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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, 2000
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
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Commission file number: 0-26906
ASTA FUNDING, INC.
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(NAME OF SMALL BUSINESS ISSUER IN ITS CHARTER)
Delaware 22-3388607
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(STATE OR OTHER JURISDICTION OF INCORPORATION (I.R.S. EMPLOYER
OR ORGANIZATION) IDENTIFICATION NO.)
210 Sylvan Avenue, Englewood Cliffs, NJ 07632
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(Address of principal executive offices) (Zip Code)
Issuer's telephone number, including area code: (201) 567-5648
Securities registered pursuant to Section 12(b) of the Exchange Act: None
Securities registered pursuant to Section 12(g) of the Exchange Act:
Common Stock, par value $.01 per share
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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, 2000
were $18,110,000.
As of December 15, 2000, the aggregate market value of the Registrant's
Common Stock (based upon the closing sales price for the Common Stock as
reported by NASDAQ on such date) held by non-affiliates of the Registrant was
approximately $7,900,000 (Aggregate market value has been estimated solely for
the purpose of this report. For the purpose of this report it has been assumed
that all officers and directors are affiliates of the Registrant. The statements
made herein shall not be construed as an admission for the purposes of
determining the affiliate status of any person.) As of December 21, 2000, the
Registrant had 3,975,000 shares of Common Stock issued and outstanding.
Transitional Small Business Disclosure Format (check one): Yes No X
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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 30, 2001.
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Part I
Item 1. Description of Business.
General
Asta Funding, Inc. (the "Company" or "Asta") is a diversified consumer
finance company that is engaged in the business of purchasing, managing,
servicing and selling distressed consumer receivables. Distressed consumer
receivables are the unpaid debts of individuals that are owed to banks, finance
companies and other credit providers. Most of Company's receivables are
MasterCard and Visa credit card accounts which were charged-off by the issuing
banks for non-payment.
In March 2000, the Company formed Asta Commercial, LLC, a wholly-owned
subsidiary of the Company to factor commercial invoices for growing companies
with unique financing needs.
Prior to May 1, 1999, the Company's business was focused on purchasing,
servicing and selling retail automobile installment contracts ("Contracts")
originated by dealers ("Dealers") in the sale primarily of used automobiles.
Through its purchases, the Company provided indirect financing to borrowers
with limited credit histories, lower than average incomes or past credit
problems ("Sub-Prime Borrowers"). The Company ceased accepting new automobile
Contracts for funding on May 1, 1999 and anticipates liquidating all remaining
Contracts.
The Company is a Delaware corporation whose principal executive offices
are located at 210 Sylvan Avenue, Englewood Cliffs, New Jersey 07632. The
Company was incorporated in New Jersey on July 7, 1994 and was reincorporated in
Delaware on October 12, 1995 as a result of a merger with a Delaware
corporation. Unless the context otherwise requires, the terms "Company" or
"Registrant" as used herein refer to Asta Funding, Inc. and its Subsidiaries.
This Annual Report on Form 10-KSB contains certain forward-looking statements
within the meaning of the Private Securities Litigation Reform Act of 1995. Such
statements are subject to risks and uncertainties that could cause actual
results to differ materially from those projected in such forward-looking
statements. Certain factors which could materially affect such results and the
future performance of the Company are described below under "Risk Factors." See
"Forward-Looking Statements."
Business Strategy
The Company's primary objective is to increase revenues through the
expansion of its consumer receivables business by, among other things:
o Increasing receivable portfolio acquisitions;
o Increasing the purchasing of factoring receivables;
o Obtaining additional lines of credit; and
o The possible expansion into other synergistic businesses.
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Consumer Receivable Business
Industry Overview
The distressed consumer receivable market is a growing industry, which
is driven by increasing levels of consumer debt. Credit card debt is the fastest
growing component of consumer debt. Despite generally good economic conditions
over the past few years, credit card charge-offs have increased as overall
consumer debt has increased.
Historically, originating institutions have sought to limit credit
losses by performing recovery efforts in-house, outsourcing recovery activities
to third-party collection agencies and selling their charged-off receivables for
immediate cash. From the originating institution's perspective, selling
receivables at the time of charge-off or shortly thereafter yields immediate
cash proceeds and represents a substantial reduction in the two to five year
period typically required for traditional recovery efforts.
Receivables are sold by originating institutions at substantial
discounts to the balances owed on the receivables, with the purchase price
varying depending on the amount that both the purchaser and seller anticipate
recovering and the costs associated with recovering these receivables. Sales of
receivables include published auction type sales; private brokered sales or
directly negotiated sales between the seller and the purchaser.
Receivable Purchase Program
The Company purchases distressed consumer receivables that have
typically been either charged-off by the credit grantors or not considered to be
prime receivables. These receivables include MasterCard and Visa accounts issued
by banks, and other consumer loans issued by credit grantors. The Company may
also purchase bulk receivable portfolios that include both distressed and
performing loans. During the fiscal year ended September 30, 2000, the Company
purchased approximately $245 million of consumer receivables at a cost of
approximately $1.4 million and sold approximately $51 million of such
receivables for a total sales price of approximately $1.6 million.
Receivables are purchased by the Company at a discount from their
charged-off amount, typically the aggregate unpaid balance at the time of
charge-off. The Company purchases receivables directly from credit grantors
through privately negotiated direct sales and through auction type sales in
which sellers of receivables seek bids from several pre-qualified debt
purchasers. In order for the Company to consider a potential seller of
receivables, a variety of factors are considered. Sellers must demonstrate that
they have adequate internal controls to detect fraud and have the ability to
provide post sale support and to honor buy-back warranty requests. The Company
pursues new acquisitions on an ongoing basis by means of industry newsletters,
brokers who specialize in these assets and other professionals with which the
Company has relationships.
The Company's senior management locates portfolios for purchase and is
responsible for performing due diligence, including on site visits of the
seller. The seller or broker usually sends either a sample listing or the actual
portfolio for sale to the Company on a diskette or other form of media. The
Company analyzes the portfolio to determine if it meets the Company's buying
criteria. If a portfolio meets the Company's buying criteria, a purchase price
is determined and the seller or
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broker is notified. After a purchase is completed, senior management monitors
the portfolios performance and uses this information in determining future
buying criteria and pricing.
Receivable Servicing
The Company's objective is to maximize the amount that it recovers on
acquired receivables. Unlike third party collection agencies that are given
specific time periods to recover on receivables, the Company has significantly
more flexibility in establishing payment programs.
The Company has four main-servicing departments which consist of the
following: collection/skiptrace, legal, customer service and accounting
departments.
The collection/skiptrace department is responsible for making contact
with the obligors and collecting the receivables. This department uses a
friendly, customer service approach to collect on receivables. Through the use
of the Company's collection software and telephone system, each collector is
responsible for contacting customers and explaining the benefits of paying the
Company and working with the customers to develop acceptable means to satisfy
their obligations. The Company also uses a series of automated collection
letters, late payment reminders, and settlement offers that are sent out at
specific intervals or at the request of a collection department employee. When
the collection department cannot contact the customer by either telephone or
mail, the account is referred to the skiptrace department.
If the collection department determines that the customer has the
ability to resolve its obligation but the Company's normal collection activities
have not resulted in any resolution of the customer's obligations, the account
is referred to the legal department. The legal department determines the
criteria for instituting legal proceedings, determines jurisdiction, places
cases for suit, obtains judgments, institutes wage garnishments and assists both
in-house and outside counsel in legal case management. The legal department also
refers accounts to the skiptrace department in order to obtain a current phone
number, address or to locate assets or the identity of the customer's employer.
The Company employs a paralegal and a dedicated support staff to process
numerous court cases each year. The legal department coordinates legal
collection activity nationwide using a network of collection attorneys.
The skiptrace department is responsible for locating and contacting
customers who could not be contacted by either the collection or legal
departments. The skiptrace employees use a variety of public and private third
party databases to locate customers. Once an account is located and contact is
made by a skiptracer, the account is then referred back to the collection or
legal department for follow-up. The skiptrace department is also responsible for
finding current employers and assets of customers when this information is
deemed necessary.
In addition to performing collection activity directly, the Company
utilizes the services of third party collection agencies to perform collection
activities on accounts that were with such agency at the time the Company
purchased the account.
The customer service department is responsible for handling incoming
calls from customers and collection agencies that are responsible for collection
of accounts. The customer service department coordinates customer inquiries on
accounts also assists the collection agencies in the collection process. The
customer service department is responsible for handling buy-back and media
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requests from companies who have purchased accounts from the Company. It works
with the buyers during the transition period and post sale process and handles
any issues that may arise once an account has been sold.
