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| ASFI > SEC Filings for ASFI > Form 10-Q on 7-Aug-2009 | All Recent SEC Filings |
7-Aug-2009
Quarterly Report
Caution Regarding Forward Looking Statements
This Form 10-Q contains forward-looking statements made pursuant to the safe
harbor provisions of the Private Securities Litigation Reform Act of 1995.
Forward-looking statements typically are identified by use of terms such as
"may," "will," "should," "plan," "expect," "believe," "anticipate," "estimate"
and similar expressions, although some forward-looking statements are expressed
differently. Forward-looking statements represent our management's judgment
regarding future events. Although we believe that the expectations reflected in
such forward-looking statements are reasonable, we can give no assurance that
such expectations will prove to be correct. All statements other than statements
of historical fact included in this report regarding our financial position,
business strategy, products, products under development and clinical trials,
markets, budgets, plans, or objectives for future operations are forward-looking
statements. We cannot guarantee the accuracy of the forward-looking statements,
and you should be aware that our actual results could differ materially from
those contained in the forward-looking statements due to a number of factors,
including the statements under "Risk Factors" and "Critical Accounting Policies"
detailed in our Annual Report on Form 10-K and Form 10-K/A for the year ended
September 30, 2008, and other reports filed with the Securities and Exchange
Commission ("SEC").
Our annual report on Form 10-K and Form 10-K/A, quarterly reports on Form 10-Q,
current reports on Form 8-K and all other documents filed by the Company or with
respect to its securities with the SEC are available free of charge through our
website at www.astafunding.com. Information on our website does not constitute a
part of this report. The SEC also maintains an internet site (www.sec.gov) that
contains reports and information statements and other information regarding
issuers, such as ourselves, who file electronically with the SEC.
Overview
We are primarily engaged in the business of acquiring, managing, servicing and
recovering on portfolios of consumer receivables. These portfolios generally
consist of one or more of the following types of consumer receivables:
• charged-off receivables - accounts that have been written-off by the
originators and may have been previously serviced by collection
agencies;
• 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, telecommunications 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. At June 30, 2009,
approximately $136.5 million of the consumer receivables acquired for
liquidation are accounted for using the interest method, while approximately
$219.8 million are accounted for using the cost recovery method. The latter
includes one portfolio valued at approximately $181 million.
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 attorney networks 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.
As a result of the recent challenging economic environment and the impact it has
had on collections, for portfolio purchases acquired in fiscal year 2009 we have
extended our time frame of the expectation of recovering 100% of our invested
capital within a 24-39 month period from an 18-28 month period and the
expectation of recovering 130-140% over 7 years which is an , increase from the
previous 5 year expectation. The collection expectations of portfolios
previously purchased were not changed. 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 nine-month period ended June 30, 2009, compared to the nine-month period
ended June 30, 2008
Finance income. During the nine-month period ended June 30, 2009, finance income
decreased $37.9 million or 41.3% to $53.7 million from $91.6 million for the
nine-month period ended June 30, 2008. The decrease was, in part, attributable
to the transfer of the $6.9 billion in face value receivables for a purchase
price of $300 million in March 2007 (the "Portfolio Purchase") from the interest
method to the cost recovery method effective at the beginning of the third
quarter of fiscal year 2008. $17.7 million in finance income was recognized
through the second quarter of fiscal year 2008 . Due to uncertainties related to
the timing of the collections of the older judgments purchased in this portfolio
as a result of the economic environment, the lack of reasonable delivery of
media requests, the lack of validation of certain account components, and the
sale of the primary servicer (which was commonly owned by the seller), the
Company determined that it no longer has the ability to develop a reasonable
expectation of the timing of the cash flows to be collected and therefore,
transferred the Portfolio Purchase to the cost recovery method. As a result of
the transfer, no finance income was recognized on the Portfolio Purchase for the
nine month period ended June 30, 2009. In addition, finance income is lower due
to the lower level of portfolio purchases and older portfolios aging out.
Average receivables under the interest method of accounting, declined
approximately $72 million from $242.2 million at June 30, 2008 to $170.0 million
at June 30, 2009. The decrease in the average level of consumer receivables is
attributable to impairments recorded, continued amortization of principal and
our reduced level of portfolio purchases which were down from $1.6 billion of
face value receivables at a cost of $48.9 million during the nine-month period
ended June 30, 2008, as compared to $427.1 million of face value receivables at
a cost of $16.5 million during the nine-month period ended June 30, 2009. Income
recognized from fully amortized portfolios (zero basis revenue) was
$31.1 million and $34.2 million for the nine months ended June 30, 2009 and
2008, respectively.
