply with such laws could have a materially adverse effect on the Company. The relationship of a customer and a credit card issuer is extensively regulated by federal and state consumer protection and related laws and regulations. Because many of its receivables were originated through credit card transactions, certain of the Company's operations are affected by such laws and regulations. Significant laws include the Federal Truth-In-Lending Act, the Fair Credit Billing Act, the Equal Opportunity Act, the Fair Credit Reporting Act and the Electronic Funds Transfer Act (and the Federal Reserve Board's regulations which relate to these Acts), as well as comparable statues in those states in which customers reside or in which the credit grantors are located. State laws may also limit the interest rate and the fees that a credit card issuer may impose on its customers. Among other things, the laws and regulations applicable to credit card issuers impose disclosure requirements when a credit card account is advertised, when it is applied for and when it is opened, at the end of monthly billing cycles and at year-end. Federal law requires credit card issuers to disclose to consumers the interest rates; fees, grace periods and balance calculations methods associated with their credit card accounts, among other things. In addition, customers are entitled under current laws to have payments and credits applied to their credit card accounts promptly, to receive prescribed notices and to require billing errors to be resolved promptly. In addition, some laws prohibit certain discriminatory practices in connection with the extension of credit. Failure by the credit grantors to have compiled with applicable statues, rules and regulations could create claims and rights offset by the customers that would reduce or eliminate their obligations under their receivables, and this could have a materially adverse effect on the Company. Pursuant to agreements under which the Company purchases receivables, the Company is normally indemnified against losses caused by the failure of the credit grantor to have complied with applicable statutes, rules and regulations relating to the receivables before they are sold to the Company. Certain laws, including the laws described above, may limit the Company's ability to collect amounts owing with respect to the receivables regardless of any act or omission on the part of the Company. For example, under the federal Fair Credit Billing Act, a credit card issuer is subject to all claims (other than tort claims) and defense arising out of certain transactions in which a credit card is used if the obligor has made a good faith attempt to obtain satisfactory resolution of a disagreement or 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 $50.00 and the place where the initial transaction occurred was in the same state as the customer's billing address or within 100 miles of that address. As a purchaser of defaulted consumer receivables, the Company may purchase receivables subject to legitimate defenses on the part of the customer. The statutes further provide that, in certain cases, customers cannot be held liable for, or their liability is limited with respect to, charges to the credit card account that were a result of an unauthorized use of the credit card. No assurances can be given that certain of the receivables were not established as a result of unauthorized use of a credit card, and, accordingly, the amount of such receivables could not be collected by the Company. Pursuant to some agreements under which the Company purchased receivables, the Company is indemnified against certain losses with respect to such receivables regardless of any act or omission on the part of the Company or the credit grantor. -14- Additional consumer protection laws may be enacted that would impose requirements on the enforcement of and collection on consumer credit card or installment accounts. Any new laws, rules or regulations that may be adopted as well as existing consumer protection laws, may adversely affect the ability of the Company to collect the receivables. In addition, the failure of the Company to comply with such requirements could adversely affect the Company's ability to enforce the receivables. Several federal and state consumer protection laws, including the Federal Truth- In-Lending Act, the Federal Equal Credit Opportunity Act, the FDCPA and the Federal Trade Commission Act, regulate the extension of credit in consumer credit transactions. These laws mandate certain disclosures with respect to finance charges on Contracts and impose certain other restrictions on Dealers. Certain state laws impose limitations on the amount of finance charges that may be charged by Dealers on credit sales. The so-called Lemon Laws enacted by the federal government and certain states provide certain rights to purchasers with respect to motor vehicles that fail to satisfy express warranties. The application of Lemon Laws or violation of such other federal and state laws may give rise to a claim or defense of a borrower against a Dealer and its assignees, including the Company and purchasers of Contracts from the Company. The Dealer Agreement contains representations by the Dealer that the sale of the motor vehicle covered by the Contract was affected in accordance with all applicable federal, state and local laws covering the sale. Although a Dealer would be obligated to repurchase Contracts that involve a breach of such warranty, there can be no assurance that the Dealer will have the financial resources to satisfy its repurchase obligations to the Company. Certain of these laws also regulate the Company's Contract servicing activities, including its methods of collection. Although the Company believes that it is currently substantially in compliance with applicable statutes and regulations, there can be no assurance that the Company will be able to maintain such compliance. The failure to comply with such statutes and regulations could have a material adverse effect upon the Company. The Company is not licensed to make loans directly to borrowers. Certain of the Company's licenses and licenses that it may be required to obtain in the future are subject to periodic renewal provisions and provisions governing changes in control, or acquisitions of certain percentages of stock, of the Company. The Dealer Agreement contains an undertaking by the Dealer that at the time of sale of a Contract to the Company, (i) the Dealer will submit an application for state registration of the financed vehicle, naming the Company as a secured party with respect to the vehicle, and (ii) that all necessary steps will be taken to obtain a perfected first priority security interest in each financed vehicle in favor of the Company under the laws of the state in which the financed vehicle is registered. If a Dealer or the Company, because of clerical error or otherwise, has failed to timely take such action or maintain such interest with respect to a financed vehicle, neither the Company nor any subsequent purchaser of the related Contract would have a perfected security interest in the financed vehicle and its security interest may be subordinate to the interest of, among others, later purchasers of the financed vehicle, holders of perfected security interests and a trustee in bankruptcy of the borrower. The security interest of the Company may also be subordinate to the interests of such third parties in the case of fraud or forgery by the borrower, administrative error by state recording officials or in certain other circumstances. -15- The Company may take action to enforce the security interest in financed vehicles with respect to any related Contracts in default by repossession and resale of the financed vehicles. The Uniform Commercial Code ("UCC") and other state laws regulate repossession sales by requiring that the secured party provide the borrower with reasonable notice of the date, time and place of any public sale of the collateral, the date after which any private sale of the collateral may be held and of the borrower's right to redeem the financed vehicle prior to any such sale and providing that any such sale be conducted in a commercially reasonable manner. In the event of a repossession and resale of a financed vehicle, after payment of outstanding liens for storage, repairs and unpaid taxes, the secured party would be entitled to be paid the full outstanding balance of the Contract out of the sale proceeds before payments are made to the holders of junior security interests in the financed vehicle, to unsecured creditors of the borrower, or, thereafter, to the borrower. Under the UCC and other laws applicable in most states, a creditor is entitled to obtain a deficiency judgment from a borrower for any deficiency on repossession and resale of the motor vehicle securing the unpaid balance of such borrower's motor vehicle loan. However, some states impose prohibitions or limitations on deficiency judgments. If a deficiency judgment were granted, the judgment would be a personal judgment against the borrower for the shortfall, and a defaulting borrower may often have insufficient capital or few sources of income available following repossession. Therefore, in many cases, it may not be useful to seek a deficiency judgment against a borrower or, if