-----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, IjXwEzURanUPQDYqNtJ/o1FG1+2vTRtY4ChExeQYdtHAWoDSpL1m2n8HfIuoKzFa stCeE1tTi2aV3F9INE3lwg== 0001125282-00-001086.txt : 20001228 0001125282-00-001086.hdr.sgml : 20001228 ACCESSION NUMBER: 0001125282-00-001086 CONFORMED SUBMISSION TYPE: 10KSB40 PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 20000930 FILED AS OF DATE: 20001227 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: 10KSB40 SEC ACT: SEC FILE NUMBER: 000-26906 FILM NUMBER: 795863 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 10KSB40 1 0001.txt ANNUAL REPORT 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, 2000 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 (I.R.S. EMPLOYER OR ORGANIZATION) 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-B contained 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, 2000 were $18,110,000. As of December 15, 2000, 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 $7,900,000 (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, 2000, the Registrant had 3,975,000 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 30, 2001. 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. In March 2000, the Company formed Asta Commercial, LLC, a wholly-owned subsidiary of the Company to factor commercial invoices for growing companies with unique financing needs. 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. and its Subsidiaries. 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 purchasing of factoring receivables; o Obtaining additional lines of credit; and o The possible expansion into other synergistic businesses. -2- Consumer Receivable Business 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, 2000, the Company purchased approximately $245 million of consumer receivables at a cost of approximately $1.4 million and sold approximately $51 million of such receivables for a total sales price of approximately $1.6 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 with which the Company has relationships. The Company's senior management locates 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 -3- 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. Receivable Servicing The Company's objective is to maximize the amount that it recovers on acquired receivables. 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 departments 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 skiptrace 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 a paralegal and a dedicated support staff to process numerous court cases each year. The legal department coordinates legal collection activity nationwide using a network of collection attorneys. The skiptrace department is responsible for locating and contacting customers who could not be contacted by either the collection or legal departments. The skiptrace employees use a variety of public and private third party databases to locate customers. Once 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. In addition to performing collection activity directly, 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. The customer service department is responsible for handling incoming calls from customers and collection agencies that are responsible for collection of accounts. The customer service department coordinates customer inquiries on accounts also assists the collection agencies in the collection process. The customer service department is responsible for handling buy-back and media -4- requests from companies who have purchased accounts from the Company. It works with the buyers during the transition period and post sale process and handles 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 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. Receivable Income Recognition The Company recognizes income on nonperforming loan portfolios, which are acquired for liquidation, using either the interest 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. At September 30, 2000, the Company had approximately $400 million and $250 million in gross distressed consumer receivables acquired for liquidation in which income is recognized under the cost recovery and interest method respectively. The distressed consumer receivables are purchased at substantial discounts and historically the Company collects substantially less than the gross receivable balances. Portfolio Sales The Company will 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, 2000, the Company sold approximately $51 million of receivables for a total sales price of approximately $1.6 million. Factoring Business In March 2000, the Company formed Asta Commercial, LLC, a wholly owned subsidiary of the Company, to factor commercial invoices. To manage this company, Asta Commercial, LLC, hired from experienced executive from a major financial institution with over fifteen years experience in the commercial factoring business. At September 30, 2000, Asta Commercial was factoring invoices for five companies and had approximately $687,000 in finance receivables outstanding. The company anticipates significantly increasing the factoring of commercial invoices during the next fiscal year. -5- Asta Commercial, LLC, specializes in providing working capital to growing companies with unique financing needs. The Company provides asset-based lending, primarily secured by accounts receivable for small growing companies. Typical customers are manufacturers, wholesale distributors and service companies. The Company is committed to working closely with growth companies to meet their specialized financing needs and anticipates significant growth in this business by providing prompt and reliable service to its customers. 