The accounting department is responsible for making daily deposits of
customer payments, posting these payments to the customers account, mailing of
monthly statements and providing senior management with daily and monthly
receivable activity and performance reports. Employees also assist collection
department employees in handling customer disputes with regard to payment and
balance information. The accounting department will assist the customer service
department in the handling of buy-back requests from companies who have
purchased receivables. In addition, the accounting department monitors the
performance on accounts that are being serviced by third party collection
agencies.
Receivable Income Recognition
The Company recognizes income on nonperforming loan portfolios, which
are acquired for liquidation, using either the interest or cost recovery method.
Upon acquisition of a portfolio of loans, the Company's management estimates the
future anticipated cash flows and determines the allocation of payments based
upon this estimate. If future cash flows cannot be estimated, the cost recovery
method is used. Under the cost recovery method, no income is recognized until
the Company has fully collected the cost of the portfolio.
At September 30, 2000, the Company had approximately $400 million and
$250 million in gross distressed consumer receivables acquired for liquidation
in which income is recognized under the cost recovery and interest method
respectively. The distressed consumer receivables are purchased at substantial
discounts and historically the Company collects substantially less than the
gross receivable balances.
Portfolio Sales
The Company will sell to other debt buyers certain receivables that it
decides not to service directly or have a third party collection agency service.
There are many factors that contribute to the decision of which receivables to
sell and which to service. During the fiscal year ended September 30, 2000, the
Company sold approximately $51 million of receivables for a total sales price of
approximately $1.6 million.
Factoring Business
In March 2000, the Company formed Asta Commercial, LLC, a wholly owned
subsidiary of the Company, to factor commercial invoices. To manage this
company, Asta Commercial, LLC, hired from experienced executive from a major
financial institution with over fifteen years experience in the commercial
factoring business. At September 30, 2000, Asta Commercial was factoring
invoices for five companies and had approximately $687,000 in finance
receivables outstanding. The company anticipates significantly increasing the
factoring of commercial invoices during the next fiscal year.
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Asta Commercial, LLC, specializes in providing working capital to
growing companies with unique financing needs. The Company provides asset-based
lending, primarily secured by accounts receivable for small growing companies.
Typical customers are manufacturers, wholesale distributors and service
companies. The Company is committed to working closely with growth companies to
meet their specialized financing needs and anticipates significant growth in
this business by providing prompt and reliable service to its customers.
Automobile Financing Business
The Company ceased accepting new automobile Contracts for funding on
May 1, 1999 and intends to liquidate all remaining Contracts. The following is a
description of the Company's former business.
The Company typically purchased Contracts from independent used car
Dealers and new car Dealers for primarily used vehicles. The Company entered
into dealer agreements and solicited Contracts from Dealers primarily through
the efforts of sales representatives and the Company's staff. The Company
currently services all of the Contracts it has purchased for its own account as
well as those contracts it purchased and subsequently sold. Servicing consists
of the collection of principal, interest and other payments on the Contracts,
providing related accounting and reporting services and, when necessary, the
repossession and sale of collateral upon an event of default. The Company
receives periodic base servicing fees for its duties relating to the accounting
for and collection of the Contracts that have been previously sold.
Other Activities
In February 2000, the Company entered a stock purchase and financing
agreement with Small Business Resources, Inc. ("SBR") As of December 14, 2000,
the Company has invested a total of $2.5 million in SBR, consisting of a loan of
$1.75 million and an equity investment of $750,000, for a one-third ownership
interest including warrants to purchase shares of common stock of SBR. The
investment was funded from cash provided by operations. SBR is a
business-to-business e-commerce company that provides a business portal where
small business owners can access content, products, resources and advice. To
date, SBR has signed more than a dozen partnership contracts with major
companies within the banking, utility and telecommunications industries. These
contracts currently reach more than three million small business owners with
whom SBR's partners have established relationships. Palisades Collection, LLC, a
wholly owned subsidiary of the Company, will be offering third party collection
services to small businesses through SBR. As of December 14, 2000, the Company's
investment totaled $2.5 million and the Company had reserved $2.25 million
against this investment.
Marketing
The Company has established relationships with brokers who market
consumer receivable portfolios from banks, finance companies and other credit
providers. In addition, the Company subscribes to national publications that
list consumer receivable portfolios for sale. The Company also directly contacts
a bank, finance company or other credit provider to solicit consumer receivables
for sale. In addition, the Company has developed relationships with experienced
brokers who are placing factoring receivables with Asta Commercial, LLC.
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Competition
The Company's businesses of purchasing distressed consumer receivables
and factoring commercial receivables is highly competitive and fragmented, and
it expects that competition from new and existing companies will increase. The
Company competes with many other purchasers of distressed consumer receivables
including third party collection companies and other financial services
companies who purchase consumer receivables or companies that factor commercial
receivables. Many of these competitors are larger and more established and may
have substantially greater financial, technological, personnel and other
resources than the Company. Moreover, the Company's future profitability will be
directly related to the availability and cost of its capital in relation to
availability and cost of capital to its competitors.
The Company's existing and potential competitors also include larger,
more established companies that have access or may have access to capital
markets, including asset-backed securities, which may be unavailable to the
Company. The Company believes that no individual competitor or group of
competitors has a dominant presence in the market. The Company's strategy is
designed to capitalize on the market's lack of a company with a dominant
presence. The Company believes that it can obtain sufficient receivables for
purchase at attractive prices by applying reasonable buying criteria and making
timely purchases.
There can be no assurances that the Company will be able to compete
successfully against current or future competitors or that competition will not
have material adverse effect on the Company's business, financial condition or
results of operations.
Management Information Systems
Management believes that a high degree of automation is necessary to
enable the Company to grow and successfully compete with other finance
companies. Accordingly, during the year ended September 30, 2000, the Company
upgraded its computer hardware and software to support the Company's servicing
of consumer receivables acquired for liquidation and factoring businesses.
Due to its desire to increase productivity through automation, the
Company intends to periodically review its systems for possible upgrades and
enhancements.
Regulation
Several federal and state consumer protection laws including the
Federal Fair Debt Collection Practices Act ("FDCPA") and comparable state
statutes establish specific guidelines and procedures which debt collectors must
follow to communicate with consumer debtors, including the time, place and
manner of such communications. It is the Company's policy to comply with the
provisions of the FDCPA and comparable state statutes in all of its collection
activities, although it may not be specifically subject to such statutes. If
these laws apply to some or all of the Company's collection activities, the
Company's failure to comply with such laws could have a materially adverse
effect on the Company. The relationship of a customer and a credit card issuer
is extensively regulated by federal and state consumer protection and related
laws and regulations. Because many of its receivables were originated through
credit card transactions, certain of the Company's operations are affected by
such laws and regulations. Significant laws include the Federal Truth-In-Lending
Act, the Fair Credit Billing Act, the Equal Opportunity Act, the Fair Credit
Reporting Act and the
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Electronic Funds Transfer Act (and the Federal Reserve Board's regulations which
relate to these Acts), as well as comparable statues in those states in which
customers reside or in which the credit grantors are located. State laws may
also limit the interest rate and the fees that a credit card issuer may impose
on its customers. Among other things, the laws and regulations applicable to
credit card issuers impose disclosure requirements when a credit card account is
advertised, when it is applied for and when it is opened, at the end of monthly
billing cycles and at year-end. Federal law requires credit card issuers to
disclose to consumers the interest rates; fees, grace periods and balance
calculations methods associated with their credit card accounts, among other
things. In addition, customers are entitled under current laws to have payments
and credits applied to their credit card accounts promptly, to receive
prescribed notices and to require billing errors to be resolved promptly. In
addition, some laws prohibit certain discriminatory practices in connection with
the extension of credit. Failure by the credit grantors to have compiled with
applicable statues, rules and regulations could create claims and rights offset
by the customers that would reduce or eliminate their obligations under their
receivables, and this could have a materially adverse effect on the Company.
Pursuant to agreements under which the Company purchases receivables, the
Company is normally indemnified against losses caused by the failure of the
credit grantor to have complied with applicable statutes, rules and regulations
relating to the receivables before they are sold to the Company.
Certain laws, including the laws described above, may limit the
Company's ability to collect amounts owing with respect to the receivables
regardless of any act or omission on the part of the Company. For example, under
the federal Fair Credit Billing Act, a credit card issuer is subject to all
claims (other than tort claims) and defense arising out of certain transactions
in which a credit card is used if the obligor has made a good faith attempt to
obtain satisfactory resolution of a disagreement or problem relative to the
transaction and, except in cases where there is a specified relationship between
the person honoring the card and the credit card issuer, the amount of the
initial transaction exceeds $50.00 and the place where the initial transaction
occurred was in the same state as the customer's billing address or within 100
miles of that address. As a purchaser of defaulted consumer receivables, the
Company may purchase receivables subject to legitimate defenses on the part of
the customer. The statutes further provide that, in certain cases, customers
cannot be held liable for, or their liability is limited with respect to,
charges to the credit card account that were a result of an unauthorized use of
the credit card. No assurances can be given that certain of the receivables were
not established as a result of unauthorized use of a credit card, and,
accordingly, the amount of such receivables could not be collected by the
Company. Pursuant to some agreements under which the Company purchased
receivables, the Company is indemnified against certain losses with respect to
such receivables regardless of any act or omission on the part of the Company or
the credit grantor.