one is obtained, it may be settled at a significant discount. Risk Factors The Company is dependent on external sources of financing to fund its operations The Company depends on external sources of financing to fund its operations, including its credit facilities, notes payable and loans made by affiliates of the Company. The failure to obtain financing and capital as needed would limit the Company's ability to operate its business or achieve its growth plans. The Company's financing sources impose certain restrictive covenants, including financial covenants. Failure to satisfy any one of these covenants would preclude the Company from further borrowing's from the Company's existing sources and could prevent the Company from securing alternative sources of financing necessary to operate its business. In addition, all of the Company's borrowings are secured by the Company's assets and in the event of any default provisions; the Company's assets would be available to the creditor to satisfy the Company's obligations. -16- The Company may not be able to purchase receivables at favorable prices and is subject to competition for such receivables The Company's success depends upon the continued availability of receivables that meet its requirements. The availability of receivable portfolios at favorable prices depends on a number of factors outside of the Company's control, including the continuation of the current growth trends in consumer debt and sales of receivable portfolios by originating institutions, as well as competitive factors affecting potential purchasers and sellers of receivables. In this regard, the Company competes with other purchasers of defaulted consumer receivables and with third-party collection agencies, and is affected by financial services companies that manage their own defaulted consumer receivables. Some of the Company's competitors have greater capital, personnel and other resources than the Company. 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 the Company's access to receivables. In addition aggressive pricing by competitors could raise the price of receivable portfolios above levels that the Company is willing to pay. The Company may not be able to recover sufficient amounts on its receivables to fund its operations The Company acquires, services and sells consumer receivables that the borrowers have failed to pay and the sellers have charged-off. The originating institutions generally have made numerous attempts to collect on these obligations, often using both its in-house collection staff and third party collection agencies. These receivables are difficult to collect and the Company may not recover its acquisition cost of the receivables and the costs associated with servicing the receivables. The loss of the Company's key personnel may adversely affect the Company's operations The loss of the services of one or more of the Company's executive officers or key employees could disrupt its operations. The Company has employment agreements with Gary Stern, the Company's President and CEO and Mitchell Herman, Company's Chief Financial Officer. The agreements contain noncompetition provisions that survive termination of employment in some circumstances. However, these agreements do not assure the continued services of these officers and we cannot assure that the noncompetition provisions will be enforceable. Competition for qualified executive officers is intense. In addition, if the Company is unable to attract, retain and motivate other highly skilled employees, its business and financial condition could be materially adversely affected. The Company uses estimates in its accounting and the Company would have to reduce its earnings if actual results are less than estimated In accounting for some receivable portfolios, the Company makes estimates and assumptions that could affect their reported amounts. If recoveries on portfolios in future periods are less than what was estimated in the current year, the Company would recognize a charge to earnings in future periods which would reduce the Company's earnings during such periods. -17- Defaults under the Company's Contracts would affect the Company's results of operations The Company's results of operations, financial condition and liquidity depend, to a material extent, on the performance of Contracts purchased and serviced by the Company. A portion of the loans purchased by the Company may default. The Company bears the full risk of losses resulting from payment defaults during such period. In the event of a payment default, the collateral value of the financed vehicle may not cover the outstanding loan balance and costs of recovery. The Company maintains an allowance for losses on loans held by the Company, which reflects management's estimates of anticipated losses for such loans. If the allowance is inadequate, then the Company would recognize as an expense the losses in excess of such allowance and results of operations could be adversely affected. The allowance for credit losses is increased by the provision for losses and for recoveries on Contracts that were previously charged-off and deceased for Contacts that are charged-off. The Company's recoveries on consumer receivables may decrease in a weak economic cycle The Company cannot assure that its recoveries on consumer receivables acquired for liquidation would not worsen in a week economic cycle. If the Company's actual recoveries are lower than projected when the portfolio was purchased, the Company's financial position, liquidity and results of operations could be adversely affected. Delinquencies, defaults, repossessions and losses generally increase during periods of economic recession and could cause a decline in values of automobiles securing outstanding loans, thereby weakening collateral coverage and increasing the possibility of a loss in the event of default. Significant increases in the inventory of used automobiles during periods of economic recession may also depress the prices at which repossessed automobiles may be sold. Because the Company focused on Sub-Prime borrowers, the actual rates of delinquencies, defaults, repossessions and losses on such loans could be higher than those experienced in the general automobile finance industry and could be more significantly affected by a general economic downturn. In addition, during an economic slowdown or recession, the Company's servicing costs may increase. While the Company believes that the underwriting criteria and collection methods it employs enable it to manage the higher risk inherent in loans made to Sub-Prime borrowers, no assurance can be given that such criteria or methods will provide adequate protection against such risks. Any sustained period of increased delinquencies, defaults, repossessions or losses or increased servicing costs could adversely affect the Company's financial position, liquidity and results of operations. The Company could suffer Year 2000 computer problems which could disrupt its operations The Company could be affected by failures of its business systems, as well as those of its suppliers, vendors and third-party collection agencies, due to the potential Year 2000 problem. Any failure could result in a disruption of the Company's collection efforts, which would impair its operations. The Company recently upgraded its computer, telecommunications, software applications, and business systems, and believes that these systems are Year 2000 compliant. However, the Company cannot assure you that Year 2000 problems will not arise with its systems. In addition, Year 2000 failures on the part of the Company's suppliers, vendors or third-party collection agencies could occur, which could also disrupt the Company's operations. Potential consequences of the Company's business systems, or the business systems of the third parties with whom the Company conducts business, not being Year 2000 compliant include failure to operate due to a lack of power, disruption or errors in credit information and receivable recovery efforts, and delays in receiving inventory and supplies. -18- Government regulations may limit the Company's ability to recover and enforce receivables Federal and state laws may limit the Company's ability to recover and enforce receivables regardless of any act or omission on the Company's part. Some laws and regulations applicable to credit card issuers may preclude the Company from collecting on receivables it purchases where the card issuer failed to comply with applicable law in generating or servicing the receivables the Company acquired. Laws relating to debt collections also directly apply to the Company's business. The Company's failure to comply with any laws or regulations applicable to it could limit its ability to recover on receivables, which could reduce its earnings. Additional consumer protection laws may be enacted that would impose requirements on the enforcement of and collection on consumer credit cards or installment accounts. Any new laws, rules or regulations may adversely affect the Company's ability to collect the receivables. Employees As of September 30, 1999, the Company had 46 full-time employees. The Company is not a party to any collective bargaining agreement. Item 2. Property. The Company's executive and administrative offices are located in Englewood Cliffs, New