Table of Contents

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

SCHEDULE 14A

 

PROXY STATEMENT PURSUANT TO SECTION 14(A) OF THE SECURITIES

EXCHANGE ACT OF 1934 (AMENDMENT NO. 2)

Filed by the Registrant ☒

 

Filed by a Party other than the Registrant ☐

 

Check the appropriate box:

 

Preliminary Proxy Statement

Confidential, for Use of the Commission Only (as permitted by Rule 14a-6(e)(2))

Definitive Proxy Statement

Definitive Additional Materials

Soliciting Material Pursuant to Rule 14a-12

 

ASTA FUNDING, INC.

(Name of Registrant as Specified In Its Charter)

 

 

     

(Name of Person(s) Filing Proxy Statement, if other than the Registrant)

Payment of Filing Fee (Check the appropriate box):

 

No fee required.

 

Fee computed on table below per Exchange Act Rules 14a-6(i)(1) and 0-11.

 

 

(1)

Title of each class of securities to which transaction applies:

Asta Funding Inc. common stock, par value $0.01 per share.

 

 

(2)

Aggregate number of securities to which transaction applies:

 

2,915,721 shares of common stock outstanding (includes 406,867 shares of common stock underlying outstanding employee stock options with an exercise price less than $13.10 per share) as of June 25, 2020 (consisting of 6,974,632 shares of common stock outstanding (including shares of company stock options) as of June 25, 2020 minus 4,058,911 shares held by the Stern Group (as defined below) (the “Rollover Shares”)).

 

 

(3)

Per unit price or other underlying value of transaction computed pursuant to Exchange Act Rule 0-11 (set forth the amount on which the filing fee is calculated and state how it was determined):

 

In accordance with Exchange Act Rule 0-11(c), the filing fee of $4,522.14 was determined by multiplying 0.0001298 by the aggregate merger consideration of $34,839,292.35. The aggregate merger consideration was calculated as the sum of (i) the product of (a) 2,508,854 outstanding shares of common stock (excluding shares of company stock options) as of June 25, 2020 to be acquired in the merger, multiplied by (b) the per share merger consideration of $13.10, plus (ii) the product of (x) 406,867 shares of common stock underlying outstanding employee stock options with an exercise price of $13.10 or less, multiplied by (y) $4.85, representing the difference between the $13.10 per share merger consideration and the $8.25 weighted average exercise price of such options. The Rollover Shares are not included in the foregoing calculation as they are being contributed to Parent (as defined below) immediately prior to the consummation of the merger.

 

 

(4)

Proposed maximum aggregate value of transaction:

$34,839,292.35

 

 

(5)

Total fee paid:

4,522.14

 

Fee paid previously with preliminary materials.

 

Check box if any part of the fee is offset as provided by Exchange Act Rule 0-11(a) (2) and identify the filing for which the offsetting fee was paid previously.  Identify the previous filing by registration statement number, or the Form or Schedule and the date of its filing.

 

 

(1)

Amount Previously Paid: 

 

 

(2)

Form, Schedule or Registration Statement No.:

 

 

(3)

Filing Party: 

 

 

(4)

Date Filed: 

 

 

Asta Funding, Inc.

 

[•], 2020

 

Dear Stockholder:

 

You are cordially invited to attend a virtual special meeting of stockholders of Asta Funding, Inc. (the “Company” or “we”) to be held exclusively online via live webcast on [•], 2020 at [•] a.m., Eastern time. There will not be a physical meeting location. The virtual special meeting can be accessed by visiting [•], where you will be able to listen to the meeting live, submit questions and vote online. Please note that you will not be able to attend the virtual special meeting in person at a physical location. We have chosen to hold a virtual, rather than an in-person, meeting because we are sensitive to the public health and travel concerns our stockholders may have and recommendations that public health officials have issued in light of the evolving novel coronavirus (“COVID-19”) situation and believe that a virtual stockholder meeting provides greater access to those who may want to attend.

 

At the meeting, you will be asked to:

 

 

consider and vote on a proposal to adopt the Agreement and Plan of Merger dated as of April 8, 2020, and as amended by Amendment No. 1 on June 25, 2020 (“Amendment No. 1” and together, the “merger agreement,” unless the context otherwise requires), by and among the Company, Asta Finance Acquisition Inc. (“Parent”) and Asta Finance Acquisition Sub Inc., a wholly-owned subsidiary of Parent (which, along with Parent, is an affiliate of Gary Stern, the Company’s Chief Executive Officer), pursuant to which each share of our common stock outstanding at the effective time of the merger will be converted into the right to receive $13.10 in cash and we will become a wholly-owned subsidiary of Parent (the “merger”); and

 

 

consider and vote upon a proposal to approve one or more adjournments of the virtual special meeting, if necessary or appropriate, to solicit additional proxies to approve the proposal to adopt the merger agreement.

 

The Company will also transact other such business as may properly come before the stockholders at the virtual special meeting or any adjournment or postponement thereof.

 

If our stockholders adopt the merger agreement and the merger is completed, you will be entitled to receive $13.10 in cash for each share of our common stock that you own immediately prior to completion of the merger (unless you have properly exercised your appraisal rights with respect to such shares). Upon completion of the merger, we will become a wholly-owned subsidiary of Parent.

 

Our board of directors, acting upon the unanimous recommendation of a special committee of independent and disinterested members of our board of directors, which committee was formed for the purpose of evaluating the possible sale of the Company, has (without the participation of Gary Stern) approved the merger agreement, the merger and the other transactions contemplated by the merger agreement and has determined that the merger agreement, the merger and the other transactions contemplated by the merger agreement are fair to, and in the best interests of, our stockholders (other than Gary Stern and members of the Stern Group).

 

Our board of directors (without the participation of Gary Stern) recommends that you vote “FOR” the adoption of the merger agreement and “FOR” approval of the adjournment of the virtual special meeting, if necessary or appropriate, to solicit additional proxies to approve the proposal to adopt the merger agreement.

 

Approval of the proposal to adopt the merger agreement requires the affirmative vote of a majority of the outstanding shares of our common stock entitled to vote thereon.

 

Your vote is very important, regardless of the number of shares you own. Whether or not you plan to attend the virtual special meeting, please complete, date, sign and return, as promptly as possible, the enclosed proxy card in the enclosed prepaid envelope, or submit your proxy through the Internet or by telephone by following the instructions described in the enclosed proxy statement. The failure to vote your shares of our common stock will have the same effect as a vote against the proposal to adopt the merger agreement.

 

The enclosed proxy statement provides you with information about the virtual special meeting, the merger agreement, the merger and other related matters to be considered by the stockholders of the Company. A copy of the merger agreement is attached as Annex A to the proxy statement and Amendment No. 1 to the merger agreement is attached as Annex B to the proxy statement. We encourage you to read the proxy statement and the merger agreement carefully and in their entirety prior to voting your shares. You also may obtain additional information about the Company from documents we have filed with the Securities and Exchange Commission by following the instructions listed in the section of the accompanying proxy statement entitled “WHERE YOU CAN FIND MORE INFORMATION.”

 

On behalf of our board of directors, I thank you for your support and urge you to vote in favor of the adoption of the merger agreement.

 

 

Sincerely,

 

 

/s/David Slackman

 

David Slackman

Chairman of the Special Committee

 

The accompanying proxy statement is dated [•], 2020 and is first being mailed, with the form of proxy, to our stockholders on or about [•], 2020.

 

NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES COMMISSION HAS APPROVED OR DISAPPROVED OF THE MERGER, PASSED UPON THE MERITS OR FAIRNESS OF THE MERGER AGREEMENT OR THE TRANSACTIONS CONTEMPLATED THEREBY, INCLUDING THE PROPOSED MERGER, OR PASSED UPON THE ADEQUACY OR ACCURACY OF THE INFORMATION CONTAINED IN THIS PROXY STATEMENT. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.

 

YOUR VOTE IS IMPORTANT. PLEASE VOTE ELECTRONICALLY VIA THE INTERNET OR TELEPHONICALLY OR BY COMPLETING, SIGNING, DATING AND PROMPTLY RETURNING THE ENCLOSED PROXY CARD, WHETHER OR NOT YOU PLAN TO ATTEND THE VIRTUAL SPECIAL MEETING. PLEASE DO NOT SEND IN ANY CERTIFICATES FOR YOUR SHARES AT THIS TIME. IF THE MERGER IS APPROVED, YOU WILL RECEIVE A LETTER OF TRANSMITTAL AND RELATED INSTRUCTIONS TO SURRENDER YOUR SHARE CERTIFICATES.

 

 

Asta Funding, Inc.

 

NOTICE OF VIRTUAL SPECIAL MEETING OF STOCKHOLDERS

 

To Be Held on [•], 2020

 

TO THE STOCKHOLDERS OF ASTA FUNDING, INC.:

 

Notice is hereby given that a virtual special meeting of the stockholders of Asta Funding, Inc., a Delaware corporation (the “Company”), will be held exclusively online via live webcast on [•], 2020 at [•] a.m., eastern time, which virtual special meeting can be accessed by visiting [•] for the following purposes:

 

 

1.

Merger Proposal. To consider and vote on a proposal to adopt the Agreement and Plan of Merger (the “merger agreement”), dated as of April 8, 2020, and as amended on June 25, 2020, by and among the Company, Asta Finance Acquisition Inc. (“Parent”) and Asta Finance Acquisition Sub Inc., a wholly-owned subsidiary of Parent (which, along with Parent, is an affiliate of Gary Stern, the Company’s Chief Executive Officer), pursuant to which each share of our common stock outstanding at the effective time of the merger will be converted into the right to receive $13.10 in cash and we will become a wholly-owned subsidiary of Parent (the “merger”); and

 

 

2.