During the first nine months of fiscal year 2009, net cash collections of
consumer receivables acquired for liquidation decreased by $40.1 million, or
25.5%, to $116.6 million from $156.7 million for the nine months ended June 30,
2008. The decrease in net collections is attributable to the aging of the
portfolio, and the declining purchase volume over the last year and half.
Collections have also been impacted by the overall slowdown in the economy.
Commissions and fees associated with gross collections from our third party
collection agencies and attorneys decreased $38.0 million, or 38.7%, to
$60.1 million for the nine months ended June 30, 2009
During the nine months ended June 30, 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 nine-month periods ended June 30,
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 June 30, 2009, the combined carrying
values of these portfolios were $9.2 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 $90,000 and $156,000 for the nine months ended
June 30, 2009 and 2008, respectively, includes interest income and service fee
income.
General and Administrative Expenses. During the nine months ended June 30, 2009,
general and administrative expenses decreased $0.5 million, or 2.6% to
$20.0 million from $20.5 million for the nine months ended June 30, 2008, and
represented 27.4% of total expenses (excluding income taxes) for the nine months
ended June 30, 2009 as compared to 26.3% for the nine month period ended June
30, 2008. The decrease in general and administrative expenses was primarily due
to reduced salary and salary related expenses and postage expense due to lower
portfolio levels, offset by professional fees related to the banking amendment
signed in the second and third quarters of this year, and higher collection
expenses with increased legal costs related to the collection cycle and
maintaining a higher level of debtor accounts acquired in the past several
years. In the second quarter of fiscal year 2009 we closed 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. The
closure yielded savings of approximately $375,000 in the third quarter of fiscal
year 2009.
Interest Expense. During the nine month period ended June 30, 2009, interest
expense decreased $7.4 million or 51.7% from $14.3 million in the same prior
year period and represented 9.4% of total expenses (excluding income taxes) for
the nine-month period ended June 30, 2009 compared to 18.3% for the nine-month
period ended June 30, 2008. The decrease in interest expense is primarily the
result of a reduction in the average loan balance from $300.8 for the nine-month
period ended June 30, 2008 to $172.7 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 nine-month period
ended June 30, 2009 was 4.9% as compared to 6.2% for the same prior year period.
Impairments. Impairments of $46.2 million were recorded by the Company during
the nine months ended June 30, 2009 as compared to $43.2 million for the nine
months ended June 30, 2008, and represented 63.2% of total expenses (excluding
income taxes) for the quarter ended June 30, 2009 as compared to 55.3% 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 sustaining a lower level
,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
$12.9 million in the nine month period ended June 30, 2008.
The three-month period ended June 30, 2009 as compared to the three month period
ended June 30, 2008
Finance income. For the three months ended June 30, 2009, finance income
decreased $6.4 million or 27.0% to $17.2 million from $23.6 million for the
three months ended June 30, 2008. The decrease is primarily attributable to the
reduced level of portfolio purchases under the interest method over the last
year and a half, the aging out of older portfolios . Average receivables under
the interest method of accounting declined approximately $91 million from
$239.4 million at June 30, 2008 to $137.0 million at June 30, 2009. The decrease
in the average level of consumer receivables is attributable to impairments
recorded, continued amortization of principal and decline in the level of
portfolio purchases over the last year and a half. Income recognized from fully
amortized portfolios (zero basis revenue) was $10.5 million and $10.4 million
for the three months ended June 30, 2009 and 2008, respectively.
During the third quarter of fiscal year 2009, net collections of consumer
receivables acquired for liquidation decreased by 23.2% to $37.6 million from
$49.0 million for the three months ended June 30, 2008. The decrease in net
collections is attributable to the aging of the portfolio, and the lower level
of portfolio purchases over the last year and half. Collections have also been
impacted by the overall slowdown in the economy. Commissions and fees associated
with gross collections from our third party collection agencies and attorney
networks decreased $13.3 million, or 45.5%, for the three months ended June 30,
2009 as compared to the same period in the prior year.
Other income. Other income of $36,000 and $12,000 for the three months ended
June 30, 2009 and 2008, respectively, includes interest and service fee income.