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 independent used car Dealers and new car Dealers for primarily used vehicles. 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. The Company receives periodic base servicing fees for its duties relating to the accounting for and collection of the Contracts that have been previously sold. Other Activities In February 2000, the Company entered a stock purchase and financing agreement with Small Business Resources, Inc. ("SBR") As of December 14, 2000, the Company has invested a total of $2.5 million in SBR, consisting of a loan of $1.75 million and an equity investment of $750,000, for a one-third ownership interest including warrants to purchase shares of common stock of SBR. The investment was funded from cash provided by operations. SBR is a business-to-business e-commerce company that provides a business portal where small business owners can access content, products, resources and advice. To date, SBR has signed more than a dozen partnership contracts with major companies within the banking, utility and telecommunications industries. These contracts currently reach more than three million small business owners with whom SBR's partners have established relationships. Palisades Collection, LLC, a wholly owned subsidiary of the Company, will be offering third party collection services to small businesses through SBR. As of December 14, 2000, the Company's investment totaled $2.5 million and the Company had reserved $2.25 million against this investment. Marketing The Company has established relationships with brokers who market consumer receivable portfolios from banks, finance companies and other credit providers. In addition, the Company subscribes to national publications that list consumer receivable portfolios for sale. The Company also directly contacts a bank, finance company or other credit provider to solicit consumer receivables for sale. In addition, the Company has developed relationships with experienced brokers who are placing factoring receivables with Asta Commercial, LLC. -6- Competition The Company's businesses of purchasing distressed consumer receivables and factoring commercial 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 who purchase consumer receivables or companies that factor commercial receivables. 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. 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, 2000, the Company upgraded its computer hardware and software to support the Company's servicing of consumer receivables acquired for liquidation and factoring businesses. 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 -7- 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. 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 -8- 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 that the Company had in place with the Dealer contained 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 contained 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. 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 -9- 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. 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. -10- 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. 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 that were purchased and are 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 decreased 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 -11- 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. Any sustained period of increased delinquencies, defaults, repossessions or losses could adversely affect the Company's financial position, liquidity, and results of operations. 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. The Companies investments in related businesses may adversely effect the Company's operations The Company has and may continue to make investments in companies that have significantly higher risk profiles with greater reward possibilities in industries which are not identical to those with which the Company has historically been involved. If the Company does not receive its cost back on these investments its business and financial condition could be materially adversely affected. Employees As of September 30, 2000, the Company had 42 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 $11,005 per month from Asta Group, Incorporated, an affiliate of the Company. The sublease expires on July 31, 2005. 