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| ASFI > SEC Filings for ASFI > Form 10-Q on 26-Feb-2009 | All Recent SEC Filings |
26-Feb-2009
Quarterly Report
• semi-performing receivables - accounts where the debtor is currently making partial or irregular monthly payments, but the accounts may have been written-off by the originators; and
• performing receivables - accounts where the debtor is making regular monthly payments that may or may not have been delinquent in the past.
We acquire these consumer receivable portfolios at a significant discount to the
amount actually owed by the borrowers. We acquire these portfolios after a
qualitative and quantitative analysis of the underlying receivables and
calculate the purchase price so that our estimated cash flow offers us an
adequate return on our acquisition costs and servicing expenses. After
purchasing a portfolio, we actively monitor its performance and review and
adjust our collection and servicing strategies accordingly.
We purchase receivables from credit grantors and others through privately
negotiated direct sales and auctions in which sellers of receivables seek bids
from several pre-qualified debt purchasers. We pursue new acquisitions of
consumer receivable portfolios on an ongoing basis through:
• our relationships with industry participants, collection agencies,
investors and our financing sources;
• brokers who specialize in the sale of consumer receivable portfolios; and
• other sources.
Critical Accounting Policies
We account for our investments in consumer receivable portfolios, using either:
• The interest method; or
• The cost recovery method.
As we believe our extensive liquidating experience in certain asset classes such
as distressed credit card receivables, telecom receivables, consumer loan
receivables, retail installment contracts, mixed consumer receivables, and auto
deficiency receivables has matured, we use the interest method for accounting
for substantially all asset acquisitions within these classes of receivables
when we believe we can reasonably estimate the timing of the cash flows. In
those situations where we diversify our acquisitions into other asset classes in
which we do not possess the same expertise or history, or we cannot reasonably
estimate the timing of the cash flows, we utilize the cost recovery method of
accounting for those portfolios of receivables.
Over time, as we continue to purchase asset classes to the point where we
believe we have developed the requisite expertise and experience, we are more
likely to utilize the interest method to account for such purchases.
The Company accounts for its investment in finance receivables using the
interest method under the guidance of AICPA Statement of Position 03-3,
"Accounting for Loans or Certain Securities Acquired in a Transfer" ("SOP
03-3"). Practice Bulletin 6, "Amortization of Discounts on Certain Acquired
Loans." ("Practice Bulletin 6") was amended by SOP 03-3. Under the guidance of
SOP 03-3 (and the amended Practice Bulletin 6), static pools of accounts are
established. These pools are aggregated based on certain common risk criteria.
Each static pool is recorded at cost and is accounted for as a single unit for
the recognition of income, principal payments and loss provision. We currently
consider for aggregation portfolios of accounts, purchased within the same
fiscal quarter, that generally have the following characteristics:
• same issuer/originator
• same underlying credit quality
• similar geographic distribution of the accounts
• similar age of the receivable and
• same type of asset class (credit cards, telecommunications, etc.)
After determining that an investment will yield an adequate return on our
acquisition cost after servicing fees, including court costs which are expensed
as incurred, we use a variety of qualitative and quantitative factors to
determine the estimated cash flows. As previously mentioned, included in our
analysis for purchasing a portfolio of receivables and determining a reasonable
estimate of collections and the timing thereof, the following variables are
analyzed and factored into our original estimates:
• the number of collection agencies previously attempting to collect the
receivables in the portfolio;
• the average balance of the receivables;
• the age of the receivables (as older receivables might be more difficult to collect or might be less cost effective);
• past history of performance of similar assets - as we purchase portfolios of similar assets, we believe we have built significant history on how these receivables will liquidate and cash flow;
• number of months since charge-off;
• payments made since charge-off;
• the credit originator and their credit guidelines;
• the locations of the debtors as there are better states to attempt to collect in and ultimately we have better predictability of the liquidations and the expected cash flows. Conversely, there are also states where the liquidation rates are not as good and that is factored into our cash flow analysis;
• financial wherewithal of the seller;
• jobs or property of the debtors found within portfolios-with our business model, this is of particular importance. Debtors with jobs or property are more likely to repay their obligation and conversely, debtors without jobs or property are less likely to repay their obligation ; and
• the ability to obtain customer statements from the original issuer.
