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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, 1998
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.
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(NAME OF SMALL BUSINESS ISSUER IN ITS CHARTER)
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Delaware 22-3388607
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(STATE OR OTHER JURISDICTION OF INCORPORATION OR ORGANIZATION) (I.R.S. EMPLOYER
IDENTIFICATION NO.)
210 Sylvan Avenue, Englewood Cliffs, NJ 07632
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(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
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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
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(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, 1998 were
$4,495,015
As of December 15, 1998, 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
$1,756,550. (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 15, 1998, the Registrant had
3,945,000 shares of Common Stock issued and outstanding.
Transitional Small Business Disclosure Format (check one): Yes No X
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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, 1999.
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Part I
Item 1. Description of Business.
General
Asta Funding, Inc. (the "Company") is a consumer finance company specializing in
the business of purchasing, liquidating, selling and servicing retail automobile
installment contracts ("Contracts") originated by dealers ("Dealers") in the
sale primarily of used automobiles. Through its purchases, the Company provides
indirect financing to borrowers with limited credit histories, lower than
average incomes or past credit problems ("Sub-Prime Borrowers"). The Company
serves as an alternative source of financing for Dealers as compared to more
traditional sources of automobile financing such as banks, credit unions or
finance companies affiliated with automobile manufacturers. Sub-Prime Borrowers
typically pay a higher rate of interest than do prime credit borrowers utilizing
traditional financing sources.
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 ("Forward-Looking
Statements"). 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".
The Company typically purchases Contracts from new-car franchise Dealers who
sell both new and used automobiles as well as independent used car Dealers. As
of September 30, 1998, the Company has entered into its standard-form dealer
agreement ("Dealer Agreement") 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. Dealers are under no obligation to submit any
Contracts to the Company, nor is the Company obligated to purchase any
Contracts. The Company enters into Dealer Agreements and solicits Contracts from
Dealers primarily through the efforts of sales representatives and the Company's
staff. The success of the Company's business is substantially dependent upon its
ability to develop and maintain relationships with Dealers.
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.
Automobile Financing Industry
Automobile financing is the largest category, by dollar amount, of consumer
installment debt in the United States. Most traditional sources of automobile
financing, such as commercial banks, credit unions and captive finance companies
affiliated with automobile manufacturers, generally provide automobile financing
for the most creditworthy, or so-called "prime" borrowers.
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Although prime borrowers represent the largest segment of the automobile
financing market, many potential purchasers of automobiles do not possess the
qualifications required for prime borrowers. The sub-prime credit market is
comprised of consumers who are deemed to be relatively high credit risks due to
various factors, including, among other things, previous credit problems, the
absence or limited extent of their prior credit history or limited financial
resources and, therefore, are unable to obtain credit from traditional sources
of automobile financing. The Company believes that there is substantial demand
for Sub-Prime Borrower financing because the market has not been effectively
served by traditional financing sources.
Expansion and Diversification
During 1998, the Company formed three new wholly owned subsidiaries. RAC
Acceptance Co., L.L.C. (`RAC") was formed to purchase military consumer
automobile Contracts. During 1998, RAC purchased approximately $675,000 in
military Contracts. At September 30, 1998, RAC had ceased purchasing military
Contracts and is currently in the process of liquidating all remaining
receivables.
E. R. Receivables, Corp., L.L.C. ("ER") was formed to purchase non-conforming
consumer loans in bulk from financial institutions. During 1998, ER purchased a
portfolio of approximately $6.0 million of performing and non-performing
consumer receivables at a discount. It subsequently sold approximately $2.5
million of the $6.0 million that was purchased. ER will continue to liquidate
the remaining receivables and will pursue other non-conforming consumer
receivable purchases in bulk. In addition, in June 1998, ER and Palisades
Collection, L.L.C. ("Palisades") a wholly owned subsidiary of the Company,
entered into a distressed consumer receivables loan and security agreement
pursuant to which ER will help finance the purchase of distressed consumer
receivables and Palisades will act as sub-servicer for such receivables. At
September 30, 1998, ER had invested $93,638 in this venture. There can be no
assurance that the Company will be able to expand or diversify its operations.
Business Strategy
The Company's primary objective is to increase revenues through the expansion of
its purchasing, selling and servicing of Contracts by, among other things:
o Expanding its existing Dealer network to include additional Dealers who
generate Contracts from Sub-Prime Borrowers who meet the Company's
underwriting criteria;
o Increasing Contract purchases from Dealers in the Company's existing Dealer
network;
o The possible expansion and obtainment of licenses in additional states;
o To increase the purchase of non-conforming consumer loans in bulk;
o To increase its lending activities in the purchase of distressed consumer
receivables
Purchase and Sale of Contracts
Dealer Contract Purchase Program
As of September 30, 1998, 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,
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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 twelve months ended
September 30, 1998, approximately 99% of the Contracts purchased by the Company
consisted of financing for used cars and the remaining approximately 1% for new
cars. Pursuant to the Dealer Agreement, dealers are under no obligation to
submit any Contracts to the Company, nor is the Company obligated to purchase
any Contracts. For the year ended September 30, 1998, approximately 21%, 21%,
14%, 13% and 12% of Contracts purchased by the Company were from borrowers who
reside in the states of New Jersey, Connecticut, New York, Maryland and
Pennsylvania, respectively.
Dealers generate applications from retail automobile buyers who indicate an
interest in obtaining financing from a Dealer to purchase an automobile, light
truck or passenger van. Typically, a Dealer will submit the buyer's application
to more than one financing source for review. The Company believes the Dealer's
decision to finance the automobile purchase with the Company or other financing
source is 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 either approve the application as
submitted, approve the application upon modified terms or reject the
application. The Company's credit analysts will document their decision and
notify the Dealers by facsimile transmission and/or telephone. The Company does
not purchase all of the Contracts approved for purchase because Dealers
typically offer to sell Contracts to more than one finance source and applicants
often decide not to purchase a vehicle from Dealers to whom they have submitted
a credit application. The Company buys Contracts directly from Dealers and does
not make loans directly to purchasers of automobiles.
The Company purchases Contracts from Dealers at a discount. In addition, the
Company charges an acquisition fee for each Contract purchased. The Company
believes that the level of discounts and fees are a significant factor in the
Dealer's decision to submit a Contract to the Company for purchase.
The Company attempts to control Dealer misrepresentation by carefully screening
the Dealers and the Contracts it purchases. The Company's efforts include
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 breaches 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.
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 be secured by a first priority security interest in
the purchased vehicle and must meet 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
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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 seeks 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 will afford 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 determines the value of collateral based upon
national recognized pricing services.
The Company has implemented specific procedures to control borrower
misrepresentation at the point of origination. The Company requires each Dealer
submitting a potential Contract to provide certain information to the Company,
including a completed signed loan application which lists the applicant's
income, credit and employment history as well as other personal information. The
Company verifies the employment and certain other information provided by the
borrower by contacting the related references noted on the borrower's
application. The Company also evaluates the applicants credit history as
provided by at least one independent credit bureau. The credit report typically
contains 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 require verification of certain other
information provided by the applicant or the Dealer prior to making its credit
decision. This verification process in many instances requires submission of
supporting documentation and is performed solely by Company personnel. The
Company evaluates 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
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assurances, however, that these procedures will afford adequate protection
against borrower misrepresentation.
The Company believes that its objective underwriting criteria enable it to
evaluate effectively the creditworthiness of Sub-Prime Borrowers. These criteria
include 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. These criteria are subject to change from time to time at the
discretion of the Company as circumstances may warrant.
If a Dealer sells a Contract to the Company, the requisite financing documents
are generated by the Dealer on a standardized form of Contract supplied by the
Company. The Dealer and the borrower sign the Contract, the Dealer assigns the
Contract to the Company and the Dealer forwards the signed Contract to the
Company along with other items, including the vehicle title information
indicating the Company's security interest. The Company thereupon forwards
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 provides the Company with a committed
forty-eight month securitization Contract program totaling $200 million. As of
September 30, 1998, the Company had completed two securitizations aggregating
approximately $44 million in Contracts pursuant to the agreement with Greenwich
Capital.
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 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.
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
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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 a duration similar to that estimated for the underlying
Contracts.
In future periods, the Company may recognize additional revenue from the
servicing fees if the actual performance of the Contracts is better than the
original discounted estimate. If the actual performance of the Contracts is
worse than the original discounted estimate, then a write-down would be
required.
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 year ended September 30, 1998, the Company did not complete any sales of
Contracts under its securitization agreement. Although, the Company still has
its securitization facility available to sell Contracts, it is pursuing other
alternatives for its Contracts such as whole loan sales, or additional financing
to warehouse larger amounts of receivables. In the event funds obtained from a
securitization or a whole loan sale are not sufficient to retire the
corresponding debt, the securitization or whole loan sale may adversely affect
liquidity. In addition, there can be no assurance that the Company will be able
to obtain additional financing to warehouse larger amounts of receivables or
that the failure to obtain additional financing will not have a material adverse
affect on the Company's liquidity.
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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 Contracts 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 a 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
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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.
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.
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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, 1997 and 1998. All amounts and percentages are based on the
principal amount to be paid on each Contract. The information in the tables
represent 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.
Delinquency Experience (1)
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September 30, 1998 September 30, 1997
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Number Number
Of Loans Amount Of Loans Amount
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<S> <C> <C> <C> <C>
Gross Servicing Portfolio 3671 $26,363,424 3936 $32,946,674
Period of delinquency (2)
31-60 days 273 2,047,328 175 1,696,722
61-90 days 76 494,481 48 478,540
91- + days 38 256,233 36 400,084
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Total delinquencies 387 2,798,042 259 2,575,346
Amount in repossession (3) 111 1,029,398 107 1,015,380
Total delinquencies and 498 3,827,440 366 3,590,726
amount in repossession
Delinquencies as a percent
Of Gross Servicing Portfolio 10.54% 10.61% 6.58% 7.82%
Total delinquencies and amount in
Repossession as a percent of
Gross Servicing Portfolio 13.57% 14.52% 9.30% 10.90%
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(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.
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Net Charge-Off Experience (1)
Year Ended Year Ended
September 30, 1998 September 30, 1997
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Average Servicing Portfolio
Outstanding $29,655,049 $30,129,928
Net charge-offs as a percent of
Average Servicing Portfolio 15.61% 10.69%
(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.
Portfolio Purchases
In addition to the purchase of individual Contracts from Dealers, the Company
may purchase portfolios of Contracts in bulk from Dealers or financial
institutions. Such portfolios may consist of Contracts with borrowers of a
different credit standing than the Sub- Prime Borrowers that are parties to most
of the Company's Contracts, may be comprised of Contracts that contain terms
different than the typical Contract purchased by the Company and may include
"non-performing" Contracts in which there have been delinquencies and/or
defaults. The purchase (or sale) of Contracts in bulk requires the consent of
BankAmerica Business Credit, Inc. ("BankAmerica") pursuant to the Company's
Credit Facility (as defined below).
Generally, the purchase price for portfolios will be paid in cash. Such purchase
price will be based upon the aging of Contracts in the portfolio, the
delinquency rates of borrowers that are parties to the Contracts in the
portfolio, the value of the collateral securing the Contracts in the portfolio
and the interest rates and the maturity dates of Contracts in the portfolio.
On May 20, 1998, the Company purchased 99.0% of the Class A and Class B bond
certificates of the ASTA Grantor Trust 1996-1 at a discount from Greenwich
Capital Markets, Inc. The net purchase price for the certificates was $5,544,345
including accrued interest. Such funds were made available to the Company under
its Credit Facility with Bank America and Asta Group, Incorporated, an affiliate
of the Company.
There can be no assurance that the Company will make any additional bulk
purchases of Contracts or, that, if opportunities to make a purchase arise, the
terms of such a purchase would be acceptable to the Company or that the Company
will have sufficient capital to make the purchase. Moreover, there can be no
assurance that a purchase or purchases of portfolios of Contracts in bulk will
not result in losses to the Company.
Marketing
The Company establishes relationships with Dealers through Company
representatives that contact prospective Dealers. Each representative presents
the Dealer with a marketing package, which includes the current program offered
by the Company for the purchase of Contracts, a copy of the Company's
standard-form Dealer Agreement and examples of required documentation relating
to Contracts. The Company's acceptance of a Dealer is subject to its analysis
of, among other things, the Dealer's operating history and financial condition.
After initial contact, the Company's representatives
<PAGE>
frequently communicate with Dealers to obtain feedback on the program and
address any problems or additional requirements that Dealers may have in
connection with the program. As of September 30, 1998, the Company had 5
representatives, 2 of whom are employees and 3 of whom are independent sales
representatives.
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 during
or shortly following certain holiday periods as well as seasonal changes in
Contract purchases due to the purchasing patterns of Sub-Prime Borrowers. In
addition, the Company believes that purchases of used automobiles, and therefore
financing activity, will decrease significantly in northern states during
periods of poor winter weather. Conversely, purchases and financing activity may
increase somewhat in late spring when many people receive tax refunds.
Competition
The automobile financing business is highly competitive and
fragmented. The Company competes with a number of national, local and regional
finance companies with operations similar to those of the Company. Although the
Company does not believe it currently competes with commercial banks, thrift
institutions, savings and loan associations, credit unions or captive automobile
finance companies, such companies are capable of providing retail loan financing
for used automobiles. Many of the Company's competitors and potential
competitors possess substantially greater financial, marketing, technical,
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 the availability and cost of capital to its competitors.
The Company's existing and potential competitors include larger, more
established companies that have access to capital markets, including those for
commercial paper, asset-backed securities and rated debt which may be
unavailable to the Company. Many of these competitors also have long-standing
relationships with Dealers. As the Company seeks to increase market penetration,
its success will depend, in part, on its ability to gain market share from
established competitors. 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 major national
financing source.
The Company believes that the principal competitive factors affecting a Dealer's
decision to offer Contracts for sale to a particular financing source are the
proposed purchase price for the Contracts, the reasonableness of the
underwriting guidelines and documentation requests of the financing source and
the predictability and timeliness of purchase.
The Company believes that it can obtain sufficient Contracts for purchase at
attractive prices by consistently applying reasonable underwriting criteria and
making timely purchases of qualifying Contracts. Management of the Company
believes, however, that its underwriting criteria tend to be more conservative
than many other financing sources available to Sub-Prime Borrowers as the
Company finances a lower percentage of the vehicle's book value and bases its
book value figures on a relatively conservative industry estimate. The Company's
practice could lead to the loss of Contracts to financing sources maintaining
less conservative policies. Competition by existing and potential competitors
could result in financial pressures, including reductions in the number of
Contracts purchased by the Company, reduced discounts on the purchase price for
Contracts paid to
<PAGE>
Dealers and reduced interest spreads, that would materially adversely affect the
Company's profitability.
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.
Regulation
Several federal and state consumer protection laws, including the Federal Truth-
In-Lending Act, the Federal Equal Credit Opportunity Act, the Federal Fair Debt
Collection Practices Act 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 effected
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. Furthermore, the adoption of additional statutes and regulations, or
the expansion of the Company's business into jurisdictions that have adopted
more stringent regulatory requirements than New York, New Jersey, Delaware,
Connecticut, Maryland, Pennsylvania, Virginia or Maine 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
Company intends to renew all licenses necessary to the lawful operation of its
business.
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
<PAGE>
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 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
Dependence on Credit Facilities
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. As of November
30, 1998, BankAmerica's reference rate was 8.00%. Under the Credit Facility, the
Company may borrow up to 83% (the "advance rate") of its net eligible
installment loan receivables (depending upon the trade-in value of the
automobiles securing the receivables), but in no event more than $20 million.
The advance rates are subject to decreases based on certain loan performance
criteria established by BankAmerica. At September 30, 1998 the Company's advance
rate was 78% of net eligible installment loan receivables. 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.