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. -12- 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. -13- 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 until August 15, 2000 and subsequently on the NASDAQ National Market under the symbol "ASFI." On December 15, 2000 there were approximately 37 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, 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 October 1, 1999 to December 31, 1999 9.00 2.00 January 1, 2000 to March 31, 2000 9.25 4.75 April 1, 2000 to June 30, 2000 7.06 3.00 July 1, 2000 to September 30, 2000 8.81 4.19 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. -14- 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, 2000 Compared to the Year Ended September 30, 1999 Revenues. During the year ended September 30, 2000 revenues, which consisted almost entirely of interest income, increased $6.5 million or 56.0% to $18.1 million from $11.6 million for the year ended September 30, 1999. The increase is due to the increase of interest income earned on the consumer receivables acquired for liquidation that were outstanding during the entire year ended September 30, 2000, as compared to only six-months in the prior year, partially offset by a reduction in interest income from automobile loans receivable. During the year ended September 30, 2000, the Company paid $1.4 million in its acquisition of accounts acquired for liquidation, compared to $55.4 million in the year ended September 30, 1999. Servicing fee income on Contracts sold during the year ended September 30, 2000 decreased $170,000 or 70.8% to $70,000 from $240,000 for the year ended September 30, 1999. The decrease in servicing fee income is due to the substantial decrease of previously sold automobile loans serviced by the Company during the year ended September 30, 2000, as compared to the prior year. Expenses. During the year ended September 30, 2000, general and administrative expenses increased $1 million or 32.2 % to $4.1 million from $3.1 million for the year ended September 30, 1999 and represented 48.4% of total expenses. The increase in general and administrative expenses is attributable to an increase in expenses associated with servicing the consumer receivables acquired for liquidation, partially offset by decreased expenses associated with servicing automobile loans receivable. Interest expense decreased by $3.2 million or 88.9% during the year ended September 30, 2000 to $0.4 million from $3.6 million for the year ended September 30, 1999 and represented 4.8% of total expenses. The decrease resulted from a substantial decrease in outstanding borrowings by the Company under the lines of credit and notes payable during the year ended September 30, 2000, as compared to the year ended September 30, 1999. At September 30, 2000, the Company had no borrowings outstanding under any lines of credit or notes payable. During the year ended September 30, 2000, the provision for credit and other losses increased by $2.3 million or 135.3% to $4.0 million from $1.7 million for the year ended September 30, 1999 and represented 46.8% of total expenses. The increase is due to the Company reserving $2.3 million against the investment in SBR and $1 million for potential obligations of consumer receivables that have been previously sold during the year ended September 30, 2000. 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 -15- $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. 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 and represented 20.0% of total expenses. 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. 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, 2000, the Company's cash and cash equivalents increased to $10.5 million from $780,000 at September 30, 1999. The increase was due to an increase in cash collected from consumer receivables acquired for liquidation during the entire year ended September 30, 2000, compared to cash collected from April 1, 1999 to September 30, 1999 in the prior year. Additionally, through November 1999, the cash collected on consumer receivables acquired for liquidation was used to pay down the related debt. -16- Net cash provided by operating activities was $13.8 million during the year ended September 30, 2000, compared to $6.2 million during the year ended September 30, 1999. Cash used for purchasing accounts acquired liquidation was $1.4 million during the year ended September 30, 2000, compared to $55.4 million in the year ended September 30, 1999. In February 2000, the Company entered a stock purchase and financing agreement with Small Business Resources, Inc. ("SBR") As of December 14, 2000, the Company invested a total of $2.5 million in SBR, consisting of a loan of $1.75 million and an equity investment of $750,000, for a one-third ownership interest including warrants to purchase shares of common stock of SBR. The investment was funded from cash provided by operations. SBR is a business-to-business e-commerce company that provides a business portal where small business owners can access content, products, resources and advice. To date, SBR has signed more than a dozen partnership contracts with major companies within the banking, utility and telecommunications industries. These contracts currently reach more than three million small business owners with whom SBR's partners have established relationships. Palisades Collection, LLC, a wholly owned subsidiary of the Company, will be offering third party collection services to small businesses through SBR. As of December 14, 2000, the Company's investment totaled $2.5 million and the Company had reserved $2.25 million against this investment. 