Jersey, where the Company subleases approximately 8,300 square feet of general office space for $8,677 per month from Asta Group, Incorporated, an affiliate of the Company. The sublease expires on July 31, 2000. The Company believes that the sublease is on terms that are as favorable to the Company as those terms, which could be obtained from an unaffiliated lessor of the same premises. Item 3. Legal Proceedings. As of the date of this Form 10-KSB, the Company was not involved in any material litigation in which it was a defendant. The Company regularly initiates legal proceedings as a plaintiff in connection with its routine collection activities. Item 4. Submission of Matters to a Vote of Security-Holders. None. -19- PART II Item 5. Market for Common Equity and Related Stockholder Matters. Commencing November 13, 1995 the Company's common stock par value $.01 per share ("Common Stock") has been quoted on the NASDAQ Small Cap Market under the symbol "ASFI." On December 13, 1998 there were approximately 34 holders of record of the Common Stock. High and low bid prices of the Common Stock since October 1, 1997 as reported by NASDAQ are set fourth below (such quotations reflect inter-dealer prices without retail markup, markdown, or commission, and may not necessarily represent actual transactions): High Low ----- ----- October 1, 1997 to December 31, 1997 $1.18 $0.56 January 1, 1998 to March 31, 1998 0.97 0.50 April 1, 1998 to June 30, 1998 1.13 0.72 July 1, 1998 to September 30, 1998 1.02 0.50 October 1, 1998 to December 31, 1998 1.06 0.38 January 1, 1999 to March 31, 1999 1.44 0.31 April 1, 1999 to June 30, 1999 2.56 1.25 July 1, 1999 to September 30, 1999 3.50 1.25 The Company has never paid a cash dividend on its Common Stock and does not expect to pay a cash dividend in the near future. Under the credit facility with BankAmerica the Company is prohibited from paying dividends on its Common Stock without the consent of BankAmerica. Item 6. Management's Discussion and Analysis of Financial Condition and Results of Operations In the following discussions, most percentages and dollar amounts have been rounded to aid presentation. As a result, all such figures are approximations. Results of Operations Year Ended September 30, 1999 Compared to the Year Ended September 30, 1998 Revenues. During the year ended September 30, 1999 revenues increased $6.6 million or 132.0% to $11.6 million from $5.0 million for the year ended September 30, 1998. Interest income during the year ended September 30, 1999 increased $6.4 million or 130.3% to $11.4 million from $4.9 million for the year ended September 30, 1998, and represented 97.9% of total revenues for the year ended September 30, 1999. The increase in interest income is due to the increase of interest income earned on the purchases of consumer receivables acquired for liquidation for the year ended September 30, 1999, as compared to the prior year and partially offset by the reduction in automobile loans receivable. During the year ended September 30, 1999, the Company paid $55.4 million in its acquisition of accounts acquired for liquidation, compared to $3.4 million in the year ended September 30, 1998. In addition, the Company purchased $2.6 million in Contracts during the year ended September 30, 1999 as compared to $13.1 million during the year ended September 30, 1998. Servicing fee income on Contracts sold during the year ended September 30, 1999 increased $190,000 or 380.0% to $240,000 from $50,000 for the year ended September 30, 1998. The increase in servicing fee income, which is net of the servicing assets, is due to the Company writing down its servicing assets to the estimated fair value during the year ended September 30, 1998. -20- Expenses. During the year ended September 30, 1999, general and administrative expenses decreased $142,000 or 4.39 % to $3.1 million from $3.2 million for the year ended September 30, 1998 and represented 36.8% of total expenses. The decrease in general and administrative expenses is due to a decrease in expenses associated with purchasing and servicing Contracts, partially offset by increased expenses associated with acquiring and servicing consumer receivables for liquidation. Interest expense increased by $2.9 million or 375.6% during the year ended September 30, 1999 to $3.6 million from $764,000 for the year ended September 30, 1998 and represented 43.2% of total expenses. The increase is due to an increase in borrowings associated with the purchase of consumer receivables acquired for liquidation during the year ended September 30, 1999 compared to the year ended September 30, 1998. During the year ended September 30, 1999, the provision for credit losses decreased by $2.9 million or 63.0% to $1.7 million from $4.6 million for the year ended September 30, 1998. The decrease is due to the decrease in the amount of Contracts purchased during the year ended September 30, 1999 as compared to the year ended September 30, 1998. Year Ended September 30, 1998 Compared to the Year Ended September 30, 1997 Revenues. During the year ended September 30, 1998, revenues decreased $1.2 million or 21.1% to $4.5 million from $5.7 million for the year ended September 30, 1997. Interest income increased $1.9 million or 76.0% from $2.5 million to $4.4 million for the year ended September 30, 1997, and represented 98.9% of total revenues for the year ended September 30, 1998. The increase in interest income is due to the interest income earned on the consumer receivables acquired for liquidation and an increase in dollar amount of Contracts outstanding during the year ended September 30, 1998, compared to the same period in the prior year. During the year ended September 30, 1998, the Company purchased $18.0 million in Contracts from Dealers, compared to $23.0 million in the year ended September 30, 1997. The decrease in the number of Contracts purchased from Dealers resulted from the Company's recent refocusing of its strategic business objectives by its expansion into the consumer receivables liquidation sector. Servicing fee income on Contracts sold decreased $633,000 from $683,000 to $50,000 for the year ended September 30, 1997. The decrease in servicing fee income is due to the decrease in the dollar amount of Contracts serviced by the Company during the year ended September 30, 1998 and worse than expected performance on the Contracts serviced. Expenses. During the year ended September 30, 1998, general and administrative expenses decreased $352,000 or 9.78% from $3.6 million to $3.2 million for the year ended September 30, 1997 and represented 37.7% of total expenses. The decrease in general and administrative expenses is due to a decrease in expenses associated with purchasing Contracts. Interest expense increased by $333,000 or 77.3% during the year ended September 30, 1998 from $431,000 to $764,000 for the year ended September 30, 1997, and represented 8.9% of total expenses. The increase is due to an increase in borrowings under the Company's lines of credit with BankAmerica and Sterling Financial Services Company and interest accrued and/or paid on loans from an affiliate. -21- During the year ended September 30, 1998, the provision for credit losses increased by $2.2 million or 91.7% from $2.4 million to $4.6 million for the year ended September 30, 1997. The increase reflects higher than expected losses on loans previously sold and serviced by the Company. Seasonality Management of the Company believes that the Company's operations may, to some extent, be affected by high delinquency rates by borrowers on Contracts and lower recoveries on consumer receivables acquired for liquidation during or shortly following certain holiday periods. Liquidity and Capital Needs The Company's primary sources of cash include borrower payments on consumer receivables acquired for liquidation and Contracts. The Company's primary uses of cash include its purchases of consumer receivables acquired for liquidation. As of September 30, 1999, the Company's cash and cash equivalents increased to $780,000 from $163,000 at September 30, 1998. The increase was due to an increase in cash collected during the last few days in September 1999 that was not yet available to pay down debt compared to cash collected in September 1998. Net cash provided by operating activities was $6.3 million during the year ended September 30, 1999, compared to $1.8 million during the year ended September 30, 1998. Cash used for purchasing accounts acquired liquidation was $55.4 million during the year ended September 30, 1999, compared to $3.4 million in the year ended September 30, 1998. Cash used for purchasing Contacts was $2.6 million during the year ended September 30, 1999, compared to $13.2 million in the year ended September 30, 1998. The Company's cash requirements have been and will continue to be significant. The Company depends on external financing for purchasing consumer receivables. At September 30, 1999, the Company did not have any open lines of credit to purchase consumer receivables but was in negotiations with several banks to arrange financing for future purchases. In March 1999, the Company borrowed funds from three financial institutions aggregating $52.0 million and $1.0 million from a Company controlled by the principal stockholders of the Company. Each financial institution's