<PAGE>
All of the Company's obligations under the Credit Facility are secured by a
first priority security interest in the Company's installment loan receivables
and a pledge by the Company's principal stockholders of 2,252,000 shares of the
Company's common stock. In April 1998, RAC entered into a demand credit facility
with Sterling Financial Services Company under which RAC can borrow at an
advance rate of 65% of eligible loans up to a maximum of $1 million. At
September 30, 1998, advances under this facility aggregated $449,235. The
advances bear interest at the prime rate plus 4%.
Default and Prepayment Risks
The Company's results of operations, financial condition and liquidity depend,
to a material extent, on the performance of Contracts purchased and held by the
Company prior to their sale in a securitization transaction or a whole loan sale
as well as the subsequent performance of receivables sold to securitization
trusts. A portion of the loans purchased by the Company may default or prepay
during the period prior to their sale or if they remain owned by the Company.
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. In addition, under the terms of the Credit Facility the
Company is not able to borrow against defaulted loans and loans greater than 60
days delinquent held by the Company.
The Company also retains a substantial portion of the default and prepayment
risk associated with the receivables that it sells pursuant to Company-sponsored
securitizations. A large component of the gain recognized on such sales and the
corresponding asset recorded on the Company's balance sheet is excess servicing
receivable which is based on the present value of estimated future excess cash
flows from the securitized receivables which will be received by the Company.
Accordingly, the residual interest is calculated on the basis of management's
assumptions concerning, among other things, defaults and prepayments. Actual
defaults and prepayments may vary from management's assumptions, possibly to a
material degree. In addition, the Company is required to deposit substantial
amounts of the cash flows generated by its interests in Company sponsored
securitizations ("restricted cash") into spread accounts.
The Company regularly measures its default, prepayment and other assumptions
against the actual performance of securitized receivables. If the Company were
to determine, as a result of such regular review or otherwise, that it
underestimated defaults and/or prepayments, or that any other material
assumptions were inaccurate, the Company would be required to adjust the
carrying value of the residual interest on its balance sheet. Future cash flows
from securitization trusts may also be less than expected and the Company's
results of operations and liquidity would be adversely affected, possibly to a
material degree. In addition, an increase in prepayments and defaults would
reduce the size of the Company's servicing portfolio, which would reduce the
Company's servicing fee income, further adversely affecting results of
operations and cash flows. A write-down of the residual interest and the
corresponding decreases in earnings and cash flow could affect the Company's
liquidity position and future securitizations. Although the Company believes
that it has made reasonable assumptions as to the future cash flows of the
various pools of receivables that have been sold in securitization transactions,
actual rates of default or prepayment may differ from those assumed and other
assumptions may be required to be revised upon future events.
<PAGE>
Portfolio Performance; Negative Impact on Cash Flows; Right to Terminate
Normal Servicing
Generally, the form of credit enhancement agreement entered into in connection
with securitization transactions contains specified limits on the delinquency,
defaults and loss rates on the receivables included in each trust. At any
measurement date, the delinquency, defaults or loss rate with respect to any
trust were to exceed the specified limits, provisions of the credit enhancement
agreement would automatically increase the level of credit enhancement
requirements for that trust. During the period in which the specified
delinquency, default or loss rate was exceeded, excess cash flow, if any, from
the trust would be used to fund the increase credit enhancement levels instead
of being distributed to the Company, which would have an adverse effect on the
Company's cash flow.
The credit enhancement agreement entered into in connection with securitization
transactions contain additional specified limits on the delinquency, default and
loss rates on the receivables included in each trust which are higher that the
limits referred to in the preceding paragraph. If, at any measurement date, the
delinquency, default or loss rate with respect to any trust were to exceed these
additional specified limits applicable to such trust, provisions of the credit
enhancement agreements permit the trustees to terminate the Company's servicing
rights with respect to the receivables sold to that trust. Although the Company
has never exceeded such delinquency, defaults or loss rates, there can be no
assurance that the Company's servicing rights with respect to the automobile
receivables in such trusts, or any other trust which exceeds the specified
limits in future periods, will not be terminated.
Credit-Impaired Borrowers
The Company specializes in purchasing, securitizing and servicing sub-prime
receivables. Sub-Prime borrowers are associated with higher than average
delinquency and default rates. While the Company believes that it effectively
manages such risks with its underwriting policies and collection methods, no
assurance can be given that such criteria or methods will be effective in the
future. In the event that the Company underestimates the default risk or under
prices contracts that it purchases, the Company's financial position, liquidity
and results of operations would be adversely affected, possibly to a material
degree.
Economic Conditions
Delinquencies, defaults, repossessions and losses generally increase during
periods of economic recession and such periods also may be accompanied by
decreased consumer demand for automobiles and declining 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 focuses 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 ability to complete future
securitizations and correspondingly, its financial position, liquidity and
results of operations would be adversely effected.
<PAGE>
Interest Rates
The company may be directly affected by the level of and fluctuations in
interest rates, which affect the Company's ability to earn a gross interest rate
spread between the rate charged the consumers and the rate paid on its
indebtedness. As the interest rate on the Company's indebtedness rises, the
Company may not be able to increase the rate it charges on new Contracts because
the rates on many of the Contracts purchased by the Company are already at or
near the statutory maximums, affording the Company limited opportunity to pass
on any increased interest costs. The Company believes that its results of
operations and liquidity would be adversely affected during any period of higher
interest rates, possibly to a material degree.
Competition
Reference should be made to Item 1. "Competition" for a discussion of
competitive risk factors.
Regulation
Reference should be made to Item 1. "Regulation" for a discussion of regulatory
risk factors.
Management Information Systems/Year 2000
Management believes that a high degree of automation is necessary to enable the
Company to grow and successfully compete with other financing entities.
Accordingly, during the year ended September 30, 1998, the Company upgraded its
computer hardware to support the Company's origination, accounting and
collection processes. In addition, the Company has enhanced its application
processing and credit approval software that has increased the efficiency of
processing applications.
Due to its desire to increase productivity through automation, the Company
intends to periodically review its systems for possible upgrades and
enhancements.
The Company believes that the capacity of its existing data processing and
management information systems is sufficient to allow the Company to expand its
business without significant additional capital expenditures.
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.
The Company is currently conducting a review of its IT and non-IT systems to
identify those systems which could be affected by the Year 2000 problem. The
Company is using both internal and external sources to identify, correct and
test its systems for Year 2000 compliance. The Company's assessment review is
expected to be completed by January 31, 1999. Modifications to the Company's
systems as a result of the findings of such assessment are expected to be
completed and tested by April 30, 1999. The Company has contacted its Dealers to
verify that the systems the Dealers use are
<PAGE>
or will be Year 2000 compliant. 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.
The Company estimates that the total cost of achieving Year 2000 readiness for
its internal systems is approximately $25,000. Based on its current estimates
and information currently available, the Company does not anticipate that the
costs associated with Year 2000 compliance issues will be material to the
Company's consolidated financial position or results of operations.
In the event that efforts of the Company's Year 2000 project do not address all
potential systems problems, the Company is currently developing business
interruption contingency plans. 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
complaint 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.
Employees
As of September 30, 1998, the Company had 31 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.
<PAGE>
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, 1997 there were approximately 13 holders of record of
the Common Stock. High and low bid prices of the Common Stock since October 1,
1996 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, 1996 to December 31, 1996 6.25 3.75
January 1, 1997 to March 31, 1997 5.00 2.00
April 1, 1997 to June 30, 1997 3.13 1.31
July 1, 1997 to September 30, 1997 3.38 0.75
October 1, 1997 to December 31, 1997 1.18 0.56
January 1, 1998 to March 31, 1998 0.50 0.97
April 1, 1998 to June 30, 1998 0.72 1.13
July 1, 1998 to September 30, 1998 1.02 0.50
On October 6, 1998, the Company received notification from NASDAQ that the
Company was not in compliance with the minimum $1.00 bid price requirement
necessary for continued listing of the Company's shares of common stock on The
NASDAQ Stock Market SmallCap Market. NASDAQ notified the Company that the
Company's common stock must maintain a minimum bid price of $1.00 for ten
consecutive trading days prior to January 6, 1999 to be in full compliance or
the Company's common stock would be delisted. While the Company would appeal
such delisting, the outcome of such an appeal can not be determined. Should the
Company be delisted, it would expect to be traded on the Bulletin Board.
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 the
Company is prohibited from paying dividends on its Common Stock without the
consent of BankAmerica.
<PAGE>
Item 6. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Results of Operations
Year Ended September 30, 1998 Compared to the Year Ended September 30, 1997
Revenues. During the year ended September 30, 1998, revenues decreased $1.18
million compared to the year ended September 30, 1997. Interest income increased
$1.99 million compared to 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 Accounts Acquired
for Liquidation and an increase in dollar amount of Contracts outstanding during
the year ended September 30, 1998, as compared to the same period in the prior
year. During the year ended September 30, 1998, the Company purchased
approximately $18 million in Contracts from Dealers, compared to $23 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 distressed consumer
receivables sector. Servicing fee income on Contracts sold decreased $633,000
compared to 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 compared to 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 during the year ended September 30, 1998,
compared to the same period in the prior year 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.
During the year ended September 30, 1998, the provision for credit losses
increased by $2.19 million compared to the year ended September 30, 1997. The
increase reflects higher than expected losses on loans previously sold and
serviced by the Company.
Year Ended September 30, 1997 Compared to the Year Ended September 30, 1996
Revenues. During the year ended September 30, 1997, revenues decreased $1.23
million compared to the year ended September 30, 1996. Interest income on
Contracts decreased $915,342 representing 43.3% of total revenues for the year
ended September 30, 1997. The decrease in revenues and interest income is due to
the decrease in the volume of Contracts purchased during the year ended
September 30, 1997, as compared to the same period in the prior year. During the
year ended September 30, 1997 the Company purchased $23 million in Contracts
from Dealers, compared to $28 million in the year ended September 30, 1996.
Expenses. During the year ended September 30, 1997, general and administrative
expenses increased $1.68 from the prior year and represented 56.1% of total
operating expenses. The increase is due to
<PAGE>
the addition of employees and increased overhead expenses necessary to
accommodate the Company's purchasing and servicing Contracts.
Interest expense decreased $278,433 during the year ended September 30, 1997, as
compared to the same period in the prior year and represented 6.6% of total
operating expenses. The decrease is due to the volume of Contracts held for sale
which reduced the interest accrued and/or paid during the year. During the year
ended September 30, 1997, interest expense consisted of interest accrued and/or
paid on the Company's Credit Facility and loans from an affiliate.
During the year ended September 30, 1997 provision for losses on Contracts
purchased increased by $1.6 million over the prior year and represented 37.2% of
total operating expenses. The increase in the provision reflects higher than
expected losses on loans previously sold and serviced by the Company.
Liquidity and Capital Needs
The Company's primary sources of cash from operating activities include borrower
payments on Contracts, proceeds on the sale of Contracts in excess of its
recorded investment in the Contracts and base servicing fees it earns on
Contracts it has sold. The Company's primary uses of cash include its purchases
of Contracts, ordinary operating expenses and the establishment and buildup of
Spread Accounts.
Net cash provided by operating activities was $1.3 million during the year ended
September 30, 1998 compared to net cash used of $1.1 million during the year
ended September 30, 1997. Cash used for purchasing Contacts was $18.0 million
during the year ended September 30, 1998 as compared to $22.0 million in the
year ended September 30, 1997.
The Company's cash requirements have been and will continue to be significant.
The agreement with Greenwich Capital regarding securitizations requires the
Company to make a significant cash deposits into Spread Accounts, for the
purpose of credit enhancement. The Spread Accounts are pledged to support the
related ABS, and are invested in high quality liquid securities. Excess cash
flow from securitized Contracts are deposited into the Spread Accounts until
such time as the Spread Account balances reach a specified percent of the
outstanding balance of the related ABS.
The Company anticipates the funds available under its Credit Facility, funds
made available by Asta Group, Incorporated, proceeds from the sale of Contracts,
and cash from operations will be sufficient to satisfy the Company's estimated
cash requirements for at least the next 12 months, assuming that the Company
continues to have a means by which to sell its Contacts. If for any reason the
Company is unable to sell its Contracts, or if the Company's available cash
otherwise proves to be insufficient to fund operations, the Company may be
required to seek additional funding.
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
Forward-looking statements are inherently subject to risks and uncertainties,
many of which cannot be predicted with accuracy and some of which might not even
be anticipated. Future events and actual results, financial and otherwise, could
differ materially from those set forth in or contemplated by the forward-looking
statements herein. Important factors that could contribute to such differences
are:
<PAGE>
increases in unemployment or other changes in domestic economic conditions which
adversely affect the sales of new and used automobiles and which may result in
increased delinquencies, foreclosures and losses on Contracts; adverse economic
conditions in geographic areas in which the Company's business is concentrated,
mainly the Northeast and Mid-Atlantic States; changes in interest rates, adverse
changes in the market for securitized receivables pools or a substantial
lengthening of the Company's warehousing each of which could restrict the
Company's ability to obtain cash for Contract origination and purchases;
increases in the amounts required to be set aside in spread accounts or to be
expended for other forms of credit enhancement to support future
securitizations; increased competition; a reduction in the number and amount of
acceptable Contracts submitted to the Company by its Dealers; changes in
government regulations effecting consumer credit; and other risk factors
identified herein under the caption "Risk Factors" and in the Company's filings
with the Securities and Exchange Commission, including under the caption "Risk
Factors" in its most recent Registration Statement on form S-1. Subsequent,
written and oral forward-looking statements attributable to the Company or
persons acting on its behalf are expressly qualified by the precautionary
statements in this paragraph and elsewhere in this Form 10-KSB.
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, 1998 and 1997 F-2
Consolidated Statements of Operations - Years ended
September 30, 1998 and 1997 F-3
Consolidated Statements of Shareholders' Equity - Years ended
September 30, 1998 and 1997 F-4
Consolidated Statements of Cash Flows - Years ended
September 30, 1998 and 1997 F-5
Notes to Consolidated Financial Statements F-6
<PAGE>
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 30, 1999 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, 1999 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, 1999 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, 1999 is incorporated by reference in
response to this Item 12.
<PAGE>
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.
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.
10.3 Employment Agreement, dated October 1, 1998, by and between the Company
and Mitchell Herman.
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).
(b) Reports on Form 8-K
The Registrant did not file any Current Reports on form 8-K during the quarter
ended September 30, 1998.
<PAGE>
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 21, 1998 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:
<TABLE>
<CAPTION>
Signature Title Date
- --------- ----- ----
<S> <C> <C>
/s/ Gary Stern President and Director December 21, 1998
- ---------------------------
Gary Stern
/s/ Mitchell Herman Chief Financial Officer, Secretary, December 21, 1998
- --------------------------- Chief Accounting Officer and
Mitchell Herman Director
/s/ Arthur Stern Director December 21, 1998
- ---------------------------
Arthur Stern
/s/ Martin Fife Director December 21, 1998
- ---------------------------
Martin Fife
/s/ Herman Badillo Director December 21, 1998
- ---------------------------
Herman Badillo
/s/ General Buster Glosson Director December 21, 1998
- ---------------------------
General Buster Glosson
/s/ Edward Celano Director December 21, 1998
- ---------------------------
Edward Celano
</TABLE>
<PAGE>
ASTA FUNDING, INC.
CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1998 and 1997
<PAGE>
ASTA FUNDING, INC.
Contents
Page
----
Consolidated Financial Statements
Independent auditors' report F-2
Balance sheets as of September 30, 1998 and 1997 F-3
Statements of operations for the years ended
September 30, 1998 and 1997 F-4
Statements of changes in stockholders' equity for the
years ended September 30, 1998 and 1997 F-5
Statements of cash flows for the years ended
September 30, 1998 and 1997 F-6
Notes to financial statements F-7
<PAGE>
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, 1998 and 1997, 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 audit provides 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, 1998 and 1997, and the results of its operations and its
cash flows for the years then ended in conformity with generally accepted
accounting principles.