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, 2000 the Company did not have any open lines of credit to purchase consumer receivables but had obtained a written approval from a bank for a $10 million credit facility to purchase consumer receivables subject to the completion of a loan document. The Company anticipates that its current cash available; funds to be provided upon the completion of a new credit facility with a bank; 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. 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 -17- 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. 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, 2000 and 1999 F-2 Consolidated Statements of Operations - Years ended September 30, 2000 and 1999 F-3 Consolidated Statements of Shareholders' Equity - Years ended September 30, 2000 and 1999 F-4 Consolidated Statements of Cash Flows - Years ended September 30, 2000 and 1999 F-5 Notes to Consolidated Financial Statements F-6 Item 8. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure. Not applicable -18- Asta Funding, Inc. CONSOLIDATED FINANCIAL STATEMENTS September 30, 2000 and 1999 Asta Funding, Inc. Contents Page ---- Consolidated Financial Statements Independent auditors' report F-2 Balance sheets as of September 30, 2000 and 1999 F-3 Statements of operations for the years ended September 30, 2000 and 1999 F-4 Statements of changes in stockholders' equity for the years ended September 30, 2000 and 1999 F-5 Statements of cash flows for the years ended September 30, 2000 and 1999 F-6 Notes to financial statements F-7 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. and subsidiaries as of September 30, 2000 and 1999, 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 financial statements enumerated above present fairly, in all material respects, the consolidated financial position of Asta Funding, Inc. and subsidiaries as of September 30, 2000 and 1999, and the consolidated results of their operations and their consolidated cash flows for the years then ended in conformity with generally accepted accounting principles. Richard A. Eisner & Company, LLP Florham Park, New Jersey November 7, 2000 F-2 Asta Funding, Inc. Consolidated Balance Sheets
September 30, 2000 1999 --------------- --------------- ASSETS Cash and cash equivalents $ 10,488,000 $ 780,000 Restricted cash and cash equivalents 51,000 49,000 Consumer receivables acquired for liquidation 4,367,000 16,500,000 Auto loans receivable, (less allowance for credit losses of $611,000 in 2000 and $1,122,000 in 1999) 3,190,000 8,344,000 Finance receivables, (less allowance for credit losses of $75,000) 612,000 Note receivable 250,000 Furniture and equipment (net of accumulated depreciation of $379,000 in 2000 and $246,000 in 1999) 156,000 174,000 Repossessed automobiles held for sale (net of allowance for losses of $100,000 in 2000 and $200,000 in 1999) 181,000 460,000 Deferred income taxes 1,620,000 610,000 Other assets 269,000 643,000 --------------- --------------- $ 21,184,000 $ 27,560,000 =============== =============== LIABILITIES Advances under lines of credit $ 5,422,000 Notes payable 10,636,000 Other liabilities $ 2,133,000 256,000 Income taxes payable 4,277,000 663,000 Due to affiliate 816,000 2,473,000 --------------- --------------- Total liabilities $ 7,226,000 19,450,000 --------------- --------------- Commitments STOCKHOLDERS' EQUITY Common stock, $.01 par value, authorized 10,000,000 shares, issued and outstanding 3,958,000 shares in 2000 and 3,945,000 in 1999 40,000 39,000 Additional paid-in capital 9,619,000 9,602,000 Retained earnings (accumulated deficit) 4,299,000 (1,531,000) --------------- --------------- Total stockholders' equity 13,958,000 8,110,000 --------------- --------------- $ 21,184,000 $ 27,560,000 =============== ===============
See notes to financial statements F-3 Asta Funding, Inc. Consolidated Statements of Operations
Year Ended September 30, ------------------------------- 2000 1999 ------------- ------------- Finance income $ 18,040,000 $ 11,363,000 Servicing fee income 70,000 240,000 ------------- ------------- 18,110,000 11,603,000 ------------- ------------- General and administrative expenses 4,091,000 3,094,000 Provisions for credit and other losses 3,954,000 1,688,000 Interest expense 410,000 3,634,000 ------------- ------------- 8,455,000 8,416,000 ------------- ------------- Income before provision for income taxes 9,655,000 3,187,000 Provision for income taxes 3,825,000 454,000 ------------- ------------- Net income $ 5,830,000 $ 2,733,000 ============= ============= Basic net income per share $1.48 $.69 ===== ==== Diluted net income per share $1.43 $.69 ===== ====
See notes to financial statements F-4 Asta Funding, Inc. Consolidated Statements of Changes in Stockholders' Equity