Additional consumer protection laws may be enacted that would impose
requirements on the enforcement of and collection on consumer credit card or
installment accounts. Any new laws, rules or regulations that may be adopted as
well as existing consumer protection laws, may adversely affect the ability of
the Company to collect the receivables. In addition, the failure of the Company
to comply with such requirements could adversely affect the Company's ability to
enforce the receivables.
Several federal and state consumer protection laws, including the
Federal Truth- In-Lending Act, the Federal Equal Credit Opportunity Act, the
FDCPA and the Federal Trade Commission Act, regulate the extension of credit in
consumer credit transactions. These laws mandate certain
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disclosures with respect to finance charges on Contracts and impose certain
other restrictions on Dealers. Certain state laws impose limitations on the
amount of finance charges that may be charged by Dealers on credit sales. The
so-called Lemon Laws enacted by the federal government and certain states
provide certain rights to purchasers with respect to motor vehicles that fail to
satisfy express warranties. The application of Lemon Laws or violation of such
other federal and state laws may give rise to a claim or defense of a borrower
against a Dealer and its assignees, including the Company and purchasers of
Contracts from the Company. The dealer agreement that the Company had in place
with the Dealer contained representations by the Dealer that the sale of the
motor vehicle covered by the Contract was affected in accordance with all
applicable federal, state and local laws covering the sale. Although a Dealer
would be obligated to repurchase Contracts that involve a breach of such
warranty, there can be no assurance that the Dealer will have the financial
resources to satisfy its repurchase obligations to the Company. Certain of these
laws also regulate the Company's Contract servicing activities, including its
methods of collection.
Although the Company believes that it is currently substantially in
compliance with applicable statutes and regulations, there can be no assurance
that the Company will be able to maintain such compliance. The failure to comply
with such statutes and regulations could have a material adverse effect upon the
Company.
The Company is not licensed to make loans directly to borrowers.
Certain of the Company's licenses and licenses that it may be required to obtain
in the future are subject to periodic renewal provisions and provisions
governing changes in control, or acquisitions of certain percentages of stock,
of the Company.
The dealer agreement contained an undertaking by the Dealer that at the
time of sale of a Contract to the Company, (i) the Dealer will submit an
application for state registration of the financed vehicle, naming the Company
as a secured party with respect to the vehicle, and (ii) that all necessary
steps will be taken to obtain a perfected first priority security interest in
each financed vehicle in favor of the Company under the laws of the state in
which the financed vehicle is registered. If a Dealer or the Company, because of
clerical error or otherwise, has failed to timely take such action or maintain
such interest with respect to a financed vehicle, neither the Company nor any
subsequent purchaser of the related Contract would have a perfected security
interest in the financed vehicle and its security interest may be subordinate to
the interest of, among others, later purchasers of the financed vehicle, holders
of perfected security interests and a trustee in bankruptcy of the borrower. The
security interest of the Company may also be subordinate to the interests of
such third parties in the case of fraud or forgery by the borrower,
administrative error by state recording officials or in certain other
circumstances.
The Company may take action to enforce the security interest in
financed vehicles with respect to any related Contracts in default by
repossession and resale of the financed vehicles. The Uniform Commercial Code
("UCC") and other state laws regulate repossession sales by requiring that the
secured party provide the borrower with reasonable notice of the date, time and
place of any public sale of the collateral, the date after which any private
sale of the collateral may be held and of the borrower's right to redeem the
financed vehicle prior to any such sale and providing that any such sale be
conducted in a commercially reasonable manner.
In the event of a repossession and resale of a financed vehicle, after
payment of outstanding liens for storage, repairs and unpaid taxes, the secured
party would be entitled to be paid the full
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outstanding balance of the Contract out of the sale proceeds before payments are
made to the holders of junior security interests in the financed vehicle, to
unsecured creditors of the borrower, or, thereafter, to the borrower. Under the
UCC and other laws applicable in most states, a creditor is entitled to obtain a
deficiency judgment from a borrower for any deficiency on repossession and
resale of the motor vehicle securing the unpaid balance of such borrower's motor
vehicle loan. However, some states impose prohibitions or limitations on
deficiency judgments. If a deficiency judgment were granted, the judgment would
be a personal judgment against the borrower for the shortfall, and a defaulting
borrower may often have insufficient capital or few sources of income available
following repossession. Therefore, in many cases, it may not be useful to seek a
deficiency judgment against a borrower or, if one is obtained, it may be settled
at a significant discount.
Risk Factors
The Company is dependent on external sources of financing to fund its operations
The Company depends on external sources of financing to fund its
operations, including its credit facilities, notes payable and loans made by
affiliates of the Company. The failure to obtain financing and capital as needed
would limit the Company's ability to operate its business or achieve its growth
plans. The Company's financing sources impose certain restrictive covenants,
including financial covenants. Failure to satisfy any one of these covenants
would preclude the Company from further borrowing's from the Company's existing
sources and could prevent the Company from securing alternative sources of
financing necessary to operate its business. In addition, all of the Company's
borrowings are secured by the Company's assets and in the event of any default
provisions; the Company's assets would be available to the creditor to satisfy
the Company's obligations.
The Company may not be able to purchase receivables at favorable prices and is
subject to competition for such receivables
The Company's success depends upon the continued availability of
receivables that meet its requirements. The availability of receivable
portfolios at favorable prices depends on a number of factors outside of the
Company's control, including the continuation of the current growth trends in
consumer debt and sales of receivable portfolios by originating institutions, as
well as competitive factors affecting potential purchasers and sellers of
receivables. In this regard, the Company competes with other purchasers of
defaulted consumer receivables and with third-party collection agencies, and is
affected by financial services companies that manage their own defaulted
consumer receivables.
Some of the Company's competitors have greater capital, personnel and
other resources than the Company. The possible entry of new competitors,
including competitors that historically have focused on the acquisition of
different asset types, and the expected increase in competition from current
market participants may reduce the Company's access to receivables. In addition
aggressive pricing by competitors could raise the price of receivable portfolios
above levels that the Company is willing to pay.
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The Company may not be able to recover sufficient amounts on its receivables to
fund its operations
The Company acquires, services and sells consumer receivables that the
borrowers have failed to pay and the sellers have charged-off. The originating
institutions generally have made numerous attempts to collect on these
obligations, often using both its in-house collection staff and third party
collection agencies. These receivables are difficult to collect and the Company
may not recover its acquisition cost of the receivables and the costs associated
with servicing the receivables.
The loss of the Company's key personnel may adversely affect the Company's
operations
The loss of the services of one or more of the Company's executive
officers or key employees could disrupt its operations. The Company has
employment agreements with Gary Stern, the Company's President and CEO and
Mitchell Herman, Company's Chief Financial Officer. The agreements contain
noncompetition provisions that survive termination of employment in some
circumstances. However, these agreements do not assure the continued services of
these officers and we cannot assure that the noncompetition provisions will be
enforceable. Competition for qualified executive officers is intense. In
addition, if the Company is unable to attract, retain and motivate other highly
skilled employees, its business and financial condition could be materially
adversely affected.
The Company uses estimates in its accounting and the Company would have to
reduce its earnings if actual results are less than estimated
In accounting for some receivable portfolios, the Company makes
estimates and assumptions that could affect their reported amounts. If
recoveries on portfolios in future periods are less than what was estimated in
the current year, the Company would recognize a charge to earnings in future
periods which would reduce the Company's earnings during such periods.
Defaults under the Company's Contracts would affect the Company's results of
operations
The Company's results of operations, financial condition and liquidity
depend, to a material extent, on the performance of Contracts that were
purchased and are serviced by the Company. A portion of the loans purchased by
the Company may default. The Company bears the full risk of losses resulting
from payment defaults during such period. In the event of a payment default, the
collateral value of the financed vehicle may not cover the outstanding loan
balance and costs of recovery. The Company maintains an allowance for losses on
loans held by the Company, which reflects management's estimates of anticipated
losses for such loans. If the allowance is inadequate, then the Company would
recognize as an expense the losses in excess of such allowance and results of
operations could be adversely affected. The allowance for credit losses is
increased by the provision for losses and for recoveries on Contracts that were
previously charged-off and decreased for Contacts that are charged-off.
The Company's recoveries on consumer receivables may decrease in a weak economic
cycle
The Company cannot assure that its recoveries on consumer receivables
acquired for liquidation would not worsen in a week economic cycle. If the
Company's actual recoveries are
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lower than projected when the portfolio was purchased, the Company's financial
position, liquidity and results of operations could be adversely affected.