Richard A. Eisner & Company, LLP
Florham Park, New Jersey
October 29, 1998
F-2
<PAGE>
ASTA FUNDING, INC.
Consolidated Balance Sheets
<TABLE>
<CAPTION>
September 30,
---------------------------
1998 1997
-------- --------
<S> <C> <C>
ASSETS
Cash $ 163,123 $ 503,715
Restricted cash and cash equivalents (net of estimated future losses of
$1,065,568 in 1998 and $703,072 in 1997)(Note D) 62,210 2,546,670
Loans receivable, (less allowance for credit losses of $1,209,436 in 1998
and $397,926 in 1997) (Note B) 15,903,553 3,247,542
Servicing assets (Notes A[11] and E) 36,403 897,352
Residual interest (Notes A[12] and E) 13,970 951,857
Furniture and equipment (net of accumulated depreciation of $155,630
in 1998 and $84,130 in 1997) (Notes A[5] and C) 150,015 154,605
Repossessed automobiles (net of allowance for losses of $200,000 in
1998 and $96,062 in 1997) 365,787 226,248
Deferred income taxes (Note G) 366,300
Income taxes receivable 527,463 418,101
Other assets 540,528 423,454
----------- ----------
$18,129,352 $9,369,544
=========== ==========
LIABILITIES
Advances under lines of credit $11,449,735
Accounts payable and accrued expenses 385,399 $ 419,080
Deferred income taxes (Note G) 275,000
Due to affiliate 916,487 188,360
----------- ----------
Total liabilities 12,751,621 882,440
----------- ----------
Commitments (Notes I and J)
STOCKHOLDERS' EQUITY (Note J)
Common stock, $.01 par value, authorized 10,000,000 shares, issued
and outstanding 3,945,000 shares 39,450 39,450
Additional paid-in capital 9,602,421 9,602,421
Accumulated deficit (4,264,140) (1,236,466)
Unrealized gain on residual interest (net of income taxes of $55,000 in 1997) 81,699
----------- ----------
Total stockholders' equity 5,377,731 8,487,104
----------- ----------
$18,129,352 $9,369,544
=========== ==========
</TABLE>
See notes to financial statements F-3
<PAGE>
ASTA FUNDING, INC.
Consolidated Statements of Operations
<TABLE>
<CAPTION>
Year Ended
September 30,
---------------------------
1998 1997
-------- --------
<S> <C> <C>
Interest income $ 4,445,308 $2,457,515
Gain on sale of loans (Note L) 2,533,994
Servicing fee income 49,707 682,692
----------- ----------
4,495,015 5,674,201
----------- ----------
General and administrative expenses (Note I) 3,235,733 3,588,189
Provision for credit losses 4,567,066 2,381,700
Interest expense (Note H) 763,990 430,726
----------- ----------
8,566,789 6,400,615
----------- ----------
Loss before benefit for income taxes (4,071,774) (726,414)
Benefit for income taxes (Note G) (1,044,100) (370,100)
----------- ----------
Net loss $(3,027,674) $ (356,314)
=========== ==========
Basic and diluted net loss per share $(.77) $(.09)
===== =====
Weighted average number of shares outstanding 3,945,000 3,952,315
=========== ==========
</TABLE>
See notes to financial statements F-4
<PAGE>
ASTA FUNDING, INC.
Consolidated Statements of Changes in Stockholders' Equity
<TABLE>
<CAPTION>
Additional Unrealized
Common Stock Paid-in Accumulated Gain on
Shares Amount Capital Deficit Interest Total
--------- -------- ----------- ----------- --------- ----------
<S> <C> <C> <C> <C> <C> <C>
Balance, September 30, 1996 4,460,000 $ 44,600 $ 9,597,271 $ (880,152) $8,761,719
Cancellation of escrow shares (Note J[1]) (500,000) (5,000) 5,000
Cancellation of shares (Note J[4]) (15,000) (150) 150
Change in unrealized gain on residual interest,
net of income tax effect $ 81,699 81,699
Net loss (356,314) (356,314)
--------- -------- ----------- ----------- --------- ----------
Balance, September 30, 1997 3,945,000 39,450 9,602,421 (1,236,466) 81,699 8,487,104
Change in unrealized gain on residual interest,
net of income tax effect (81,699) (81,699)
Net loss (3,027,674) (3,027,674)
--------- -------- ----------- ----------- --------- ----------
Balance, September 30, 1998 3,945,000 $ 39,450 $ 9,602,421 $(4,264,140) $ 0 $5,377,731
========= ======== =========== =========== ========= ==========
</TABLE>
See notes to financial statements F-5
<PAGE>
ASTA FUNDING, INC.
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
Year Ended September 30,
---------------------------
1998 1997
-------- --------
<S> <C> <C>
Cash flows from operating activities:
Net loss $(3,027,674) $ (356,314)
Adjustments to reconcile net loss to net cash provided by (used in)
operating activities:
Depreciation and amortization 636,059 1,801,690
Provisions for losses 4,567,066 2,381,700
Deferred income taxes (586,300) 585,000
Expenses advanced by parent 73,500 104,580
Writedown of residual interest 250,000 144,573
Changes in:
Restricted cash and cash equivalents (81,255) (3,818,948)
Loans receivable (1,415,605)
Repossessed automobiles (243,477) (256,504)
Income taxes receivable (109,362) (418,101)
Other assets (117,074) 2,011,787
Income taxes payable (1,705,000)
Accounts payable and accrued expenses (33,681) (173,276)
----------- -----------
Net cash provided by (used in) operating activities 1,327,802 (1,114,418)
----------- -----------
Cash flows from investing activities:
Loans purchased (16,562,003)
Loan principal payments 7,153,860
Purchase of securitization certificates (4,600,000)
Principal payments received on residual interest 551,188 225,254
Capital expenditures (71,527) (118,567)
----------- -----------
Net cash (used in) provided by investing activities (13,528,482) 106,687
----------- -----------
Cash flows from financing activities:
Advances from (repayment to) affiliate 410,353 (1,835,924)
Advances under lines of credit 11,449,735
Payment on bank overdraft (54,304)
----------- -----------
Net cash provided by (used in) financing activities 11,860,088 (1,890,228)
----------- -----------
Net decrease in cash (340,592) (2,897,959)
Cash at beginning of year 503,715 3,401,674
----------- -----------
Cash at end of year $ 163,123 $ 503,715
=========== ===========
Supplemental disclosure of cash flow information:
Cash paid for:
Interest $ 674,004 $ 555,083
Income taxes 1,365 $ 1,167,576
</TABLE>
See notes to financial statements F-6
<PAGE>
ASTA FUNDING, INC.
Notes to Financial Statements
September 30, 1998 and 1997
NOTE A - THE COMPANY AND ITS SIGNIFICANT ACCOUNTING POLICIES
[1] The Company:
Asta Funding, Inc. (the "Company") is 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 are generally purchased
from automobile dealers in the northeastern and mid-atlantic states.
Additionally, through wholly-owned subsidiaries, the Company purchases
and liquidates portfolios of nonconforming consumer loans.
Effective October 1, 1997, the Company changed its policy of purchasing
and selling loans to purchasing and liquidating the loans.
[2] Principles of consolidation:
The consolidated financial statements include the accounts of Asta
Funding, Inc. and its wholly-owned subsidiaries, Asta Auto Receivables
Company, which is a limited purpose corporation formed to accommodate the
structures under which the Company sells its contracts, E.R. Receivables,
Corp. L.L.C., which is engaged in the business of purchasing and
liquidating nonconforming consumer receivables, RAC Acceptance Co.,
L.L.C., which purchased and is liquidating automobile installment
contracts of military personnel and Palisades Collections, L.L.C. which
was formed to provide collection services for E. R. Receivables Corp.,
L.L.C. 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:
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.
Gain on sales of loans receivable principally represents the present
value of the differential between the interest rates charged by the
Company and the interest rates passed on to the purchaser of the
receivables, after considering the effects of estimated prepayments,
repurchases, normal servicing fees and estimated future losses. Gains on
the sale of loan receivables are recorded on the trade date using the
specific identification method.
Effective January 1, 1997, as required by Statement of Financial
Accounting Standards No. 125, "Accounting for Transfers and Servicing of
Financial Assets and Extinguishment of Liabilities" ("SFAS 125"), upon
the sale of loans, the Company allocates the cost, based upon the
relative fair values, to the loan, the servicing asset and residual
interest, if any. The impact of the adoption of SFAS 125 on net income in
1997 was immaterial.
The Company recognizes income on nonconforming loan portfolios, which are
acquired for liquidation, using the interest 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.
F-7
<PAGE>
ASTA FUNDING, INC.
Notes to Financial Statements
September 30, 1998 and 1997
NOTE A - 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.
The provision for credit losses for the loans receivable sold with
recourse is measured based on the present value of expected future losses
discounted at a riskless interest rate.
[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 at the time that loans are
sold or paid in full.
[8] Repossessed automobiles:
The Company records repossessed automobiles at the lower of loan balance
or estimated fair value.
After foreclosure, valuations are periodically performed by management
and the automobiles are carried at the lower of loan balance 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 spread accounts for loans sold (Note D)
being reported for financial accounting and tax purposes in different
periods.
[10] Net loss per share:
In February 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 128, "Earnings per Share"
("FAS 128") which is effective for periods ended after December 15, 1997
and requires that, upon adoption, all prior periods be restated.
Basic and diluted per share data has been computed on the basis of the
loss for the period divided by the weighted average shares outstanding
during the period. All potentially dilutive securities have been excluded
from the calculation since they would be anti-dilutive.
F-8
<PAGE>
ASTA FUNDING, INC.
Notes to Financial Statements
September 30, 1998 and 1997
NOTE A - THE COMPANY AND ITS SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
[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:
In accordance with SFAS 125, effective January 1, 1997, 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] 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 - 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
<PAGE>
ASTA FUNDING, INC.
Notes to Financial Statements
September 30, 1998 and 1997
NOTE B - LOANS RECEIVABLE AND ALLOWANCE FOR CREDIT LOSSES (CONTINUED)
As of September 30, 1998 and 1997, nonaccrual loans, excluding the portfolio of
nonconforming loans aggregating $919,268 as of September 30, 1998, totaled
$384,998 and $203,469, respectively.
Changes in the allowance for credit losses consisted of the following:
1998 1997
----------- --------
Balance, beginning of period $ 397,926 $466,395
Provisions 1,897,413 357,878
Charge-offs (1,631,888) (781,690)
Recoveries 545,985 355,343
----------- --------
Balance, end of period $ 1,209,436 $397,926
=========== ========
NOTE C - FURNITURE AND EQUIPMENT
Furniture and equipment as of September 30, 1998 and 1997 consist of the
following:
1998 1997
----------- ---------
Furniture $ 45,599 $ 35,787
Equipment 260,046 202,948
----------- ---------
305,645 238,735
Less accumulated depreciation 155,630 84,130
----------- ---------
Balance, end of period $ 150,015 $ 154,605
=========== =========
Depreciation expense for the years ended September 30, 1998 and 1997 aggregated
$76,117 and $61,856, respectively.
NOTE D - RESTRICTED CASH AND ESTIMATED FUTURE LOSSES ON LOANS SOLD
In connection with the sale of loans in 1997 and 1996, the Company was required
to deposit funds into separate cash accounts with trustees for possible interest
adjustments due to borrowers prepaying the loans and into the Spread Accounts
for possible losses. Additionally, the Company is required to deposit into the
Spread Accounts cash flows from residual interests in order to maintain a
specified percentage of the outstanding principal balance of the certificates.
This percentage may increase in the event of defaults and/or losses exceeding
certain specified levels. Additionally, losses are charged against the Spread
Accounts. If the Spread Accounts are in excess of the specified percentage, the
trustee will release the excess funds to the Company.
F-10
<PAGE>
ASTA FUNDING, INC.
Notes to Financial Statements
September 30, 1998 and 1997
NOTE E - SERVICING ASSETS AND RESIDUAL INTEREST
Changes in servicing assets and residual interest for the two years ended
September 30, 1998 are as follows:
Servicing Residual
Assets Interest
----------- ------------
Balance, September 30, 1996 $ 2,675,407
Assets originating from loan sales 106,352 $ 1,040,412
Amortization/principal payments (1,739,834) (225,254)
Impairment loss (144,573)
Change in market value 136,699
----------- -----------
Balance, September 30, 1997 $ 897,352 $ 951,857
Amortization/principal payments (559,942) (551,188)
Impairment loss (250,000)
Transfer to loans receivable (301,007)
Change in market value (136,699)
----------- -----------
Balance, September 30, 1998 $ 36,403 $ 13,970
=========== ===========
In May 1998, the Company repurchased the outstanding Certificates on the 1996-1
Trust, which had a remaining principal balance of $5,952,999 for an aggregate
purchase price of $5,544,345. Of the purchase price, $4,600,000 was funded
directly by a line of credit and $244,274 was funded directly by an affiliate.
Accordingly, the remaining related servicing asset was reclassified to loans
receivable.
NOTE F - LINES OF CREDIT
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. As of September 30, 1998, the Company's
advance rate was 78% of eligible loans. As of September 30, 1998, advances under
this facility aggregated $11,000,500. 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.
In April 1998, RAC entered into a demand credit facility with a bank under which
RAC can borrow at an advance rate of 65% of eligible loans receivable up to a
maximum of $1 million. As of September 30, 1998, advances under this facility
aggregated $449,235. The advances bear interest at the prime rate plus 4%.
As of September 30, 1998, based upon the most restrictive covenants, the company
is precluded from declaring or paying cash dividends.
F-11
<PAGE>
ASTA FUNDING, INC.
Notes to Financial Statements
September 30, 1998 and 1997
NOTE G - INCOME TAXES
The significant components of the Company's deferred tax assets and
liabilities as of September 30, 1998 and 1997 are as follows:
1998 1997
----------- ----------
Deferred tax assets:
Allowance for credit losses $ 988,500 $ 513,300
Net operating losses 638,300 95,400
----------- ----------
Total deferred tax assets 1,626,800 608,700
----------- ----------
Deferred tax liabilities:
Restricted cash and cash equivalents 180,700 828,700
Unrealized gain on residual interests 55,000
----------- ----------
Total deferred tax liabilities 180,700 883,700
----------- ----------
Valuation allowance (1,079,800)
-----------
Net deferred tax assets (liability) $ 366,300 $ (275,000)
=========== ==========
The components of the benefit for income taxes for the years ended September 30,
1998 and 1997 are as follows:
1998 1997
----------- ----------
Current:
Federal $ (457,800) $ (836,000)
State (119,100)
----------- ----------
(457,800) (955,100)
----------- ----------
Deferred:
Federal (488,000) 538,000
State (98,300) 47,000
----------- ----------
(586,300) 585,000
----------- ----------
Benefit for income taxes $(1,044,100) $ (370,100)
=========== ==========
As of September 30, 1998, the Company has a net operating loss carryforward
aggregating $904,000 expiring thorough 2018.
The difference between the statutory federal income tax rate on the Company's
net loss and the Company's effective income tax rate is summarized as follows:
1998 1997
---------- ----------
Statutory federal income tax rate 34.0% 34.0%
State income tax, net of federal benefit 1.6 6.5
Reversal of income tax accruals 10.3 4.4
Other (2.8) 6.0
Valuation allowance (17.5)
----- ----
Effective income tax rate 25.6% 50.9%
===== ====
F-12
<PAGE>
ASTA FUNDING, INC.