Additional Accumulated Common Stock Paid-in Income Shares Amount Capital (Deficit) Total ------ ------ ---------- ----------- ----- Balance, September 30, 1998 3,945,000 $ 39,000 $ 9,602,000 $ (4,264,000) $5,377,000 Exercise of options 25,000 Cancellation of common stock (25,000) Net income 2,733,000 2,733,000 --------- --------- ------------ ------------- ---------- Balance, September 30, 1999 3,945,000 39,000 9,602,000 (1,531,000) 8,110,000 Exercise of options and warrants 13,000 1,000 17,000 18,000 --------- --------- ------------ Net income 5,830,000 5,830,000 --------- --------- ------------ ------------- ---------- Balance, September 30, 2000 3,958,000 $ 40,000 $ 9,619,000 $ 4,299,000 $13,958,000 ========= ========= ============ ============= ===========
See notes to financial statements F-5 Asta Funding, Inc. Consolidated Statements of Cash Flows
Year Ended September 30, --------------------------------- 2000 1999 -------------- -------------- Cash flows from operating activities: Net income $ 5,830,000 $ 2,733,000 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 133,000 132,000 Amortization of loan discount 1,000,000 Provisions for losses 3,954,000 1,688,000 Deferred income taxes (1,010,000) (244,000) Expenses advanced by affiliate 15,000 58,000 Changes in: Restricted cash and cash equivalents (2,000) 13,000 Repossessed automobiles held for sale 379,000 (94,000) Income taxes receivable 527,000 Other assets 374,000 (102,000) Income taxes payable 3,614,000 663,000 Other liabilities 477,000 (129,000) -------------- -------------- Net cash provided by operating activities 13,764,000 6,245,000 -------------- -------------- Cash flows from investing activities: Auto loans purchased (2,603,000) Auto loan principal payments collected 4,689,000 7,806,000 Purchase of consumer receivables acquired for liquidation (1,442,000) (55,444,000) Principal payments received from sale or collection of consumer receivables acquired for liquidation 13,325,000 39,613,000 Principal payments received on residual interest 14,000 Capital expenditures (115,000) (120,000) Notes receivable (2,114,000) Finance receivables (687,000) -------------- -------------- Net cash provided by (used in) investing activities 13,656,000 (10,734,000) -------------- -------------- Cash flows from financing activities: Advances from (repayments to) affiliate (1,672,000) 1,498,000 Repayments under lines of credit (5,422,000) (6,044,000) Proceeds from notes payable 52,000,000 Repayments of notes payable (10,636,000) (42,348,000) Proceeds from exercise of options and warrants 18,000 -------------- -------------- Net cash provided by (used in) financing activities (17,712,000) 5,106,000 -------------- -------------- Net increase in cash and cash equivalents 9,708,000 617,000 Cash and cash equivalents at beginning of year 780,000 163,000 -------------- -------------- Cash and cash equivalents at end of year $ 10,488,000 $ 780,000 ============== ============== Supplemental disclosure of cash flow information: Cash paid for: Interest $ 365,000 $ 3,679,000 Income taxes 344,000 1,000
See notes to financial statements F-6 Asta Funding, Inc. Notes to Financial Statements September 30, 2000 and 1999 Note A - 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 is liquidating the 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. [5] Finance Receivables: Finance receivables are factored accounts receivable primarily with full recourse. F-7 Asta Funding, Inc. Notes to Financial Statements September 30, 2000 and 1999 Note A - The Company and its Significant Accounting Policies (continued) [6] 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). [7] 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. [8] 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. [9] 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. [10] 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. [11] Net income per share: Basic per share data is determined by dividing net income by the weighted average shares outstanding during the period. Diluted per share data is computed by dividing net income by the weighted average shares outstanding, assuming all dilutive potential common shares were issued. With respect to the assumed proceeds from the exercise of dilutive options, the treasury stock method is calculated using the average market price for the period. F-8 Asta Funding, Inc. Notes to Financial Statements September 30, 2000 and 1999 Note A - 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, 2000 and 1999:
2000 1999 -------------------------------------- ----------------------------------------------- Weighted Weighted Average Per Share Average Per Share Net Income Shares Amount Net Income Shares Amount ---------- ------ ------ ---------- ------ ------ Basic $5,830,000 3,946,000 $1.48 $2,733,000 3,946,000 $.69 ===== ==== Effect of dilutive stock options 126,000 26,000 ---------- --------- --------- Diluted $5,830,000 4,072,000 $1.43 $2,733,000 3,972,000 $.69 ========== ========= ===== ========== ========= ====
[12] 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. [13] 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 B - Segment Reporting The Company has two reportable segments: finance receivables and consumer receivables. The finance receivables segment consists of the business of liquidating sub-prime auto receivables and collecting factored 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.