Adjournment Proposal. To consider and vote upon a proposal to approve one or more adjournments of the virtual special meeting, if necessary or appropriate, to solicit additional proxies to approve the proposal to adopt the merger agreement.

 

The Company will also transact other such business as may properly come before the stockholders at the virtual special meeting or any adjournment or postponement thereof.

 

The merger agreement and the merger are more fully described in the accompanying proxy statement, which you should read carefully in its entirety before voting.

 

Our board of directors has fixed the close of business on [•], 2020 as the record date for the determination of stockholders entitled to notice of, and to vote at, this virtual special meeting and any adjournment or postponement thereof. Only holders of our common stock at the close of business on the record date are entitled to vote at the virtual special meeting.

 

Our board of directors, acting upon the unanimous recommendation of a special committee of independent and disinterested members of our board of directors, which committee was formed for the purpose of evaluating an offer by Gary Stern to take the Company private, has (without the participation of Gary Stern) approved the merger agreement, the merger and the other transactions contemplated by the merger agreement and has determined that the merger agreement, the merger and the other transactions contemplated by the merger agreement are fair to, and in the best interests of, our stockholders (other than Gary Stern and members of the Stern Group).

 

OUR BOARD OF DIRECTORS (WITHOUT THE PARTICIPATION OF GARY STERN) RECOMMENDS THAT YOU VOTE “FOR” THE ADOPTION OF THE MERGER AGREEMENT AND “FOR” APPROVAL OF THE ADJOURNMENT OF THE VIRTUAL SPECIAL MEETING, IF NECESSARY OR APPROPRIATE, TO SOLICIT ADDITIONAL PROXIES TO APPROVE THE PROPOSAL TO ADOPT THE MERGER AGREEMENT.

 

Your vote is very important, regardless of the number of shares you own. The approval of the adoption of the merger agreement requires the affirmative vote of the holders of a majority of the outstanding shares of our common stock. If you abstain or do not vote on the adoption of the merger agreement, it will have the same effect as a vote by you against the adoption of the merger agreement.

 

 

Whether or not you plan to attend the virtual special meeting, please complete, date, sign and return, as promptly as possible, the enclosed proxy card in the enclosed prepaid envelope, or submit your proxy through the Internet or by telephone. Properly executed proxy cards with no instructions indicated on the proxy card will be voted FOR the adoption of the merger agreement and FOR approval of the adjournment of the virtual special meeting, if necessary or appropriate to solicit additional proxies to approve the proposal to adopt the merger agreement.

 

If your shares are held in “street name,” which means through a brokerage firm, bank or other nominee, you should instruct your broker, bank or other nominee how to vote your shares using the voting instruction form furnished by your broker, bank or other nominee. If you do not instruct your broker, bank or other nominee how to vote, your shares will not be voted on any proposal on which your broker, bank or other nominee does not have discretionary authority to vote. This is called a “broker non-vote.” In these cases, the broker, bank or other nominee can register your shares as being present at the meeting for the purposes of determining the presence of a quorum but will not be able to vote on matters for which specific authorization is required. If you do not instruct your broker, bank or other nominee how to vote, it will have the same effect as a vote against the adoption of the merger agreement.

 

 

If you attend the virtual special meeting, you may revoke your proxy and cast your vote at the virtual special meeting via the virtual meeting website, even if you have previously returned your proxy card or submitted your proxy through the Internet or by telephone. Your attendance at the virtual special meeting alone will not revoke your proxy.

 

If you hold your shares in “street name,” you must obtain a legal proxy from your broker, bank or other nominee in order to vote at the virtual special meeting. Please contact your broker, bank or other nominee for instructions on how to obtain such a legal proxy. If your shares are held by a broker, bank or other nominee, and you plan to attend the virtual special meeting, please also have available at the virtual special meeting this legal proxy and your statement evidencing your beneficial ownership of our common stock. Instructions on who can attend and participate via Internet, including how to demonstrate proof of stock ownership, are posted at www.proxyvote.com. Please carefully review the instructions in the enclosed proxy statement and the enclosed proxy card, the information forwarded by your broker, bank or other nominee, or www.proxyvote.com regarding each of these options.

 

Stockholders who do not vote in favor of the adoption of the merger agreement have the right to demand appraisal of the fair value of their shares of our common stock, as determined by the Court of Chancery of the State of Delaware, if the merger is completed, but only if they perfect their appraisal rights and the other requirements of the Delaware General Corporation Law are satisfied. A copy of the Delaware statutory provisions relating to appraisal rights is attached as Annex D to the proxy statement, and a summary of these provisions can be found under “Appraisal Rights” on page 69 in the proxy statement.

 

The enclosed proxy statement provides you with information about the virtual special meeting, the merger agreement, the merger and other related matters to be considered by our stockholders. A copy of the merger agreement is attached as Annex A to the proxy statement and Amendment No. 1 to the merger agreement is attached as Annex B to the proxy statement. We encourage you to read the proxy statement and the merger agreement carefully and in their entirety prior to voting your shares. You also may obtain additional information about the Company from documents we have filed with the Securities and Exchange Commission by following the instructions listed in the section of the accompanying proxy statement entitled “WHERE YOU CAN FIND MORE INFORMATION.”

 

You should not send any certificates representing shares of our common stock with your proxy card. Upon completion of the merger, we will send instructions to you regarding the procedure for exchanging your stock certificates for the cash merger consideration.

 

By order of the Board of Directors,

 

/s/ Seth Berman

 

Seth Berman

General Counsel and Secretary

 

Englewood Cliffs, New Jersey

[•], 2020

 

 

ASTA FUNDING, INC.

210 Sylvan Avenue

Englewood Cliffs, New Jersey 07632

(201) 567-5648

 

PROXY STATEMENT – DATED [•], 2020

 

GENERAL INFORMATION

 

PROXY STATEMENT

 

The enclosed proxy is solicited by the board of directors of Asta Funding, Inc. (the “Company,” “we” or “us”) for use at the special meeting of stockholders to be held exclusively online via live webcast on [•], 2020 at [•] a.m., Eastern time. A stockholder giving a proxy has the right to revoke it by giving written notice of such revocation to the Secretary of the Company at any time before it is voted, by submitting to the Company a duly-executed, later-dated proxy, or by voting the shares subject to such proxy by written ballot at the virtual special meeting. The presence at virtual special meeting of a stockholder who has given a proxy does not revoke such proxy unless such stockholder files the aforementioned notice of revocation or votes by written ballot. The proxy statement is dated [•], 2020.

 

This proxy statement, the enclosed form of proxy and our Annual Report on Form 10-K for the year ended September 30, 2019, which includes our consolidated financial statements, are first being mailed to stockholders on [•], 2020. All shares represented by valid proxies pursuant to this solicitation (and not revoked before they are exercised) will be voted as specified in the proxy. Proxy cards that are returned signed, but without voting instructions, will be voted in accordance with the recommendations of the board of directors. Our board of directors recommends that you vote “FOR” the adoption of the merger agreement and “FOR” approval of the adjournment of the virtual special meeting to solicit additional proxies, if necessary or appropriate, to approve the proposal to adopt the merger agreement.

 

The solicitation of proxies may be made by directors, officers and regular employees of the Company or any of its subsidiaries by mail, telephone, facsimile or e-mail or in person without additional compensation payable with respect thereto. Arrangements will be made with brokerage houses and other custodians, nominees and fiduciaries to forward proxy-soliciting material to the beneficial owners of stock held of record by such persons, and we will reimburse them for reasonable out-of-pocket expenses incurred by them in so doing. All costs relating to the solicitation of proxies will be borne by us including expenses in connection with the preparation and mailing of the proxy statement, form of proxy and any other material furnished to the stockholders by us in connection with the Meeting.

 

The Company has engaged Laurel Hill Advisory Group, LLC (“Laurel Hill”) to solicit proxies in connection with the virtual special meeting. Laurel Hill’s fee for its proxy solicitation services is $6,000, in addition to out-of-pocket expenses. If the Company authorizes Laurel Hill to commence a telephone solicitation campaign of retail and selected unvoted stockholders, those outbound calls will be billed at a rate of $5.50 per contact plus set up and telephone number look-up charges. Inbound phone calls received from stockholders will be billed at $5.50 per call.

 

Important Notice Regarding the Availability of Proxy Materials for the Special Virtual Meeting of Stockholders to Be Held on [•].

 

This proxy statement, the accompanying form of proxy card and our Annual Report on Form 10-K for the fiscal year ended September 30, 2019, including financial statements, are available on the internet at http://www.astafunding.com. Under the rules issued by the Securities and Exchange Commission, we are providing access to our proxy materials both by sending you this full set of proxy materials and by making our proxy materials available to you free of charge on the Internet.

 

Throughout this proxy statement, all references to the “Company,” “Asta Funding,” “we,” “us,” and “our” refer to Asta Funding, Inc., unless otherwise indicated or the context otherwise requires. You are being asked to consider and approve the adoption of the “merger agreement” which sets forth the terms pursuant to which the “merger” will be effectuated. In addition to the Company, Asta Finance Acquisition Inc. and Asta Finance Acquisition Sub Inc., which we may refer to as “Parent” and “Merger Sub,” respectively, or collectively as “Parent Parties” in this proxy statement, are parties to the merger agreement. Both Parent and Merger Sub are affiliated with Gary Stern, the Company’s Chief Executive Officer, and certain family members and affiliates of Gary Stern, which we may refer to as “the Stern Group,” in this proxy statement. Lincoln International LLC, who served as financial advisor to the Special Committee of our board of directors, may be referred to in this proxy statement as “Lincoln.