Notes to Financial Statements
September 30, 1998 and 1997
NOTE H - RELATED PARTY TRANSACTIONS
The Company leases its facilities through July 2000 pursuant to a sublease from
an affiliate of the Company. The terms of the sublease are substantially
identical to the terms of the underlying lease between the affiliate of the
Company and the lessor. Minimum lease payments are as follows:
September 30,
-------------
1999 $104,124
2000 86,770
--------
$190,894
========
Rent expense for the years ended September 30, 1998 and 1997 was approximately
$127,400 and $134,100, respectively, (including $109,200 and $106,000 to an
affiliate) (see Note H).
During the years ended September 30, 1998 and 1997, salaries, related payroll
taxes and other expenses allocated from an affiliate aggregated $73,500 and
$104,580, respectively. Management allocates costs monthly based upon its
estimate of the cost of services provided by the affiliate.
During the years ended September 30, 1998 and 1997, an affiliate advanced funds
to the Company. Interest expense, at 12 and 8 percent per annum, respectively,
aggregated $44,434 and $7,950 in the years ended September 30, 1998 and 1997,
respectively.
NOTE I - COMMITMENTS
Employment agreements:
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, 1998 are $276,250.
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, 1998 and 1997 is $75,000, per annum of consulting expense related to this
and a prior consulting agreement.
F-13
<PAGE>
ASTA FUNDING, INC.
Notes to Financial Statements
September 30, 1998 and 1997
NOTE J - STOCKHOLDERS' EQUITY
[1] Escrow shares:
Upon consummation of the Company's initial public offering November 1995,
certain shareholders deposited 1,000,000 shares of common stock (the
"Escrow Shares") into an escrow account with the Company's transfer
agent, pursuant to an agreement by the Company, the escrow agent, and
Whale Securities, LP. The escrow agreement provides for the escrow shares
to be released either in their entirety or in increments of 500,000
depending on the Company's attainment of certain income levels for the
fiscal years ending September 30, 1996 and September 30, 1997 or
alternatively, if the Company's common stock trades above certain levels
for a specified period of time during the fiscal years ending September
30, 1996 and 1997.
As of September 30, 1996, the Company exceeded the income level in the
escrow agreement which provided for the release of 500,000 of the escrow
shares. However, as of September 30, 1997, the Company did not attain the
income level nor did the stock price meet or exceed the per share value
necessary for the release of the remaining 500,000 escrow shares. As a
result, the remaining escrow shares have been canceled.
[2] Stock options:
The Company has a stock option plan under which 420,000 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 October 2004 through June
2007.
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 grant 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 loss and net
loss per share for 1997 would have been approximately $(372,000) and
$(0.09), respectively. The weighted average fair value of the options
granted during 1997 were $1.13 per share on the date of grant using the
Black-Scholes option pricing model with the following assumptions:
dividend yield 0% volatility 40%, expected life 10 years, risk free
interest rates from 5.75% to 6.75%
The following table summarizes stock option transactions under the plan:
<TABLE>
<CAPTION>
Year Ended September 30,
----------------------------------------------------------
1998 1997
----------------------------- ------------------------
Weighted Weighted
Average Average
Exercise Exercise
Shares Price Shares Price
-------- -------- -------- ---------
<S> <C> <C> <C> <C>
Outstanding options at the beginning of year 284,500 $4.34 417,500 $3.53
Options granted 14,000 1.75
Options expired or canceled (147,000) 1.78
-------- ----- -------- -----
Outstanding options at the end of year 284,500 $4.34 284,500 $4.34
======== ===== ======== =====
</TABLE>
F-14
<PAGE>
ASTA FUNDING, INC.
Notes to Financial Statements
September 30, 1998 and 1997
NOTE J - STOCKHOLDERS' EQUITY (CONTINUED)
The following table summarizes information about the Plan's outstanding options
as of September 30, 1998:
<TABLE>
<CAPTION>
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
- --------------- ----------- --------------- -------- ----------- --------
<S> <C> <C> <C> <C> <C>
$0.01 25,000 6.05 $0.01 25,000 $0.01
$1.75 14,000 8.72 $1.75 12,000 $1.75
$4.50 - $5.00 245,500 7.18 $4.93 225,500 $4.95
</TABLE>
As of September 30, 1998, 420,000 shares have been reserved for the
exercise of stock options, including 135,500 shares available for
future grant.
[3] Common stock:
During the year ended September 30, 1997, an officer terminated his
employment with the Company. Pursuant to an agreement, 15,000 shares of
common stock owned by the former officer were canceled and another 25,000
shares are subject to cancellation should losses, through December 31,
1998, on certain loans exceed a defined amount.
NOTE K - 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 year
ended September 30, 1998 and 1997.
NOTE L - GAIN ON SALE OF LOANS
In 1997, the Company securitized and sold loans with limited recourse. Since the
Company did not retain the future economic benefits embodied in the loans and
can reasonably estimate its obligation under the recourse provisions (see Note
D), the transactions have been accounted for as sales. Accordingly, the Company
recognized a gain of $2,533,994 in 1997. Additionally, the Company entered into
an agreement to securitize and sell, through the same investment banker, an
additional $155,000,000 of loans through May 2000.
F-15
<PAGE>
ASTA FUNDING, INC.
Notes to Financial Statements
September 30, 1998 and 1997
NOTE M - 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, 1998 and 1997 about
the fair value of the financial instruments recorded on the Company's financial
statements in accordance with SFAS 107:
<TABLE>
<CAPTION>
1998 1997
----------------------------------- ------------------------------------
Carrying Value Fair Value Carrying Value Fair Value
----------------- -------------- ----------------- --------------
<S> <C> <C> <C> <C>
Cash, restricted cash and
and cash equivalents $ 225,333 $ 225,333 $3,050,385 $3,050,385
Loans receivable 15,903,553 17,975,405 3,247,542 3,803,681
Servicing assets and
residual interests 50,373 50,373 1,849,209 1,863,564
Advances under lines of
credit and due to affiliates 12,366,222 12,366,222 188,360 188,360
</TABLE>
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.
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 and due to affiliates:
Since these are primarily variable rate and short-term, the carrying amounts
approximate fair value.
F-16
<PAGE>
EXHIBIT INDEX
Exhibit
Number
- -------
3.1 Certificate of Incorporation. (1)
3.2 By laws.
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.
10.3 Employment Agreement, dated October 1, 1998, by and between the Company
and Mitchell Herman.
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).
(b) Reports on Form 8-K
The Registrant did not file any Current Reports on form 8-K during the quarter
ended September 30, 1998.
<PAGE>
BY-LAWS
OF
ASTA FUNDING, INC.
(Hereinafter called the "Corporation")
ARTICLE I
OFFICES
Section 1. Registered Office. The registered office of the
Corporation shall be in the City of Dover, County of Kent. State of Delaware.
Section 2. Other Offices. The Corporation may also have offices
at such other places both within and without the State of Delaware as tile Board
of Directors may from time to time determine.
ARTICLE II
MEETINGS OF STOCKHOLDERS
Section 1. Place of Meetings. Meetings of the stockholder for
the election of directors or for any other purpose shall be held at such time
and place, either within or without the State of Delaware as shall be designated
from time to time by the Board of Directors and stated in the notice of the
meeting or in a duly executed waiver of notice thereof.
Section 2. Annual Meetings. The Annual Meetings of stockholders
for the election of directors or for any other purpose shall be held at such
time and place, either within or without the State of Delaware as shall be
designated from time to time by the Board of Directors and stated in the notice
of the meeting, at which meetings the stockholders shall elect by a plurality
vote a Board of Directors, and transact such other business as may properly be
brought before the meeting. Written notice of the Annual Meeting stating the
place, date and hour of the meeting shall be given to each stockholder entitled
to vote at such meeting not less than ten nor more than sixty days before the
date of the meeting.
<PAGE>
Section 3. Special Meetings. Unless otherwise prescribed by law
or by the Certificate of Incorporation, Special Meetings of Stockholders, for
any purpose or purposes, may be called by either (i) the President, (ii) the
Secretary or (iii) any Assistant Secretary, if there be one, and shall be called
by any such officer at the request in writing of any one or more members of the
Board of Directors or upon the affirmative vote, verified in writing, of the
holders of twenty-five (25%) percent of the outstanding shares of Common Stock.
Written notice of a Special Meeting stating the place, date and hour of the
meeting and the purpose or purposes for which the meeting is called shall be
given not less than ten nor more than sixty days before the date of the meeting
to each stockholder entitled to vote at such meeting.
Section 4. Quorum. Except as otherwise provided by law or by the
Certificate of Incorporation, the holders of a majority of the capital stock
issued and outstanding and entitled to vote thereat, present in person or
represented by proxy, shall constitute a quorum at all meetings of the
stockholders for the transaction of business. If, however, such quorum shall not
be present or represented at any meeting of the stockholders, the stockholders
entitled to vote thereat, present in person or represented by proxy, shall have
power to adjourn the meeting from time to time, without notice other than
announcement at the meeting, until a quorum shall be present or represented. At
such adjourned meeting at which a quorum shall be present or represented, any
business may be transacted which might have been transacted at the meeting as
originally noticed. If the adjournment is for more than thirty days, or if after
the adjournment a new record date is fixed for the adjourned meeting, a notice
of the adjourned meeting shall be given to each stockholder entitled to vote at
the meeting.
<PAGE>
Section 5. Voting. Unless otherwise required by law, the
Certificate of Incorporation or these By-laws, any question brought before any
meeting of stockholders shall be decided by the vote of the holders of a
majority of the stock represented and entitled to vote thereat. Each stockholder
represented at a meeting of stockholders shall be entitled to cast one vote for
each share of the capital stock entitled to vote thereat held by such
stockholder. Such votes may he cast in person or by proxy but no proxy shall be
voted on or after three years from its date, unless such proxy provides for a
longer period. The Board of Directors, in its discretion, or the officer of the
Corporation presiding at a meeting of stockholders, in his discretion, may
require that any votes cast at such meeting shall be cast by written ballot.
Section 6. Consent of Stockholders in Lieu of Meeting. Unless
otherwise provided in the Certificate of Incorporation, any action required or
permitted to be taken at any Annual or Special Meeting of Stockholders of the
Corporation, may be taken without a meeting, without prior notice and without a
vote, if a consent in writing, setting forth the action so taken, shall be
signed by the holders of outstanding stock having not less than the minimum
number of votes that would be necessary to authorize or take such action at a
meeting at which all shares entitled to vote thereon were present and voted.
Such written consent shall be deemed effective upon receipt by the Secretary of
the Corporation of a copy of such written consent executed by each stockholder
of record by facsimile, telex, telegram or cable. Prompt notice of the taking of
the corporate action without a meeting by less than unanimous written consent
shall be given to those stockholders who have not consented in writing.
Section 7. List of Stockholders Entitled to Vote. The officer of
the Corporation who has charge of the stock ledger of the Corporation shall
prepare and make, at least ten days before every meeting of stockholders, a
complete list of the stockholders entitled to vote at the meetings arranged in
alphabetical order, and showing the address of each stockholder and the number
of shares registered in the name of each stockholder. Such list shall be open to
<PAGE>
the examination of any stockholder, for any purpose germane to the meeting,
during ordinary business hours, for a period of at least ten days prior to the
meeting, either at a place within the city where the meeting is to be held,
which place shall be specified in the notice of the meeting, or, if not so
specified, at the place where the meeting is to be held. The list shall also be
produced and kept at the time and place of the meeting during the whole time
thereof, and may be inspected by any stockholder of the Corporation who is
present.
Section 8. Stock Ledger. The stock ledger of the Corporation
shall be the only evidence as to who are the stockholders entitled to examine
the stock ledger, the list required by Section 7 of this Article II or the books
of the Corporation, or to vote in person or by proxy at any meeting of
stockholders.
ARTICLE III
DIRECTORS
Section 1. Number and Election of Directors. The Board of
Directors shall consist of one or more members. The number of directors may be
changed from time to time by resolution of the Board of Directors. Except as
provided in Section 2 of this Article, directors shall be elected by a plurality
of the votes cast at Annual Meetings of Stockholders, and each director so
elected shall hold office until the next Annual Meeting and until his successor
is duly elected and qualified or until his earlier resignation or removal. Any
director may resign at any time upon notice to the Corporation. Directors need
not be stockholders.
Section 2. Removal and Vacancies. At any time, the stockholders
may remove any director or the entire Board of Directors and elect directors to
fill the vacancies created by such removal, unless otherwise provided by law. A
director may be so removed, with or without cause, at any time.
<PAGE>
Vacancies and newly created directorships resulting from any
increase in the authorized number of directors may be filled by a majority of
the directors may be filled by a majority of the directors then in office,
though less than a quorum, or by a sole remaining director, and the directors so
chosen shall hold office until the next annual election and until their
successors are duly elected and shall qualify, unless sooner displaced. If there
are no directors in office, then an election of directors may be held in the
manner provided by statute. If, at the time of filling any vacancy or any newly
created directorship, the directors then in office shall constitute less than a
majority of the whole Board of Directors (as constituted immediately prior to
any such increase), the Court of Chancery may, upon application of any
stockholder or stockholders holding at least ten percent of the total number of
the shares at the time outstanding having the right to vote for such directors,
summarily order an election to be held to fill any such vacancies or newly
created directorships, or to replace the directors chosen by the directors then
in office.
Section 3. Duties and Powers. The business, operations and
affairs of the Corporation shall be managed by the Board of Directors; provided,
however, that the Board of Directors may delegate such management
responsibilities to such officer(s) as they may appoint to the extent permitted
by the Certificate of Incorporation, these By-laws and the laws of the State of
Delaware. All decisions concerning the affairs, operations and policies of the
Corporation shall be decided by the Board of Directors.
Section 4. Meetings. The Board of Directors of the Corporation
may hold meetings, both regular and special, either within or without the State
of Delaware. Regular meetings of the Board of Directors may be held without
notice at such time and at such place as may from time to time be determined by
the Board of Directors. Any one or more members of the Board of Directors, or
the stockholders, acting by a majority vote,
<PAGE>
may call a meeting of the Board of Directors or require action by consent for
the Directors, including a meeting by written consent, at any time. Notice
thereof stating the place, date and hour of the meeting shall be given to each
director either by mail not less than forty-eight (48) hours before the date of
the meeting, by telephone or telegram on twenty-four (24) hours' notice, or on
such shorter notice as the person or persons calling such meeting may deem
necessary or appropriate in the circumstances.
Section 5. Quorum. Except as may be otherwise specifically
provided by law, the Certificate of Incorporation or these By-laws, at all
meetings of the Board of Directors, a majority of the entire Board of Directors
shall constitute a quorum for the transaction of business and the act of a
majority of the directors present at any meeting at which there is a quorum
shall be the act of the Board of Directors. If a quorum shall not be present at
any meeting of the Board of Directors, the directors present thereat may adjourn
the meeting from time to time, without notice Other than announcement at the
meeting, until a quorum shall be present.
Section 6. Actions of Board. Unless otherwise provided by the
Certificate of Incorporation or these By-laws, any action required or permitted
to be taken at any meeting of the Board of Directors or of any committee thereof
may be taken without a meeting, if all the members of the Board of Director or
committee, as the case may be, consent thereto in writing, and the writing or
writings are flied with the minutes of proceedings of the Board of Directors or
committee. Such written consent shall be deemed effective upon receipt by the
Secretary of the Corporation of a copy of such written consent by facsimile,
telex, telegram or cable executed by each director.
Section 7. Meetings by Means of Conference Telephone. Unless
otherwise provided by the Certificate of Incorporation or these By-laws, members
of the Board of Directors of the Corporation, or any committee designated by the
<PAGE>
Board of Directors, may participate in a meeting of the Board of Directors or
such committee by means of a conference telephone or similar communications
equipment by means of which all persons participating in the meeting can hear
each other, and participation in a meeting pursuant to this Section 7 shall
constitute presence in person at such meeting.