We will obtain and utilize as appropriate input including, but not limited to,
monthly collection projections and liquidation rates, from our third party
collection agencies and attorneys, as further evidentiary matter, to assist us
in developing collection strategies and in modeling the expected cash flows for
a given portfolio.
We acquire accounts that have experienced deterioration of credit quality
between origination and the date of our acquisition of the accounts. The amount
paid for a portfolio of accounts' reflects our determination that it is probable
we will be unable to collect all amounts due according to the portfolio of
accounts' contractual terms. We consider the expected payments and estimate the
amount and timing of undiscounted expected principal, interest and other cash
flows for each acquired portfolio coupled with expected cash flows from accounts
available for sales. The excess of this amount over the cost of the portfolio,
representing the excess of the account's cash flows expected to be collected
over the amount paid, is accreted into income recognized on finance receivables
over the expected remaining life of the portfolio.
We believe we have significant experience in acquiring certain distressed
consumer receivable portfolios at a significant discount to the amount actually
owed by underlying debtors. We acquire these portfolios only after both
qualitative and quantitative analyses of the underlying receivables are
performed and a calculated purchase price is paid so that we believe our
estimated cash flow offers us an adequate return on our costs including
servicing expenses. Additionally, when considering larger portfolio purchases of
accounts, or portfolios from issuers from whom we have little or limited
experience, we have the added benefit of soliciting our third party collection
agencies and attorneys for their input on liquidation rates and at times
incorporate such input into the price we offer for a given portfolio and the
estimates we use for our expected cash flows.
Typically, when purchasing portfolios for which we have the experience detailed
above, we have expectations of recovering 100% return of our invested capital
back within an 18-28 month time frame and expectations of collecting in the
range of 130-150% of our invested capital over 3-5 years. Historically, we have
generally been able to achieve these results and we continue to use this as our
basis for establishing the original cash flow estimates for our portfolio
purchases. We routinely monitor these results against the actual cash flows and,
in the event the cash flows are below our expectations and we believe there are
no reasons relating to mere timing differences or explainable delays (such as
can occur particularly when the court system is involved) for the reduced
collections, an impairment would be recorded as a provision for credit losses.
Conversely, in the event the cash flows are in excess of our expectations and
the reason is due to timing, we would defer the "excess" collection as deferred
revenue.
The Company uses the cost recovery method when collections on a particular pool
of accounts cannot be reasonably predicted. Under the cost recovery method, no
income is recognized until the cost of the portfolio has been fully recovered. A
pool can become fully amortized (zero carrying balance on the balance sheet)
while still generating cash collections. In this case, all cash collections are
recognized as revenue when received.
In the following discussions, most percentages and dollar amounts have been
rounded to aid presentation. As a result, all figures are approximations.
Results of Operations
The three-month period ended December 31, 2008, compared to the three-month
period ended December 31, 2007.
Finance income. For the three months ended December 31, 2008, finance income
decreased $15.7 million or 46.1% to $18.4 million from $34.1 million for the
three months ended December 31, 2007. As collections have slowed, and the
environment for collections is challenging, our finance income decreased, also
in part due, to the transfer of the purchase of the $6.9 billion in face value
receivables for a purchase price of $300 million in March of 2007 (the
"Portfolio Purchase") from the interest method to the cost recovery method in
the third quarter of fiscal year 2008. Finance income of $8.8 million was
recognized in the first quarter of fiscal year 2008 as compared to zero revenue
recognized this fiscal year. In addition, the average balance of consumer
receivables acquired for liquidation decreased from $552.5 million for the three
month period ended December 31, 2007 to $427.7 million for the three month
period ended December 31, 2008. The decrease was caused by the impairments
recorded in the first quarter of fiscal year 2009 and the decline in portfolio
purchases in the final three quarters of fiscal year 2008 and continuing through
the first quarter of 2009. As the Company significantly curtailed its portfolio
purchasing during this period, purchasing only $1.1 million in new portfolios in
the current quarter as compared to $37.5 million in the first quarter of fiscal
year 2008, there was a significant decline of finance income in the current
quarter.
