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| ASFI > SEC Filings for ASFI > Form 10-Q on 8-May-2009 | All Recent SEC Filings |
8-May-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.
Results of Operations
The six-month period ended March 31, 2009, compared to the six-month period
ended March 31, 2008
Finance income. For the six-month period ended March 31, 2009, finance income
decreased $31.5 million or 46.3% to $36.5 million from $68.0 million for the
six-month period ended March 31, 2008. The purchase of the $6.9 billion in face
value receivables for a purchase price of $300 million in March 2007 (the
"Portfolio Purchase") was accounted for using the interest method for the six
month period ended March 31, 2008, during which time $17.7 million in finance
income was recognized. The Portfolio Purchase was transferred to the cost
recovery method effective at the beginning of the third quarter of fiscal year
2008. As a result of the transfer, no finance income was recognized on the
Portfolio Purchase for the six month period ended March 31, 2009. In addition,
receivables under the interest method of accounting, excluding the Portfolio
Purchase, declined $105 million from $242.6 million at March 31, 2008 to
$137.5 million at March 31, 2009. The decrease in the average level of consumer
receivables is attributable impairments recorded, amortization of the portfilos
and portfolio purchases down from $1.3 billion of face value receivables at a
cost of $41.3 million during the six-month period ended March 31, 2008, to $91.5
million of face value receivables at a cost of $2.7 million during the six-month
period ended March 31, 2009. This decline results in the further reduction of
finance income by $13.8 million.
During the first six months of fiscal year 2009, gross collections decreased
30.3% to $123.2 million from $176.7 million for the six months ended March 31,
2008. Commissions and fees associated with gross collections from our third
party collection agencies and attorneys decreased $24.7 million for the six
months ended March 31, 2009 as compared to the same period in the prior year and
averaged 35.9% of collections for the six months ended March 31, 2009 as
compared to 39.1% in the same prior year period. Net collections decreased by
26.7% to $79.0 million from $107.7 million for the six months ended March 31,
2008. The Company pays a third party servicer a fee of $275,000 per month for
twenty-five months for its consulting and skiptracing efforts in connection with
the Portfolio Purchase. This fee, which began in May 2007 and ends in May 2009,
is recorded as part of general and administrative expenses.
Income recognized from fully amortized portfolios (zero based revenue) was
$20.6 million and $23.9 million for the six months ended March 31, 2009 and
2008, respectively.
During the six months ended March 31, 2009, three 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 in Puerto Rico. Due to local market
conditions, the future cash flows of this portfolio became increasingly
unpredictable. The second portfolio is made up of retail installment contracts
that have not followed the performance curves we have historically experienced
in this area of the market. The third portfolio has not performed as expected as
compared to other portfolios in its class. Based upon the forecasts not being as
reliable as first forecasted, we transferred these portfolios to the cost
recovery method. Finance income on these portfolios collectively was
approximately 3% of revenue for each of the six-month periods ended March 31,
2009 and 2008, respectively. As a result of the transfer to the cost recovery
method, we will not recognize finance income on these three portfolios until
their carrying values are recovered. At March 31, 2009, the combined carrying
values of these portfolios were $9.5 million. Impairments of approximately
$8.9 million were recorded in the first and second quarters of fiscal year 2009
on these three portfolios.
Other income. Other income of $ 54,000 and $144,000 for the six months ended
March 31, 2009 and 2008, respectively, includes interest and service fee income.
General and Administrative Expenses. During the six months ended March 31, 2009,
general and administrative expenses increased $0.5 million, or 3.4% to
$13.4 million from $12.9 million for the six months ended March 31, 2008, and
represented 22.9% of total expenses (excluding income taxes) for the six months
ended March 31, 2009 as compared to 22.1% for the six month period ended
March 31, 2008. The increase in general and administrative expenses was
primarily due to an increase in collection expenses that resulted from the
higher cost of maintaining the increased number of debtor accounts acquired in
the past several years. In addition, professional fees increased during the
six-month period ended March 31, 2009 resulting from work related to the bank
amendments that were finalized on February 20, 2009. Also, amortization
increased during the six-month period ended March 31, 2009 as compared to the
same prior year period, reflecting increased amortization expense related to the
fees on the loan amendments. The increased collection and amortization expenses
were partially offset by lower postage and lower salary and salary -related
expenses in fiscal year 2009 compared to the prior year. The reduced postage
expense resulted from the reduced portfolio purchases in fiscal year 2009. The
reduced salary expense reflected lower average number of employees during the
six-month period ended March 31, 2009 compared to the same prior year period, in
part, the result of the closing of the Pennsylvania collection facility. The
cost of closing the Pennsylvania call center in February 2009 was approximately
$250,000 and was included in general and administrative expense in the three
month period ended March 31, 2009. This action is estimated to save the Company
approximately $1.5 million annually.