Delinquencies, defaults, repossessions and losses generally increase
during periods of economic recession and could cause a decline in values of
automobiles securing outstanding loans, thereby weakening collateral coverage
and increasing the possibility of a loss in the event of default. Any sustained
period of increased delinquencies, defaults, repossessions or losses could
adversely affect the Company's financial position, liquidity, and results of
operations.
Government regulations may limit the Company's ability to recover and enforce
receivables
Federal and state laws may limit the Company's ability to recover and
enforce receivables regardless of any act or omission on the Company's part.
Some laws and regulations applicable to credit card issuers may preclude the
Company from collecting on receivables it purchases where the card issuer failed
to comply with applicable law in generating or servicing the receivables the
Company acquired. Laws relating to debt collections also directly apply to the
Company's business. The Company's failure to comply with any laws or regulations
applicable to it could limit its ability to recover on receivables, which could
reduce its earnings. Additional consumer protection laws may be enacted that
would impose requirements on the enforcement of and collection on consumer
credit cards or installment accounts. Any new laws, rules or regulations may
adversely affect the Company's ability to collect the receivables.
The Companies investments in related businesses may adversely effect the
Company's operations
The Company has and may continue to make investments in companies that
have significantly higher risk profiles with greater reward possibilities in
industries which are not identical to those with which the Company has
historically been involved. If the Company does not receive its cost back on
these investments its business and financial condition could be materially
adversely affected.
Employees
As of September 30, 2000, the Company had 42 full-time employees. The
Company is not a party to any collective bargaining agreement.
Item 2. Property.
The Company's executive and administrative offices are located in
Englewood Cliffs, New Jersey, where the Company subleases approximately 8,300
square feet of general office space for $11,005 per month from Asta Group,
Incorporated, an affiliate of the Company. The sublease expires on July 31,
2005. The Company believes that the sublease is on terms that are as favorable
to the Company as those terms, which could be obtained from an unaffiliated
lessor of the same premises.
-12-
<PAGE>
Item 3. Legal Proceedings.
As of the date of this Form 10-KSB, the Company was not involved in any
material litigation in which it was a defendant. The Company regularly initiates
legal proceedings as a plaintiff in connection with its routine collection
activities.
Item 4. Submission of Matters to a Vote of Security-Holders.
None.
-13-
<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 until
August 15, 2000 and subsequently on the NASDAQ National Market under the symbol
"ASFI." On December 15, 2000 there were approximately 37 holders of record of
the Common Stock. High and low bid prices of the Common Stock since October 1,
1997 as reported by NASDAQ are set fourth below (such quotations reflect
inter-dealer prices without retail markup, markdown, or commission, and may not
necessarily represent actual transactions):
High Low
---- ---
October 1, 1998 to December 31, 1998 $1.06 $0.38
January 1, 1999 to March 31, 1999 1.44 0.31
April 1, 1999 to June 30, 1999 2.56 1.25
July 1, 1999 to September 30, 1999 3.50 1.25
October 1, 1999 to December 31, 1999 9.00 2.00
January 1, 2000 to March 31, 2000 9.25 4.75
April 1, 2000 to June 30, 2000 7.06 3.00
July 1, 2000 to September 30, 2000 8.81 4.19
The Company has never paid a cash dividend on its Common Stock and does
not expect to pay a cash dividend in the near future.
-14-
<PAGE>
Item 6. Management's Discussion and Analysis of Financial Condition and
Results of Operations
In the following discussions, most percentages and dollar amounts have
been rounded to aid presentation. As a result, all such figures are
approximations.
Results of Operations
Year Ended September 30, 2000 Compared to the Year Ended September 30, 1999
Revenues. During the year ended September 30, 2000 revenues, which
consisted almost entirely of interest income, increased $6.5 million or 56.0% to
$18.1 million from $11.6 million for the year ended September 30, 1999. The
increase is due to the increase of interest income earned on the consumer
receivables acquired for liquidation that were outstanding during the entire
year ended September 30, 2000, as compared to only six-months in the prior year,
partially offset by a reduction in interest income from automobile loans
receivable. During the year ended September 30, 2000, the Company paid $1.4
million in its acquisition of accounts acquired for liquidation, compared to
$55.4 million in the year ended September 30, 1999. Servicing fee income on
Contracts sold during the year ended September 30, 2000 decreased $170,000 or
70.8% to $70,000 from $240,000 for the year ended September 30, 1999. The
decrease in servicing fee income is due to the substantial decrease of
previously sold automobile loans serviced by the Company during the year ended
September 30, 2000, as compared to the prior year.
Expenses. During the year ended September 30, 2000, general and
administrative expenses increased $1 million or 32.2 % to $4.1 million from $3.1
million for the year ended September 30, 1999 and represented 48.4% of total
expenses. The increase in general and administrative expenses is attributable to
an increase in expenses associated with servicing the consumer receivables
acquired for liquidation, partially offset by decreased expenses associated with
servicing automobile loans receivable.
Interest expense decreased by $3.2 million or 88.9% during the year
ended September 30, 2000 to $0.4 million from $3.6 million for the year ended
September 30, 1999 and represented 4.8% of total expenses. The decrease resulted
from a substantial decrease in outstanding borrowings by the Company under the
lines of credit and notes payable during the year ended September 30, 2000, as
compared to the year ended September 30, 1999. At September 30, 2000, the
Company had no borrowings outstanding under any lines of credit or notes
payable.
During the year ended September 30, 2000, the provision for credit and
other losses increased by $2.3 million or 135.3% to $4.0 million from $1.7
million for the year ended September 30, 1999 and represented 46.8% of total
expenses. The increase is due to the Company reserving $2.3 million against the
investment in SBR and $1 million for potential obligations of consumer
receivables that have been previously sold during the year ended September 30,
2000.
Year Ended September 30, 1999 Compared to the Year Ended September 30, 1998
Revenues. During the year ended September 30, 1999 revenues increased
$6.6 million or 132.0% to $11.6 million from $5.0 million for the year ended
September 30, 1998. Interest income during the year ended September 30, 1999
increased $6.4 million or 130.3% to $11.4 million from
-15-
<PAGE>
$4.9 million for the year ended September 30, 1998, and represented 97.9% of
total revenues for the year ended September 30, 1999. The increase in interest
income is due to the increase of interest income earned on the purchases of
consumer receivables acquired for liquidation for the year ended September 30,
1999, as compared to the prior year and partially offset by the reduction in
automobile loans receivable. During the year ended September 30, 1999, the
Company paid $55.4 million in its acquisition of accounts acquired for
liquidation, compared to $3.4 million in the year ended September 30, 1998. In
addition, the Company purchased $2.6 million in Contracts during the year ended
September 30, 1999 as compared to $13.1 million during the year ended September
30, 1998. Servicing fee income on Contracts sold during the year ended September
30, 1999 increased $190,000 or 380.0% to $240,000 from $50,000 for the year
ended September 30, 1998. The increase in servicing fee income, which is net of
the servicing assets, is due to the Company writing down its servicing assets to
the estimated fair value during the year ended September 30, 1998.
Expenses. During the year ended September 30, 1999, general and
administrative expenses decreased $142,000 or 4.39 % to $3.1 million from $3.2
million for the year ended September 30, 1998 and represented 36.8% of total
expenses. The decrease in general and administrative expenses is due to a
decrease in expenses associated with purchasing and servicing Contracts,
partially offset by increased expenses associated with acquiring and servicing
consumer receivables for liquidation.
Interest expense increased by $2.9 million or 375.6% during the year
ended September 30, 1999 to $3.6 million from $764,000 for the year ended
September 30, 1998 and represented 43.2% of total expenses. The increase is due
to an increase in borrowings associated with the purchase of consumer
receivables acquired for liquidation during the year ended September 30, 1999
compared to the year ended September 30, 1998.
During the year ended September 30, 1999, the provision for credit
losses decreased by $2.9 million or 63.0% to $1.7 million from $4.6 million for
the year ended September 30, 1998 and represented 20.0% of total expenses. The
decrease is due to the decrease in the amount of Contracts purchased during the
year ended September 30, 1999 as compared to the year ended September 30, 1998.
Seasonality
Management of the Company believes that the Company's operations may,
to some extent, be affected by high delinquency rates by borrowers on Contracts
and lower recoveries on consumer receivables acquired for liquidation during or
shortly following certain holiday periods.
Liquidity and Capital Needs
The Company's primary sources of cash include borrower payments on
consumer receivables acquired for liquidation and Contracts. The Company's
primary uses of cash include its purchases of consumer receivables acquired for
liquidation. As of September 30, 2000, the Company's cash and cash equivalents
increased to $10.5 million from $780,000 at September 30, 1999. The increase was
due to an increase in cash collected from consumer receivables acquired for
liquidation during the entire year ended September 30, 2000, compared to cash
collected from April 1, 1999 to September 30, 1999 in the prior year.