During the first quarter of fiscal year 2009, gross collections decreased 26. 3%
to $65.8 million from $89.3 million for the three months ended December 31,
2007. Commissions and fees associated with gross collections from our third
party collection agencies and attorneys decreased $7.7 million, or 24.4%, to
$23.7 million from $31.4 million for the three months ended December 31, 2008 as
compared to the same prior year period, consistent with the decrease in gross
collections. Commissions and fees amounted to 36.0% of gross collections for the
three month period ended December 31, 2008, compared to 35.1% in the same period
of the prior year. Net collections for the three months ended December 31, 2008
decreased 27.3% to $42.1 million from $57.9 million for the same prior year
period.
Income from fully amortized portfolios (zero basis revenue) was $10.1 million
for the three month period ended December 31, 2008, compared to $11.0 million
for the three month period ended December 31, 2007.
During the first quarter of fiscal year 2009, two portfolios were transferred
from the interest method to the cost recovery method. Based on the nature of
these portfolios and the recent cash flows, our estimates of the timing of
expected cash flows became uncertain. One of the portfolios is related to
unsecured installment loans domiciled outside the United States. Due to local
market conditions, the future cash flows of this portfolio became increasingly
unpredictable. The other portfolio is made up of retail installment contracts
that have not followed the performance curves provided by our servicer with
experience in this area of the market. Based upon the forecasts not being as
reliable as first forecasted we transferred both of these portfolios to the cost
recovery method. Finance income was less than 2% of revenue for each of the
three month periods ended December 31, 2008 and 2007, respectively, on these
portfolios collectively. As a result of the transfer to the cost recovery
method, we will not recognize finance income on these two portfolios until their
carrying values are recovered. At December 2008 the combined carrying values of
these portfolios were $6.1 million. Impairments of approximately $7.4 million
were recorded in the first quarter of fiscal year 2009 on these two portfolios.
Other income. Other income of $32,000 and $140, 000 for three month periods
ended December 31, 2008 and 2007, respectively includes interest income from
banks and service fee income.
General and Administrative Expenses. During the three-month period ended
December 31, 2008, general and administrative expenses increased $1.2 million or
21.1% to $7.0 million from $5.8 million for the three-months ended December 31,
2007, and represented 22.2% of total expenses (excluding income taxes) for the
three-month period ended December 31, 2008, as compared to 49.4% for the three-
month period ended December 31, 2007. The increase in general and administrative
expenses was due to an increase in collection expenses that resulted from a
greater number of legal settlements. Additionally, amortization expense was
higher due to loan amendments and related legal fees incurred during the second
half of fiscal year 2008. Furthermore, stock based compensation expense
increased in the first quarter of fiscal year 2009 as compared to the same prior
year period.
Interest Expense. During the three-month period ended December 31, 2008,
interest expense decreased $2.7 million or 46.6% from $5.9 million to
$3.2 million for the same period in the prior year and represented 10.0% of
total expenses (excluding income taxes) for the three-month period ended
December 31, 2008 as compared to 50.6% for the three-month period ended
December 31, 2007. The lower interest expense in the 2008 fiscal quarter is
primarily a reflection of decreased borrowings. In addition to the continuing
paydown of the BMO loan, lower borrowings on our credit facility are
attributable to reduced portfolio purchasing requirements. Additionally,
interest rates on total average debt are lower in the current fiscal quarter
compared to that in the same prior year quarter (a 5.98% average rate on total
debt, excluding the subordinated debt - related party as compared to a 7.20%
average rate last year).
Impairments. The Company recorded impairments of $21.4 million for the
three-month period ended December 31, 2008, which represents 67.8% of total
expense (excluding income taxes). Of the $21.4 million of impairments,
$7.4 million related to the two portfolios transferred to the cost recovery
method, as more fully described under Finance income, above. The remaining
impairments relate the timing and, or, the amount of collections projected to be
below our original expectations. There were no impairments recorded during the
three-month period ended December 31, 2007.