Section 8. Committees. The Board of Directors may, by resolution
passed by a majority of the entire Board of Directors, designate one or more
committees, each committee to consist of one or more of the directors of the
Corporation. The Board of Directors may designate one or more directors as
alternate members of any committee, who may replace any absent or disqualified
member at any meeting of any such committee. In the absence or disqualification
of a member of a committee, and in the absence of a designation by the Board of
Directors of an alternate member to replace the absent or disqualified member,
the member or members thereof present at any meeting and not disqualified from
voting, whether or not he or they constitute a quorum, may unanimously appoint
another member of the Board of Directors to act at the meeting in the place of
any absent or disqualified member. Any committee, to the extent allowed by law
and provided in the resolution establishing such committee, shall have and may
exercise all the powers and authority of the Board of Directors in the
management of the business and affairs of the Corporation. Each committee shall
keep regular minutes and report to the Board of Directors when required.
Section 9. Compensation. The directors may be paid their
expenses, if any, of attendance at each meeting of the Board of Directors and
may be paid a fixed sum for attendance at each meeting of the Board of Directors
or a stated salary as director. No such payment shall preclude any director from
serving the Corporation in any other capacity and receiving compensation
therefor. Members of special or standing committees may be allowed like
compensation for attending committee meetings.
<PAGE>
Section 10. Interested Directors. No contract or transaction
between the Corporation and one or more of its directors or officers, or between
the Corporation and any other corporation, partnership, association, or other
organization in which one or more of its directors or officers are directors or
officers, or have a financial interest, shall be void or voidable solely for
this reason, or solely because the director or officer is present at or
participates in the meeting of the Board of Directors or committee thereof which
authorizes the contract or transaction, or solely because his or their votes are
counted for such purpose if (i) the material facts as to his or their
relationship or interest and as to the contract or transaction are disclosed or
are known to the Board of Directors or the committee, and the Board of Directors
or committee in good faith authorizes the contract or transaction by the
affirmative votes of a majority of the disinterested directors, even though the
disinterested directors be less than a quorum; or (ii) the material facts as to
his or their relationship or interest and as to the contract or transaction are
disclosed or are known to the stockholders entitled to vote thereon, and the
contract or transaction is specifically approved in good faith by vote of the
stockholders; or (iii) the contract or transaction is fair as to the Corporation
as of the time it's authorized, approved or ratified, by the Board of Directors,
a committee thereof or the stockholders. Common or interested directors may be
counted in determining the presence of a quorum at a meeting of the Board of
Directors or of a committee, which authorizes the contract or transaction.
<PAGE>
ARTICLE IV
OFFICERS
Section 1. General. The officers of the Corporation shall be
chosen by the Board of Directors and shall be a President, Vice President,
Secretary and Treasurer. The Board of Directors, in its discretion, may also
choose a Chairman of the Board of Directors (who must be a director), Assistant
Secretaries, Assistant Treasurers and other officers. Any number of offices may
be held by the same person, unless otherwise prohibited by law, the Certificate
of Incorporation or these By-laws. The officers of the Corporation need not be
stockholders of the Corporation nor, except in the case of the Chairman of the
Board of Directors, need such officers be directors of the Corporation.
Section 2. Election. The Board of Directors at its first meeting
held after each Annual Meeting of Stockholders shall elect the officers of the
Corporation who shall hold their offices for such terms and shall exercise such
powers and perform such ditties as shall be determined from time to time by the
Board of Directors; and all officers of the Corporation shall hold office until
their successors are chosen and qualified, or until their earlier resignation or
removal. Any officer elected by the Board of Directors may be removed at any
time by the affirmative vote of a majority of the Board of Directors. Any
vacancy occurring in any office of the Corporation shall be filled by the Board
of Directors. The salaries of all officers of the Corporation shall be fixed by
the Board of Directors.
Section 3. Voting Securities Owned by the Corporation. Powers of
attorney, proxies, waivers of notice of meeting, consents and other instruments
relating to securities owned by the Corporation may be executed in the name of
and on behalf of the Corporation by the President or any Vice President and any
such officer may, in the name of and on behalf of the Corporation, take all such
action as any such officer may deem advisable to vote in person or by proxy at
any meeting of security holders of any corporation in which the Corporation may
<PAGE>
own securities and at any such meeting shall possess and may exercise any and
all rights and power incident to the ownership of such securities and which, as
Section 4. The President shall be the Chief Executive Officer of the Corporation
and shall preside at all meetings of the stockholders and of the Board of
Directors. He shall have such powers and perform such duties as are prescribed
by the Board of Directors. Subject to the control and direction of the Board of
Directors, the President may enter into any contract or execute and deliver any
instrument in the name and on behalf of the Corporation. In general, he shall
perform all duties incident to the office of President, as herein defined, and
all such other duties as from time to time may be assigned to him by the Board
of Directors.
Section 5. Vice-Presidents. At the request of the President or
in his absence or in the event of his inability or refusal to act (and if there
be no Chairman of the Board of Directors), the Vice-President or the
Vice-Presidents if there is more than one (in the order designated by the Board
of Directors) shall perform the duties of the President, and when so acting,
shall have all the powers of and be subject to all the restrictions upon the
President. Each Vice-President shall perform such other duties and have such
other powers as the Board of Directors from time to time may prescribe. If there
be no Chairman of the Board of Directors and no Vice President, the Board of
Directors shall designate the officer of the Corporation who, in the absence of
the President or in the event of the inability or refusal of the President to
act, shall perform the duties of the President, and when so acting, shall have
all the powers of and be subject to all the restrictions upon the President.
Section 6. Secretary. The Secretary shall attend all meetings of
the stockholders and record all the proceedings thereat in a book or books to be
kept for that purpose; the Secretary shall also perform like duties for the
Board of Directors and for standing committees when required. The Secretary
shall give, or cause to be given, notice of all meetings of the stockholders and
<PAGE>
special meetings of the Board of Directors, and shall perform such other duties
as may be prescribed by the Board of Directors or President, under whose
supervision he shall be. If the Secretary shall be unable or shall refuse to
cause to be given notice or all meetings of the stockholders and special
meetings of the Board of Directors, and if there be no Assistant Secretary, then
either the Board of Directors or the President may choose another officer to
cause such notice to be given. The Secretary shall have custody of the seal of
the Corporation and the Secretary or any Assistant Secretary, if there be one,
shall have authority to affix the same to any instrument requiring it and when
so affixed, it may be attested by the signature of the Secretary or by the
signature of any such Assistant Secretary. The Board of Directors may give
general authority to any other officer to affix the seal of the Corporation and
to attest the affixing by his signature. The Secretary shall see that all books,
reports, statements, certificates and other documents and records required by
law to be kept or filed are properly kept or filed, as the case may be.
Section 7. Treasurer. The Treasurer shall have the custody of
the corporate funds and securities and shall keep full accurate accounts of
receipts and disbursements in books belonging to the Corporation and shall
deposit all moneys and other valuable effects in the name and to the credit of
the Corporation in such depositories as may be designated by the Board of
Directors. The Treasurer shall disburse the funds of the Corporation as may be
ordered by the Board of Directors, taking proper vouchers for such
disbursements, and shall render to the President and the Board of Directors, at
its regular meetings, or when the Board of Directors so requires, an account of
all his transactions as Treasurer and of the financial condition of the
Corporation. If required by the Board of Directors, the Treasurer shall give the
Corporation a bond in such sum and with such surety or sureties as shall be
satisfactory to the Board of Directors for the faithful performance of his
<PAGE>
office and for the restoration to the Corporation, in the case of his death,
resignation, retirement or removal from office, of all books, papers, vouchers,
money and other property of whatever kind in his possession or under his control
belonging to the Corporation.
Section 8. Assistant Secretaries. Except as may be otherwise
provided in these By-laws, Assistant Secretaries, if there be any, shall perform
such duties and have such powers as from time to time may be assigned to them by
the Board of Directors, the President, any Vice-President, if there be one, or
the Secretary, and in the absence of the Secretary or in the event of his
disability or refusal to act, shall perform the duties of the Secretary, and
when so acting, shall have all the powers of and be subject to all the
restrictions upon the Secretary.
Section 9. Assistant Treasurers. Assistant Treasurers, if there
be any, shall perform such duties and have such powers as from time to time may
be assigned to them by the Board of Directors, the President, any
Vice-President, if there be one, or the Treasurer, and in the absence of the
Treasurer or in the event of his disability or refusal to act, shall perform the
duties of the Treasurer, and when so acting, shall have all the powers of and be
subject to all the restrictions upon the Treasurer. If required by the Board of
Directors, an Assistant Treasurer shall give the Corporation a bond in such sum
and with such surety or sureties as shall be satisfactory to the Board of
Directors for the faithful performance of the duties of his office and for the
restoration to the Corporation, in case of his death, resignation, retirement or
removal from office, of all books, papers, vouchers, money and other property of
whatever kind in his possession or under his control belonging to the
Corporation.
Section 10. Other Officers. Such other officers as the Board of
Directors may choose shall perform such duties and have such powers as from time
to time may be assigned to them by the Board of Directors. The Board of
Directors may delegate to any other officer of the Corporation the power to
choose such other officers and to prescribe their respective duties and powers.
<PAGE>
ARTICLE V
STOCK
Section 1. Form of Certificates. Every holder of stock in the
Corporation shall be entitled to have a certificate signed, in the name of the
Corporation (i) by the President or a Vice-President and (ii) by the Treasurer
or an Assistant Treasurer, or the Secretary or an Assistant Secretary of the
Corporation, certifying the number of shares owned by him in the Corporation.
Section 2. Signatures. Where a certificate is countersigned by
(i) a transfer agent other than the Corporation or its employee, or (ii) a
registrar other than the Corporation or its employee, any other signature on the
certificate may be a facsimile. In case any officer, transfer agent or registrar
who has signed or whose facsimile signature has been placed upon a certificate
shall have ceased to be such officer, transfer agent or registrar before such
certificate is issued it may be issued by the Corporation with the same effect
as if he were such officer, transfer agent or registrar at the date of issue.
Section 3. Lost Certificates. The Board of Directors may direct
a new certificate to be issued in place of any certificate theretofore issued by
the Corporation alleged to have been lost, stolen or destroyed, upon the making
of an affidavit of that fact by the person claiming the certificate of stock to
be lost, stolen or destroyed. When authorizing such issue of a new certificate,
the Board of Directors may, in its discretion and as a condition precedent to
the issuance thereof, require the owner of such lost, stolen or destroyed
certificate, or his legal representative, to advertise the same in such manner
as the Board of Directors shall require and/or to give the Corporation a bond in
such sum as it may direct as indemnity against any claim that may be made
against the Corporation with respect to the certificate alleged to have been
lost, stolen or destroyed.
Section 4. Transfers. Stock of the Corporation shall be
transferable in the manner prescribed by law and in these By-laws. Transfers of
stock shall be made on the books of the Corporation only by the person named in
the certificate or by his attorney lawfully constituted in writing and upon the
surrender of the certificate therefor, which shall be cancelled before a new
certificate shall be issued.
Section 5. Record Date. In order that the Corporation may
determine the stockholders entitled to notice of or to vote at any meeting of
stockholders or any adjournment thereof, or entitled to express consent to
corporate action in writing without a meeting, or entitled to receive payment of
any dividend or other distribution or allotment of any rights, or entitled to
exercise any rights in respect of any change, conversion or exchange of stock,
or for the purpose of any other lawful action, the Board of Directors may fix,
in advance, a record date, which shall not be more than sixty days nor less than
ten days before the date of such meeting, nor more than sixty days prior to any
other action. A determination of stockholders of record entitled to notice of or
to vote at a meeting of stockholders shall apply to any adjournment of the
meeting, provided, however, that the Board of Directors may fix a new record
date for the adjourned meeting.
Section 6. Beneficial Owners. The Corporation shall be entitled
to recognize the exclusive right of a person registered on its books as the
owner of shares to receive dividends, and to vote as such owner, and to hold
liable for calls and assessments a person registered on its books as the owner
of shares, and shall not be bound to recognize any equitable or other claim to
or interest in such share or shares on the part of any other person, whether or
not it shall have express or other notice thereof, except as otherwise provided
by law.
<PAGE>
ARTICLE VI
NOTICES
Section 1. Notices. Whenever written notice is required by law,
the Certificate of Incorporation or these By-laws, to be given to any director,
member of a committee or stockholder, such notice may be given by mail,
addressed to such director, member of a committee or stockholder, at his address
as it appears on the records of the Corporation, with postage thereon prepaid
and such notice shall be determined to be given at the time when the same shall
be deposited in the United States mail. Written notice may also be given
personally or by facsimile, telex, telegram or cable.
Section 2. Waivers of Notice. Whenever any notice is required by
law, the Certificate of Incorporation or these by-laws, to be given to any
director, member of a committee or stockholder, a waiver thereof in writing,
signed, by the person or persons entitled to said notice, whether before or
after the time stated therein, shall be deemed equivalent thereto.
ARTICLE VII
GENERAL PROVISIONS
Section 1. Dividends. Dividends upon the capital stock of the
Corporation, subject to the provisions of the Certificate of Incorporation, if
any, may be declared by the Board of Directors at any regular or special
meeting, and may be paid in cash, in property, or in shares of the capital
stock. Before payment of any dividend, there may be set aside out of any funds
of the Corporation available for dividends such sum or sums as the Board of
Directors from time to time, in its absolute discretion, deems proper as a
reserve or reserves to meet contingencies, or for equalizing dividends, or for
repairing or maintaining any property of the Corporation, or for any proper
purpose, and the Board of Directors may modify or abolish any such reserve.
<PAGE>
Section 2. Disbursements. All checks or demands for money and
notes of the Corporation shall be signed by such officer or officers or such
other person or persons as the Board of Directors may from time to time
designate.
Section 3. Fiscal Year. The fiscal year of the Corporation shall
be fixed by resolution of the Board of Directors.
Section 4. Corporate Seal. The corporate seal shall have
inscribed thereon the name of the Corporation, the year of its organization and
the words "Corporate Seal, Delaware". The seal may be used by causing it or a
facsimile thereof to be impressed, affixed, reproduced, or otherwise.
ARTICLE VIII
INDEMNIFICATION
Section 1. Power to Indemnify in Actions, Suits or Proceedings
other Than those by or in the right of the Corporation. Subject to Section 3 of
this Article VIII, the Corporation shall indemnify any person who was or is a
party or is threatened to be made a party to any threatened, pending or
completed action, suit or proceeding, whether civil, criminal, administrative or
investigative (other than an action by or in the right of the Corporation) by
reason of the fact that he is or was a director or officer of the Corporation,
or is or was a director or officer of the Corporation serving at the request of
the Corporation as a director, officer, employee or agent of another
corporation, partnership, joint venture, trust, employee benefit plan or other
enterprise, against expenses (including attorneys' fees), judgements, fines and
<PAGE>
amounts paid in settlement actually and reasonably incurred by him in collection
with such action, suit or proceeding if he acted in good faith and in a manner
he reasonably believed to be in or not opposed to the best interests of the
Corporation, and, with respect to any criminal action or proceeding, had no
reasonable cause to believe his conduct was unlawful. The termination of any
action. suit or proceeding by judgment, order, settlement, conviction, or upon a
plea of nolo contendere or its equivalent, shall not, of itself, create a
presumption that the person did not act in good faith and in a manner which he
reasonably believed to be in or not opposed to the best interests of the
Corporation, and, with respect to any criminal action or proceeding, had
reasonable cause to believe that his conduct was unlawful.