Additionally, through November 1999, the cash collected on consumer receivables
acquired for liquidation was used to pay down the related debt.
-16-
<PAGE>
Net cash provided by operating activities was $13.8 million during the
year ended September 30, 2000, compared to $6.2 million during the year ended
September 30, 1999. Cash used for purchasing accounts acquired liquidation was
$1.4 million during the year ended September 30, 2000, compared to $55.4 million
in the year ended September 30, 1999.
In February 2000, the Company entered a stock purchase and financing
agreement with Small Business Resources, Inc. ("SBR") As of December 14, 2000,
the Company invested a total of $2.5 million in SBR, consisting of a loan of
$1.75 million and an equity investment of $750,000, for a one-third ownership
interest including warrants to purchase shares of common stock of SBR. The
investment was funded from cash provided by operations. SBR is a
business-to-business e-commerce company that provides a business portal where
small business owners can access content, products, resources and advice. To
date, SBR has signed more than a dozen partnership contracts with major
companies within the banking, utility and telecommunications industries. These
contracts currently reach more than three million small business owners with
whom SBR's partners have established relationships. Palisades Collection, LLC, a
wholly owned subsidiary of the Company, will be offering third party collection
services to small businesses through SBR. As of December 14, 2000, the Company's
investment totaled $2.5 million and the Company had reserved $2.25 million
against this investment.
The Company's cash requirements have been and will continue to be
significant. The Company depends on external financing for purchasing consumer
receivables. At September 30, 2000 the Company did not have any open lines of
credit to purchase consumer receivables but had obtained a written approval from
a bank for a $10 million credit facility to purchase consumer receivables
subject to the completion of a loan document.
The Company anticipates that its current cash available; funds to be
provided upon the completion of a new credit facility with a bank; funds made
available by an Affiliate, and cash from operations will be sufficient to
satisfy the Company's estimated cash requirements for at least the next 12
months.
The Company does not anticipate any need for significant capital
expenditures in connection with the expansion of its business for at least 12
months.
Forward-Looking Statements
This Form 10-K contains forward-looking statements within the meaning
of the "safe harbor" provisions under section 21E of the Securities and Exchange
Act of 1934 and the Private Securities Litigation Act of 1995. The Company uses
forward-looking statements in its description of its plans and objectives for
future operations and assumptions underlying these plans and objectives.
Forward-looking terminology includes the words "may", "expects", "believes",
"anticipates", "intends", "forecasts", "projects", or similar terms, variations
of such terms or the negative of such terms. These forward-looking statements
are based on management's current expectations and are subject to factors and
uncertainties which could cause actual results to differ materially from those
described in such forward-looking statements. The Company expressly disclaims
any obligation or undertaking to release publicly any updates or revisions to
any forward-looking statements contained in this Form 10-K to reflect any change
in its expectations or any changes in events, conditions or circumstances on
which any forward-looking statement is based. Factors which could cause such
results to differ materially from those described in the forward-looking
statements include those set forth under "Risk Factors" and elsewhere in, or
incorporated by reference into this Form 10-K. These factors
-17-
<PAGE>
include the following: the Company is dependent on external sources of
financing to fund its operations; the Company may not be able to purchase
receivables at favorable prices and is subject to competition for such
receivables; the Company may not be able to recover sufficient amounts on its
receivables to fund its operations; government regulations may limit the
Company's ability to recover and enforce receivables and other risks.
Item 7. Financial Statements.
The Financial Statements of the Company, the Notes thereto and the
Report of Independent Auditors thereon required by this item appear in this
report on the pages indicated in the following index:
Index to Audited Financial Statements: Page
-------------------------------------- ----
Independent Auditors' Report F-1
Consolidated Balance Sheets - September 30, 2000 and 1999 F-2
Consolidated Statements of Operations - Years ended
September 30, 2000 and 1999 F-3
Consolidated Statements of Shareholders' Equity - Years ended
September 30, 2000 and 1999 F-4
Consolidated Statements of Cash Flows - Years ended
September 30, 2000 and 1999 F-5
Notes to Consolidated Financial Statements F-6
Item 8. Changes in and Disagreements With Accountants on Accounting and
Financial Disclosure.
Not applicable
-18-
<PAGE>
Asta Funding, Inc.
CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2000 and 1999
<PAGE>
Asta Funding, Inc.
Contents
Page
----
Consolidated Financial Statements
Independent auditors' report F-2
Balance sheets as of September 30, 2000 and 1999 F-3
Statements of operations for the years ended
September 30, 2000 and 1999 F-4
Statements of changes in stockholders' equity for the
years ended September 30, 2000 and 1999 F-5
Statements of cash flows for the years ended
September 30, 2000 and 1999 F-6
Notes to financial statements F-7
<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. and subsidiaries as of September 30, 2000 and 1999, and the related
consolidated statements of operations, changes in stockholders' equity and cash
flows for the years then ended. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements enumerated above present fairly, in all
material respects, the consolidated financial position of Asta Funding, Inc. and
subsidiaries as of September 30, 2000 and 1999, and the consolidated results of
their operations and their consolidated cash flows for the years then ended in
conformity with generally accepted accounting principles.
Richard A. Eisner & Company, LLP
Florham Park, New Jersey
November 7, 2000
F-2
<PAGE>
Asta Funding, Inc.
Consolidated Balance Sheets
<TABLE>
<CAPTION>
September 30,
2000 1999
--------------- ---------------
<S> <C> <C>
ASSETS
Cash and cash equivalents $ 10,488,000 $ 780,000
Restricted cash and cash equivalents 51,000 49,000
Consumer receivables acquired for liquidation 4,367,000 16,500,000
Auto loans receivable, (less allowance for credit losses of $611,000 in
2000 and $1,122,000 in 1999) 3,190,000 8,344,000
Finance receivables, (less allowance for credit losses of $75,000) 612,000
Note receivable 250,000
Furniture and equipment (net of accumulated depreciation of $379,000
in 2000 and $246,000 in 1999) 156,000 174,000
Repossessed automobiles held for sale (net of allowance for losses of
$100,000 in 2000 and $200,000 in 1999) 181,000 460,000
Deferred income taxes 1,620,000 610,000
Other assets 269,000 643,000
--------------- ---------------
$ 21,184,000 $ 27,560,000
=============== ===============
LIABILITIES
Advances under lines of credit $ 5,422,000
Notes payable 10,636,000
Other liabilities $ 2,133,000 256,000
Income taxes payable 4,277,000 663,000
Due to affiliate 816,000 2,473,000
--------------- ---------------
Total liabilities $ 7,226,000 19,450,000
--------------- ---------------
Commitments
STOCKHOLDERS' EQUITY
Common stock, $.01 par value, authorized 10,000,000 shares, issued
and outstanding 3,958,000 shares in 2000 and 3,945,000 in 1999 40,000 39,000
Additional paid-in capital 9,619,000 9,602,000
Retained earnings (accumulated deficit) 4,299,000 (1,531,000)
--------------- ---------------
Total stockholders' equity 13,958,000 8,110,000
--------------- ---------------
$ 21,184,000 $ 27,560,000
=============== ===============
</TABLE>
See notes to financial statements F-3
<PAGE>
Asta Funding, Inc.
Consolidated Statements of Operations
<TABLE>
<CAPTION>
Year Ended
September 30,
-------------------------------
2000 1999
------------- -------------
<S> <C> <C>
Finance income $ 18,040,000 $ 11,363,000
Servicing fee income 70,000 240,000
------------- -------------
18,110,000 11,603,000
------------- -------------
General and administrative expenses 4,091,000 3,094,000
Provisions for credit and other losses 3,954,000 1,688,000
Interest expense 410,000 3,634,000
------------- -------------
8,455,000 8,416,000
------------- -------------
Income before provision for income taxes 9,655,000 3,187,000
Provision for income taxes 3,825,000 454,000
------------- -------------
Net income $ 5,830,000 $ 2,733,000
============= =============
Basic net income per share $1.48 $.69
===== ====
Diluted net income per share $1.43 $.69
===== ====
</TABLE>
See notes to financial statements F-4
<PAGE>
Asta Funding, Inc.
Consolidated Statements of Changes in Stockholders' Equity
<TABLE>
<CAPTION>
Additional Accumulated
Common Stock Paid-in Income
Shares Amount Capital (Deficit) Total
------ ------ ---------- ----------- -----
<S> <C> <C> <C> <C> <C>
Balance, September 30, 1998 3,945,000 $ 39,000 $ 9,602,000 $ (4,264,000) $5,377,000
Exercise of options 25,000
Cancellation of common stock (25,000)
Net income 2,733,000 2,733,000
--------- --------- ------------ ------------- ----------
Balance, September 30, 1999 3,945,000 39,000 9,602,000 (1,531,000) 8,110,000
Exercise of options and warrants 13,000 1,000 17,000 18,000
--------- --------- ------------
Net income 5,830,000 5,830,000
--------- --------- ------------ ------------- ----------
Balance, September 30, 2000 3,958,000 $ 40,000 $ 9,619,000 $ 4,299,000 $13,958,000
========= ========= ============ ============= ===========
</TABLE>
See notes to financial statements F-5
<PAGE>
Asta Funding, Inc.