Interest Expense. During the six month period ended March 31, 2009, interest
expense decreased $5.5 million or 51.9% from $10.7 million in the same prior
year period and represented 8.8% of total expenses (excluding income taxes) for
the six-month period ended March 31, 2009 compared to 18.2% for the six-month
period ended March 31, 2008. The decrease in interest expense is primarily the
result of a reduction in the average loan balance from $318.5 for the six-month
period ended March 31, 2008 to $183.7 million for the same current year period
as we continue our program of reducing debt, in addition to reduced portfolio
purchases. Additionally, the average interest rate in the six-month period ended
March 31, 2009 was 5.1% as compared to 6.2% for the same prior year period.
Impairments. Impairments of $39.8 million were recorded by the Company during
the six months ended March 31, 2009 as compared to $35.0 million for the six
months ended March 31, 2008, and represented 68.3% of total expenses (excluding
income taxes) for the quarter ended March 31, 2009 as compared to 59.7% for the
same prior year period. Included in impairments is $8.9 million related to three
portfolios transferred to the cost recovery method. As relative collections with
respect to our expectations on these portfolios were deteriorating, we believed
that these impairment charges and adjustments to our cash flow expectations
became necessary. We recorded impairments on the Portfolio Purchase in the
amount of $30.3 million and five other portfolios in the amount of $4.7 million
in the six month period ended March 31, 2008.
The three-month period ended March 31, 2009, compared to the three-month period
ended March 31, 2008
Finance income. For the three months ended March 31, 2009, finance income
decreased $15.8 million or 46.6% to $18.1 million from $33.9 million for the
three months ended March 31, 2008. The Portfolio Purchase was accounted for
using the interest method for the three-month period ended March 31, 2008,
during which time $8.8 million in finance income was recognized. The Portfolio
Purchase was transferred to the cost recovery method effective in the third
quarter of fiscal year 2008. As a result of the transfer, no finance income was
recognized on the Portfolio Purchase for the three-month period ended March 31,
2009. In addition, receivables under the interest method of accounting,
excluding the Portfolio Purchase, declined $105 million from $242.6 million at
March 31, 2008 to $137.5 million at March 31, 2009. The decrease in the average
level of consumer receivables is largely attributable to the impairments
recorded, amortization of the portfolios and the decrease in portfolio purchases
down from $155 million of face value receivables at a cost of $3.8 million
during the three-month period ended March 31, 2008, to $44.0 million of face
value receivables at a cost of $1.6 million during the three-month period ended
March 31, 2009. This decline results in the further reduction of finance income
by $7.0 million.
During the second quarter of fiscal year 2009, gross collections decreased 34.3%
to $57.4 million from $87.4 million for the three months ended March 31, 2008.
Commissions and fees associated with gross collections from our third party
collection agencies and attorneys decreased $17.2 million, or 45.6%, for the
three months ended March 31, 2009 as compared to the same period in the prior
year and averaged 35.7% during the three-month period ended March 31, 2009. Net
collections decreased by 25.8% to $36.9 million from $49.8 million for the three
months ended March 31, 2008. The Company pays a third party servicer a monthly
fee of $275,000 per month for twenty-five months for its consulting and
skiptracing efforts in connection with the Portfolio Purchase. This fee, which
began in May 2007, is recorded as part of general and administrative expenses.
The final payment is due in May 2009.
During the three months ended March 31, 2009, one portfolio was transferred from
the interest method to the cost recovery method. Based on the nature of this
portfolio and the recent cash flows, our estimates of the timing of expected
cash flows became uncertain. Based upon the forecast not being as reliable as
first forecasted we transferred this portfolio to the cost recovery method.