 

 

TABLE OF CONTENTS

 

SUMMARY TERM SHEET

1

Parties to the Merger (page 14)

1

The Purpose of the Virtual Special Meeting of Stockholders (Page 66)

2

The Virtual Special Meeting of Stockholders of Asta Funding, Inc. (Page 66)

2

The Merger; Closing (Page 72)

2

Treatment of Options (Page 73)

2

Recommendation of Our Board of Directors (Page 29)

2

Purposes and Reasons of the Company for the Merger (Page 34)

3

Opinion of the Financial Advisor to the Special Committee of Our Board of Directors (Page 36)

3

Interests of Our Directors and Officers in the Merger (Page 26)

3

Financing the Merger (Page 61)

3

Regulatory Approvals Required for the Merger (Page 61)

4

Material U.S. Federal Income Tax Consequences (Page 63)

4

Conditions to the Merger (Page 77)

4

Restrictions on Solicitations of Other Offers (Page 79)

5

Termination of the Merger Agreement (Page 87)

6

Termination Fees and Expenses (Page 88)

7

Specific Performance (Page 89)

8

Appraisal Rights (Page 68)

8

Market Price of the Common Stock and Dividend Information (Page 100)

8

   

QUESTIONS & ANSWERS ABOUT THE SPECIAL MEETING AND THE MERGER

9

   

PROPOSAL NO. 1—THE MERGER

14

SPECIAL FACTORS

14

Parties to the Merger

14

Background of the Merger

14

Interests of Our Directors and Executive Officers in the Merger 26

Recommendation of Our Board of Directors

29

Reasons for the Merger and Recommendation of Our Board of Directors

29

Purposes and Reasons of the Company for the Merger

34

Purposes and Reasons of the Parent Parties and Stern Group for the Merger

34

Opinion of the Financial Advisor to the Special Committee of Our Board of Directors

36

Management Estimates

45

Certain Effects of the Merger

60

Financing the Merger

61

Regulatory Approvals Required for the Merger

61

Delisting and Deregistration of Our Common Stock

61

Indemnification and Directors’ and Officers’ Liability Insurance

62

Voting Agreements

62

Stern Group Commitment Letters

63

Material U.S. Federal Income Tax Consequences of the Merger

63

U.S. Holders

64

Non-U.S. Holders

64

Fees and Expenses

65

Litigation Related to the Merger

65

   

VIRTUAL SPECIAL MEETING OF STOCKHOLDERS OF ASTA FUNDING, INC.

66

Date, Time and Place of Meeting

66

Record Date; Shares Entitled to Vote; Outstanding Shares

66

 

 

The Purpose of the Virtual Special Meeting of Stockholders

66

Quorum; Abstentions; Broker Non-Votes

66

Votes Required

67

Solicitation of Proxies

67

Voting; Proxies and Revocation

67

Recommendation of our Board of Directors

68

Appraisal Rights

68

Adjournments and Postponements

71

   

THE MERGER AGREEMENT

72

Explanatory Note Regarding the Merger Agreement

72

The Merger

72

Closing; Effective Time

72

Merger Consideration

73

Treatment of Options

73

Payment for the Shares of Common Stock

73

Representations and Warranties

74

Conduct of Business Prior to Closing

76

Access and Information

77

Conditions to the Merger

77

Restrictions on Solicitations of Other Offers

79

Stockholders Meeting

81

Employee Matters

82

Consents and Approvals

82

Indemnification and Insurance

84

Financing the Merger

84

Other Covenants

87

Termination of the Merger Agreement

87

Termination Fees and Expenses

88

Specific Performance

89

   

SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

90

Changes in Control

91

Transactions in Common Stock

91

   

IMPORTANT INFORMATION REGARDING ASTA

93

Company Background

93

Directors, Executive Officers and Corporate Governance

94

Audit Committee

96

Director Independence

96

Selected Summary Historical Consolidated Financial Data

96

Book Value Per Share

100

Market Price of the Common Stock and Dividend Information

100

Dividends

100

   

IMPORTANT INFORMATION REGARDING THE PARENT PARTIES AND THE STERN GROUP

101

The Parent Parties

101

The Stern Group

101

   

PROPOSAL NO. 2—ADJOURNMENT OF THE VIRTUAL SPECIAL MEETING

104

   

DEADLINE FOR STOCKHOLDER PROPOSALS TO BE PRESENTED AT NEXT ANNUAL MEETING

105

   

HOUSEHOLDING OF PROXY MATERIALS

106

   

WHERE YOU CAN FIND MORE INFORMATION

107

 

 

OTHER MATTERS

108

   
ANNEX A: AGREEMENT AND PLAN OF MERGER  
   
ANNEX B: AMENDMENT TO AGREEMENT AND PLAN OF MERGER  
   

ANNEX C: OPINION OF LINCOLN INTERNATIONAL LLC

 
   
ANNEX D: DELAWARE CORPORATION LAW SECTION 262  

 

 

 

SUMMARY TERM SHEET

 

This summary term sheet highlights selected information from this proxy statement and may not contain all of the information that is important to you. We encourage you to read carefully the remainder of this proxy statement, including the attached annexes and the other documents to which we have referred you, because this section does not provide all the information that might be important to you with respect to the merger and the other matters being considered at the virtual special meeting of stockholders. See also “Where You Can Find More Information” on page 107 of this proxy statement. We have included references to other portions of this proxy statement to direct you to a more complete description of the topics presented in this summary.

 

Parties to the Merger (page 14)

 

Asta Funding, Inc.

 

Asta Funding, Inc., a Delaware corporation, is engaged in several business segments in the financial services industry including funding of personal injury claims, through our wholly owned subsidiaries Sylvave, LLC, Simia Capital, LLC and Arthur Funding LLC, social security disability advocacy through our wholly owned subsidiaries GAR Disability Advocates, LLC (“GAR”) and Five Star Veterans Disability, LLC and the business of purchasing, managing for our own account and servicing distressed consumer receivables, including charged off receivables and semi-performing receivables. Our principal executive offices are located at 210 Sylvan Avenue, Englewood Cliffs, New Jersey 07632. Our telephone number is (201) 567-5648. Our common stock trades on the NASDAQ Global Select Market under the symbol “ASFI.” See “Important Information Regarding Asta” beginning on page 93 of this proxy statement for a more detailed discussion of the Company.

 

Parent Parties

 

Asta Finance Acquisition Inc. (“Parent”) is a Delaware corporation formed on December 26, 2019, and Asta Finance Acquisition Sub Inc. (“Merger Sub”) is a Delaware corporation formed on December 26, 2019 and is a wholly owned subsidiary of Parent. Each of the Parent and Merger Sub (together, the “Parent Parties”) was formed for purposes of entering into the merger agreement and consummating the transactions contemplated by the merger agreement. None of the Parent Parties has engaged in any business except for activities incident to its formation and in connection with the transactions contemplated by the merger agreement. The Parent Parties are affiliated with the Stern Group. See “Important Information Regarding the Parent Parties and the Stern Group” beginning on page 101 of this proxy statement for a more detailed discussion of the Parent Parties.

 

The Purpose of the Virtual Special Meeting of the Stockholders (page 66)

 

You will be asked to consider and vote upon the proposal to adopt the Agreement and Plan of Merger, dated as of April 8, 2020, as amended by Amendment No. 1 to the Agreement and Plan of Merger, dated June 25, 2020 (“Amendment No. 1” and together, the “merger agreement,” unless context otherwise requires), by and among Parent, Merger Sub and the Company. The merger agreement provides that at the effective time of the merger, Merger Sub will be merged with and into the Company (the “merger”), with the Company surviving the merger as a wholly-owned subsidiary of Parent. At the effective time of the merger, each share of common stock of the Company (the “Common Stock”) outstanding immediately prior to the effective time of the merger (other than certain excluded shares and shares held by any of the Company’s stockholders who are entitled to and properly exercise appraisal rights under Delaware law (“dissenting shares”)) will be converted into the right to receive $13.10 in cash, without interest (the “merger consideration”), less any applicable withholding taxes, whereupon all such shares will be automatically canceled and will cease to exist, and the holders of such shares will cease to have any rights with respect thereto other than the right to receive the merger consideration. Shares of Common Stock held by any of the Parent Parties (including the shares held by the members of the Stern Group, which shares will be contributed to Parent prior to the merger) and by the Company or any wholly-owned subsidiary of the Company will not be entitled to receive the merger consideration.

 

Following and as a result of the merger, the Company will become a privately held company, wholly-owned by Parent, which in turn will be owned by the following entities and individuals:

 

 

Gary Stern, our Chief Executive Officer, President and Chairman of our board of directors

 

Ricky Stern, our Senior Vice President and President of GAR

 

Arthur Stern, our former Chairman Emeritus and former director

 

GMS Family Investors LLC, a Delaware limited liability, the sole manager of which is Ricky Stern

 

Emily Stern, the daughter of Gary Stern and sister of Ricky Stern

 

Asta Group, Incorporated, a Delaware corporation owned, in part, by Gary Stern, Ricky Stern, Arthur Stern, and Emily Stern, and for which Gary Stern serves as a director

 

The Ricky Stern Family 2012 Trust, the Emily Stern Family 2012 Trust, the Ricky Stern 2012 GST Trust, and the Emily Stern 2012 GST Trust, each of which are trusts for which Gary Stern and Ricky Stern (or both) serve as trustees

 

 

The Virtual Special Meeting of Stockholders of Asta Funding, Inc. (Page 66)

 

The virtual special meeting of our stockholders will be held exclusively online via live webcast on [•], 2020 at [•] a.m., Eastern time. There will not be a physical meeting location. The virtual special meeting can be accessed via webcast by visiting [•], where you will be able to listen to the meeting live, submit questions and vote online. Please note that you will not be able to physically attend the virtual special meeting in person. At the virtual special meeting, our stockholders will be asked to vote on a proposal to adopt the merger agreement and, if necessary or appropriate, to approve one or more adjournments of the virtual special meeting for the purpose of soliciting additional proxies if there are not sufficient votes to approve the proposal to adopt the merger agreement.