note is collateralized by specific portfolios of accounts acquired for liquidation. During the year ended September 30, 1999, the Company repaid approximately $41.0 million of the $52.0 million borrowed. A bank provided $10.0 million in exchange for a note payable with interest at the prime rate plus 4.5% per annum and the first million dollars collected on the portfolio after repayment of the note and interest. As of September 30, 1999, $779,000 was outstanding. A factoring company loaned the Company $5.0 million in exchange for a note payable with interest at 20% per annum. As of September 30, 1999, the outstanding balance due was $1.9 million. An investment banking firm provided $37.0 million in exchange for a note payable with interest at the LIBOR rate plus 2% plus $1.5 million to be collected on a different portfolio (payable after the $5.0 million note payable to the factoring company is repaid) and sharing in subsequent collections, net of expenses of the portfolio collateralizing this obligation. As of September 30, 1999, the outstanding balance of the note was $8.0 million. -22- In January 1998, the Company renewed its credit facility with BankAmerica (the "Credit Facility") pursuant to which BankAmerica agreed to provide the Company with a maximum of $20 million. The Credit Facility has a term of two years. The outstanding principal amount of the indebtedness under the Credit Facility bears interest at the rate of 1% per annum over BankAmerica's reference rate plus .25% per annum on the average unused amount of the Credit Facility. Under the Credit Facility, the Company may borrow up to 83% (the "advance rate") of its net eligible automobile Contracts (depending upon the trade-in value of the automobiles securing the Contracts), but in no event more than $20 million. The advance rate is subject to decreases based on certain loan performance criteria established by BankAmerica. At September 30, 1999, the Company's advance rate was 75% of net eligible installment Contracts. On June 30, 1999, at the Company's request, BankAmerica reduced the maximum amount the of the Credit Facility from $20 million to $8 million. At September 30, 1999, advances under this facility aggregated $5.4 million. The Company's ability to continue to borrow under the Credit Facility will be dependent upon its compliance with the terms thereof, including compliance with certain financial covenants such as the maintenance of a minimum ratio of earnings before interest and taxes to interest expense, a minimum tangible net worth and a maximum ratio of total liabilities to tangible net worth. In addition, events of default under the Credit Facility will occur if, among other things, if the existing stockholders of the Company no longer own at least 51% of the outstanding Common Stock, or if there occurs a material adverse change in the Company's financial condition. Pursuant to the Credit Facility, BankAmerica's consent will be required for the Company to make bulk purchases or sales of Contracts. The BankAmerica Facility is secured by a first priority security interest in the Company's Contracts and a pledge by the Company's principal stockholders of 2,252,000 shares of the Company's common stock. In April 1998, the Company entered into demand credit facility a bank under which the Company can borrow at an advance rate of 65% of eligible loans up to a maximum of $1.0 million. At September 30, 1999, advances under this facility aggregated $16,000. The advances bear interest at the prime rate plus 4%. The Company anticipates the funds available under its Credit Facilities and notes payable, funds made available by an Affiliate, and cash from operations will be sufficient to satisfy the Company's estimated cash requirements for at least the next 12 months. The Company does not anticipate any need for significant capital expenditures in connection with the expansion of its business for at least 12 months. Year 2000 The Company recognizes the need to ensure that its operations and systems (including information technology (IT) and non-IT systems) will not be adversely impacted by year 2000 hardware and software issues. The Year 2000 problem is the result of computer programs being written using two digits (rather than four) to define the applicable years. Any of the Company's programs that have time-sensitive software may recognize the date using "00" as the year 1900 rather than the year 2000, which could result in miscalculations or system failures. The Year 2000 problem affects the Company's installed computer systems, network elements, software applications and other business systems that have time sensitive programs. -23- The Company has conducted a review of its IT and non-IT systems to identify those systems which could be affected by the Year 2000 problem. The Company used both internal and external sources to identify correct and test its systems for Year 2000 compliance. Modifications to the Company's systems as a result of the findings of such assessment were completed and tested by April 30, 1999. The Company has contacted its Dealers and major vendors to verify that the systems they use are or will be Year 2000 compliant. Most of the Company's major Dealers and vendors have advised the Company that they are already Year 2000 compliant or expect to be Year 2000 in the near future. If the Company's Dealers or others with whom the Company does business experience problems relating to the Year 2000 issue, the Company's business, financial condition or results of operations could be materially adversely affected. As of September 30, 1999, the Company has spent approximately $20,000 on the Year 2000 compliance and does not anticipate any additional costs associated with Year 2000 compliance. In the event that efforts of the Company's Year 2000 project did not address all potential systems problems, the Company is currently developing business interruption contingency plans, which include ensuring that all staff are available or scheduled to work prior to, during and immediately after December 31, 1999. Contingency planning for possible Year 2000 disruptions will continue to be defined, improved and implemented. The Company believes that its Year 2000 project will allow it to be Year 2000 compliant in a timely manner. There can be no assurances, however, that the Company's information technology systems or those of a third party on which the Company relies will be Year 2000 compliant by year 2000 or that the Company's contingency plans will mitigate the effects of any noncompliance. An interruption of the Company's ability to conduct its business due to a Year 2000 readiness problem could have a material adverse effect on the Company's business, operations or financial condition. The foregoing discussion of the implications of the Year 2000 problem for the Company contains numerous forward-looking statements based on inherently uncertain information. There can be no guarantee that the Company's Year 2000 goals or expense estimates will be achieved, and actual results could differ. Forward-Looking Statements This Form 10-K contains forward-looking statements within the meaning of the "safe harbor" provisions under section 21E of the Securities and Exchange Act of 1934 and the Private Securities Litigation Act of 1995. The Company uses forward-looking statements in its description of its plans and objectives for future operations and assumptions underlying these plans and objectives. Forward-looking terminology includes the words "may", "expects", "believes", "anticipates", "intends", "forecasts", "projects", or similar terms, variations of such terms or the negative of such terms. These forward-looking statements are based on management's current expectations and are subject to factors and uncertainties which could cause actual results to differ materially from those described in such forward-looking statements. The Company expressly disclaims any obligation or undertaking to release publicly any updates or revisions to any forward-looking statements contained in this Form 10-K to reflect any change in its expectations or any changes in events, conditions or circumstances on which any forward-looking statement is based. Factors which could cause such results to differ materially from those described in the forward-looking statements include those set forth under "Risk Factors" and elsewhere in, or incorporated by reference into this Form 10-K. These factors include the following: the Company is dependent on external sources of financing to fund its operations; the Company may not be able to purchase receivables at favorable prices and is subject to competition for such receivables; the Company may not be able to recover sufficient amounts on its receivables to fund its operations; government regulations may limit the Company's ability to recover and enforce receivables and other risks. -24- Item 7. Financial Statements. The Financial Statements of the Company, the Notes thereto and the Report of Independent Auditors thereon required by this item appear in this report on the pages indicated in the following index:
Index to Audited Financial Statements: Page -------------------------------------- ---- Independent Auditors' Report F-1 Consolidated Balance Sheets - September 30, 1999 and 1998 F-2 Consolidated Statements of Operations - Years ended September 30, 1999 and 1998 F-3 Consolidated Statements of Shareholders' Equity - Years ended September 30, 1999 and 1998 F-4 Consolidated Statements of Cash Flows - Years ended September 30, 1999 and 1998 F-5 Notes to Consolidated Financial Statements F-6