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
Year Ended September 30,
---------------------------------
2000 1999
-------------- --------------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 5,830,000 $ 2,733,000
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization 133,000 132,000
Amortization of loan discount 1,000,000
Provisions for losses 3,954,000 1,688,000
Deferred income taxes (1,010,000) (244,000)
Expenses advanced by affiliate 15,000 58,000
Changes in:
Restricted cash and cash equivalents (2,000) 13,000
Repossessed automobiles held for sale 379,000 (94,000)
Income taxes receivable 527,000
Other assets 374,000 (102,000)
Income taxes payable 3,614,000 663,000
Other liabilities 477,000 (129,000)
-------------- --------------
Net cash provided by operating activities 13,764,000 6,245,000
-------------- --------------
Cash flows from investing activities:
Auto loans purchased (2,603,000)
Auto loan principal payments collected 4,689,000 7,806,000
Purchase of consumer receivables acquired for liquidation (1,442,000) (55,444,000)
Principal payments received from sale or collection of consumer receivables
acquired for liquidation 13,325,000 39,613,000
Principal payments received on residual interest 14,000
Capital expenditures (115,000) (120,000)
Notes receivable (2,114,000)
Finance receivables (687,000)
-------------- --------------
Net cash provided by (used in) investing activities 13,656,000 (10,734,000)
-------------- --------------
Cash flows from financing activities:
Advances from (repayments to) affiliate (1,672,000) 1,498,000
Repayments under lines of credit (5,422,000) (6,044,000)
Proceeds from notes payable 52,000,000
Repayments of notes payable (10,636,000) (42,348,000)
Proceeds from exercise of options and warrants 18,000
-------------- --------------
Net cash provided by (used in) financing activities (17,712,000) 5,106,000
-------------- --------------
Net increase in cash and cash equivalents 9,708,000 617,000
Cash and cash equivalents at beginning of year 780,000 163,000
-------------- --------------
Cash and cash equivalents at end of year $ 10,488,000 $ 780,000
============== ==============
Supplemental disclosure of cash flow information:
Cash paid for:
Interest $ 365,000 $ 3,679,000
Income taxes 344,000 1,000
</TABLE>
See notes to financial statements F-6
<PAGE>
Asta Funding, Inc.
Notes to Financial Statements
September 30, 2000 and 1999
Note A - The Company and its Significant Accounting Policies
[1] The Company:
Prior to May 1999, the Company was primarily engaged in the business of
purchasing and servicing retail installment sales contracts originated by
automobile dealers financing the purchase primarily of used automobiles
by sub-prime borrowers. The loans were generally purchased from
automobile dealers in the northeastern and mid-atlantic states. The
Company ceased accepting new automobile contracts for funding on May 1,
1999 and is liquidating the remaining contracts. Currently, the Company's
primary business is purchasing and liquidating nonperforming consumer
loans.
[2] Principles of consolidation:
The consolidated financial statements include the accounts of Asta
Funding, Inc. and its wholly-owned subsidiaries. All significant
intercompany balances and transactions have been eliminated in
consolidation.
[3] Cash and cash equivalents:
The Company considers all highly liquid investments with a maturity of
three months or less at the date of purchase to be cash equivalents.
The Company maintains cash balances in various financial institutions.
Management periodically evaluates the creditworthiness of such
institutions.
[4] Income recognition:
The Company recognizes income on nonperforming loan portfolios, which are
acquired for liquidation, using either the interest method or cost
recovery method. Upon acquisition of a portfolio of loans, the Company's
management estimates the future anticipated cash flows and determines the
allocation of payments based upon this estimate. If future cash flows
cannot be estimated, the cost recovery method is used. Under the cost
recovery method, no income is recognized until the Company has fully
collected the cost of the portfolio.
Interest income from sub-prime automobile loans is recognized using the
interest method. Accrual of interest income on loans receivable is
suspended when a loan is contractually delinquent more than 60 days. The
accrual is resumed when the loan becomes contractually current, and past
due interest income is recognized at that time. In addition, a detailed
review of loans will cause earlier suspension if collection is doubtful.
[5] Finance Receivables:
Finance receivables are factored accounts receivable primarily with full
recourse.
F-7
<PAGE>
Asta Funding, Inc.
Notes to Financial Statements
September 30, 2000 and 1999
Note A - The Company and its Significant Accounting Policies (continued)
[6] Furniture and equipment:
Furniture and equipment is stated at cost. Depreciation is provided
using the straight-line method over the estimated useful lives of the
assets (5 to 7 years).
[7] Credit losses:
Provisions for credit losses are charged to operations in amounts
sufficient to maintain the allowance at a level considered adequate to
cover the losses of principal in the existing portfolio. The Company's
charge-off policy is based on an account-by-account review of loans
receivable. Loans receivable are charged-off when management deems them
to be uncollectible.
[8] Loan origination fees and costs:
Direct loan origination fees collected and costs incurred are deferred
and amortized over the average lives of the loans using the interest
method. Unamortized amounts are recognized in operations at the time
that loans are sold or paid in full.
[9] Repossessed automobiles held for sale:
Upon foreclosure of the loan, the Company records repossessed
automobiles at the lower of the loan balance or estimated fair value of
the automobile.
After foreclosure, valuations are periodically performed by management
and the carrying value of the automobiles are adjusted to the lower of
cost recorded upon repossession or estimated fair value.
[10] Income taxes:
Deferred federal and state taxes arise from net operating losses and
temporary differences resulting primarily from the provision for credit
losses and funds deposited in accounts for loans sold being reported
for financial accounting and tax purposes in different periods.
[11] Net income per share:
Basic per share data is determined by dividing net income by the
weighted average shares outstanding during the period. Diluted per
share data is computed by dividing net income by the weighted average
shares outstanding, assuming all dilutive potential common shares were
issued. With respect to the assumed proceeds from the exercise of
dilutive options, the treasury stock method is calculated using the
average market price for the period.
F-8
<PAGE>
Asta Funding, Inc.
Notes to Financial Statements
September 30, 2000 and 1999
Note A - The Company and its Significant Accounting Policies (continued)
The following table presents the computation of basic and diluted per share data
for the years ended September 30, 2000 and 1999:
<TABLE>
<CAPTION>
2000 1999
-------------------------------------- -----------------------------------------------
Weighted Weighted
Average Per Share Average Per Share
Net Income Shares Amount Net Income Shares Amount
---------- ------ ------ ---------- ------ ------
<S> <C> <C> <C> <C> <C> <C>
Basic $5,830,000 3,946,000 $1.48 $2,733,000 3,946,000 $.69
===== ====
Effect of dilutive stock
options 126,000 26,000
---------- --------- ---------
Diluted $5,830,000 4,072,000 $1.43 $2,733,000 3,972,000 $.69
========== ========= ===== ========== ========= ====
</TABLE>
[12] Use of estimates:
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities
and disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
[13] Stock-based compensation:
Statement of Financial Accounting Standards No. 123, "Accounting for
Stock-Based Compensation" ("SFAS 123") allows companies to either expense
the estimated fair value of stock options or to continue to follow the
intrinsic value method set forth in APB Opinion 25, "Accounting for Stock
Issued to Employees" ("APB 25") but disclose the pro forma effects on net
income had the fair value of the options been expensed. The Company has
elected to continue to apply APB 25 in accounting for its stock option
incentive plans.
Note B - Segment Reporting
The Company has two reportable segments: finance receivables and consumer
receivables. The finance receivables segment consists of the business of
liquidating sub-prime auto receivables and collecting factored receivables. The
consumer receivables segment liquidates nonperforming consumer credit card
receivables.
The accounting policies of the segments are those described in the summary of
significant accounting policies.
<TABLE>
<CAPTION>
2000 1999
-------------------------------------------- ------------------------------------------
Finance Consumer Finance Consumer
Receivables Receivables Total Receivables Receivables Total
----------- ----------- ----- ----------- ----------- -----
<S> <C> <C> <C> <C> <C> <C>
Service fee income $ 70,000 $ 70,000 $ 240,000 $ 240,000
Interest income 1,704,000 $ 16,336,000 18,040,000 3,720,000 $ 7,643,000 11,363,000
Interest expense 249,000 161,000 410,000 821,000 2,813,000 3,634,000
Depreciation 133,000 133,000 97,000 97,000
Segment income (loss) (1,738,000) 7,568,000 5,830,000 (501,000) 3,234,000 2,733,000
Segment assets 6,447,000 14,737,000 21,184,000 9,917,000 17,643,000 27,560,000
</TABLE>
F-9
<PAGE>
Asta Funding, Inc.