 

The Merger; Closing (Page 72)

 

At the effective time of the merger, Merger Sub will merge with and into the Company, the separate corporate existence of Merger Sub will cease and the Company will continue its corporate existence under Delaware law as the surviving corporation in the Merger. The certificate of incorporation of the surviving corporation will be amended and restated in its entirety to be in the form of the certificate of incorporation attached as Exhibit A to the merger agreement, until amended in accordance with its terms or by applicable law. The bylaws of the surviving corporation will be amended and restated in their entirety to be in the form of the bylaws attached as Exhibit B to the merger agreement, until amended in accordance with their terms or by applicable law. The directors of Merger Sub immediately prior to the effective time of the merger will be the directors of the surviving corporation and will hold office until their respective successors are duly elected and qualified, or their earlier death, incapacitation, retirement, resignation or removal in accordance with the certificate of incorporation and bylaws of the surviving corporation. The officers of the Company immediately prior to the effective time of the merger will be the officers of the surviving corporation and will hold office until their respective successors are duly elected or appointed and qualified, or their earlier death, incapacitation, retirement, resignation or removal in accordance with the certificate of incorporation and bylaws of the surviving corporation.

 

The merger will become effective at the time (which we refer to as the “effective time” of the merger) when the Company files a certificate of merger with the Secretary of State of the State of Delaware or at such later date or time as Parent and the Company agree in writing and specify in the certificate of merger in accordance with the Delaware General Corporation Law (“DGCL”).

 

The closing of the merger will take place on a date which will be the second business day after the satisfaction or waiver (to the extent permitted by applicable law) of the closing conditions stated in the merger agreement (other than those conditions that by their nature are to be satisfied at the closing, but subject to the satisfaction or waiver of such conditions) or at such other time and date as the Company and Parent may agree in writing.

 

Treatment of Options (Page 73)

 

Except as otherwise agreed to in writing prior to the effective time of the merger by Parent and a holder of any Company stock options with respect to any of such holder’s Company stock options, each Company stock option, whether vested or unvested and whether with an exercise price per share that is greater or less than, or equal to, $13.10, that is outstanding immediately prior to the effective time of the merger, will, as of the effective time of the merger, become fully vested and be canceled and converted into the right to receive an amount in cash from the surviving corporation equal to (a) the product of (i) the excess, if any, of $13.10 over the exercise price per share of Common Stock subject to such Company stock option multiplied by (ii) the total number of shares of Common Stock subject to such Company stock option, without interest, less (b) such amounts as are required to be withheld or deducted under applicable tax provisions.

 

Recommendation of Our Board of Directors (Page 29)

 

After deliberation and consultation with its legal advisors, and acting upon the recommendation of the Special Committee which was advised by its own legal and financial advisors, our board of directors has determined (without the participation of Gary Stern) that the merger agreement, the merger and the other transactions contemplated by the merger agreement are fair to, and in the best interests of, our stockholders (other than Gary Stern and members of the Stern Group). Our board of directors (without the participation of Gary Stern) recommends that our stockholders vote FOR the proposal to adopt the merger agreement and FOR the adjournment proposal. See “Proposal No. 1—The Merger—Special Factors - Recommendation of our Board of Directors” beginning on page 29 of this proxy statement for a more detailed discussion of the recommendation of our board of directors.

 

 

Purposes and Reasons of the Company for the Merger

 

The Company’s purpose for engaging in the merger is to enable its stockholders to receive $13.10 per share of Company Common Stock, which represents a premium of approximately 13.2% to the 30-trading day average stock price of $11.57 as of June 24, 2020,  a premium of approximately 25.1% to the average closing share price of our common stock for the 90 days ended on June 24, 2020, a premium of approximately 42.0% to the average price of our common stock during the 52 weeks prior to June 24, 2020 and a premium of approximately 17.6% to the last trading day before the announcement that the Company, Parent and Merger Sub had entered into an amendment to the merger agreement, of $11.14.

 

Opinion of the Financial Advisor to the Special Committee of Our Board of Directors (Page 36)

 

On June 19, 2020, Lincoln rendered its opinion to the Special Committee of the Board of Directors of Asta Funding, Inc. to the effect that, as of the date of such opinion and based upon and subject to the various assumptions made, procedures followed, matters considered and qualifications and limitations on the scope of review undertaken by Lincoln as set forth in its written opinion, the merger consideration of $13.10 per share in cash to be received by the holders of shares of common stock of Asta Funding, Inc. (other than Gary Stern and members of the Stern Group) in the proposed transaction, was fair, from a financial point of view, to the holders of such shares.

 

Lincoln’s opinion was directed to the Special Committee (in its capacity as such) and only addressed the fairness, from a financial point of view, to the non-Stern Group holders of the merger consideration to be received by such stockholders in the proposed transaction and did not address any other aspect or implication of the proposed transaction, any related transaction or any other agreement, arrangement or understanding entered into in connection therewith or otherwise. The summary of Lincoln’s opinion in this proxy statement is qualified in its entirety by reference to the full text of its written opinion, which is attached as Annex C to this proxy statement and describes the procedures followed, assumptions made, qualifications and limitations on the review undertaken and other matters considered by Lincoln in connection with the preparation of its opinion. However, neither Lincoln’s opinion nor the summary of its opinion and the related analyses set forth in this proxy statement are intended to be, and do not constitute, advice or a recommendation to the Special Committee, any security holder of the Company or any other person as to how to act or vote with respect to any matter relating to the proposed transaction or otherwise.

 

Interests of Our Directors and Officers in the Merger (Page 26)

 

In considering the recommendation of our Special Committee and board of directors with respect to the merger agreement, our stockholders should be aware that certain of our directors and executive officers have certain interests in the merger that are different from, or in addition to, the interests of stockholders generally. These interests may create potential conflicts of interest. In particular, as is described elsewhere in this proxy statement, Gary Stern, who is Chairman of the Board, President and Chief Executive Officer of the Company, is a director, officer and stockholder of Parent and will be a controlling stockholder of Parent after completion of the merger.

 

Our board of directors was aware of and discussed and considered these interests when it approved the merger. These interests may create potential conflicts of interest.

 

Financing the Merger

 

In connection with entering into the merger agreement, the Stern Group has entered into a rollover commitment letter in favor of the Parent. Pursuant to this commitment letter, the Stern Group has committed to transfer, contribute and deliver the shares of our common stock that they directly own to the Parent in exchange for common stock of the Parent.

 

Parent entered into a Commitment Letter with Bank Leumi USA, dated April 3, 2020, as amended on June 25, 2020. Pursuant to this debt commitment letter, Bank Leumi has committed to provide a loan facility to Parent for purposes of funding the merger consideration. The loan is expected to have a floating interest rate based on 1-month LIBOR plus 150 basis points, but in any event, no less than 2.7% per annum, and will have an expected maturity date one month after the closing date of the loan. The loan is intended to be secured by a valid first-priority perfected security interest in cash collateral and eligible securities of the Parent Parties and us.

 

Gary Stern has executed and delivered a limited guarantee in our favor as a condition and inducement for us to enter into the merger agreement. Pursuant to this limited guarantee, Gary Stern is guaranteeing certain obligations of the Parent Parties in connection with the merger agreement.

 

 

Regulatory Approvals Required for the Merger (Page 61)

 

In connection with the merger, we are required to file a certificate of merger with the Secretary of State of Delaware in accordance with the DGCL after the approval of the merger agreement by our stockholders.

 

Material U.S. Federal Income Tax Consequences (Page 63)

 

Generally, the receipt of cash in exchange for our common stock pursuant to the merger will be a taxable transaction to our stockholders for U.S. federal income tax purposes. A U.S. holder of our common stock receiving cash in the merger generally will recognize gain or loss for U.S. federal income tax purposes in an amount equal to the difference between the amount of cash received (before reduction for any applicable withholding taxes) and the holder’s adjusted tax basis in the shares of our stock surrendered. A non-U.S. holder of our common stock generally will not be subject to U.S. federal income tax on the gain recognized upon the receipt of cash in exchange for our common stock pursuant to the merger unless the gain is effectively connected with the conduct of a trade or business in the United States or the non-U.S. holder is a nonresident alien individual who is present in the United States for 183 days or more in the taxable year of the merger and certain other conditions are met.

 

The tax consequences of the merger to any particular stockholder may vary depending on his, her or its particular circumstances. Due to the individual nature of tax consequences, each stockholder is urged to consult his, her or its own tax advisor as to the specific tax consequences to such stockholder of the merger, including the effects of any applicable U.S. federal state, local, foreign, estate, gift or other tax laws.

 

 Conditions to the Merger (Page 77)

 

Conditions to Each Party’s Obligations

 

Each party’s obligation to complete the merger is subject to the satisfaction of the following conditions at or prior to the effective time of the merger, unless waived in writing by all parties:

 

 

the proposal to adopt the merger agreement has been approved by the affirmative vote of holders of at least a majority of the outstanding shares of the Common Stock entitled to vote thereon;

 

 

the proposal to adopt the merger agreement has been approved by the affirmative vote of holders of at least a majority of the outstanding shares of the Common Stock entitled to vote thereon, other than the Parent, the Stern Group and any other officers and directors of the Company and any other person having any equity interest in, or any right to acquire any equity interest in, Merger Sub or any person of which Merger Sub is a direct or indirect subsidiary;

 

 

there is no injunction or similar order prohibiting the consummation of the merger (i) by a governmental entity having jurisdiction over the business of the Company and its subsidiaries (other than a de minimis portion of such business) or (ii) that, if not abided by, would potentially result in criminal liability; and

 

 

there is no law prohibiting or making illegal the merger (i) by any governmental entity in a jurisdiction in which the business of the Company and its subsidiaries is conducted (other than a de minimis portion of such business) or (ii) that, if not abided by, would potentially result in criminal liability.