25 ASTA FUNDING, INC. CONSOLIDATED FINANCIAL STATEMENTS SEPTEMBER 30, 1999 and 1998 ASTA FUNDING, INC. Contents Page ---- Consolidated Financial Statements Independent auditors' report F-1 Balance sheets as of September 30, 1999 and 1998 F-2 Statements of operations for the years ended September 30, 1999 and 1998 F-3 Statements of changes in stockholders' equity for the years ended September 30, 1999 and 1998 F-4 Statements of cash flows for the years ended September 30, 1999 and 1998 F-5 Notes to financial statements F-6 INDEPENDENT AUDITORS' REPORT Board of Directors and Stockholders Asta Funding, Inc. Englewood Cliffs, New Jersey We have audited the accompanying consolidated balance sheets of Asta Funding, Inc. as of September 30, 1999 and 1998, and the related consolidated statements of operations, changes in stockholders' equity and cash flows for the years then ended. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. 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 enumerated above present fairly, in all material respects, the financial position of Asta Funding, Inc. as of September 30, 1999 and 1998, and the results of its operations and its cash flows for the years then ended in conformity with generally accepted accounting principles. As discussed in Note A to the financial statements, the Company revised its method of computing the value of the residual interests related to loans sold and, accordingly, restated its 1998 financial statements Richard A. Eisner & Company, LLP Florham Park, New Jersey October 29, 1999 ASTA FUNDING, INC. Consolidated Balance Sheets
September 30, ----------------------- 1999 1998 --------- -------- ASSETS Cash and cash equivalents $ 780,000 $ 163,000 Restricted cash and cash equivalents (Note G) 49,000 62,000 Consumer receivables acquired for liquidation (Notes B[4] and E) 16,500,000 919,000 Auto loans receivable, (less allowance for credit losses of $1,122,000 in 1999 and $1,209,000 in 1998 (Note D) 8,344,000 14,985,000 Servicing assets (Notes B[11] and H) 36,000 Residual interest (Notes B[12] and H) 14,000 Furniture and equipment (net of accumulated depreciation of $246,000 in 1999 and $156,000 in 1998) (Notes B[5] and F) 174,000 150,000 Repossessed automobiles held for sale (net of allowance for losses of $200,000 in 1999 and $200,000 in 1998) 460,000 366,000 Deferred income taxes (Note J) 610,000 366,000 Income taxes receivable 527,000 Other assets 643,000 541,000 --------------- -------------- $ 27,560,000 $ 18,129,000 =============== ============== LIABILITIES Advances under lines of credit (Note I) $ 5,422,000 $ 11,450,000 Notes payable (Note I) 10,636,000 Accounts payable and accrued expenses 256,000 385,000 Income taxes payable 663,000 Due to affiliate (Note K) 2,473,000 917,000 --------------- -------------- Total liabilities 19,450,000 12,752,000 --------------- -------------- Commitments (Notes K and L) STOCKHOLDERS' EQUITY (Note M) Common stock, $.01 par value, authorized 10,000,000 shares, issued and outstanding 3,945,000 shares 39,000 39,000 Additional paid-in capital 9,602,000 9,602,000 Accumulated deficit (1,531,000) (4,264,000) --------------- -------------- Total stockholders' equity 8,110,000 5,377,000 --------------- -------------- $ 27,560,000 $ 18,129,000 =============== ==============
See notes to financial statements F-2 ASTA FUNDING, INC. Consolidated Statements of Operations
Year Ended September 30, ----------------------------- 1999 1998 ------------- ------------- (as restated) (Note A) Interest income $ 11,363,000 $ 4,933,000 Servicing fee income 240,000 50,000 ------------- ------------- 11,603,000 4,983,000 ------------- ------------- General and administrative expenses (Note L) 3,094,000 3,236,000 Provision for credit losses 1,688,000 4,567,000 Interest expense (Note K) 3,634,000 764,000 ------------- ------------- 8,416,000 8,567,000 ------------- ------------- Income (loss) before provision (benefit) for income taxes 3,187,000 (3,584,000) Provision (benefit) for income taxes (Note J) 454,000 (1,044,000) ------------ ------------- Net income (loss) $ 2,733,000 $ (2,540,000) ============= ============= Basic and diluted net income (loss) per share $.69 $(.64) ==== ======
See notes to financial statements F-3 Consolidated Statements of Changes in Stockholders' Equity
Accumulated Additional Other Common Stock Paid-in Accumulated Comprehensive Shares Amount Capital Deficit Income ----------- --------- ------------- -------------- ---------------- Balance, as originally reported September 30, 1997 3,945,000 $ 39,000 $ 9,602,000 $(1,236,000) $82,000 Restatement (Note A) (488,000) ----------- --------- ------------ ------------- ---------------- Balance, as restated September 30, 1997 3,945,000 39,000 9,602,000 (1,724,000) 82,000 Change in unrealized gain on residual interest, net of income tax effect (82,000) Net loss (2,540,000) ----------- --------- ------------ ------------ ---------------- Balance, September 30, 1998 3,945,000 39,000 9,602,000 (4,264,000) 0 Exercise of options 25,000 Cancellation of common stock (Note M[2]) (25,000) Net income 2,733,000 ----------- --------- ------------ ------------- ---------------- Balance, September 30, 1999 3,945,000 $ 39,000 $ 9,602,000 $ (1,531,000) $ 0 =========== ========= ============ ============== ================
[RESTUBBED TABLE]
Comprehensive Income Total ---------------- ------------ Balance, as originally reported September 30, 1997 $8,487,000 Restatement (Note A) (488,000) ------------- Balance, as restated September 30, 1997 7,999,000 Change in unrealized gain on residual interest, net of income tax effect $(82,000) (82,000) Net loss (2,540,000) (2,540,000) --------------- ------------ Balance, September 30, 1998 $(2,622,000) 5,377,000 =============== Exercise of options Cancellation of common stock (Note M[2]) Net income $2,733,000 2,733,000 --------------- ----------- Balance, September 30, 1999 $2,733,000 $8,110,000 =============== ==========
See notes to financial statements F-4 ASTA FUNDING, INC. Consolidated Statements of Cash Flows
Year Ended September 30, -------------------------------- 1999 1998 -------------- -------------- (as restated) (Note A) Cash flows from operating activities: Net income (loss) $ 2,733,000 $ (2,540,000) Adjustments to reconcile net loss to net cash provided by operating activities: Depreciation and amortization 132,000 635,000 Amortization of loan discount 1,000,000 Provisions for losses 1,688,000 4,567,000 Deferred income taxes (244,000) (586,000) Expenses advanced by affiliate 58,000 73,000 Writedown of residual interest 250,000 Changes in: Restricted cash and cash equivalents 13,000 (81,000) Repossessed automobiles held for sale (94,000) (243,000) Income taxes receivable 527,000 (109,000) Other assets (102,000) (117,000) Income taxes payable 663,000 Accounts payable and accrued expenses (129,000) (33,000) -------------- -------------- Net cash provided by operating activities 6,245,000 1,816,000 -------------- -------------- Cash flows from investing activities: Auto loans purchased (2,603,000) (13,155,000) Auto loan principal payments 7,806,000 4,666,000 Purchase of consumer receivables acquired for liquidation (55,444,000) (3,407,000) Principal payments received from sale or collection of consumer receivables acquired for liquidation 39,613,000 2,488,000 Purchase of securitization certificates (4,600,000) Principal payments received on residual interest 14,000 63,000 Capital expenditures (120,000) (72,000) -------------- -------------- Net cash used in investing activities (10,734,000) (14,017,000) ------------- -------------- Cash flows from financing activities: Advances from affiliate 1,498,000 410,000 Advances (repayments) under lines of credit (6,044,000) 11,450,000 Proceeds from notes payable 52,000,000 Repayments of notes payable (42,348,000) -------------- -------------- Net cash provided by financing activities 5,106,000 11,860,000 -------------- -------------- Net increase (decrease) in cash 617,000 (341,000) Cash at beginning of year 163,000 504,000 -------------- -------------- Cash at end of year $ 780,000 $ 163,000 ============== ============== Supplemental disclosure of cash flow information: Cash paid for: Interest $ 3,679,000 $ 674,000 Income taxes 1,000 1,000