2000 1999 -------------------------------------------- ------------------------------------------ Finance Consumer Finance Consumer Receivables Receivables Total Receivables Receivables Total ----------- ----------- ----- ----------- ----------- ----- Service fee income $ 70,000 $ 70,000 $ 240,000 $ 240,000 Interest income 1,704,000 $ 16,336,000 18,040,000 3,720,000 $ 7,643,000 11,363,000 Interest expense 249,000 161,000 410,000 821,000 2,813,000 3,634,000 Depreciation 133,000 133,000 97,000 97,000 Segment income (loss) (1,738,000) 7,568,000 5,830,000 (501,000) 3,234,000 2,733,000 Segment assets 6,447,000 14,737,000 21,184,000 9,917,000 17,643,000 27,560,000
F-9 Asta Funding, Inc. Notes to Financial Statements September 30, 2000 and 1999 Note C - 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 4 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. As of September 30, 2000 and 1999, nonaccrual auto loans receivable aggregated $6,000 and $385,000, respectively. Changes in the allowance for credit losses consisted of the following: 2000 1999 ------------- ------------- Balance, beginning of period $ 1,122,000 $ 1,209,000 Provisions 565,000 1,438,000 Charge-offs (1,506,000) (1,662,000) Recoveries 430,000 137,000 ------------- ------------- Balance, end of period $ 611,000 $ 1,122,000 ============= ============= Note D - Consumer Receivables Acquired for Liquidation As of September 30, 2000, the Company used the interest method on portfolios with carrying values aggregating $3,335,000 and the cost recovery method on portfolios with carrying values aggregating $1,032,000. Note E - Note Receivable In February 2000, the Company entered into an agreement with Small Business Resources, Inc. ("SBR"), a business-to-business E-Commerce Company, Small Business Worldwide, Inc. ("SBW"), the holding company for SBR (a wholly-owned subsidiary), and Hispanic Business Resources, Inc. ("HBR"), a subsidiary of SBR whereby the Company would invest up to $2,500,000 in SBR. As of September 30, 2000, the Company had advanced $2,100,000 to SBR, incurred costs of $14,000 and provided an allowance of $1,864,000 to reflect its estimated net realizable value. In addition, since the Company has agreed to advance the remaining $400,000, the potential loss has been recognized in the accompanying financial statements. Subsequent to year end, the Company and SBR, HBR, and SBW amended their agreement whereby the Company exchanged $750,000 of the advances for 19.9% of SBW's outstanding common stock, a warrant to purchase up to 13.3% (1,698,184 shares) of SBW's common stock at $0.01per share, and 51% of HBR's outstanding common stock.. F-10 Asta Funding, Inc. Notes to Financial Statements September 30, 2000 and 1999 Note F - Furniture and Equipment Furniture and equipment as of September 30, 2000 and 1999 consist of the following: 2000 1999 ----------- ----------- Furniture $ 46,000 $ 46,000 Equipment 489,000 374,000 535,000 420,000 Less accumulated depreciation 379,000 246,000 ----------- ----------- Balance, end of period $ 156,000 $ 174,000 =========== =========== Depreciation expense for the years ended September 30, 2000 and 1999 aggregated $133,000 and $97,000, 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. Note H - Financing In January 1998, the Company entered into a two year credit facility with a bank under which the Company could borrow up to a maximum of $20 million. In June 1999, the credit facility was reduced to a maximum of $8 million. During the year ended September 30, 2000, the credit facility was paid in full and closed. In March 1999, the Company borrowed funds from three financial institutions aggregating $52,000,000. Each financial institution's note was collateralized by specific portfolios of consumer receivables acquired for liquidation. During the year ended September 30, 2000, the balance was paid in full. The investment banking firm which provided $37,000,000 of the aforementioned $52,000,000, in exchange for a $37,000,000 note collateralized by a portfolio of consumer receivables acquired for liquidation, a sharing of subsequent collections on this portfolio and $1,500,000 to be collected from on a different portfolio. In December 1999, after the $37,000,000 note had been paid in full, the Company paid the investment banking firm $1,225,000 in settlement of the Company's remaining obligations under this agreement. Note I - Other Liabilities Other liabilities as of September 30, 2000 and 1999 are as follows:
2000 1999 ---------- ------------- Estimated losses on commitments and contingencies $1,400,000 Due to seller of consumer receivables 500,000 Accounts payable 159,000 $ 60,000 Accrued interest and other 74,000 196,000 ---------- ------------- Total other liabilities $2,133,000 $ 256,000 ========== =============