 

Conditions to Parent’s and Merger Sub’s Obligations

 

The obligation of Parent and Merger Sub to complete the merger is subject to the satisfaction or waiver by Parent of the following additional conditions at or prior to the effective time of the merger:

 

 

the representations and warranties of the Company in the merger agreement relating to (i) capitalization, (ii) dividends, (iii) the absence of any material adverse effect since September 30, 2019, (iv) finder’s and broker’s fees and (v) takeover laws and rights agreements must be true and correct (except, subject to certain exceptions, for such inaccuracies as are de minimis) both when made and as of the closing date of the merger or, with respect to certain representations and warranties, as of a specified date;

 

 

the representations and warranties of the Company in the merger agreement relating to (i) the Company’s subsidiaries, (ii) corporate authority and (iii) outstanding indebtedness must be true and correct in all material respects both when made and as of the closing date of the merger or, with respect to certain representations and warranties, as of a specified date;

 

 

the other representations and warranties of the Company in the merger agreement (except those listed in the above preceding bullet points) must be true and correct both when made and as of the closing date of the merger or, with respect to certain representations and warranties, as of a specified date, except where the failure to be true and correct would not result in a material adverse effect, as described under “The Merger Agreement—Conditions to the Merger” beginning on page 77;

 

 

 

the Company must have performed in all material respects all obligations that it is required to perform under the merger agreement prior to the closing date of the merger; and

 

 

the Company must have delivered to Parent an officer’s certificate stating that the conditions set forth above have been satisfied.

 

Conditions to Our Obligations

 

Our obligation to complete the merger is subject to the satisfaction or waiver of the following further conditions at or prior to the effective time of the merger:

 

 

the representations and warranties of the Parent Parties in the merger agreement must be true and correct in all material respects both when made and as of the closing date of the merger (except with respect to certain representations and warranties made as of a specified date), except where the failure to be true and correct would not impair, prevent or delay in any material respect the ability of any of the Parent Parties to perform its obligations under the merger agreement;

 

 

the Parent Parties must have performed in all material respects all obligations that they are required to perform under the merger agreement prior to the closing; and

 

 

the Parent Parties must have delivered to the Company an officer’s certificate stating that the conditions set forth above have been satisfied.

 

Restrictions on Solicitations of Other Offers (Page 79)

 

The merger agreement provides that, subject to certain exceptions, until the effective time of the merger (or, if earlier, the termination of the merger agreement), we must not, and must cause our subsidiaries and representatives not to:

 

 

initiate, solicit, knowingly encourage, induce or knowingly facilitate (including by way of furnishing information) or assist any inquiries or the making, submission, announcement or commencement of any proposal or offer that constitutes, or could reasonably be expected to lead to, any acquisition proposal;

 

 

execute or enter into any contract, letter of intent or agreement in principle relating to, or that could reasonably be expected to lead to, any acquisition proposal (other than an acceptable confidentiality agreement);

 

 

enter into any contract or agreement in principle requiring the Company to abandon, terminate or fail to consummate the merger or any other transactions contemplated by the merger agreement or breach its obligations thereunder, or propose or agree to do any of the foregoing;

 

 

fail to enforce, or grant any waiver under, any standstill or similar agreement with any person; provided, however, if the Special Committee determines by resolution in good faith, after consultation with its outside legal counsel that the failure to do so would be inconsistent with its fiduciary duties under Delaware Law, it may release any person from its standstill or similar obligations solely for purposes of enabling such person to confidentially submit to the Company’s board of directors an acquisition proposal;

 

 

engage in, continue or otherwise participate in any discussions or negotiations regarding, or provide or furnish any non-public information or data relating to the Company or any of the Company subsidiaries or afford access to the business, properties, assets, books and records or personnel of the Company or any of the Company subsidiaries to any person (other than Parent, Merger Sub, or any of their respective affiliates or representatives) with the intent to initiate, solicit, encourage, induce or assist with the making, submission, announcement or commencement of any proposal or offer that constitutes, or could reasonably be expected to lead to, any acquisition proposal; or

 

 

otherwise knowingly facilitate any effort or attempt to make any acquisition proposal.

 

 

Notwithstanding the foregoing, from the date of the merger agreement until the date that the Company stockholder approvals have been obtained, following the receipt by the Company of an unsolicited bona fide written acquisition proposal, (i) the Special Committee shall be permitted to participate in discussions regarding such acquisition proposal solely to the extent necessary to clarify the terms of such acquisition proposal and (ii) if the Special Committee determines by resolution in good faith, after consultation with its outside financial advisors and outside legal counsel, (A) that such acquisition proposal constitutes or would reasonably be expected to lead to a superior proposal and (B) that the failure to take the actions set forth in clauses (x) and (y) below with respect to such acquisition proposal would be inconsistent with its fiduciary duties under Delaware Law, then the Company may, in response to such acquisition proposal, (x) furnish access and non-public information with respect to the Company and the Company subsidiaries to the person who has made such acquisition proposal pursuant to an acceptable confidentiality agreement (as long as all such information provided to such Person has previously been provided to Parent or is provided to Parent prior to or concurrently with the time it is provided to such Person) and (y) participate in discussions and negotiations with such person regarding such acquisition proposal.

 

Termination of the Merger Agreement (Page 87)

 

The merger agreement may be terminated at any time by mutual written consent prior to the effective time of the merger, whether before or after stockholder approval has been obtained. In addition, either the Company or Parent may terminate the merger agreement if:

 

 

the merger has not been completed by December 31, 2020 (the “termination date”), as long as the party seeking to terminate the merger agreement has not breached in any material respect its obligations under the merger agreement in any manner that was the primary cause of the failure to consummate the merger on or before such date;

 

 

any final nonappealable injunction or similar order that permanently enjoins or otherwise prohibits the consummation of the merger has been issued (i) by a governmental entity having jurisdiction over the business of the Company and its subsidiaries (other than a de minimis portion of such business) or (ii) that, if not abided by, would potentially result in criminal liability, and the party seeking to terminate the merger agreement has used the required efforts to prevent, oppose and remove such injunction; or

 

 

the proposal to adopt the merger agreement has been submitted to the stockholders of the Company for approval and the required vote has not been obtained, provided, that Parent shall not have the right to terminate the merger agreement if the failure to obtain the Stockholder Approval is due to the failure of the members of the Stern Group to vote the shares of Common Stock beneficially owned or controlled by the members of the Stern Group in favor of the approval of the adoption of the merger agreement in accordance with the terms and conditions of the Stern Group Voting Agreement.

 

Parent may terminate the merger agreement:

 

 

if there is a breach, in any material respect, of any representation, warranty, covenant or agreement on the part of the Company which would result in a failure of certain conditions relating to the Company’s representations, warranties, covenants and agreements to be satisfied and which breach is incapable of being cured by the termination date, or is not cured within thirty days following delivery of written notice of such breach, so long as the Parent is not then in material breach of their representations, warranties, agreements or covenants contained in the merger agreement; or

 

 

if the Company’s board of directors or the Special Committee does not include its recommendation to vote in favor of the proposal to adopt the merger agreement in this proxy statement or changes its recommendation, the Company enters into an alternative acquisition agreement, the Company’s board of directors or the Special Committee approves or recommends any alternative proposal or publicly proposes to take any of the previous actions, or a tender or exchange offer constituting an alternative proposal has been commenced and the Company has not sent to its stockholders within ten business days a statement disclosing that the Company’s board of directors or the Special Committee recommends rejection of such tender or exchange offer; in each case, so long as Parent terminates the merger agreement within thirty calendar days of the occurrence of any of the foregoing

 

The Company may terminate the merger agreement:

 

 

if there is a breach, in any material respect, of any representation, warranty, covenant or agreement on the part of the Parent Parties which would result in a failure of certain conditions relating to the Parent Parties representations, warranties, covenants and agreements to be satisfied and which breach is incapable of being cured by the termination date, or is not cured within thirty days following delivery of written notice of such breach, provided that the Company is not then in material breach of its representations, warranties, agreements or covenants contained in the merger agreement;

 

 

 

prior to the approval of the proposal to adopt the merger agreement by the Company’s stockholders, in order to enter into a definitive agreement with respect to a superior proposal, provided that substantially concurrently with such termination, the Company must enter into such definitive agreement and pay to Parent the termination fee described under “The Merger Agreement —Termination Fees and Expenses; Reimbursement of Expenses” beginning on page 88 and 89; or

 

 

if (i) all conditions to the Parent Parties’ obligation to consummate the merger have been satisfied, (ii) the Company has irrevocably confirmed in writing that all conditions to its obligation to consummate the merger have been satisfied or the Company is willing to waive any unsatisfied condition and stands ready, willing and able to consummate the closing on such date, (iii) the Parent Parties fail to consummate the merger within three business days following the date the merger was required to close and (iv) the Company stood ready, willing and able to consummate the closing during those three business days.