Section 2. Power to Indemnify in Actions, Suits or Proceedings
by or in the Right of the Corporation. Subject to Section 3 of this Article
VIII, the Corporation shall indemnify any person who was or is a party or is
threatened to be made a party to any threatened, pending or completed action or
suit by or in the right of the Corporation to procure a judgment in its favor by
reason of the fact that he is or was a director or officer of the Corporation,
or is or was a director or officer of the Corporation serving at the request of
the Corporation as a director, officer, employee or agent of another
corporation, partnership, joint venture, trust, employee benefit plan or other
enterprise against expenses (including attorneys' fees) actually and reasonably
incurred by him in connection with the defense or settlement of such action or
suit if he acted in good faith and in a manner he reasonably believed to be in
or not opposed to the best interests of the Corporation; except that no
indemnification shall be made in respect of any claim, issue or matter as to
which such person shall have been adjudged to be liable to the Corporation
unless and only to the extent that the Court of Chancery or the court in which
such action or suit was brought shall determine upon application that, despite
the adjudication of liability but in view of all the circumstances of the case,
such person is fairly and reasonably entitled to indemnity for such expenses
which the Court of Chancery or such other Court shall deem proper.
<PAGE>
Section 3. Authorization of Indemnification. Any indemnification
under this Article VIII (unless ordered by a court) shall be made by the
Corporation only as authorized in the specific case upon a determination that
indemnification of the director, officer, employee or agent is proper in the
circumstances because he has met the applicable standard of conduct set forth in
Section 1 or Section 2 of this Article VIII, as the case may be. Such
determination shall be made (i) by the Board of Directors by a majority vote of
a quorum consisting of directors who were rot parties to such action, suit or
proceeding, or (ii) if such a quorum is not obtainable, or, even if obtainable a
quorum of disinterested directors so directs, by independent legal counsel in a
written opinion, or (iii) by the stockholders. To the extent, however, that a
director, officer, employee or agent of the Corporation has been successful on
the merits or otherwise in defense of any action, suit or proceeding described
above, or in defense of any claim, issue or matter therein, he shall be
indemnified against expenses (including attorneys' fees) actually and reasonably
incurred by him in connection therewith, without the necessity of authorization
in the specific case.
Section 4. Good Faith Defined. For purposes of any determination
under Section 1 and 2 of this Article VIII, a person shall be deemed to have
acted in good faith and in a manner he reasonably believed to be in or not
opposed to the best interests the Corporation, or, with respect to any criminal
action or proceeding, to have had no reasonable cause to believe his conduct was
unlawful, if his action is based on the records or books of account of the
Corporation or another enterprise, or on information supplied to him by the
officers of the Corporation or another enterprise in the course of their duties,
or on the advice of legal counsel for the Corporation or another enterprise or
<PAGE>
on information or records given or reports made to the Corporation or another
enterprise by an independent certified public accountant or by an appraiser or
other expert selected with reasonable care by the Corporation or another
enterprise. The term "another enterprise" as used in this Section 4 shall mean
any other corporation or any partnerships joint venture, trust, employee benefit
plan or other enterprise of which such person is or was serving at the request
of the Corporation as a director, officer, employee or agent. The provisions of
this Section4 shall not be deemed to be exclusive or to limit in any way the
circumstances in which a person may be deemed to have met the applicable
standard of conduct set forth in Sections 1 or 2 of this Article VIII, as the
case may be.
Section 5. Indemnification by a Court. Notwithstanding any
contrary determination in the specific case under Section 3 of this Article
VIII, and notwithstanding the absence of any determination thereunder, any
director, officer, employee or agent may apply to any court of competent
jurisdiction in the State of Delaware for indemnification to the extent
otherwise permissible under Sections 1 and 2 of this Article VIII. The basis of
such indemnification by a court shall be a determination by such court that
indemnification of the director, officer, employee or agent is proper in the
circumstances because he has met the applicable standards of conduct set forth
in Sections 1 or 2 of this Article VIII, as the case may be. Neither a contrary
determination in the specific case under Section 3 of this Article VIII nor the
absence of any determination thereunder shall be a defense to such application
or create a presumption that the director, officer, employee or agent seeking
indemnification has not met any applicable standard of conduct. Notice of any
application for indemnification pursuant to this Section 5 shall be given to the
Corporation promptly upon the filing of such application. If successful, in
whole or in part, the director, officer, employee or agent seeking
indemnification shall also be entitled to be paid the expense of prosecuting
such application.
<PAGE>
Section 6. Expenses Payable in Advance. Expenses incurred by a
director or officer in defending or investigating a threatened or pending
action, suit or proceeding may be paid by the Corporation in advance of the
final disposition of such action, suit or proceeding upon receipt of an
undertaking by or on behalf of such director, officer, employee or agent to
repay such amount if it shall ultimately be determined that he is not entitled
to be indemnified by the Corporation as authorized in this Article VIII.
Section 7. Nonexclusively of Indemnification and Advancement of
Expenses. The indemnification and advancement of expenses provided by or granted
pursuant to this Article VIII shall not be deemed exclusive of any other rights
to which those seeking indemnification or advancement of expenses may be
entitled under any By-law, agreement, contract, vote of stockholders or
disinterested directors or pursuant to the direction (howsoever embodied) of any
court of competent jurisdiction or otherwise, both as to action in his official
capacity and to action in another capacity while holding such office, it being
the policy of the Corporation that indemnification of the persons specified in
Sections 1 and 2 of this Article VIII shall be made to the fullest extent
permitted by law. The provisions of this Article VIII shall not be deemed to
preclude the indemnification of any person who is not specified in Sections 1 or
2 of this Article VIII but whom the Corporation has the power or obligation to
indemnify under the provisions of the General Corporation law of the State of
Delaware, or otherwise.
Section 8. Insurance. The Corporation may purchase and maintain
insurance on behalf of any person who is or was a director, officer, employee or
agent of the Corporation, or is or was a director or officer of the Corporation
serving at the request of the Corporation as a director, officer, employee or
agent of another corporation, partnership, joint venture, trust, employee
benefit plan or other enterprise against any liability asserted against him and
incurred by him in any such capacity, or arising out of his status as such,
whether or not the Corporation would have the power or the obligation to
indemnify him against such liability under the provisions of this Article VIII.
<PAGE>
Section 9. Certain Definitions. For purposes of this Article
VIII, references to "the Corporation" shall include, in addition to the
resulting corporation, any constituent corporation (including any constituent of
a constituent) absorbed in a consolidation or merger which, if its separate
existence had continued, would have had power and authority to indemnify its
directors, officers, employees or agents, so that any person who is or was a
director, officer, employee or agent of such constituent corporation, or is or
was a director or officer of such constituent corporation serving at the request
of such constituent corporation as a director, officer, employee or agent of
another corporation, partnership, joint venture, trust, employee benefit plan or
other enterprise, shall stand in the same position under the provisions of this
Article VIII with respect to the resulting or surviving corporation as he would
have with respect to such constituent corporation if its separate existence had
continued. For purposes of this Article VIII, references to "fines" shall
include any excise taxes assessed on a person with respect to an employee
benefit plan and references to "serving at the request of the Corporation" shall
include any service as a director, officer, employee or agent of the Corporation
which imposes duties on, or involves services by, such director, officer,
employee or agent with respect to an employee benefit plan, its participants or
beneficiaries; and a person who acted in good faith and in a manner he
reasonably believed to be in the interest of the participant and beneficiaries
of an employee benefit plan shall be deemed to have acted in a "not opposed to
the best interests of the Corporation" as referred to in this Article VIII.
Section 10. Survival of Indemnification and Advancement of
Expenses. The indemnification and advancement of expenses provided by, or
granted pursuant to, this Article VIII shall, unless otherwise provided when
authorized or ratified, continue as to a person who has ceased to be a director,
officer, employee or agent and shall inure to the benefit of the heirs,
executors and administrators of such a person.
<PAGE>
Section 11. Limitation on Indemnification. Notwithstanding
anything contained in this Article VIII to the contrary, except for proceedings
to enforce rights to indemnification (which shall be governed by Section 5
hereof), the Corporation shall not be obligated to indemnify any director,
officer, employee or agent in connection with a proceedings (or part thereof)
initiated by such person unless such proceeding (or part thereof) was authorized
or consented to by the Board of Directors of the Corporation.
Section 12. Indemnification of Employees and Agents. The
Corporation may, to the extent authorized from time to time by the Board of
Directors, provide rights to indemnification and to the advancement of expenses
to employees and agents of the Corporation similar to those conferred in this
Article VIII to directors and officers of the Corporation.
ARTICLE IX
AMENDMENTS
Section 1. These By-laws may be altered, amended or repealed, in
whole or in part, or new By-laws may be adopted by the stockholders or by the
Board of Directors, provided, however, that notice of such alteration,
amendment, repeal or adoption of new By-laws be contained in the notice of such
meeting of stockholders or Board of Directors as the case may be All such
amendments approved by either the holders of a majority of the outstanding
capital stock entitled to vote thereon or by a majority of the entire Board of
Directors then in office.
<PAGE>
Section 2. Entire Board of Directors. As used in this Article IX
and in these By-laws generally, the term '"Entire Board of Directors" means the
total number of directors which the Corporation would have if there were no
vacancies.
<PAGE>
EMPLOYMENT AGREEMENT
AGREEMENT, dated as of the 1st day of October, 1998 by and between ASTA
FUNDING, INC., a Delaware corporation, with offices at 210 Sylvan Ave.,
Englewood Cliffs, NJ 07632 (the "Company") and GARY STERN, an individual
residing at 1252 Lyle Terrace, Fair Lawn, NJ 07410 ( the "Employee")
W I T N E S E T H:
WHEREAS, the parties desire to enter this agreement to set forth the
terms of the Employee's employment by the Company.
NOW, THEREFORE, in consideration of the mutual premises and covenants
set forth herein and for other good and value consideration, the receipt,
adequacy and legal sufficiency of which are hereby acknowledged, the Company and
the Employee mutually agree as follows:
1. Employment Duties.
(a) Employment. The Company agrees to employ the Employee, and the
Employee agrees to accept employment with the Company, on the terms and
conditions set forth.
(b) Scope of Duties. During the term of this Agreement, Employee
shall devote his entire business time, attention and energy to the business, and
to seeking improvement in the profitability, of the Company. He shall serve as
President and Chief Executive Officer of the Company and its subsidiaries and
shall have the authority to perform and shall perform all of the duties that are
customary for the offices of the President and Chief Executive Officer, subject
at all times to the control and direction of the Board of Directors of the
Company, and shall perform such services as typically are provided by the
President and Chief Executive Officer of a corporation and such other services
consistent therewith as shall be assigned to him from time to time by the Board
of Directors of the Company.
(c) Service. The Employee shall perform his duties in a diligent
manner; shall not engage in activities which are or could be detrimental to the
existing or future business of the Company and its subsidiaries; and shall
observe and conform to all laws, customs, and standards of business ethics and
honest business practices. The Employee shall be requested, and does hereby
agree, to be a full time employee of the Company. The Company acknowledges,
however, that the Employee may serve as the Chief Executive Officer of Asta
Group, Incorporated. During the term of this Agreement, Employee shall not
engage in any other business activity which, in the reasonable judgement of the
Company's Board of Directors, conflicts with the duties of Employee hereunder,
whether or not such activity is pursued for gain, profit or other pecuniary
advantage; provided, however, that it is understood that this Section 1 (c)
shall not preclude Employee from making passive investments in other companies.
<PAGE>
(d) Professional Standards. Recognizing and acknowledging that it is
essential for the protection and enhancement of the name and business of the
Company and its subsidiaries and the good will pertaining thereto, the Employee
shall perform his duties under this Agreement professionally and in accordance
with the standards established by the Company from time to time; and the
Employee shall not act, and shall refrain from acting, in any manner that could
harm or tarnish the name, business or income of the Company and its subsidiaries
or the good will pertaining thereto.
2. Compensation.
(a) Base Salary. For all services rendered by the Employee during
the term of this Agreement , the Company shall pay the Employee an annual base
salary ("Base Salary") of $151,250 payable in accordance with the Company's
customary payment policies and periods. In the sole discretion of the Board of
Directors, the Employee's annual Base Salary may be increased by up to 10% of
the amount of his then current salary.
(b) Bonuses. The employee shall be eligible to receive bonuses as
determined by the Board of Directors in its sole discretion.
(c) Stock Options. The Employee shall be eligible to receive stock
options as determined by the Board of Directors in its sole discretion.
(d) Fringe Benefits. During the term of this Agreement, the Company
shall obtain and maintain a term life insurance policy in the amount of
$1,000,000 naming the Employee's designee as beneficiary, (ii) shall maintain an
excess disability insurance policy for the Employee, (iii) shall provide to the
Employee and the Employee's family full health insurance coverage, and (iv),
shall provide to the Employee a leased luxury automobile along with automobile
insurance. Employee shall use such automobile principally for business purposes.
(e) Vacation. The Employee shall be entitled to an annual vacation
of fifteen (15) working days for each full calendar year of employment
hereunder, which may be taken all at once or from time to time; provided,
however, that (i) the Employee shall schedule such vacation time so as to
mitigate the adverse effects to the Company of the Employee's absence; (ii) the
Employee shall give the Company at least thirty days (30) days notice of
consecutive vacation days in excess of five (5) to be taken by the Employee at
any one time; and (iii) up to one (1) week unused vacation time during the
calendar year may be carried over and used by the Employee in the following
calendar year.
3. Non-Competition.
(a) In view of the Employee's knowledge of the trade secrets and
other proprietary information relating to the business of the Company and its
subsidiaries and their customers and dealers which the Employee has heretofore
obtained and is expected to obtain during the term the Employee is employed
under this Agreement (the "Employment Period"), and in consideration of the
compensation to be received
<PAGE>
hereunder, the Employee agrees: (i) that he will not during the Employment
Period Participate In (as such term hereinafter defined) any other business or
organization if such business or organization now is or shall then be competing
with or be of a nature similar to the business of the Company or its
subsidiaries and (ii) (A) for a period of eighteen (18) months after the
Termination Date (as defined in Section 7) due to a termination of this
Agreement for Cause or (B) for such period as the Company shall continue to pay
to the Employee his Base Salary and insurance benefits in accordance with
Section 9(b) after a termination of the Employee's employment Without Cause, he
will not in any geographic area in which the Company does business as of the
Termination Date compete with or be engaged in the same business as, or
Participate In, any other business or organization which competes with or is
engaged in the same business as, the Company or its subsidiaries with respect to
any service offered or activity engaged in up to the Termination Date, except
that in each case the provisions of this Section 3 will not be deemed breached
merely because the Employee owns not more than 2% of the outstanding common
stock of a corporation, if, at the time of its acquisition by the Employee, such
stock is listed on a national securities exchange, is reported on NASDAQ, or is
regularly traded in the over-the-counter market by a member of a national
securities exchange.
(b) The term "Participate In" shall mean: "directly or indirectly,
for his own benefit or for, or through any other person, firm, or corporation,
own, manage, operate, control, loan money to (provide, that an investment in
debt instruments issued pursuant to an effective registration statement under
the Securities Act of 1993, as amended shall not be deemed to be a loan), or
participate in the ownership, management, operation, or control of, or be
connected as a director, officer, employee, partner, consultant, agent,
independent contractor, or otherwise with, or acquiesce in the use of his name
in."
(c) During the Employment Period and, in the case of the termination
of the Employee's employment for Cause only, for a period one (1) year after the
Termination Date, the Employee will not directly or indirectly:
(i) reveal the name of, solicit, use or interfere with, or
endeavor to entice away from the Company (or any of its subsidiaries) any of
their customers, vendors, dealers which originate loans purchased by the Company
("Dealers") or employees, or
(ii) employ any person who, at any time up to the Termination
Date, was an employee of the Company or its subsidiaries without the written
consent of the Company.
(d) The Employee agrees that the provisions of this Section 3 are
necessary and reasonable to protect the Company in the conduct of its business.