See notes to financial statements F-5 ASTA FUNDING, INC. Notes to Financial Statements September 30, 1999 and 1998 NOTE A - RESTATEMENT During the year ended September 30, 1997, Asta Funding, Inc. (the "Company") securitized and sold loans with limited recourse. At the time of the sale, the Company recognized a residual interest using the cash-in method of computing its estimated value. Subsequent guidance on implementation of the standard on accounting for transfers of financial assets issued by the staff of the Financial Accounting Standards Board in December 1998 provided that the estimated value of residual interests should be determined using the cash-out method, which results in a lower fair value for the residual interest (and a resultant lower gain on sale) and increased amounts of interest income subsequent to the sale. The staff of the Securities and Exchange Commission advised the Company that such guidance be reflected retroactively. Accordingly, prior year financial statements have been adjusted resulting in the accumulated deficit as of September 30, 1997 and the loss for the year ended September 30, 1997being increased and the net loss for the year ended September 30, 1998 being decreased from amounts previously reported by $488,000 ($.13 per share). NOTE B - THE COMPANY AND ITS SIGNIFICANT ACCOUNTING POLICIES [1] The Company: Prior to May 1999, the Company was primarily engaged in the business of purchasing and servicing retail installment sales contracts originated by automobile dealers financing the purchase primarily of used automobiles by sub-prime borrowers. The loans were generally purchased from automobile dealers in the northeastern and mid-atlantic states. The Company ceased accepting new automobile contracts for funding on May 1, 1999 and will liquidate all remaining contracts. Currently, the Company's primary business is purchasing and liquidating nonperforming consumer loans. [2] Principles of consolidation: The consolidated financial statements include the accounts of Asta Funding, Inc. and its wholly-owned subsidiaries. All significant intercompany balances and transactions have been eliminated in consolidation. [3] Cash and cash equivalents: The Company considers all highly liquid investments with a maturity of three months or less at the date of purchase to be cash equivalents. The Company maintains cash balances in various financial institutions. Management periodically evaluates the creditworthiness of such institutions. [4] Income recognition: The Company recognizes income on nonperforming loan portfolios, which are acquired for liquidation, using either the interest method or cost recovery method. Upon acquisition of a portfolio of loans, the Company's management estimates the future anticipated cash flows and determines the allocation of payments based upon this estimate. If future cash flows cannot be estimated, the cost recovery method is used. Under the cost recovery method, no income is recognized until the Company has fully collected the cost of the portfolio. Interest income from sub-prime automobile loans is recognized using the interest method. Accrual of interest income on loans receivable is suspended when a loan is contractually delinquent more than 60 days. The accrual is resumed when the loan becomes contractually current, and past due interest income is recognized at that time. In addition, a detailed review of loans will cause earlier suspension if collection is doubtful. F-6 ASTA FUNDING, INC. Notes to Financial Statements September 30, 1999 and 1998 NOTE B - THE COMPANY AND ITS SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) [5] Furniture and equipment: 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). [6] Credit losses: Provisions for credit losses are charged to operations in amounts sufficient to maintain the allowance at a level considered adequate to cover the losses of principal in the existing portfolio. The Company's charge-off policy is based on an account-by-account review of loans receivable. Loans receivable are charged-off when management deems them to be uncollectible. [7] Loan origination fees and costs: Direct loan origination fees collected and costs incurred are deferred and amortized over the average lives of the loans using the interest method. Unamortized amounts are recognized in operations at the time that loans are sold or paid in full. [8] Repossessed automobiles held for sale: Upon foreclosure of the loan, the Company records repossessed automobiles at the lower of the loan balance or estimated fair value of the automobile. After foreclosure, valuations are periodically performed by management and the carrying value of the automobiles are adjusted to the lower of cost recorded upon repossession or estimated fair value. [9] Income taxes: Deferred federal and state taxes arise from net operating losses and temporary differences resulting primarily from the provision for credit losses and funds deposited in accounts for loans sold being reported for financial accounting and tax purposes in different periods. [10] Net income (loss) per share: Basic per share data is determined by dividing net income (loss) 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. With respect to the assumed proceeds from the exercise of dilutive options, the treasury stock method is calculated using average market price for the period. For 1998, all potentially dilutive securities have been excluded from the calculation since they would be antidilutive. F-7 ASTA FUNDING, INC. Notes to Financial Statements September 30, 1999 and 1998 NOTE B - THE COMPANY AND ITS SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) The following table presents the computation of basic and diluted per share data for the years ended September 30, 1999 and 1998:
1 9 9 9 1 9 9 8 ------------------------------------------ ----------------------------------------------- Weighted Weighted Average Per Share Average Per Share Net Income Shares Amount Net Loss Shares Amount ---------- ---------- --------- ----------- ------------- ------ Basic $2,733,000 3,946,000 $.69 $(2,540,000) 3,945,000 $(.64) ---------- ===== ----------- ------------- ====== Effect of dilutive stock options 26,000 ---------- ---------- Diluted $2,733,000 3,972,000 $0.69 $(2,540,000) 3,945,000 $(.64) ========== ========== ===== ============ ============= ======
[11] Servicing assets: Servicing assets arise from the sale of loans. Servicing assets represent the estimated present value of the differential between the contractual servicing fee and the Company's normal servicing cost. These capitalized amounts are amortized over the estimated average life of the loans in each pool sold. The Company reviews the carrying amount of each pool for possible impairment. If the estimated present value of the future servicing income is less than the carrying amount, the Company recognizes an impairment loss and reduces future amortization accordingly. [12] Residual interest: The Company, upon sale of loans, recognizes a residual interest. The residual interest represents the estimated discounted cash flow of the differential of the total interest to be earned on the loans sold and the sum of the interest to be paid to the investors and the contractual servicing fee. [13] Use of estimates: The preparation of financial statements in conformity with generally accepted accounting principles 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. Actual results could differ from those estimates. [14] Comprehensive income: During the year ended September 30, 1999, the Company adopted the provisions of SFAS No. 130, "Reporting Comprehensive Income." SFAS No. 130 establishes standards for reporting comprehensive income and its components in financial statements. Comprehensive income, as defined, includes all changes in equity (net assets) during a period from non-owner sources. F-8 ASTA FUNDING, INC. Notes to Financial Statements September 30, 1999 and 1998 NOTE B - THE COMPANY AND ITS SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) [15] Stock-based compensation: Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation" ("SFAS 123") allows companies to either expense the estimated fair value of stock options or to continue to follow the intrinsic value method set forth in APB Opinion 25, "Accounting for Stock Issued to Employees" ("APB 25") but disclose the pro forma effects on net income had the fair value of the options been expensed. The Company has elected to continue to apply APB 25 in accounting for its stock option incentive plans. NOTE C - SEGMENT REPORTING The Company has two reportable segments: auto receivables and consumer receivables. The auto receivables segment is in the business of liquidating sub-prime auto receivables. The consumer receivables segment liquidates nonperforming consumer credit card receivables. The accounting policies of the segments are those described in the summary of significant accounting policies.
1 9 9 9 1 9 9 8 ------------------------------------------- -------------------------------------------- Auto Consumer Auto Consumer Receivables Receivables Total Receivables Receivables Total ----------- ----------- ----------- ------------- ----------- ----------- Service fee income $ 240,000 $ 240,000 $ 50,000 $ 50,000 Interest income 3,720,000 $ 7,643,000 11,363,000 4,209,000 $724,000 4,933,000 Interest expense 821,000 2,813,000 3,634,000 746,000 18,000 764,000 Depreciation 97,000 97,000 76,000 76,000 Segment income (loss) (501,000) 3,234,000 2,733,000 (3,225,000) 685,000 (2,540,000) Segment assets 9,917,000 17,643,000 27,560,000 17,177,000 952,000 18,129,000