 

Termination Fees and Expenses (Page 88)

 

The Company will be required to pay to Parent an amount equal to $400,000 in cash if:

 

 

the Company terminates the merger agreement to enter into an acquisition agreement related to a superior proposal with a person or group that made an alternative acquisition proposal that the Special Committee determined is, or could reasonably be expected to result in, a superior proposal, subject to certain requirements; or

 

 

Parent terminates the merger agreement because the Board or any committee thereof (including the Special Committee) has changed its recommendation and the event giving rise to such termination is the submission of an acquisition proposal by a person or group that made an alternative acquisition proposal that the Special Committee determined is, or could reasonably be expected to result in, a superior proposal, subject to certain requirements; or

 

 

the merger agreement is terminated under certain circumstances and, within twelve months of such termination, the Company enters into a definitive agreement with respect to an acquisition proposal or an acquisition proposal is consummated; or

 

 

the Company terminates the merger agreement to enter into an acquisition agreement related to a superior proposal in any circumstance other than those referred to above; or

 

 

Parent terminates the merger agreement because the Board or the Special Committee has changed its recommendation in any circumstances, other than those referred to above.

 

Parent will be required to pay to the Company an amount equal to $500,000 in cash if the Company terminates the merger agreement:

 

 

as a result of a material breach by any of the Parent Parties of the merger agreement that cannot be cured by the termination date or is not cured within thirty days of notice;

 

 

because (i) the merger is not consummated upon the satisfaction or waiver of all closing conditions, (ii) the Company has irrevocably notified Parent in writing that all conditions to its obligation to complete the merger have been satisfied or that it is willing to waive any unsatisfied conditions, (iii) the Parent Parties fail to complete the closing of the merger within three business days following the date the closing of the merger was required pursuant to the merger agreement and (iv) the Company has irrevocably confirmed in writing that it is ready, willing and able to consummate the merger; or

 

 

because the effective time of the merger has not occurred on or before the termination date, if, at the time of or prior to such termination, the Company would have been entitled to terminate the merger agreement pursuant to the immediately foregoing bullet point.

 

 

The Company will be required to pay Parent (or one or more of its designees) the documented out-of-pocket expenses incurred by the Parent and its respective affiliates in connection with the merger agreement and the financing and the transactions contemplated thereby, up to a maximum amount of $250,000, if the Company or Parent has terminated the merger agreement because the meeting of the Company’s stockholders has concluded and the approval of the proposal to adopt the merger agreement by the required vote of the stockholders has not been obtained. Any such amount may be credited against a Company termination fee, if any, payable to the Parent.

 

 

Specific Performance (Page 89)

 

In the event of a breach or threatened breach of any covenant or obligation in the merger agreement, the non-breaching party will be entitled (in addition to any other remedy that may be available to it whether in law or equity, including monetary damages) to a decree or order of specific performance to enforce the observance and performance of such covenant or obligation and/or to enforce specifically the terms and provisions of the merger agreement and an injunction or injunctions restraining such breach or threatened breach.

 

Appraisal Rights (Page 68)

 

If the merger is completed, under Delaware law, holders of common stock who do not vote in favor of adopting the merger agreement will have the right to seek appraisal of the fair value of their shares of common stock as determined by the Court of Chancery of the State of Delaware, but only if they comply with all requirements of Delaware law, which are summarized in this proxy statement. This appraisal amount could be more than, the same as or less than the merger consideration. Any holder of common stock intending to exercise such holder’s appraisal rights, among other things, must submit a written demand for an appraisal to us prior to the vote on the adoption of the merger agreement and must not vote or otherwise submit a proxy in favor of adoption of the merger agreement. Your failure to follow exactly the procedures specified under Delaware law will result in the loss of your appraisal rights.

 

Market Price of the Common Stock and Dividend Information (Page 100)

 

The closing price of our common stock on the Global Select Market of The NASDAQ Stock Market, LLC, which we may refer to as the NASDAQ Global Select Market, on June 24, 2020, the last trading day prior to the public announcement of the merger agreement amendment, was $11.14. The $13.10 that will be paid to holders of our common stock in exchange for each share of our common stock they hold represents a premium of approximately 25.1% to the average closing share price of our common stock for the 90 days ended on June 24, 2020 and a premium of approximately 42.0% to the average price of our common stock during the 52 weeks prior to June 24, 2020. 

 

 

QUESTIONS  & ANSWERS ABOUT THE VIRTUAL SPECIAL MEETING AND THE MERGER

 

The following questions and answers are intended to address briefly some commonly asked questions about the merger, the merger agreement and the virtual special meeting. These questions and answers may not address all questions that are important to you as a stockholder of Asta Funding, Inc. Please refer to the “Summary Term Sheet” and the more detailed information contained elsewhere in this proxy statement, including in its annexes, all of which you should read carefully. See also “Where You Can Find More Information” beginning on page 107.

 

Q:

Why am I receiving this proxy statement?

 

A:

We have agreed to merge under the terms of a merger agreement that is described in this proxy statement. A copy of the merger agreement and Amendment No. 1 to the merger agreement are attached to this proxy statement as Annex A and Annex B, respectively. You should carefully read this proxy statement in its entirety.

 

In order for the merger to be completed, stockholders holding a majority of the outstanding shares of our common stock must vote to adopt the merger agreement. You are receiving this proxy statement and proxy card or voting instruction form because you own shares of our common stock. This proxy statement describes matters on which we urge you to vote and is intended to assist you in deciding how to vote your shares of common stock with respect to such matters.

 

We will hold a virtual special meeting of stockholders in order to seek approval of the proposal to adopt the merger agreement and other related matters on which we urge you to vote. This proxy statement contains important information about these matters as well as the virtual special meeting of stockholders. The enclosed voting materials allow you to vote your shares of our common stock without attending the virtual special meeting of stockholders.

 

Your vote is important. We encourage you to vote your shares of common stock as soon as possible.

 

Q:

What is the purpose of the virtual special meeting?

 

A:

At the virtual special meeting, the holders of our common stock will act upon the matters outlined in this proxy statement, including a proposal to adopt the merger agreement and a proposal to approve one or more adjournments of the virtual special meeting, if necessary or appropriate, to solicit additional proxies to approve the proposal to adopt the merger agreement, and in the discretion of the proxy holders, on any other proposals to be voted on at the virtual special meeting.

 

For specific information regarding the merger agreement and adjournment, see “Proposal No. 1—The Merger” beginning on page 14 and “Proposal No. 2– Adjournment of the Virtual Special Meeting” on page 104, respectively.

 

Q:

Where and when is the virtual special meeting?

 

A:

The virtual special meeting of our stockholders will be held exclusively online via live webcast on [•], 2020 at [•] a.m., eastern time. There will not be a physical meeting location. The virtual special meeting can be accessed via webcast by visiting [•], where you will be able to listen to the meeting live, submit questions and vote online. We encourage you to allow ample time for online check-in, which will open at [*]. Eastern Time. Please note that you will not be able to physically attend the virtual special meeting in person.

 

Q:

Why is the Company merging?

 

A:

After deliberation and consultation with its legal advisors as well as a special committee of independent and disinterested members of the board of directors, which committee was formed for the purpose of evaluating the possible sale of the Company and was advised by its own legal and financial advisors, our board of directors has determined (without the participation of Gary Stern) that the merger agreement, the merger and the other transactions contemplated by the merger agreement are fair to, and in the best interests of, our stockholders (other than Gary Stern and members of the Stern Group).

 

 

Q:

How does the board of directors recommend that I vote?

 

A:

Our board of directors (without the participation of Gary Stern) recommends that our stockholders vote FOR the proposal to adopt the merger agreement; and FOR the proposal to approve one or more adjournments of the virtual special meeting, if necessary or appropriate, to solicit additional proxies to approve the proposal to adopt the merger agreement. See “Special Factors—Recommendations of our Board of Directors” beginning on page 29 of this proxy statement for a more detailed discussion of the recommendation of our board of directors.

 

 

Q:

What will happen if the merger is not completed?

 

A:

If the proposal to adopt the merger agreement is not approved by the Company’s stockholders, or if the merger is not consummated for any other reason, the Company’s stockholders will not receive any payment for their shares in connection with the merger. Instead, the Company will remain a public company and shares of Common Stock will continue to be listed and traded on NASDAQ Global Select Market. Under specified circumstances, the Company may be required to pay Parent (or one or more of its designees) a termination fee of $400,000 or the documented out-of-pocket expenses of the Parent Parties and their affiliates, up to a maximum amount of $250,000, or Parent may be required to pay the Company a termination fee of $500,000. See “The Merger Agreement—Termination Fees and Expenses; Reimbursement of Expenses” beginning on page 88.

 

Q:

What will happen in the merger?

 

A:

We and our businesses will be acquired by Parent in a cash merger transaction. At the completion of the merger, we will become a wholly-owned subsidiary of Parent. As a result, shares of our common stock will no longer be listed on any stock exchange, including the NASDAQ Global Select Market, or quotation system, and will be deregistered under the Securities Exchange Act of 1934, as amended (the “Exchange Act”).

 

Q:

Why was the original merger agreement amended?

 

A:

Amendment No. 1 amended the merger agreement to reflect an increase in the merger consideration from $11.47 per share in cash to $13.10 per share in cash following negotiations between the independent special committee of our board of directors and the Stern Group. For more information about the background of and reasons for Amendment No. 1, see “Special Factors—Background of the Merger” beginning on page 14 and “Reasons for the Merger and Recommendation of Our Board of Directors” beginning on page 29.

 

Q:

What will a stockholder of the Company receive if the merger is completed?

 

A:

In exchange for each share of our common stock owned and outstanding at the effective time of the merger, each stockholder will receive a cash payment per share of $13.10 unless such stockholder properly exercises and does not withdraw its appraisal rights under the Delaware General Corporation Law, which we may refer to as the DGCL, with respect to such shares (as described below). For example, if a stockholder owns 100 shares of common stock, such stockholder will receive $1,310.00 in cash in exchange for their shares of common stock. You will not own any shares of the capital stock in the Company following completion of the merger.

 

Q:

What will a holder of the Company’s stock options receive if the merger is completed?