If any restriction contained in this Section 3 shall be deemed to be invalid,
illegal, or unenforceable by reason of the extent, duration, or geographical
scope thereof, or otherwise, then the court making such determination shall have
the right to reduce such
<PAGE>
extent, duration, geographical scope, or other provisions hereof, and in its
reduced from such restriction shall then be enforceable in the manner
contemplated hereby.
4. Confidential Information. All confidential information which the
Employee may now possess, may obtain during or after the Employment Period, or
may create prior to the end of the Employment Period relating to the business of
the Company or its subsidiaries or of any of their respective customers, vendors
or Dealers shall not be published, disclosed, or made accessible by him to any
other person, firm or corporation either during or after the Employment Period
or used by him except during the Employment Period in the business and for the
benefit of the Company or its subsidiaries without the prior written consent of
the Company. The Employee shall return all tangible evidence of such
confidential information to the Company prior to or at the end of the Employment
Period.
5. Rights of the Company.
(a) Any interest in copyrights, copyrightable works, developments,
discoveries, designs and processes, patents, patent applications, inventions and
technological innovations (collectively, "Inventions") which the Employee (i)
owns, conceives of or develops, alone or with others, (A) relating to the
business of the Company or its subsidiaries or any business in which the Company
(or its subsidiaries) contemplates being engaged or (B) which anticipate
research or development of the Company or its subsidiaries, or (ii) conceives of
or develops utilizing the time, material, facilities or information of the
Company or its subsidiaries, in either case during the Employment Period, shall
belong to the Company.
(b) As soon as the Employee owns, conceives of or develops any
Invention, the Employee shall immediately communicate such fact in writing to
the Board of Directors of the Company. Upon the request of the Company, the
Employee shall, without further compensation but at the Company's expense
(subject to clause (i) below) execute all such assignments and other documents
(including applications for trademarks, copyrights and patents and assignments
thereof) and take all such other action as the Company may reasonably request,
including obtaining spousal consents or waivers, (i) to vest in the Company all
right, title and interest of the Employee in and to such Inventions, free and
clear of all liens, mortgages, security interests, pledges, charges and
encumbrances ( the Employee to take such action, at his expense, as is necessary
to remove all such liens) and (ii) if patentable or copyrightable, to obtain
patents or copyrights (including extensions and renewals) therefor in any and
all jurisdictions in and outside the United States in the name of the Company or
in such other names(s) as the Company shall determine.
6. Insurance. The Employee agrees to submit to such medical
examinations as may be reasonably required by the Company to enable the Company
to obtain, at its opinion, key man life insurance on the life of the Employee in
such amount and with such insurer as the Company may determine in its sole
discretion.
7. Employment Period. The Employment Period shall commence on the date
<PAGE>
of this Agreement and shall continue for a term ending on September 30, 2001 or
such earlier date on which any of the following events occurs (the "Termination
Date"):
(a) the death of the Employee;
(b) the voluntary resignation of the Employee;
(c) the termination by the Board of Directors of the Employee's
employment for Disability (as hereinafter defined);
(d) the termination by the Board of Directors of the Employee's
employment for Cause (as hereinafter defined); or
(e) the termination by the Board of Directors of the Employee's
employment Without Cause (as hereafter defined)
8. Definitions Relating to Termination
(a) Disability
The term "Disability" shall mean any physical or mental
condition of the Employee which, in the reasonable discretion of the Board of
Directors, after consultation with the Employee's physician, materially impairs
the Employee's ability to render the services to be performed by him hereunder
for a period of 90 consecutive days or for at least 120 days in any consecutive
180 day period.
(b) Cause
The term "Cause" shall mean the good faith finding by the Board
of Directors of the Company upon resolution adopted by it of the existence of
any one of the following:
(i) The Employee's failure or refusal to perform specific
written directives consistent with his duties and responsibilities as set forth
in Section 1 hereof, which lack of performance is not cured within 15 days after
written notice thereof or 30 days if at the 15th day and thereafter the Employee
is diligently attempting to cure;
(ii) Excessive use of alcohol or the use of illegal drugs, which
interferes with the performance of the Employee's obligations under this
Agreement;
(iii) Conviction of a felony or of any crime involving moral
turpitude or fraud;
(iv) The commission by the Employee of any willful or
intentional act which the Employee reasonably should have contemplated would
have the effect of injuring the reputation, financial condition, business or
business relationships of the Company (and its subsidiaries, individually or
taken as a whole) and / or the Employee; or
<PAGE>
(v) Any material breach (not covered by any of the clauses (i)
through hereof) of any of the provisions of this Agreement, if such breach is
not cured within 30 days after written notice thereof to by the Board of
Directors.
(c) Without Cause
The term "Without Cause" shall mean a determination of the Board
of Directors to terminate the Employee for any reason other than death,
Disability or for Cause.
9. Effect of Termination
(a) If the Employee's employment is terminated for Disability, for
Cause or upon his death, the Employee or his estate shall be paid the Employee's
Base Salary and other benefits hereunder through the Termination Date.
(b) If the Employee's employment is terminated Without Cause, the
Company shall until September 30, 2001 (i) pay the Employee's his Base Salary
and (ii) maintain the term life insurance policy provided in Section 2(d)(i)
hereof.
(c) Irrespective of the basis for the termination of the
Employee's employment with the Company, all benefits (including fringe
benefits), if any, due the Employee hereunder shall cease as of the Termination
Date, other than (i) COBRA rights which shall continue to the extent provided
thereunder, (ii) Base Salary as provided in Section 9(b), (iii) insurance as
provided in Section 9(b) and (iv) rights under any stock options the Employee
may have been granted.
10. Arbitration. Any controversy or claim arising out of or relating to
this Agreement, or any breach or termination thereof, shall be settled by
arbitration in New Jersey, in accordance with the laws of the State of New
Jersey and the then current rules of the American Arbitration Association or any
successor thereto. Within ten (10) days after a request for arbitration by one
party to the other, the Company and the Employee shall each select one
arbitrator. Within ten (10) days after the second of such arbitrators has been
selected, the two arbitrators thereby selected shall choose a third arbitrator
who shall be the Chairman of the panel. If the first two arbitrators selected
cannot agree upon a third arbitrator, the American Arbitration Association shall
name the third arbitrator. The arbitrators may grant injunctions or other relief
in such dispute or controversy. In the arbitration, the parties shall be
entitled to pre-hearing discovery. The decision of the arbitrators shall be
final, conclusive and binding on the parties to the arbitration. In connection
with such arbitration and the enforcement of any award rendered as a result
thereof, the parties hereto irrevocably consent to the personal jurisdiction of
the federal and state courts located in New Jersey, and further consent that any
process or notice of motion or other application to the said Courts or Judges
thereof may be served inside or outside the State of New Jersey by registered
mail or personal service, provided a time period of at least twenty (20) days
for appearance is allowed. The Company shall not be required to seek injunctive
relief from the arbitrators but may seek such injunctive relief
<PAGE>
in a court proceeding. This Section 6 shall survive the termination (by
expiration or otherwise) of this Agreement.
11. Modification. This Agreement sets forth the entire understanding of
the parties with respect to the subject matter hereof, supersedes all existing
agreements between them concerning such subject matter, and may be modified only
by a written instrument duly executed by each party.
12. Notices. Any notice or communication to be given hereunder by any
party to the other shall be in writing and shall be deemed to have been given
when personally delivered or transmitted by facsimile, or three (3) days after
the date sent by registered or certified mail, postage prepaid, as follows:
(a) if to the Company, addressed to it at:
210 Sylvan Avenue
Englewood Cliffs, NJ 07632
Attention: Chairman
with copies to:
Lowenstein Sandler P.C.
65 Livingston Avenue
Roseland, NJ 07068
Attn: John D. Schupper, Esq.
(b) If to the Employee, addressed to him at:
1252 Lyle Terrace
Fair Lawn, NJ 07410
or to such other persons or addressed as may be designated in writing
by the party to receive such notice.
13. Waiver. Any waiver by either party of a breach of any provision of
this Agreement shall not operate as or be construed to be a waiver of any other
breach of such provision or of any breach of any other provision of this
Agreement. The failure of a party to insist upon strict adherence to any term of
this Agreement on one or more occasions shall not be considered a waiver or
deprive that party of the right thereafter to insist upon strict adherence to
that term or any other term of this Agreement. Any waiver must be in writing.
<PAGE>
14. Assignment. The Employee's rights and obligations under this
Agreement shall not be transferable by assignment or otherwise. The Company may
assign its rights and obligations hereunder to any of its subsidiaries or
affiliates. The Company will provide notice of such assignment to the Employee.
15. Successors and Assigns. The provisions of this Agreement shall be
binding upon and inure of the benefit of the Employee and his heirs and personal
representatives, and shall be binding upon and inure to the benefit of the
Company and its successors and assigns.
16. Headings. The headings in this Agreement are solely for the
convenience of reference and shall be given no effect in the construction or
interpretation of this Agreement.
17. Injunctive Relief. As it would be very difficult to measure the
damages which would result to the Company from a breach of any of the covenants
contained in Section 3, 4 or 5 of this Agreement, in the event of such a breach
the Company shall have the right to have such covenants specifically enforced by
a court of competent jurisdiction. Employee hereby recognizes and acknowledges
that irreparable injury or damage shall result to the business of the Company in
the event of a breach or threatened breach by Employee of the terms and
provisions of Section 3, 4 or 5. Therefore, Employee agrees that the Company
shall be entitled to an injunction restraining Employee from engaging in any
activity constituting such breach or threatened breach. Nothing contained herein
shall be construed as prohibiting the Company from pursuing any other remedies
available to the Company at law or in equity for such breach or threatened
breach, including, but not limited to, recovery of damages from Employee and, if
Employee is still employed by the Company, terminating the employment of
Employee in accordance with the terms and provisions hereof.
18. Jurisdiction. The validity and interpretation of this Agreement
shall be construed in accordance with and be governed by the laws of the State
of New Jersey.
19. Attorney's Fees. If a legal action or other proceeding is brought
for enforcement of this Agreement because of an alleged dispute, breach,
default, or misrepresentation in connection with any of the provisions of this
Agreement, the successful or prevailing party shall be entitled to recover
reasonable attorney's fees and cost incurred, in addition to any other relief to
which they may be entitled.
20. Severability. The provisions of this Agreement are severable and
should any provision hereof be void, voidable or unenforceable under any
applicable law, such void, voidable or unenforceable provision shall not affect
or invalidate any other provision of this Agreement, which shall continue to
govern the relative rights and duties of the parties as though the void,
voidable or unenforceable provision were not a part hereof.
21. Survival. All warranties, representations, indemnities, covenants
<PAGE>
and other agreements of the parties hereto shall survive the execution, delivery
and termination of this Agreement and shall, notwithstanding the execution,
delivery and termination of this Agreement, continue in full force and effect.
22. Acknowledgement. The Employee specifically acknowledges that: the
Employee has read and understands all of the terms of this Agreement; in
executing this Agreement, the Employee does not rely on any inducements,
agreements, promises or representations of the Company or any agent of the
Company, other than the terms and conditions specifically set forth in this
Agreement; the Employee has had an opportunity to consult with independent
counsel with respect to the execution of this Agreement; and that the Employee
has made such investigation of the facts pertaining to this Agreement and of all
the matters pertaining hereto as he deems necessary.
IN WITNESS WHEREOF, the Company and the Employee have executed this
Agreement on the day and year first above written.
ASTA FUNDING, INC.
By: /s/ Gary Stern
-----------------------
Gary Stern, President
/s/ Mitchell Herman
------------------------
Mitchell Herman
Chief Financial Officer
<PAGE>
EMPLOYMENT AGREEMENT
AGREEMENT, dated as of the 1st day of October, 1998 by and between ASTA
FUNDING, INC., a Delaware corporation, with offices at 210 Sylvan Ave.,
Englewood Cliffs, NJ 07632 (the "Company") and MITCHELL HERMAN, an individual
residing at 20 Renshaw Drive, Montville, NJ 07045 ( the "Employee")
W I T N E S E T H:
WHEREAS, the parties desire to enter this agreement to set forth the
terms of the Employee's employment by the Company.
NOW, THEREFORE, in consideration of the mutual premises and covenants
set forth herein and for other good and value consideration, the receipt,
adequacy and legal sufficiency of which are hereby acknowledged, the Company and
the Employee mutually agree as follows:
1. Employment Duties.
(a) Employment. The Company agrees to employ the Employee, and the
Employee agrees to accept employment with the Company, on the terms and
conditions set forth.
(b) Scope of Duties. During the term of this Agreement, Employee
shall devote his entire business time, attention and energy to the business, and
to seeking improvement in the profitability, of the Company. He shall serve as
Chief Financial Officer and Secretary of the Company and its subsidiaries and
shall have the authority to perform and shall perform all of the duties that are
customary for the offices of the Chief Financial Officer and Secretary, subject
at all times to the control and direction of the President and Board of
Directors of the Company, and shall perform such services as typically are
provided by the Chief Financial Officer and Secretary of a corporation and such
other services consistent therewith as shall be assigned to him from time to
time by the President of the Board of Directors of the Company.
(c) Service. The Employee shall perform his duties in a diligent
manner; shall not engage in activities which are or could be detrimental to the
existing or future business of the Company and its subsidiaries; and shall
observe and conform to all laws, customs, and standards of business ethics and
honest business practices. The Employee shall be requested, and does hereby
agree, to be a full time employee of the Company. The Company acknowledges,
however, that the Employee may serve as the Chief Financial Officer of Asta
Group, Incorporated. During the term of this Agreement, Employee shall not
engage in any other business activity which, in the reasonable judgement of the
Company's Board of Directors, conflicts with the duties of Employee hereunder,
whether or not such activity is pursued for gain, profit or other pecuniary
advantage; provided, however, that it is understood that this Section 1 (c)
shall not preclude Employee from making passive investments in other companies.
<PAGE>
(d) Professional Standards. Recognizing and acknowledging that it is
essential for the protection and enhancement of the name and business of the
Company and its subsidiaries and the good will pertaining thereto, the Employee
shall perform his duties under this Agreement professionally and in accordance
with the standards established by the Company from time to time; and the
Employee shall not act, and shall refrain from acting, in any manner that could
harm or tarnish the name, business or income of the Company and its subsidiaries
or the good will pertaining thereto.
2. Compensation.
(a) Base Salary. For all services rendered by the Employee during
the term of this Agreement , the Company shall pay the Employee an annual base
salary ("Base Salary") of $125,000, payable in accordance with the Company's
customary payment policies and periods. In the sole discretion of the Board of
Directors, the Employee's annual Base Salary may be increased by up to 10% of
the amount of his then current salary.
(b) Bonuses. The employee shall be eligible to receive bonuses as
determined by the Board of Directors in its sole discretion.
(c) Stock Options. The Employee shall be eligible to receive stock
options as determined by the Board of Directors in its sole discretion.
(d) Fringe Benefits. During the term of this Agreement, the Company
shall obtain and maintain a term life insurance policy in the amount of $600,000
naming the Employee's designee as beneficiary, (ii) shall maintain an excess
disability insurance policy for the Employee, (iii) shall provide to the
Employee and the Employee's family full health insurance coverage, and (iv),
shall provide to the Employee a leased luxury automobile along with automobile
insurance. Employee shall use such automobile principally for business purposes.
(e) Vacation. The Employee shall be entitled to an annual vacation
of fifteen (15) working days for each full calendar year of employment
hereunder, which may be taken all at once or from time to time; provided,
however, that (i) the Employee shall schedule such vacation time so as to
mitigate the adverse effects to the Company of the Employee's absence; (ii) the
Employee shall give the Company at least thirty days (30) days notice of
consecutive vacation days in excess of five (5) to be taken by the Employee at
any one time; and (iii) up to one (1) week unused vacation time during the
calendar year may be carried over and used by the Employee in the following
calendar year.