NOTE D - AUTO LOANS RECEIVABLE AND ALLOWANCE FOR CREDIT LOSSES Substantially all loans are at fixed rates of interest, collateralized by automobiles, and have remaining maturities of 5 years or less. Each automobile loan provides for full amortization, equal monthly payments and can be fully prepaid by the borrower at any time without penalty. The Company purchases the loans from dealers at a discount from the amount financed under the contract. Substantially all borrowers are located in the northeastern and mid-atlantic states. F-9 ASTA FUNDING, INC. Notes to Financial Statements September 30, 1999 and 1998 NOTE D - AUTO LOANS RECEIVABLE AND ALLOWANCE FOR CREDIT LOSSES (CONTINUED) As of September 30, 1999 and 1998, nonaccrual auto loans receivable aggregated $206,000 and $385,000, respectively. Changes in the allowance for credit losses consisted of the following: 1999 1998 ------------- ------------- Balance, beginning of period $ 1,209,000 $ 398,000 Provisions 1,438,000 1,897,000 Charge-offs (1,662,000) (1,632,000) Recoveries 137,000 546,000 ------------- ------------- Balance, end of period $ 1,122,000 $ 1,209,000 ============= ============= NOTE E - CONSUMER RECEIVABLES ACQUIRED FOR LIQUIDATION As of September 30, 1999, the Company used the interest method on portfolios with carrying values aggregating $9,494,000 and the cost recovery method on portfolios with carrying values aggregating $7,006,000. NOTE F - FURNITURE AND EQUIPMENT Furniture and equipment as of September 30, 1999 and 1998 consist of the following: 1999 1998 ----------- ----------- Furniture $ 46,000 $ 46,000 Equipment 374,000 260,000 ----------- ----------- 420,000 306,000 Less accumulated depreciation 246,000 156,000 ----------- ----------- Balance, end of period $ 174,000 $ 150,000 =========== =========== Depreciation expense for the years ended September 30, 1999 and 1998 aggregated $97,000 and $76,000, respectively. NOTE G - RESTRICTED CASH In connection with the sale of loans in 1997, the Company was required to deposit funds into separate cash accounts with trustees for possible interest adjustments due to borrowers prepaying the loans. F-10 ASTA FUNDING, INC. Notes to Financial Statements September 30, 1999 and 1998 NOTE H - SERVICING ASSETS AND RESIDUAL INTEREST Changes in servicing assets and residual interest for the two years ended September 30, 1999 are as follows: Servicing Residual Assets Interest -------------- ------------ Balance, September 30, 1997 $ 897,000 $ 952,000 Amortization/principal payments (560,000) (551,000) Impairment loss (250,000) Transfer to loans receivable (301,000) Change in market value (137,000) -------------- ------------ Balance, September 30, 1998 36,000 14,000 Amortization/principal payments (36,000) (14,000) -------------- ------------ Balance, September 30, 1999 $ 0 $ 0 ============== ============ In May 1998, the Company repurchased the outstanding Certificates on the 1996-1 Trust, which had a remaining principal balance of $5,953,000 for an aggregate purchase price of $5,544,000. Of the purchase price, $4,600,000 was funded directly by a line of credit and $244,000 was funded directly by an affiliate. Accordingly, the remaining related servicing asset was reclassified to loans receivable. NOTE I - FINANCING In January 1998, the Company entered into a two year credit facility with a bank under which the Company can borrow, at an advance rate of up to 83% of eligible loans, up to a maximum of $20 million. In June 1999, the credit facility was reduced to a maximum of $8 million. As of September 30, 1999, the Company's advance rate was 75% of eligible loans and advances aggregated $5,406,000. The advances bear interest at the prime rate plus 1%. This line of credit contains covenants requiring, among other things, maintenance of certain financial ratios and minimum tangible net worth. Additionally, the principal stockholders of the Company pledged 2,252,000 shares of the Company's common stock as additional collateral. As of September 30, 1999, based upon the most restrictive covenants, the Company is precluded from declaring or paying cash dividends. In April 1998, the Company entered into a demand credit facility with a bank under which it can borrow at an advance rate of 65% of eligible loans receivable up to a maximum of $1 million. As of September 30, 1999, advances under this facility aggregated $16,000. The advances bear interest at the prime rate plus 4%. In March 1999, the Company borrowed funds from three financial institutions aggregating $52,000,000. Each financial institution's note is collateralized by specific portfolios of consumer receivables acquired for liquidation. The borrowings from the financial institutions, which had aggregate outstanding balances of $10,676,000 at September 30, 1999, are as follows: a) A bank provided $10,000,000 in exchange for a note payable with interest at the prime rate plus 4.25% per annum and the first million dollars collected on the portfolio after repayment of the note and interest. As of September 30, 1999, $779,000 was outstanding. b) A factoring company loaned the Company $5,000,000,in exchange for a note payable with interest at 20% per annum. As of September 30, 1999, the outstanding balance due was $1,856,000. F-11 ASTA FUNDING, INC. Notes to Financial Statements September 30, 1999 and 1998 NOTE I - FINANCING (CONTINUED) c) An investment banking firm provided $37,000,000 in exchange for a note payable with interest at the LIBOR rate plus 2% plus $1,500,000 to be collected on a different portfolio (payable after the $5,000,000 note payable to the factoring company is repaid) and sharing in subsequent collections, net of expenses of the portfolio collateralizing this obligation. As of September 30, 1999, the outstanding balance of the note was $8,000,000. NOTE J - INCOME TAXES The significant components of the Company's deferred tax assets and liabilities as of September 30, 1999 and 1998 are as follows: 1999 1998 ------------- ------------- Deferred tax assets: Allowance for credit losses $ 528,000 $ 989,000 Net operating losses 82,000 443,000 ------------- ------------- Total deferred tax assets 610,000 1,432,000 Deferred tax liabilities: Restricted cash and cash equivalents 181,000 Valuation allowance (885,000) ------------- ------------- Net deferred tax assets $ 610,000 $ 366,000 ============= ============= The components of the provision (benefit) for income taxes for the years ended September 30, 1999 and 1998 are as follows: 1999 1998 ------------- -------------- Current: Federal $ 698,000 $ (458,000) ------------- -------------- Deferred: Federal (138,000) (451,000) State (106,000) (135,000) ------------- -------------- (244,000) (586,000) ------------- ------------- Provision (benefit) for income taxes $ 454,000 $ (1,044,000) ============= ============== The deferred tax valuation allowance decreased by $885,000 during the year ended September 30, 1999 and increased by $885,000 during the year ended September 30, 1998. As of September 30,1999, the Company has a net operating loss carryforward for state tax purposes aggregating $1,077,000 expiring in 2005. F-12 ASTA FUNDING, INC. Notes to Financial Statements September 30, 1999 and 1998 NOTE J - INCOME TAXES (CONTINUED) The difference between the statutory federal income tax (benefit) rate on the Company's pre-tax income (loss) and the Company's effective income tax rate is summarized as follows: 1999 1998 ----- ----- Statutory federal income tax rate 34.0% (34.0)% State income tax, net of federal benefit (1.8) (2.6) Reversal of income tax accruals (11.7) Other .4 2.8 Increase (decrease) in valuation allowance (18.4) 16.3 ----- ---- Effective income tax rate 14.2% (29.2)% ===== ====== NOTE K - RELATED PARTY TRANSACTIONS The Company leases its facilities through July 2000 pursuant to a sublease from a company controlled by the principal stockholders of the Company (the "Affiliate"). The terms of the sublease are substantially identical to the terms of the underlying lease between the Affiliate and the lessor. The future minimum lease payment as of September 30, 2000 is $87,000 which is payable during the year ended September 30, 2000. Rent expense for the years ended September 30, 1999 and 1998 was approximately $121,000 and $127,000, respectively, (including $108,000 and $109,000 to the Affiliate). During the years ended September 30, 1999 and 1998, salaries, related payroll taxes and other expenses allocated from the Affiliate aggregated $49,000 and $74,000, respectively. Management allocates costs monthly based upon its estimate of the cost of services provided by the Affiliate. During the years ended September 30, 1999 and 1998, the Affiliate advanced funds to the Company. Interest expense, at 12 percent per annum, aggregated $218,000 and $44,000 in the years ended September 30, 1999 and 1998, respectively. Additionally, the Affiliate purchased a $700,000 loan participation from the bank that advanced the Company $10,000,000 and a $500,000 subordinated participation from a factoring company that loaned the Company $5,000,000 (see Note I). As of September 30, 1999, $500,000 was outstanding on these obligations and are included in notes payable. NOTE L - COMMITMENTS During October 1998, the Company entered into employment agreements with two executives which expire in September 2001. Under the terms of the agreements, the aggregate annual base salaries effective September 30, 1999 are $320,000. Additionally, each executive may be granted annual bonuses. The Company has a one-year consulting agreement with a director of the Company, pursuant to which he will be paid an annual fee of $75,000. Included in the accompanying consolidated statements of operations for the year ended September 30, 1999 and 1998 is $75,000, per annum of consulting expense related to this and a prior consulting agreement. F-13 ASTA FUNDING, INC. Notes to Financial Statements September 30, 1999 and 1998 NOTE M - STOCKHOLDERS' EQUITY [1] Stock options: The Company has a stock option plan under which 395,000 shares of common stock are reserved for issuance upon exercise of either incentive or nonincentive stock options which may be granted from time to time by the Board of Directors to employees and others. The Board of Directors determines the option price (not to be less than fair market value for incentive options) at the date of grant. The options have a maximum term of 10 years and outstanding options expire from September 2005 through June 2009. The Company applies APB 25 in accounting for its stock option incentive plan and, accordingly, recognizes compensation expense for the difference between the fair value of the underlying common stock and the exercise price of the option at the date of grant. Had compensation cost for the Company's stock option plan been determined based upon the fair value at the grant date for awards under the plans consistent with the methodology prescribed under SFAS No. 123, the Company's proforma net income and net income per share for 1999 would have been approximately $2,600,000 and $.69, respectively. The weighted average fair value of the options granted during 1999 were $1.46 per share on the date of grant using the Black-Scholes option pricing model with the following assumptions: dividend yield 0%, volatility 94%, expected life 10 years, risk free interest rate of 5.9%. The following table summarizes stock option transactions under the plan:
Year Ended September 30, ----------------------------------------------------- 1999 1998 ------------------------- -------------------------- Weighted Weighted Average Average Exercise Exercise Shares Price Shares Price ---------- -------- ------- --------- Outstanding options at the beginning of year 284,500 $4.34 284,500 $4.34 Options granted 132,000 1.63 Options exercised (25,000) .01 ----------- ----- ---------- ----- Outstanding options at the end of year 391,500 $3.70 284,500 $4.34 ========== ===== ========== =====
The following table summarizes information about the Plan's outstanding options as of September 30, 1999:
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 -------------- ----------- --------------- -------- ----------- --------- $1.625 - $1.75 146,000 8.72 $1.64 63,833 $1.65 $4.50 - $5.00 245,500 6.18 $4.93 245,500 $4.93
As of September 30, 1999, 395,000 shares have been reserved for the exercise of stock options, including 3,500 shares available for future grant. F-14 ASTA FUNDING, INC. Notes to Financial Statements September 30, 1999 and 1998 NOTE M - STOCKHOLDERS' EQUITY (CONTINUED) [2] Common stock: During the year ended September 30, 1997, an officer terminated his employment with the Company. Pursuant to the agreement, 25,000 shares were subject to cancellation should losses, through December 31, 1998, on certain loans exceed a defined amount. During the year ended September 30, 1999, losses exceeded such amount and the shares were canceled. NOTE N - RETIREMENT PLAN The Company maintains a 401(k) Retirement Plan covering all of its eligible employees. Matching contributions to the plan are made at the discretion of the Board of Directors each plan year. There were no contributions for the years ended September 30, 1999 and 1998. NOTE O - FAIR VALUE OF FINANCIAL INSTRUMENTS Statement of Financial Accounting Standards No. 107, "Disclosures about Fair Values of Financial Instruments" ("SFAS 107") requires disclosure of fair value information about financial instruments, whether or not recognized on the balance sheet, for which it is practicable to estimate that value. Because no market exists for certain of the Company's 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. Fair value estimates are based on existing balance sheet financial instruments without attempting to estimate the value of anticipated future business and the value of assets and liabilities that are not considered financial instruments. The tax ramifications related to the realization of the unrealized gains and losses can have a significant effect on the fair value estimates and have not been considered in the estimates. The following summarizes the information as of September 30, 1999 and 1998 about the fair value of the financial instruments recorded on the Company's financial statements in accordance with SFAS 107:
1999 1998 -------------------------------- -------------------------------- Carrying Value Fair Value Carrying Value Fair Value -------------- ----------- -------------- ----------- Cash, restricted cash and and cash equivalents $ 829,000 $ 829,000 $ 225,000 $ 225,000 Consumer receivables acquired for liquidation 16,500,000 21,500,000 919,000 919,000 Loans receivable 8,344,000 9,985,000 14,985,000 16,203,000 Servicing assets and residual interests 50,000 50,000 Advances under lines of credit, notes payable and due to affiliates 18,531,000 18,531,000 12,366,000 12,366,000
F-15 ASTA FUNDING, INC. Notes to Financial Statements September 30, 1999 and 1998 NOTE O - FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED) The methodology and assumptions utilized to estimate the fair value of the Company's financial instruments are as follows: Cash, restricted cash and cash equivalents: The carrying amount approximates fair value. Consumer receivables acquired for liquidation: The Company has estimated the fair value based on the present value of expected future cash flows. Loans receivable, servicing assets and residual interests: The Company has estimated the fair value based on the present value of expected future cash flows. Advances under lines of credit, notes payable and due to affiliates: Since these are primarily variable rate and short-term, the carrying amounts approximate fair value. F-16 Item 8. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure. Not applicable PART III Item 9. Directors, Executive Officers, Promoters and Control Persons; Compliance With Section 16(a) of the Exchange Act. Information contained under the caption "Directors, Executive Officers, Promoters and Control Persons" in the Company's definitive Proxy Statement to be filed with the Commission on or before January 27, 2000, is incorporated by reference in response to this Item 9. Item 10. Executive Compensation. Information contained under the caption "Executive Compensation" in the Company's definitive Proxy Statement to be filed with the Commission on or before January 27, 2000 is incorporated by reference in response to this Item 10. Item 11. Security Ownership of Certain Beneficial Owners and Management. Information contained under the caption "Security Ownership of Certain Beneficial Owners and Management" in the Company's definitive Proxy Statement to be filed with the Commission on or before January 27, 2000 is incorporated herein by reference in response to this Item 11. Item 12. Certain Relationships and Related Transactions Information contained under the caption "Certain Relationships and Related Transactions" in the Company's definitive Proxy Statement to be filed with the Commission on or before January 30, 2000 is incorporated by reference in response to this Item 12. -26- Part IV Item 13. Exhibits and Reports on Form 8-K. (a) Exhibits Exhibit Number -------- 3.1 Certificate of Incorporation. (1) 3.2 By laws. (4) 10.1 Consulting Agreement, by and between the Company and Arthur Stern. (2) 10.2 Employment Agreement dated October 1, 1998, by and between the Company and Gary Stern. (4) 10.3 Employment Agreement dated October 1, 1998, by and between the Company and Mitchell Herman. (4) 10.4 Credit Facility with BankAmerica. (3) 21. Subsidiaries of the Company. 27. Financial Data Schedule. 1. Incorporated by reference to Exhibit 3.1 to the Company's Registration Statement on Form SB-2 (File No. 33-97212). 2. Incorporated by reference to Exhibit 10.7 to the Company's Registration Statement on Form SB-2 (File No. 33-97212). 3. Incorporated by reference to Exhibit 10.3 to the Company's Registration Statement on Form SB-2 (File No. 33-97212). 4. Incorporated by reference to the Company's Annual Report on Form 10-KSB for the year ended September 30, 1998. (b) Reports on Form 8-K During the quarter ended September 30, 1999, the Registrant filed a current report on Form 8-K under Item 5 on July 22, 1999. -27- SIGNATURES In accordance with Section 13 or 15(d) of the Exchange Act, the Registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. ASTA FUNDING, INC. Dated: December 23, 1999 By:/s/Gary Stern ----------------- Gary Stern President In accordance with the Exchange Act, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated:
Signature Title Date - --------- ----- ----- /s/Gary Stern President and Director December 23, 1999 - ---------------------- Gary Stern /s/Mitchell Herman Chief Financial Officer, Secretary, December 23, 1999 - ---------------------- Chief Accounting Officer and Mitchell Herman Director /s/Arthur Stern Director December 23, 1999 - ---------------------- Arthur Stern /s/Martin Fife Director December 23, 1999 - ---------------------- Martin Fife /s/Herman Badillo Director December 23, 1999 - ---------------------- Herman Badillo /s/General Buster Glosson Director December 23, 1999 - ------------------------- General Buster Glosson /s/Edward Celano Director December 23, 1999 - ----------------- Edward Celano -28-
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