General and Administrative Expenses. During the three-month period ended
June 30, 2009, general and administrative expenses decreased $1.0 million or
12.9% to $6.6 million from $7.6 million for the three-months ended June 30,
2008, and represented 44.9% of total expenses (excluding income taxes) for the
three months ended June 30, 2009 as compared to 39.2% for the same period in the
prior year. The decrease is primarily the result of lower salary and
salary-related expenses, as the full effect of the closing of the Pennsylvania
call center in the second quarter of fiscal year 2009 was reflected in the third
quarter of fiscal 2009. In addition as the level of portfolio purchases has been
lower, postage related to mailings was down. Also, as we have made significant
improvements in the technology area in the past several years, technology costs
have moved lower towards a level of maintenance.
Interest Expense. During the three-month period ended June 30, 2009, interest
expense was $1.8 million compared to $3.6 million in the same period in the
prior year and represented 12.1% of total expenses (excluding income taxes) for
the three-month period ended June 30, 2009 compared to 18.8% in the same prior
year period. The decrease in interest expense is primarily the result of the
decrease in the average loan balance from $270.6 million for the three-month
period ended June 30, 2008 to $152.4 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 June 30, 2009 was 4.3% as compared to 5.3% for the same prior year period.
Impairments. Impairments of $6.4 million were recorded by the Company during the
three months ended June 30, 2009 as compared to $8.2 million for the three
months ended June 30, 2008, and represented 43.1% of total expenses (excluding
income taxes) for the quarter ended June 30, 2009 as compared to 42.0% for the
three months ended June 30, 2008. There were 5 portfolios impaired in each of
the three-month periods. As relative collections with respect to our
expectations on these portfolios were sustaining a lower level, we believed that
these impairment charges and adjustments to our cash flow expectations became
necessary.
Liquidity and Capital Resources
Our primary sources of cash from operations include collections on the
receivable portfolios that we have acquired. Our primary uses of cash include
repayment of debt, our purchases of consumer receivable portfolios, interest
payments, costs involved in the collections of consumer receivables, dividends
and taxes. We rely significantly upon our lenders to provide the funds necessary
for the purchase of consumer and commercial accounts receivable portfolios. As
of June 30, 2009, the Seventh Amendment to the Fourth Amended and Restated Loan
Agreement (the "Credit Facility") entered into on February 20, 2009, granted an
$80 million line of credit from a consortium of banks (the "Bank Group") for
portfolio purchases and working capital. 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, with a minimum rate of 5%.
The Credit Facility is collateralized by all portfolios of consumer receivables
acquired for liquidation other than the assets of Palisades Acquisition XVI,
LLC, a 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. The Credit
Facility's commitment termination date ("Commitment Termination Date") was
July 11, 2009.
As of June 30, 2009, there was a $35.5 million outstanding balance on the Credit
Facility. 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 availability was $26.1 million on June 30, 2009.
On July 10, 2009 the Company entered into the Eighth Amendment to the Fourth
Amended and Restated Loan Agreement. This Amendment revised the Commitment
Termination Date from July 11, 2009 to December 31, 2009. Also, the Credit
Facility commitment shall not exceed the following amounts: (1) $40.0 million
through July 30, 2009; (2) $34.0 million from July 31, 2009 through August 30,
2009; (3) $30.8 million from August 31, 2009 through September 29, 2009; (4)
$22.9 million from September 30, 2009 through October 30, 2009; (5)
$15.0 million from October 31, 2009 through November 29, 2009; (6) $7.4 million
from November 30, 2009 through December 30, 2009; and (6) Zero Dollars on
December 31, 2009. In addition, use of Advances to finance portfolio purchases
in excess of $7.5 million shall require the consent of the Administrative Agent
and use of Advances to finance portfolio purchases in excess of (a)
$15.0 million in the aggregate as of July 31, 2009 and August 31, 2009; (b)
$8.0 million in the aggregate as of September 30, 2009; (c) $6.0 million in the
aggregate as of October 31, 2009 and November 30, 2009; and (d) $2.0 million in
the aggregate as of December 31, 2009, during any 120 day period shall require
the consent of the Requisite Lenders. In addition, the Company shall have no net
loss on a consolidated basis during any Fiscal Year, provided however, for
Fiscal Year ending September 30, 2009 only, a net loss not to exceed
$10.0 million will be permitted under this Amendment
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 and accounts as to which the sellers have 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 a new Receivables Financing
Agreement entered into by Palisades XVI with a major financial institution as
the funding source, and consists of debt with full recourse only to Palisades
XVI, and, as of June 30, 2008, bore an interest rate of approximately 320 basis
points over LIBOR. 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.
. . .
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