F-11 Asta Funding, Inc. Notes to Financial Statements September 30, 2000 and 1999 Note J - Income Taxes The significant components of the Company's deferred tax assets and liabilities as of September 30, 2000 and 1999 are as follows:
2000 1999 Deferred tax assets: Allowances for credit and other losses $1,620,000 $ 528,000 Net operating losses 82,000 ---------- ----------- Total deferred tax assets $1,620,000 $ 610,000 ========== ===========
The components of the provision (benefit) for income taxes for the years ended September 30, 2000 and 1999 are as follows:
2000 1999 ------------- ------------- Current: Federal $ 3,854,000 $ 698,000 State 981,000 ------------- ------------- 4,835,000 698,000 ------------- ------------- Deferred: Federal (850,000) (138,000) State (160,000) (106,000) ------------- ------------- (1,010,000) (244,000) ------------- ------------- Provision for income taxes $ 3,825,000 $ 454,000 ============= =============
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:
2000 1999 Statutory federal income tax rate 34.0% 34.0% State income tax, net of federal benefit 5.8 (1.8) Other (0.8) .4 Increase (decrease) in valuation allowance (18.4) ---- ----- Effective income tax rate 39.0% 14.2% ==== =====
F-12 Asta Funding, Inc. Notes to Financial Statements September 30, 2000 and 1999 Note K - Related Party Transactions The Company leases its facilities through July 2005 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 payments are as follows: Twelve Months Ending September 30, -------------------- 2001 $ 147,000 2002 141,000 2003 139,000 2004 140,000 2005 61,000 ----------- $ 628,000 =========== During the year ended September 30, 2000 and 1999, the Company paid a director of the Company $75,000 per year for consulting services. Rent expense for the years ended September 30, 2000 and 1999 was approximately $119,000 and $127,000, respectively, (including $104,000 and $108,000 to the Affiliate). During the years ended September 30, 2000 and 1999, salaries, related payroll taxes and other expenses allocated from the Affiliate aggregated $15,000 and $49,000, respectively. Management allocates costs monthly based upon its estimate of the cost of services provided by the Affiliate. During the years ended September 30, 2000 and 1999, the Affiliate advanced funds to the Company. Interest expense, at 12 percent per annum, aggregated $91,000 and $218,000 in the years ended September 30, 2000and 1999, respectively. Note L - Commitments and Contingencies During October 1998, the Company entered into employment agreements with two executives, which expire in September 2001. During September 2000, the Company modified the terms of the agreements. Under the new terms, the aggregate annual base salaries effective September 30, 2000 are $475,000. Additionally, each executive may be granted annual bonuses. In September 1999, the Company sold a portfolio of consumer accounts acquired for liquidation during the normal course of business. The purchaser claims that they are entitled to unidentified consumer receivable payments that collection agencies have sent to the Company. The Company has acknowledged that the purchaser is entitled to certain receipts and has requested that the purchaser specifically identify the payments. The Company believes that it has adequately provided for this matter. F-13 Asta Funding, Inc. Notes to Financial Statements September 30, 2000 and 1999 Note M - Stockholders' Equity [1] Stock options and warrants: The Company has a stock option plan under which 885,000 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 and related interpretations in accounting for its employee 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 diluted net income per share for 2000 would have been approximately $5,781,000 and $1.42, respectively and 1999 would have been approximately $2,600,000 and $.69, respectively. This is not necessarily indicative of future results of operations, due to among other reasons, vesting provisions and future stock option grants. The weighted average fair value of the options granted during 2000 and 1999 were $5.01 and $1.46 per share on the dates of grant, respectively, using the Black-Scholes option pricing model with the following assumptions: dividend yield 0%, volatility 119% (2000) and 94% (1999), 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, -------------------------------------------------------- 2000 1999 ------------------------ ------------------------- Weighted Weighted Average Average Exercise Exercise Shares Price Shares Price ------- -------- ------- -------- Outstanding options at the beginning of year 391,500 $ 3.70 284,500 $4.34 Options granted 206,000 5.19 132,000 1.63 Options cancelled (3,000) 1.63 Options exercised (10,000) 1.75 (25,000) .01 ------- ------- Outstanding options at the end of year 584,500 $ 4.27 391,500 $3.70 ======= ====== ======= =====