 

A:

Except as otherwise agreed to in writing prior to the effective time of the merger by Parent and a holder of any Company stock options with respect to any of such holder’s Company stock options, each Company stock option, whether vested or unvested and whether with an exercise price per share that is greater or less than, or equal to, $13.10, that is outstanding immediately prior to the effective time of the merger, will, as of the effective time of the merger, become fully vested and be canceled and converted into the right to receive an amount in cash from the surviving corporation equal to (a) the product of (i) the excess, if any, of $13.10 over the exercise price per share of Common Stock subject to such Company stock option multiplied by (ii) the total number of shares of Common Stock subject to such Company stock option, without interest, less (b) such amounts as are required to be withheld or deducted under applicable tax provisions

 

Q:

Will I have appraisal rights if I dissent from the merger?

 

A:

Yes. Under the DGCL, you have the right to seek appraisal of the fair value of your shares of our common stock, as determined by the Court of Chancery of the State of Delaware, if the merger is completed, but only if (a) you do not vote in favor of adoption of the merger agreement, (b) you deliver a written demand before the vote (as described elsewhere in this proxy statement), (c) you continuously hold through the effective time of the merger the shares for which you demand appraisal and (d) you meet the other requirements of the DGCL. See “The Virtual Special Meeting of Stockholders of Asta Funding, Inc.—Appraisal Rights” beginning on page 68 of this proxy statement for a more detailed discussion of appraisal rights and the text of DGCL Section 262 attached as Annex D to this proxy statement. Failure to follow the procedures set forth in Section 262 of the DGCL will result in the loss of appraisal rights.

 

Q:

Should I send in my stock certificates now?

 

A:

No. After the merger is completed you will receive written instructions from the exchange agent on how to exchange your stock certificates for the cash merger consideration. Please do not send in your stock certificates with your proxy.

 

 

Q:

When do you expect the merger to be completed?

 

A:

We are working toward completing the merger as quickly as practicable after the virtual special meeting of stockholders and currently anticipate that the merger will be completed [•]. However, there can be no assurances that the merger will be completed at all, or if completed, that it will be completed [•].

 

Q:

Who is entitled to vote at the virtual special meeting?

 

A:

Our board of directors has fixed the close of business on [____], 2020 as the record date for the determination of stockholders entitled to notice of, and to vote at, the virtual special meeting and any adjournment or postponement thereof. Only holders of our common stock at the close of business on the record date are entitled to vote at the virtual special meeting.

 

Q:

What is a quorum for the virtual special meeting?

 

A:

There must be a quorum for the virtual special meeting of stockholders to be held. The holders of a majority of the issued and outstanding shares of our common stock entitled to vote, present in person via the live webcast or represented by a properly executed and delivered proxy, will constitute a quorum for the purpose of transacting business at the virtual special meeting of stockholders. Only holders of record of our common stock on the record date will be entitled to vote at the virtual special meeting of stockholders. All shares of our common stock represented at the virtual special meeting of stockholders, but not voting, including abstentions, will be counted as present for determining the presence or absence of a quorum. On the record date, there were [•] shares of common stock outstanding and entitled to vote. Thus, [•] shares of common stock must be represented by proxy or by stockholders present and entitled to vote at the virtual special meeting to have a quorum.

 

 

Q:

What vote of the Company’s stockholders is required to adopt the merger agreement?

 

A:

Approval of the proposal to adopt the merger agreement requires the affirmative vote of the holders of a majority of the shares of our common stock outstanding as of the record date. In addition, it is a condition precedent in the merger agreement that we obtain the affirmative vote (in person via the live webcast or by proxy) in favor of the proposal to adopt the merger agreement by the holders of a majority of the outstanding shares of Common Stock entitled to vote thereon not owned, directly or indirectly, by the Parent, the Stern Group, any other officers and directors of the Company or any other person having an equity interest in, or any right to acquire an equity interest in, Merger Sub or any entity of which Merger Sub is a direct or indirect subsidiary.

 

Q:

What vote of the Company’s stockholders is required to adopt the proposal to adjourn the virtual special meeting, if necessary or appropriate to solicit additional proxies to approve the proposal to adopt the merger agreement?

 

A:

Approval of the proposal regarding adjournment of the virtual special meeting, if necessary or appropriate, to solicit additional proxies to approve the proposal to adopt the merger agreement require the approval of a majority of the votes represented by the shares of our common stock present and entitled to vote thereon.

 

Q:

What do I need to do now?

 

A:

We urge you to read this proxy statement carefully, including its annexes, and consider how the merger will affect you. If you are a stockholder of record, you can ensure your shares are voted at the special meeting by completing, dating, signing and returning the enclosed proxy card in the enclosed prepaid envelope or by voting through the Internet or by telephone. If you hold your shares in “street name,” you can ensure that your shares are voted at the special meeting by instructing your broker, bank or other nominee how to vote, as discussed below. Please do not send in your stock certificates with your proxy.

 

Q:

How do I cast my vote?

 

A:

If you are the record owner of your shares, you may vote:

 

 

Via Internet by casting your vote at www.proxyvote.com using the Internet voting instructions printed on your proxy card;

 

 

Via telephone. To submit a proxy by calling the toll-free number on the proxy card before 11:59 p.m., Eastern Time, on [*], 2020. You will then be prompted to enter the control number printed on your proxy card and to follow the subsequent instructions. Submitting a proxy by telephone is available 24 hours a day;

 

 

By signing and dating each proxy card you receive and returning it in the enclosed prepaid envelope; or

 

 

 

By casting your vote at the virtual special meeting via www.proxyvote.com. There will not be a physical meeting location. Any stockholder can attend the virtual special meeting by visiting www.proxyvote.com, where stockholders may vote and submit questions during the meeting. Instructions on who can attend and participate via Internet, including how to demonstrate proof of stock ownership, are posted at www,proxyvote.com.

 

If you hold your shares in “street name,” you should follow the procedures provided by your broker, bank or other nominee.

 

 

If you return your signed proxy card, but do not mark the boxes showing how you wish to vote, your shares will be voted FOR the adoption of the merger agreement and FOR the proposal to approve the adjournment of the special meeting, if necessary or appropriate, to solicit additional proxies to approve the proposal to adopt the merger agreement.

 

Q:

If my broker holds my shares in “street name,” will my broker vote my shares?

 

A:

Yes, but only if you instruct your broker, bank or other nominee how to vote your shares. You should follow the procedures provided by your broker, bank or other nominee regarding the voting of your shares. If you do not provide instruction on how to vote your shares, your shares will not be voted on the merger proposal and the effect will be the same as a vote by you against the adoption of the merger agreement. We urge you to contact your broker, bank or other nominee promptly to ensure that your vote is counted.

 

Q:     May I attend the virtual special meeting and vote in person?

 

A:

Yes. All stockholders as of the record date may attend the virtual special meeting online and holders of our common stock may vote in person. If your shares of our common stock are held in “street name,” you must obtain a legal proxy from your broker, bank or other nominee and bring your statement evidencing your beneficial ownership of our common stock in order to attend the virtual special meeting and vote in person via the Internet.

 

Whether or not you plan to attend the virtual special meeting, and unless you hold your shares in “street name,” please submit your proxy through the Internet or by telephone or complete, date, sign and return, as promptly as possible, the enclosed proxy card in the enclosed prepaid envelope.

 

Q:

Can I change my vote after I have delivered my proxy?

 

A:

If you submit your proxy through the Internet or by mail, you may revoke your proxy at any time before the vote is taken at the virtual special meeting in any of the following ways:

 

 

filing an instrument of revocation or a duly executed proxy bearing a later date by mail to our secretary at 210 Sylvan Avenue, Englewood Cliffs, New Jersey 07632;

 

 

casting your vote at the virtual special meeting via the virtual meeting website.

 

If your shares are not registered in your own name, you will need additional documentation from your record holder to vote personally at the virtual special meeting.

 

Your attendance at the virtual special meeting alone does not automatically revoke your proxy.

 

Q:

What do I do if I receive more than one proxy or set of voting instructions?

 

A:

If you hold shares of our common stock in “street name” and also directly as a record holder or otherwise, you may receive more than one proxy and/or set of voting instructions relating to the special meeting. Each of these should be voted and returned separately in accordance with the instructions provided in this proxy statement in order to ensure that all of your shares of our common stock are voted.

 

 

Q:

What happens if I sell my shares of the Company’s common stock before the virtual special meeting?

 

A:

The record date for stockholders entitled to vote at the virtual special meeting is earlier than both the date of the virtual special meeting and the consummation of the proposed merger. If you transfer your shares of our common stock after the record date but before the virtual special meeting, unless special arrangements (such as provision of a proxy) are made between you and the person to whom you transfer your shares and each of you notifies us in writing of such special arrangements, you will retain your right to vote such shares at the virtual special meeting but will transfer the right to receive the per share merger consideration to the person to whom you transfer your shares.

 

 

Q:

Will a proxy solicitor be used?

 

A:

This solicitation is made on behalf of our board of directors. We have retained Laurel Hill Advisory Group, LLC, which we may refer to as Laurel Hill, to assist our officers, directors and employees in the solicitation of proxies for the virtual special meeting of stockholders. We estimate that we will pay Laurel Hill a fee of approximately $6,000. We have also agreed to reimburse Laurel Hill for reasonable administrative and out-of-pocket expenses incurred in connection with the proxy solicitation and to indemnify Laurel Hill against certain losses, costs and expenses.

 

Q:

Who can help answer my questions?

 

A:

If you have additional questions about the matters described in this proxy statement or how to submit your proxy, or if you need additional copies of this proxy statement, you should contact:

 

 

 

2 Robbins Lane, Suite 201

Jericho, New York 11753

Banks and Brokers Call (516) 933-3100

All Others Call Toll-Free (888) 742-1305

 

 

You may also obtain additional information about us from documents filed with the SEC by following the instructions in the section entitled “Where You Can Find More Information” on page 107 of this proxy statement.