Notes to Financial Statements
September 30, 2000 and 1999
Note C - Auto Loans Receivable and Allowance for Credit Losses
Substantially all loans are at fixed rates of interest, collateralized by
automobiles, and have remaining maturities of 4 years or less. Each automobile
loan provides for full amortization, equal monthly payments and can be fully
prepaid by the borrower at any time without penalty. The Company purchases the
loans from dealers at a discount from the amount financed under the contract.
Substantially all borrowers are located in the northeastern and mid-atlantic
states.
As of September 30, 2000 and 1999, nonaccrual auto loans receivable aggregated
$6,000 and $385,000, respectively.
Changes in the allowance for credit losses consisted of the following:
2000 1999
------------- -------------
Balance, beginning of period $ 1,122,000 $ 1,209,000
Provisions 565,000 1,438,000
Charge-offs (1,506,000) (1,662,000)
Recoveries 430,000 137,000
------------- -------------
Balance, end of period $ 611,000 $ 1,122,000
============= =============
Note D - Consumer Receivables Acquired for Liquidation
As of September 30, 2000, the Company used the interest method on portfolios
with carrying values aggregating $3,335,000 and the cost recovery method on
portfolios with carrying values aggregating $1,032,000.
Note E - Note Receivable
In February 2000, the Company entered into an agreement with Small Business
Resources, Inc. ("SBR"), a business-to-business E-Commerce Company, Small
Business Worldwide, Inc. ("SBW"), the holding company for SBR (a wholly-owned
subsidiary), and Hispanic Business Resources, Inc. ("HBR"), a subsidiary of SBR
whereby the Company would invest up to $2,500,000 in SBR. As of September 30,
2000, the Company had advanced $2,100,000 to SBR, incurred costs of $14,000 and
provided an allowance of $1,864,000 to reflect its estimated net realizable
value. In addition, since the Company has agreed to advance the remaining
$400,000, the potential loss has been recognized in the accompanying financial
statements.
Subsequent to year end, the Company and SBR, HBR, and SBW amended their
agreement whereby the Company exchanged $750,000 of the advances for 19.9% of
SBW's outstanding common stock, a warrant to purchase up to 13.3% (1,698,184
shares) of SBW's common stock at $0.01per share, and 51% of HBR's outstanding
common stock..
F-10
<PAGE>
Asta Funding, Inc.
Notes to Financial Statements
September 30, 2000 and 1999
Note F - Furniture and Equipment
Furniture and equipment as of September 30, 2000 and 1999 consist of the
following:
2000 1999
----------- -----------
Furniture $ 46,000 $ 46,000
Equipment 489,000 374,000
535,000 420,000
Less accumulated depreciation 379,000 246,000
----------- -----------
Balance, end of period $ 156,000 $ 174,000
=========== ===========
Depreciation expense for the years ended September 30, 2000 and 1999 aggregated
$133,000 and $97,000, respectively.
Note G - Restricted Cash
In connection with the sale of loans in 1997, the Company was required to
deposit funds into separate cash accounts with trustees for possible interest
adjustments due to borrowers prepaying the loans.
Note H - Financing
In January 1998, the Company entered into a two year credit facility with a bank
under which the Company could borrow up to a maximum of $20 million. In June
1999, the credit facility was reduced to a maximum of $8 million. During the
year ended September 30, 2000, the credit facility was paid in full and closed.
In March 1999, the Company borrowed funds from three financial institutions
aggregating $52,000,000. Each financial institution's note was collateralized by
specific portfolios of consumer receivables acquired for liquidation. During the
year ended September 30, 2000, the balance was paid in full. The investment
banking firm which provided $37,000,000 of the aforementioned $52,000,000, in
exchange for a $37,000,000 note collateralized by a portfolio of consumer
receivables acquired for liquidation, a sharing of subsequent collections on
this portfolio and $1,500,000 to be collected from on a different portfolio. In
December 1999, after the $37,000,000 note had been paid in full, the Company
paid the investment banking firm $1,225,000 in settlement of the Company's
remaining obligations under this agreement.
Note I - Other Liabilities
Other liabilities as of September 30, 2000 and 1999 are as follows:
<TABLE>
<CAPTION>
2000 1999
---------- -------------
<S> <C> <C>
Estimated losses on commitments and contingencies $1,400,000
Due to seller of consumer receivables 500,000
Accounts payable 159,000 $ 60,000
Accrued interest and other 74,000 196,000
---------- -------------
Total other liabilities $2,133,000 $ 256,000
========== =============
</TABLE>
F-11
<PAGE>
Asta Funding, Inc.
Notes to Financial Statements
September 30, 2000 and 1999
Note J - Income Taxes
The significant components of the Company's deferred tax assets and liabilities
as of September 30, 2000 and 1999 are as follows:
<TABLE>
<CAPTION>
2000 1999
Deferred tax assets:
<S> <C> <C>
Allowances for credit and other losses $1,620,000 $ 528,000
Net operating losses 82,000
---------- -----------
Total deferred tax assets $1,620,000 $ 610,000
========== ===========
</TABLE>
The components of the provision (benefit) for income taxes for the years ended
September 30, 2000 and 1999 are as follows:
<TABLE>
<CAPTION>
2000 1999
------------- -------------
Current:
<S> <C> <C>
Federal $ 3,854,000 $ 698,000
State 981,000
------------- -------------
4,835,000 698,000
------------- -------------
Deferred:
Federal (850,000) (138,000)
State (160,000) (106,000)
------------- -------------
(1,010,000) (244,000)
------------- -------------
Provision for income taxes $ 3,825,000 $ 454,000
============= =============
</TABLE>
The difference between the statutory federal income tax (benefit) rate on the
Company's pre-tax income (loss) and the Company's effective income tax rate is
summarized as follows:
<TABLE>
<CAPTION>
2000 1999
<S> <C> <C>
Statutory federal income tax rate 34.0% 34.0%
State income tax, net of federal benefit 5.8 (1.8)
Other (0.8) .4
Increase (decrease) in valuation allowance (18.4)
---- -----
Effective income tax rate 39.0% 14.2%
==== =====
</TABLE>
F-12
<PAGE>
Asta Funding, Inc.
Notes to Financial Statements
September 30, 2000 and 1999
Note K - Related Party Transactions
The Company leases its facilities through July 2005 pursuant to a sublease from
a company controlled by the principal stockholders of the Company (the
"Affiliate"). The terms of the sublease are substantially identical to the terms
of the underlying lease between the Affiliate and the lessor. The future minimum
lease payments are as follows:
Twelve Months
Ending September 30,
--------------------
2001 $ 147,000
2002 141,000
2003 139,000
2004 140,000
2005 61,000
-----------
$ 628,000
===========
During the year ended September 30, 2000 and 1999, the Company paid a director
of the Company $75,000 per year for consulting services.
Rent expense for the years ended September 30, 2000 and 1999 was approximately
$119,000 and $127,000, respectively, (including $104,000 and $108,000 to the
Affiliate).
During the years ended September 30, 2000 and 1999, salaries, related payroll
taxes and other expenses allocated from the Affiliate aggregated $15,000 and
$49,000, respectively. Management allocates costs monthly based upon its
estimate of the cost of services provided by the Affiliate.
During the years ended September 30, 2000 and 1999, the Affiliate advanced funds
to the Company. Interest expense, at 12 percent per annum, aggregated $91,000
and $218,000 in the years ended September 30, 2000and 1999, respectively.
Note L - Commitments and Contingencies
During October 1998, the Company entered into employment agreements with two
executives, which expire in September 2001. During September 2000, the Company
modified the terms of the agreements. Under the new terms, the aggregate annual
base salaries effective September 30, 2000 are $475,000. Additionally, each
executive may be granted annual bonuses.
In September 1999, the Company sold a portfolio of consumer accounts acquired
for liquidation during the normal course of business. The purchaser claims that
they are entitled to unidentified consumer receivable payments that collection
agencies have sent to the Company. The Company has acknowledged that the
purchaser is entitled to certain receipts and has requested that the purchaser
specifically identify the payments. The Company believes that it has adequately
provided for this matter.
F-13
<PAGE>
Asta Funding, Inc.
Notes to Financial Statements
September 30, 2000 and 1999
Note M - Stockholders' Equity
[1] Stock options and warrants:
The Company has a stock option plan under which 885,000 shares of common
stock are reserved for issuance upon exercise of either incentive or
nonincentive stock options, which may be granted from time to time by the
Board of Directors to employees and others. The Board of Directors
determines the option price (not to be less than fair market value for
incentive options) at the date of grant. The options have a maximum term
of 10 years and outstanding options expire from September 2005 through
June 2009.