Liquidity and Capital Resources
Our primary source of cash from operations is collections on the receivable
portfolios we have acquired. Our primary uses of cash include repayments under
our line of credit, purchases of consumer receivable portfolios, interest
payments, costs involved in the collections of consumer receivables, dividends
and taxes. Management believes the results of operations will provide enough
liquidity to meet our obligations of the business and be in compliance with debt
covenants. We rely significantly upon our lenders to provide the funds necessary
for the purchase of consumer accounts receivable portfolios. As of December 31,
2008, we had a $175 million line of credit with a consortium of banks ("the Bank
Group) for portfolio purchases ("the Credit Facility"). The Credit Facility
bears interest at the lesser of LIBOR plus an applicable margin, or the prime
rate minus an applicable margin based on certain leverage ratios. The Credit
Facility is collateralized by all portfolios of consumer receivables acquired
for liquidation and all other assets of the Company excluding the assets of
Palisades Acquisition XVI, LLC, a wholly-owned subsidiary of the Company
("Palisades XVI"), and contains financial and other covenants (relative to
tangible net worth, interest coverage, and leverage ratio, as defined) that must
be maintained in order to borrow funds. As of December 31, 2008, there was a
$64.1 million outstanding balance under this facility and availability of
$18.5 million. Our borrowing availability is based on a formula calculated on
the age of the receivables. Availability has remained at approximately the same
level as the end of the fiscal year. The balance outstanding at December 31,
2007 was $167.4 million. Although we are within the borrowing limits of this
facility, there are certain limitations in place with regard to
collateralization whereby the Company may be limited in its ability to borrow
funds to purchase additional portfolios. On March 30, 2007 the Company signed
the Third Amendment to the Fourth Amended and Restated Loan Agreement (this and
all future amendments referred to as ("the Credit Facility")) with the Bank
Group that amended certain terms of the Credit Facility, whereby the parties
agreed to a Temporary Overadvance of $16 million to be reduced to zero on or
before May 17, 2007. In addition, the parties agreed to an increase in interest
rate to LIBOR plus 275 basis points for LIBOR loans, an increase from 175 basis
points. The rate is subject to adjustment each quarter upon delivery of results
that evidence a need for an adjustment. As of May 7, 2007, the Temporary
Overadvance was approximately $12 million. On May 10, 2007, the Company signed
the Fourth Amendment to the Credit Facility whereby the parties agreed to revise
certain terms of the agreement which eliminated the Temporary Overadvance
provision. On June 26, 2007 the Company signed the Fifth Amendment to the Credit
Facility with the Bank Group that amended certain terms of the Credit Agreement
whereby the parties agreed to further amend the definition of the Borrowing Base
and increase the advance rates on portfolio purchases allowing the Company more
borrowing availability within the $175 million upper limit. On December 4, 2007,
the Company signed the Sixth Amendment to the Credit Facility with the Bank
Group that temporarily increased the total revolving loan commitment from
$175 million to $185 million. If utilized, the increase of $10 million was
required to be repaid by February 29, 2008. The temporary increase was not used.
The term of the Credit Facility ends July 11, 2009. If the loan agreement cannot
be renewed at maturity, we believe we can sell any of the assets secured by this
line of credit, which is all assets of the Company except those owned by
Palisades XVI. On February 20, 2009, the Company and the Bank Group entered into
the Seventh Amendment to Fourth Amended and Restated loan Agreement. See below
for more information.
In March 2007, Palisades XVI consummated the Portfolio Purchase. The Portfolio
Purchase is made up of predominantly credit card accounts and includes accounts
in collection litigation, accounts as to which the sellers had been awarded
judgments, and other traditional charge-offs. The Company's line of credit with
the Bank Group was fully utilized, as modified in February 2007, with the
aggregate deposit of $75 million paid for the Portfolio Purchase.
The remaining $225 million was paid on March 5, 2007 by borrowing approximately
$227 million (inclusive of transaction costs) under the Receivables Financing
Agreement entered into by Palisades XVI with BMO as the funding source, and
consists of debt with full recourse only to Palisades XVI, bore an interest rate
of approximately 170 basis points over LIBOR at the inception of the agreement.