The following table summarizes information about the Plan's outstanding options as of September 30, 2000:
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 - $1.75 136,000 8.62 $1.63 94,666 $1.63 $4.50 - $5.25 448,500 7.34 $5.07 245,500 $4.93
F-14 Asta Funding, Inc. Notes to Financial Statements September 30, 2000 and 1999 Note M - Stockholders' Equity (continued) As of September 30, 2000, there were warrants, expiring November 13, 2000 to purchase 110,000 shares of the Company's common stock at $6.50 per share. As of September 30, 2000, 995,000 shares have been reserved for the exercise of warrants and options. [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, 2000 and 1999. 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, 2000 and 1999 about the fair value of the financial instruments recorded on the Company's financial statements in accordance with SFAS 107:
2000 1999 --------------------------------- -------------------------------- Carrying Value Fair Value Carrying Value Fair Value -------------- ---------- -------------- ---------- Cash, restricted cash and and cash equivalents $ 10,539,000 $10,539,000 $ 829,000 $ 829,000 Consumer receivables acquired for liquidation 4,367,000 6,551,000 16,500,000 21,500,000 Loans receivable 3,190,000 4,248,000 8,344,000 9,985,000 Finance receivable 612,000 810,000 Advances under lines of credit, notes payable and due to affiliates 816,000 816,000 18,531,000 18,531,000
The methodology and assumptions utilized to estimate the fair value of the Company's financial instruments are as follows: F-13 Asta Funding, Inc. Notes to Financial Statements September 30, 2000 and 1999 Note O - Fair Value of Financial Instruments (continued) 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 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 30, 2001, 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 30, 2001 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 30, 2001 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, 2001 is incorporated by reference in response to this Item 12. -19- 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. (2) 10.1 Employment Agreement dated October 1, 1998, by and between the Company and Gary Stern. (2) 10.2 Employment Agreement dated October 1, 1998, by and between the Company and Mitchell Herman. (2) 10.3 Amended and Restated Stock Purchase Agreement dated October 12, 2000, between AstaFunding.Com, LLC, a subsidiary of the Company and Small Business Resources, Inc., Small Business Worldwide, Inc. and Hispanic Business Resources, Inc. (3) 10.4 Common Stock Purchase Warrant dated October 12, 2000, issued by Small Business Worldwide to AstaFunding.Com, LLC. (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 the Company's Annual Report on Form 10-KSB for the year ended September 30, 1999. 3. Incorporated by reference to the Company's Report filed on Form 8-K/A on November 2, 2000. (b) Reports on 8-K The Registrant filed a report on Form 8-K under Item 5 on October 27, 2000 and a report on 8-K/A on November 2, 2000. -20- 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 18, 2000 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 18, 2000 - --------------------------- Gary Stern /s/ Mitchell Herman Chief Financial Officer, December 18, 2000 - --------------------------- Secretary, Chief Accounting Mitchell Herman Officer and Director /s/ Arthur Stern Director December 18, 2000 - --------------------------- Arthur Stern /s/ Martin Fife Director December 18, 2000 - --------------------------- Martin Fife /s/ Herman Badillo Director December 18, 2000 - --------------------------- Herman Badillo /s/ General Buster Glosson Director December 18, 2000 - --------------------------- General Buster Glosson /s/ Edward Celano Director December 18, 2000 - --------------------------- Edward Celano /s/ Harvey Leibowitz Director December 18, 2000 - --------------------------- Harvey Leibowitz
-21- EX-21 2 0002.txt SUBSIDIARIES OF THE COMPANY DOCUMENT Exhibit-21 DESCRIPTION SUBSIDIARIES OF THE COMPANY COMPANY NAME ASTA FUNDING, INC. TYPE OF FILING 10 - KSB FISCAL-YEAR-END 9/30/00 Asta Funding Acquisition I, LLC Asta Funding Acquisition II, LLC Asta Funding Acquisition III, LLC Asta Funding.Com, LLC RAC Acceptance Corp., LLC E.R. Receivables Corp., LLC Palisades Collections, LLC Asta Commercial, LLC Asta Auto Receivables Company EX-27 3 0003.txt FINANCIAL DATA SCHEDULE
5 12-MOS SEP-30-2000 OCT-01-1999 SEP-30-2000 10,488,000 0 8,955,000 (786,000) 181,000 0 535,000 (380,000) 21,184,000 7,226,000 0 0 0 40,000 9,619,000 21,184,000 18,110,000 18,110,000 0 0 4,091,000 3,954,000 410,000 9,655,000 3,825,000 5,830,000 0 0 0 5,830,000 1.48 1.43
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