The Company applies APB 25 and related interpretations in accounting for
its employee stock option incentive plan and, accordingly, recognizes
compensation expense for the difference between the fair value of the
underlying common stock and the exercise price of the option at the date
of grant. Had compensation cost for the Company's stock option plan been
determined based upon the fair value at the grant date for awards under
the plans consistent with the methodology prescribed under SFAS No. 123,
the Company's proforma net income and diluted net income per share for
2000 would have been approximately $5,781,000 and $1.42, respectively and
1999 would have been approximately $2,600,000 and $.69, respectively.
This is not necessarily indicative of future results of operations, due
to among other reasons, vesting provisions and future stock option
grants. The weighted average fair value of the options granted during
2000 and 1999 were $5.01 and $1.46 per share on the dates of grant,
respectively, using the Black-Scholes option pricing model with the
following assumptions: dividend yield 0%, volatility 119% (2000) and 94%
(1999), expected life 10 years, risk free interest rate of 5.9%.
The following table summarizes stock option transactions under the plan:
<TABLE>
<CAPTION>
Year Ended September 30,
--------------------------------------------------------
2000 1999
------------------------ -------------------------
Weighted Weighted
Average Average
Exercise Exercise
Shares Price Shares Price
------- -------- ------- --------
<S> <C> <C> <C> <C>
Outstanding options at the beginning of year 391,500 $ 3.70 284,500 $4.34
Options granted 206,000 5.19 132,000 1.63
Options cancelled (3,000) 1.63
Options exercised (10,000) 1.75 (25,000) .01
------- -------
Outstanding options at the end of year 584,500 $ 4.27 391,500 $3.70
======= ====== ======= =====
</TABLE>
The following table summarizes information about the Plan's outstanding options
as of September 30, 2000:
<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> <C>
$1.625 - $1.75 136,000 8.62 $1.63 94,666 $1.63
$4.50 - $5.25 448,500 7.34 $5.07 245,500 $4.93
</TABLE>
F-14
<PAGE>
Asta Funding, Inc.
Notes to Financial Statements
September 30, 2000 and 1999
Note M - Stockholders' Equity (continued)
As of September 30, 2000, there were warrants, expiring November 13, 2000 to
purchase 110,000 shares of the Company's common stock at $6.50 per share.
As of September 30, 2000, 995,000 shares have been reserved for the exercise of
warrants and options.
[2] Common stock:
During the year ended September 30, 1997, an officer terminated his
employment with the Company. Pursuant to the agreement, 25,000 shares
were subject to cancellation should losses, through December 31, 1998, on
certain loans exceed a defined amount. During the year ended September
30, 1999, losses exceeded such amount and the shares were canceled.
Note N - Retirement Plan
The Company maintains a 401(k) Retirement Plan covering all of its eligible
employees. Matching contributions to the plan are made at the discretion of the
Board of Directors each plan year. There were no contributions for the years
ended September 30, 2000 and 1999.
Note O - Fair Value of Financial Instruments
Statement of Financial Accounting Standards No. 107, "Disclosures about Fair
Values of Financial Instruments" ("SFAS 107") requires disclosure of fair value
information about financial instruments, whether or not recognized on the
balance sheet, for which it is practicable to estimate that value. Because no
market exists for certain of the Company's assets and liabilities, fair value
estimates are based upon judgments regarding credit risk, investor expectation
of economic conditions, normal cost of administration and other risk
characteristics, including interest rate and prepayment risk. These estimates
are subjective in nature and involve uncertainties and matters of judgment which
significantly affect the estimates.
Fair value estimates are based on existing balance sheet financial instruments
without attempting to estimate the value of anticipated future business and the
value of assets and liabilities that are not considered financial instruments.
The tax ramifications related to the realization of the unrealized gains and
losses can have a significant effect on the fair value estimates and have not
been considered in the estimates.
The following summarizes the information as of September 30, 2000 and 1999 about
the fair value of the financial instruments recorded on the Company's financial
statements in accordance with SFAS 107:
<TABLE>
<CAPTION>
2000 1999
--------------------------------- --------------------------------
Carrying Value Fair Value Carrying Value Fair Value
-------------- ---------- -------------- ----------
<S> <C> <C> <C> <C>
Cash, restricted cash and
and cash equivalents $ 10,539,000 $10,539,000 $ 829,000 $ 829,000
Consumer receivables
acquired for liquidation 4,367,000 6,551,000 16,500,000 21,500,000
Loans receivable 3,190,000 4,248,000 8,344,000 9,985,000
Finance receivable 612,000 810,000
Advances under lines of
credit, notes payable and
due to affiliates 816,000 816,000 18,531,000 18,531,000
</TABLE>
The methodology and assumptions utilized to estimate the fair value of the
Company's financial instruments are as follows:
F-13
<PAGE>
Asta Funding, Inc.
Notes to Financial Statements
September 30, 2000 and 1999
Note O - Fair Value of Financial Instruments (continued)
Cash, restricted cash and cash equivalents:
The carrying amount approximates fair value.
Consumer receivables acquired for liquidation:
The Company has estimated the fair value based on the present value of expected
future cash flows.
Loans receivable, servicing assets and residual interests:
The Company has estimated the fair value based on the present value of expected
future cash flows.
Advances under lines of credit, notes payable and due to affiliates:
Since these are primarily variable rate and short-term, the carrying amounts
approximate fair value.
F-16
<PAGE>
PART III
Item 9. Directors, Executive Officers, Promoters and Control Persons;
Compliance With Section 16(a) of the Exchange Act.
Information contained under the caption "Directors, Executive Officers,
Promoters and Control Persons" in the Company's definitive Proxy Statement to be
filed with the Commission on or before January 30, 2001, is incorporated by
reference in response to this Item 9.
Item 10. Executive Compensation.
Information contained under the caption "Executive Compensation" in the
Company's definitive Proxy Statement to be filed with the Commission on or
before January 30, 2001 is incorporated by reference in response to this Item
10.
Item 11. Security Ownership of Certain Beneficial Owners and Management.
Information contained under the caption "Security Ownership of Certain
Beneficial Owners and Management" in the Company's definitive Proxy Statement to
be filed with the Commission on or before January 30, 2001 is incorporated
herein by reference in response to this Item 11.
Item 12. Certain Relationships and Related Transactions
Information contained under the caption "Certain Relationships and Related
Transactions" in the Company's definitive Proxy Statement to be filed with the
Commission on or before January 30, 2001 is incorporated by reference in
response to this Item 12.
-19-
<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. (2)
10.1 Employment Agreement dated October 1, 1998, by and
between the Company and Gary Stern. (2)
10.2 Employment Agreement dated October 1, 1998, by and
between the Company and Mitchell Herman. (2)
10.3 Amended and Restated Stock Purchase Agreement dated
October 12, 2000, between AstaFunding.Com, LLC, a
subsidiary of the Company and Small Business
Resources, Inc., Small Business Worldwide, Inc. and
Hispanic Business Resources, Inc. (3)
10.4 Common Stock Purchase Warrant dated October 12,
2000, issued by Small Business Worldwide to
AstaFunding.Com, LLC. (3)
21. Subsidiaries of the Company.
27. Financial Data Schedule.
1. Incorporated by reference to Exhibit 3.1 to the Company's
Registration Statement on Form SB-2 (File No. 33-97212).
2. Incorporated by reference to the Company's Annual Report on
Form 10-KSB for the year ended September 30, 1999.
3. Incorporated by reference to the Company's Report filed on
Form 8-K/A on November 2, 2000.
(b) Reports on 8-K
The Registrant filed a report on Form 8-K under Item 5 on October
27, 2000 and a report on 8-K/A on November 2, 2000.
-20-
<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 18, 2000 By: /s/Gary Stern
------------------------
Gary Stern
President
In accordance with the Exchange Act, this report has been
signed below by the following persons on behalf of the Registrant and in the
capacities and on the dates indicated:
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ Gary Stern President and Director December 18, 2000
---------------------------
Gary Stern
/s/ Mitchell Herman Chief Financial Officer, December 18, 2000
--------------------------- Secretary, Chief Accounting
Mitchell Herman Officer and Director
/s/ Arthur Stern Director December 18, 2000
---------------------------
Arthur Stern
/s/ Martin Fife Director December 18, 2000
---------------------------
Martin Fife
/s/ Herman Badillo Director December 18, 2000
---------------------------
Herman Badillo
/s/ General Buster Glosson Director December 18, 2000
---------------------------
General Buster Glosson
/s/ Edward Celano Director December 18, 2000
---------------------------
Edward Celano
/s/ Harvey Leibowitz Director December 18, 2000
---------------------------
Harvey Leibowitz
</TABLE>
-21-