Finance income was less than 1% of revenue for each of the three month periods
ended March 31, 2009 and 2008, respectively, on this portfolio. As a result of
the transfer to the cost recovery method, we will not recognize finance income
on this portfolio until its carrying values is recovered. At March 31, 2009, the
carrying value of this portfolio was $4.0 million. An impairment of
approximately $1.5 million was recorded in the second quarter of fiscal year
2009 on this portfolio.
Income recognized from fully amortized portfolios (zero based revenue) was
$10.5 million and $12.2 million for the three months ended March 31, 2009 and
2008, respectively.
Other income. Other income of $ 22,000 and $4,000 for the three months ended
March 31, 2009 and 2008, respectively, includes interest and service fee income.
General and Administrative Expenses. During the three-month period ended
March 31, 2009, general and administrative expenses decreased $0.8 million or
10.9% to $6.3 million from $7.1 million for the three-months ended March 31,
2008, and represented 23.7% of total expenses (excluding income taxes) for the
three months ended March 31, 2009 as compared to 15.2% for the same period in
the prior year. The decrease is the result of lower postage expense and lower
salary and salary-related expenses, partially offset by an increase in
professional fees associated with the work on the banking arrangements finalized
February 20, 2009. The cost of closing the Pennsylvania call center was
approximately $250,000 and was included in general and administrative expense in
the three month period ended March 31, 2009.
Interest Expense. During the three-month period ended March 31, 2009, interest
expense was $2.0 million compared to $4.7 million in the same period in the
prior year and represented 7.3% of total expenses (excluding income taxes) for
the three-month period ended March 31, 2009 compared to 10.1% in the same prior
year period. The decrease in interest expense is primarily the result the
average loan balance from $315.7 million for the three-month period ended
March 31, 2008 to $172.0 million for the same current year period as we continue
our program of reducing debt, in addition to reduced portfolio purchases.
Additionally, the average interest rate in the three-month period ended
March 31, 2009 was 4.1% as compared to 6.8% for the same prior year period.
Impairments. Impairments of $18.4 million were recorded by the Company during
the three months ended March 31, 2009 as compared to $35.0 million for the three
months ended March 31, 2008, and represented 69.0% of total expenses (excluding
income taxes) for the quarter ended March 31, 2009 as compared to 74.7% for the
three months ended March 31, 2008. Included in impairments is $1.5 million
related to a portfolio transferred to the cost recovery method. For the three
months ended March 31, 2008, we recorded impairments on the Portfolio Purchase
in the amount of $30.3 million and 5 other portfolios in the amount of
$4.7 million. As relative collections with respect to our expectations on these
portfolios were deteriorating, we believed that these impairment charges and
adjustments to our cash flow expectations became necessary.
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 of
debt, purchases of consumer receivable portfolios, interest payments, costs
involved in the collections of consumer receivables, dividends and taxes.
Management believes that 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.
On February 20, 2009, we executed the Seventh Amendment to the Fourth Amended
and Restated Loan Agreement (this and all other amendments referred to as the
"Credit Facility") with a consortium of banks ("the Bank Group") See further
discussion on this amendment below. As of March 31, 2009, we had an
$85.0 million line of credit on the Credit Facility. The Credit Facility will
reduce to $80.0 million by June 30, 2009. 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 March 31, 2009, there was a
$44.8 million outstanding balance under this facility and availability of
$20.9 million. Our borrowing availability is based on a formula calculated on
the age of the receivables. The balance outstanding at March 31, 2008 was
$148.3 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. 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 the Credit Facility, which is all assets of the Company except
those owned by Palisades XVI.
On March 30, 2007 the Company signed the Third Amendment to the Credit Facility
whereby the parties agreed to a Temporary Overadvance of $16 million. In
addition, the parties agreed to an increase in interest rate to LIBOR plus 275
basis points for LIBOR loans, subject to an adjustment each quarter, an increase
from 175 basis points. On May 10, 2007, the Company signed the Fourth Amendment
to the Credit Facility whereby the parties agreed to revise certain terms of the
. . .
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