The term of the original agreement was three years. All proceeds received as a
result of the net collections from the Portfolio Purchase are applied to
interest and principal of the underlying loan. The Company made certain
representations and warranties to the lender to support the transaction. The
Portfolio Purchase is serviced by Palisades Collection, LLC, a wholly owned
subsidiary of the Company, which has also engaged several unrelated
subservicers. As of December 31, 2008, there was a $119.8 million outstanding
balance under this facility.
On December 27, 2007, Palisades XVI entered into the second amendment of its
Receivables Financing Agreement. As the actual collections had been slower than
the minimum collections scheduled under the original agreement, which
contemplated sales of accounts which had not occurred, the lender and Palisades
XVI agreed to a lower amortization schedule which did not contemplate the sales
of accounts. The effect of this reduction was to extend the payments of the loan
from approximately 25 months to approximately 31 months from the date of the
second amendment. The lender charged Palisades XVI a fee of $475,000 which was
paid on January 10, 2008. The fee was capitalized and is being amortized over
the remaining life of the Receivables Financing Agreement.
On May 19, 2008, Palisades XVI entered into the third amendment of its
Receivables Financing Agreement. As the actual collections on the Portfolio
Purchase continued to be slower than the minimum collections scheduled under the
second amendment, the lender and Palisades XVI agreed to an extended
amortization schedule. The effect of this reduction is to extend the length of
the original loan to three years, nine months, an extension of nine months. The
lender also increased the interest rate to approximately 320 basis points (from
170 basis points) over LIBOR, subject to automatic reduction in the future if
additional capital contributions are made by the parent of Palisades XVI. In
addition, on May 19, 2008, the Company entered into an amended and restated
Servicing Agreement among Palisades XVI, Palisades Collection, L.L.C. and the
BMO (the "Servicing Agreement"). The amendment calls for increased
documentation, responsibilities and approvals of subservicers engaged by
Palisades Collection L.L.C.
On April 29, 2008, the Company obtained a subordinated loan pursuant to a subordinated promissory note from Asta Group, Inc. (" the Family Entity"). The loan is in the aggregate principal amount of $8.2 million, bears interest at a rate of 6.25% per annum, is payable interest only each quarter until its maturity date of January 9, 2010, subject to prior repayment in full of the Company's senior loan facility with the Bank Group. Interest expense on this loan was $154,000 from the inception of the loan through September 30, 2008. The subordinated loan was incurred by the Company to resolve certain issues described below. Proceeds of the subordinated loan were used to reduce the balance due on our line of credit with the Bank Group on June 13, 2008. This facility is secured by the Bank Group Collateral, other than the assets of Palisades XVI, which was separately financed by the BMO Facility. The Servicer that provides servicing for certain portfolios within the Bank Group Collateral, was also engaged by Palisades Collection, LLC, after the initial purchase of the Portfolio Purchase in March 2007, to provide certain management services with respect to the portfolios owned by Palisades XVI and financed by the BMO Facility and to provide subservicing functions for portions of the Portfolio Purchase. Collections with respect to the Portfolio Purchase, and most portfolios purchased by the Company, lag the costs and fees which are expended to generate those collections, particularly when court costs are advanced to pursue an aggressive litigation strategy, as is the case with the Portfolio Purchase. Start-up cash flow issues with respect to the Portfolio Purchase were exacerbated by (a) collection challenges caused by the current economic environment, (b) the fact that Palisades Collection believed that it would be desirable to engage the Servicer to perform management services with respect to the Portfolio Purchase which services were not contemplated at the time of the initial Portfolio Purchase and (c) Palisades Collection believed it would be desirable to commence litigations and incur court costs at a faster rate than initially budgeted. The agreements with the Servicer call for a 3%fee on substantially all gross collections from the Portfolio Purchase on the first $500 million and 7% on substantially all collections from the Portfolio Purchase in excess of $500 million. Additionally, the Company pays the Servicer a monthly fee of $275,000 for twenty-five months commencing May 2007 for its consulting, asset identification and skiptracing efforts in connection with the Portfolio Purchase. The Servicer also receives a servicing fee with respect to those . . .
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