3. Non-Competition.
(a) In view of the Employee's knowledge of the trade secrets and
other proprietary information relating to the business of the Company and its
subsidiaries and their customers and dealers which the Employee has heretofore
obtained and is expected to obtain during the term the Employee is employed
under this Agreement (the "Employment Period"), and in consideration of the
compensation to be received
<PAGE>
hereunder, the Employee agrees: (i) that he will not during the Employment
Period Participate In (as such term hereinafter defined) any other business or
organization if such business or organization now is or shall then be competing
with or be of a nature similar to the business of the Company or its
subsidiaries and (ii) (A) for a period of eighteen (18) months after the
Termination Date (as defined in Section 7) due to a termination of this
Agreement for Cause or (B) for such period as the Company shall continue to pay
to the Employee his Base Salary and insurance benefits in accordance with
Section 9(b) after a termination of the Employee's employment Without Cause, he
will not in any geographic area in which the Company does business as of the
Termination Date compete with or be engaged in the same business as, or
Participate In, any other business or organization which competes with or is
engaged in the same business as, the Company or its subsidiaries with respect to
any service offered or activity engaged in up to the Termination Date, except
that in each case the provisions of this Section 3 will not be deemed breached
merely because the Employee owns not more than 2% of the outstanding common
stock of a corporation, if, at the time of its acquisition by the Employee, such
stock is listed on a national securities exchange, is reported on NASDAQ, or is
regularly traded in the over-the-counter market by a member of a national
securities exchange.
(b) The term "Participate In" shall mean: "directly or indirectly,
for his own benefit or for, or through any other person, firm, or corporation,
own, manage, operate, control, loan money to (provide, that an investment in
debt instruments issued pursuant to an effective registration statement under
the Securities Act of 1993, as amended shall not be deemed to be a loan), or
participate in the ownership, management, operation, or control of, or be
connected as a director, officer, employee, partner, consultant, agent,
independent contractor, or otherwise with, or acquiesce in the use of his name
in."
(c) During the Employment Period and, in the case of the termination
of the Employee's employment for Cause only, for a period one (1) year after the
Termination Date, the Employee will not directly or indirectly:
(i) reveal the name of, solicit, use or interfere with, or
endeavor to entice away from the Company (or any of its subsidiaries) any of
their customers, vendors, dealers which originate loans purchased by the Company
("Dealers") or employees, or
(ii) employ any person who, at any time up to the Termination
Date, was an employee of the Company or its subsidiaries without the written
consent of the Company.
(d) The Employee agrees that the provisions of this Section 3 are
necessary and reasonable to protect the Company in the conduct of its business.
If any restriction contained in this Section 3 shall be deemed to be invalid,
illegal, or unenforceable by reason of the extent, duration, or geographical
scope thereof, or otherwise, then the court making such determination shall have
the right to reduce such extent, duration, geographical scope, or other
provisions hereof, and in its reduced from such restriction shall then be
enforceable in the manner contemplated hereby.
<PAGE>
4. Confidential Information. All confidential information which the
Employee may now possess, may obtain during or after the Employment Period, or
may create prior to the end of the Employment Period relating to the business of
the Company or its subsidiaries or of any of their respective customers, vendors
or Dealers shall not be published, disclosed, or made accessible by him except
to any other person, firm or corporation either during or after the Employment
Period or used by him during the Employment Period in the business and for the
benefit of the Company or its subsidiaries without the prior written consent of
the Company. The Employee shall return all tangible evidence of such
confidential information to the Company prior to or at the end of the Employment
Period.
5. Rights of the Company.
(a) Any interest in copyrights, copyrightable works, developments,
discoveries, designs and processes, patents, patent applications, inventions and
technological innovations (collectively, "Inventions") which the Employee (i)
owns, conceives of or develops, alone or with others, (A) relating to the
business of the Company or its subsidiaries or any business in which the Company
(or its subsidiaries) contemplates being engaged or (B) which anticipate
research or development of the Company or its subsidiaries, or (ii) conceives of
or develops utilizing the time, material, facilities or information of the
Company or its subsidiaries, in either case during the Employment Period, shall
belong to the Company.
(b) As soon as the Employee owns, conceives of or develops any
Invention, the Employee shall immediately communicate such fact in writing to
the Board of Directors of the Company. Upon the request of the Company, the
Employee shall, without further compensation but at the Company's expense
(subject to clause (i) below) execute all such assignments and other documents
(including applications for trademarks, copyrights and patents and assignments
thereof) and take all such other action as the Company may reasonably request,
including obtaining spousal consents or waivers, (i) to vest in the Company all
right, title and interest of the Employee in and to such Inventions, free and
clear of all liens, mortgages, security interests, pledges, charges and
encumbrances ( the Employee to take such action, at his expense, as is necessary
to remove all such liens) and (ii) if patentable or copyrightable, to obtain
patents or copyrights (including extensions and renewals) therefor in any and
all jurisdictions in and outside the United States in the name of the Company or
in such other names(s) as the Company shall determine.
6. Insurance. The Employee agrees to submit to such medical
examinations as may be reasonably required by the Company to enable the Company
to obtain, at its opinion, key man life insurance on the life of the Employee in
such amount and with such insurer as the Company may determine in its sole
discretion.
<PAGE>
7. Employment Period. The Employment Period shall commence on the date
of this Agreement and shall continue for a term ending on September 30, 2001 or
such earlier date on which any of the following events occurs (the "Termination
Date"):
(a) the death of the Employee;
(b) the voluntary resignation of the Employee;
(c) the termination by the Board of Directors of the Employee's
employment for Disability (as hereinafter defined);
(d) the termination by the Board of Directors of the Employee's
employment for Cause (as hereinafter defined); or
(e) the termination by the Board of Directors of the Employee's
employment Without Cause (as hereafter defined)
8. Definitions Relating to Termination
(a) Disability
The term "Disability" shall mean any physical or mental condition of
the Employee which, in the reasonable discretion of the Board of Directors,
after consultation with the Employee's physician, materially impairs the
Employee's ability to render the services to be performed by him hereunder for a
period of 90 consecutive days or for at least 120 days in any consecutive 180
day period.
(b) Cause
The term "Cause" shall mean the good faith finding by the Board of
Directors of the Company upon resolution adopted by it of the existence of any
one of the following:
(i) The Employee's failure or refusal to perform specific
written directives consistent with his duties and responsibilities as set forth
in Section 1 hereof, which lack of performance is not cured within 15 days after
written notice thereof or 30 days if at the 15th day and thereafter the Employee
is diligently attempting to cure;
(ii) Excessive use of alcohol or the use of illegal drugs, which
interferes with the performance of the Employee's obligations under this
Agreement;
(iii) Conviction of a felony or of any crime involving moral
turpitude or fraud;
(iv) The commission by the Employee of any willful or
intentional act which the Employee reasonably should have contemplated would
have the effect of injuring the reputation, financial condition, business or
business relationships of the Company (and its subsidiaries, individually or
taken as a whole) and / or the Employee; or
<PAGE>
(v) Any material breach (not covered by any of the clauses (i)
through hereof) of any of the provisions of this Agreement, if such breach is
not cured within 30 days after written notice thereof to by the Board of
Directors.
(c) Without Cause
The term "Without Cause" shall mean a determination of the Board of
Directors to terminate the Employee for any reason other than death, Disability
or for Cause.
9. Effect of Termination
(a) If the Employee's employment is terminated for Disability, for
Cause or upon his death, the Employee or his estate shall be paid the Employee's
Base Salary and other benefits hereunder through the Termination Date.
(b) If the Employee's employment is terminated Without Cause, the
Employee or his estate shall be paid the Employee's Base Salary and other
benefits hereunder for a maximum period of 12 months after the date of
termination or until such time the Employee becomes a full time employee of
another employer if this occurs prior to the 12 months.
(c) Irrespective of the basis for the termination of the Employee's
employment with the Company, all benefits (including fringe benefits), if any,
due the Employee hereunder shall cease as of the Termination Date, other than
(i) COBRA rights which shall continue to the extent provided thereunder, (ii)
Base Salary as provided in Section 9(b), (iii) insurance as provided in Section
9(b) and (iv) rights under any stock options the Employee may have been granted.
10. Arbitration. Any controversy or claim arising out of or relating to
this Agreement, or any breach or termination thereof, shall be settled by
arbitration in New Jersey, in accordance with the laws of the State of New
Jersey and the then current rules of the American Arbitration Association or any
successor thereto. Within ten (10) days after a request for arbitration by one
party to the other, the Company and the Employee shall each select one
arbitrator. Within ten (10) days after the second of such arbitrators has been
selected, the two arbitrators thereby selected shall choose a third arbitrator
who shall be the Chairman of the panel. If the first two arbitrators selected
cannot agree upon a third arbitrator, the American Arbitration Association shall
name the third arbitrator. The arbitrators may grant injunctions or other relief
in such dispute or controversy. In the arbitration, the parties shall be
entitled to pre-hearing discovery. The decision of the arbitrators shall be
final, conclusive and binding on the parties to the arbitration. In connection
with such arbitration and the enforcement of any award rendered as a result
thereof, the parties hereto irrevocably consent to the personal jurisdiction of
the federal and state courts located in New Jersey, and further consent that any
process or notice of motion or other application to the said Courts or Judges
thereof may be served inside or outside the State of New Jersey by registered
mail or personal service, provided a time
<PAGE>
period of at least twenty (20) days for appearance is allowed. The Company shall
not be required to seek injunctive relief from the arbitrators but may seek such
injunctive relief in a court proceeding. This Section 6 shall survive the
termination (by expiration or otherwise) of this Agreement.
11. Modification. This Agreement sets forth the entire understanding of
the parties with respect to the subject matter hereof, supersedes all existing
agreements between them concerning such subject matter, and may be modified only
by a written instrument duly executed by each party.
12. Notices. Any notice or communication to be given hereunder by any
party to the other shall be in writing and shall be deemed to have been given
when personally delivered or transmitted by facsimile, or three (3) days after
the date sent by registered or certified mail, postage prepaid, as follows:
(a) if to the Company, addressed to it at:
210 Sylvan Avenue
Englewood Cliffs, NJ 07632
Attention: President
with copies to:
Lowenstein Sandler P.C.
65 Livingston Avenue
Roseland, NJ 07068
Attn: John D. Schupper, Esq.
(b) If to the Employee, addressed to him at:
20 Renshaw Drive
Montville, NJ 07045
or to such other persons or addressed as may be designated in writing by the
party to receive such notice.
13. Waiver. Any waiver by either party of a breach of any provision of
this Agreement shall not operate as or be construed to be a waiver of any other
breach of such provision or of any breach of any other provision of this
Agreement. The failure of a party to insist upon strict adherence to any term of
this Agreement on one or more occasions shall not be considered a waiver or
deprive that party of the right thereafter to insist upon strict adherence to
that term or any other term of this Agreement. Any waiver must be in writing.
<PAGE>
14. Assignment. The Employee's rights and obligations under this
Agreement shall not be transferable by assignment or otherwise. The Company may
assign its rights and obligations hereunder to any of its subsidiaries or
affiliates. The Company will provide notice of such assignment to the Employee.
15. Successors and Assigns. The provisions of this Agreement shall be
binding upon and inure of the benefit of the Employee and his heirs and personal
representatives, and shall be binding upon and inure to the benefit of the
Company and its successors and assigns.
16. Headings. The headings in this Agreement are solely for the
convenience of reference and shall be given no effect in the construction or
interpretation of this Agreement.
17. Injunctive Relief. As it would be very difficult to measure the
damages which would result to the Company from a breach of any of the covenants
contained in Section 3, 4 or 5 of this Agreement, in the event of such a breach
the Company shall have the right to have such covenants specifically enforced by
a court of competent jurisdiction. Employee hereby recognizes and acknowledges
that irreparable injury or damage shall result to the business of the Company in
the event of a breach or threatened breach by Employee of the terms and
provisions of Section 3, 4 or 5. Therefore, Employee agrees that the Company
shall be entitled to an injunction restraining Employee from engaging in any
activity constituting such breach or threatened breach. Nothing contained herein
shall be construed as prohibiting the Company from pursuing any other remedies
available to the Company at law or in equity for such breach or threatened
breach, including, but not limited to, recovery of damages from Employee and, if
Employee is still employed by the Company, terminating the employment of
Employee in accordance with the terms and provisions hereof.
18. Jurisdiction. The validity and interpretation of this Agreement
shall be construed in accordance with and be governed by the laws of the State
of New Jersey.
19. Attorney's Fees. If a legal action or other proceeding is brought
for enforcement of this Agreement because of an alleged dispute, breach,
default, or misrepresentation in connection with any of the provisions of this
Agreement, the successful or prevailing party shall be entitled to recover
reasonable attorney's fees and cost incurred, in addition to any other relief to
which they may be entitled.
20. Severability. The provisions of this Agreement are severable and
should any provision hereof be void, voidable or unenforceable under any
applicable law, such void, voidable or unenforceable provision shall not affect
or invalidate any other provision of this Agreement, which shall continue to
govern the relative rights and duties of the parties as though the void,
voidable or unenforceable provision were not a part hereof.
<PAGE>
21. Survival. All warranties, representations, indemnities, covenants
and other agreements of the parties hereto shall survive the execution, delivery
and termination of this Agreement and shall, notwithstanding the execution,
delivery and termination of this Agreement, continue in full force and effect.
22. Acknowledgement. The Employee specifically acknowledges that: the
Employee has read and understands all of the terms of this Agreement; in
executing this Agreement, the Employee does not rely on any inducements,
agreements, promises or representations of the Company or any agent of the
Company, other than the terms and conditions specifically set forth in this
Agreement; the Employee has had an opportunity to consult with independent
counsel with respect to the execution of this Agreement; and that the Employee
has made such investigation of the facts pertaining to this Agreement and of all
the matters pertaining hereto as he deems necessary.
IN WITNESS WHEREOF, the Company and the Employee have executed
this Agreement on the day and year first above written.
ASTA FUNDING, INC.
By: /s/ Gary Stern
-------------------------
Gary Stern, President
/s/ Mitchell Herman
---------------------------
Mitchell Herman
<PAGE>
Asta Funding, Inc. & Subsidiaries
Form 10-KSB
Exhibit 21
Subsidiaries of the Company
Name State of Incorporation
---- ----------------------
1) Asta Auto Receivables Company Delaware
2) E. R. Receivables, Corp., L.L.C. Delaware
3) RAC Acceptance Co., L.L.C. Delaware
4) Palisades Collection, L.L.C. Delaware
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> SEP-30-1998
<PERIOD-START> OCT-01-1997
<PERIOD-END> SEP-30-1998
<CASH> 163,123
<SECURITIES> 0
<RECEIVABLES> 21,048,455
<ALLOWANCES> (4,567,066)
<INVENTORY> 365,787
<CURRENT-ASSETS> 17,010,299
<PP&E> 176,671
<DEPRECIATION> 155,630
<TOTAL-ASSETS> 18,129,352
<CURRENT-LIABILITIES> 12,751,621
<BONDS> 0
0
0
<COMMON> 39,450
<OTHER-SE> 9,602,421
<TOTAL-LIABILITY-AND-EQUITY> 18,129,352
<SALES> 4,495,015
<TOTAL-REVENUES> 4,495,015
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 3,235,733
<LOSS-PROVISION> 4,567,066
<INTEREST-EXPENSE> 763,990
<INCOME-PRETAX> (4,071,774)
<INCOME-TAX> (1,044,100)
<INCOME-CONTINUING> (3,027,674)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (3,027,674)
<EPS-PRIMARY> (0.77)
<EPS-DILUTED> (0.77)
</TABLE>