 

Neither the SEC nor any state securities regulatory commission has approved or disapproved of the merger, passed upon the merits or fairness of the merger agreement or the transactions contemplated thereby, including the proposed merger, or passed upon the adequacy or accuracy of the information contained in this proxy statement. Any representation to the contrary is a criminal offense.

 

 

PROPOSAL NO. 1—THE MERGER

 

This section of the proxy statement describes the principal aspects of the proposed merger. While we believe that this description covers the material terms of the merger and the related transactions, this summary may not contain all of the information that is important to Asta Funding stockholders. You can obtain a more complete understanding of the merger by reading the merger agreement and Amendment No. 1 to the merger agreement, copies of which are attached to this proxy statement as Annex A and Annex B, respectively. You are encouraged to read the merger agreement and the other annexes to this proxy statement carefully and in their entirety.

 

SPECIAL FACTORS

Parties to the Merger

 

Asta Funding, Inc.

 

Asta Funding, Inc., a Delaware corporation, is engaged in several business segments in the financial services industry including funding of personal injury claims, through our wholly owned subsidiaries Sylvave, LLC, Simia Capital, LLC and Arthur Funding LLC, social security disability advocacy through our wholly owned subsidiaries GAR Disability Advocates, LLC and Five Star Veterans Disability, LLC, and, through our wholly owned subsidiaries Palisades Collection, LLC, Palisades Acquisition XVI, LLC, Palisades XIX, LLC, Palisades Acquisitions XXIII, LLC and VATIV Recovery Solutions, LLC, the business of purchasing, managing for our own account and servicing distressed consumer receivables, including charged off receivables, and semi-performing receivables. For additional information, please visit www.astafunding.com. Our principal executive offices are located at 210 Sylvan Avenue, Englewood Cliffs, New Jersey 07632. Our telephone number is (201) 567-5648. Our common stock trades on the NASDAQ Global Select Market under the symbol “ASFI.” Please see the section entitled “Important Information Regarding Asta” beginning on page 93 of this proxy statement.

 

Asta Finance Acquisition Inc.

 

The Parent is a Delaware corporation formed on December 26, 2019 for purposes of entering into the merger agreement and consummating the transactions contemplated by the merger agreement. The Parent has not engaged in any business except for activities incident to its formation and in connection with the transactions contemplated by the merger agreement. The Parent is affiliated with the Stern Group. Gary Stern serves as the sole officer and director of the Parent. Upon consummation of the merger, the stockholders of the Parent will be the members of the Stern Group, with their respective holdings being proportional to the shares of our Common Stock contributed to the Parent. The Parent is the sole stockholder of Merger Sub and, upon consummation of the merger, will be our sole stockholder. The address of the Parent is c/o Moomjian, Waite & Coleman, LLP, 350 Jericho Turnpike, Jericho, NY 11753. Please see the section entitled “Important Information Regarding the Parent Parties and the Stern Group” beginning on page 101 of this proxy statement.

 

Asta Finance Acquisition Sub Inc.

 

The Merger Sub is a Delaware corporation formed on December 26, 2019 for purposes of entering into the merger agreement and consummating the transactions contemplated by the merger agreement. The Merger Sub has not engaged in any business except for activities incident to its formation and in connection with the transactions contemplated by the merger agreement. The Merger Sub is wholly owned by Parent, and will merge with and into the Company, with the Company as the surviving corporation. The address of Merger Sub is c/o Moomjian, Waite & Coleman, LLP, 350 Jericho Turnpike, Jericho, NY 11753. Please see the section entitled “Important Information Regarding the Parent Parties and the Stern Group” beginning on page 101 of this proxy statement.

 

Background of the Merger 

 

As part of their ongoing oversight and management of the Company’s business, the board of directors and senior management of the Company regularly review and assess the Company’s operations, performance, prospects and strategic direction, and evaluate the possibility of pursuing various strategic transactions and other strategic alternatives as part of ongoing efforts to strengthen the business and enhance stockholder value, while taking into account economic, regulatory, competitive and other conditions.

 

 

On October 30, 2019, Gary Stern, the Chairman, President and Chief Executive Officer and a major stockholder of the Company, submitted to the board of directors of the Company a non-binding offer to acquire all of the outstanding shares of common stock of the Company at a price of $10.75 per share and take the company private (sometimes referred to as the “proposed transaction”). In his initial proposal, Gary Stern stated that he was not interested in taking the Company private unless the transaction was approved by a special committee of independent directors and the Company obtained an affirmative vote of the majority of the minority stockholders, which include stockholders other than Gary Stern or members of the Stern Group, in favor of the proposed transaction. Additionally, in his initial proposal, Gary Stern stated that he was not interested in selling his shares in the Company to a third party or participating in any merger or other strategic transaction involving any third party, and did not intend to vote in his capacity as a stockholder in favor of any such alternative transaction.

 

On October 30, 2019, the board of directors adopted a resolution at a meeting, in which it appointed a special negotiating committee of independent and disinterested directors to consider and negotiate the proposed transaction (“Special Committee”), and appointed David Slackman (“Mr. Slackman”), Timothy Bishop (“Mr. Bishop”) and Michael Monteleone (“Mr. Monteleone”) as members of the Special Committee and appointed Mr. Slackman as Chair of the Special Committee.

 

On October 31, 2019, David Slackman interviewed Tannenbaum Helpern Syracuse & Hirschtritt, LLP (“Tannenbaum”) for the role of independent legal counsel for the Special Committee.

 

On November 1, 2019, the Special Committee retained Tannenbaum to act as legal counsel to the Special Committee.

 

The board of directors adopted a resolution by unanimous written consent, dated November 2, 2019, that, among other things, authorize and delegate to the Special Committee the exclusive power and authority of the board of directors to: (1) establish, approve, modify, monitor and direct the process and procedures related to the review and evaluation of the proposed transaction, including the authority to determine not to proceed with any such process, procedures, review or evaluation and the authority not to recommend the proposed transaction; (2) respond to any communications, inquiries or proposals regarding the proposed transaction; (3) review, evaluate, investigate, pursue and negotiate the terms and conditions of the proposed transaction with Gary Stern (sometimes referred to as “Mr. Stern”) or any other party the Special Committee deems appropriate; (4) determine on behalf of the board of directors and the Company whether the proposed transaction is advisable and is fair to, and in the best interests of, the Company and its stockholders (or any subset of the stockholders of the Company that the Special Committee determines to be appropriate); (5) reject or approve the proposed transaction; (6) recommend to the board of directors the consummation of the proposed transaction; (7) review, analyze, evaluate and monitor all proceedings and activities of the Company related to the proposed transaction; (8) investigate the Company, the potential buyer, the proposed transaction and matters related thereto as it deems appropriate; (9) consider, evaluate, and make recommendations to the board of directors concerning, other transactions presented to the Special Committee involving the acquisition of all of the outstanding common stock of the Company, or similar going private transactions; (10) retain such financial, legal and other advisers as the Special Committee may deem to be necessary or appropriate; and (11) take such other actions as the Special Committee may deem to be necessary or appropriate for the Special Committee to discharge its duties.

 

The board of directors also resolved not to recommend any going private transaction or any alternative transaction without a prior favorable recommendation by the Special Committee.

 

Between November 3, 2019 and November 7, 2019, representatives of Tannenbaum held discussions with two potential financial advisors (previously identified by the Special Committee members), who would be retained as financial advisor to assist the Special Committee in evaluating and negotiating the proposed transaction and provide an opinion as to the fairness of any proposed consideration to the stockholders of the Company (excluding any members of the Stern Group) in connection with the proposed transaction.

 

On November 4, 2019, a putative derivative action was filed by Daniel Litten, on behalf of the Company, asserting claims against certain current and former directors and officers of the Company regarding certain transactions occurring between March 2016 through December 2018 (the “Litten action”).

 

On November 7, 2019, Tannenbaum reported to the Special Committee on its discussions with the financial advisor candidates to the Special Committee. The Special Committee requested that Tannenbaum contact a third financial advisor candidate, arrange for the three candidates to meet with the Special Committee and present their respective proposals for an engagement by the Special Committee.

 

On November 13, 2019, the Special Committee held a meeting at the Tannenbaum offices in New York City, at which representatives of Tannenbaum were present. During the meeting, the three financial advisor candidates, Marshall Stevens, Lincoln and Duff & Phelps, presented their respective proposals for an engagement by the Special Committee. Representatives from each candidate presented their background, experience and expertise in mergers and acquisitions advisory matters, public company transactions, and going private transactions. In light of Gary Stern’s offer, which noted that he was not interested in selling his shares in the Company to a third party or participating in any merger or other strategic transaction involving any third party, and did not intend to vote in his capacity as a stockholder in favor of any such alternative transaction, it was determined that the Special Committee’s financial advisors would not solicit any other potential buyers for the Company or alternative transactions. The members of the Special Committee and Tannenbaum conducted a vigorous interview with each candidate.

 

 

On November 20, 2019, the Special Committee held a telephonic meeting, at which representatives of Tannenbaum were present, and discussed and reviewed the three financial advisor candidates taking into consideration the background, experience and fees of each candidate. On the basis of Lincoln’s knowledge, background and deal experience, the Special Committee unanimously selected Lincoln to serve as its financial advisor for the proposed transaction. The Special Committee also discussed the Litten action.

 

On November 22, 2019, the Special Committee entered into an engagement letter agreement with Lincoln and the Company, in which the parties agreed that the Special Committee would retain Lincoln to act as its financial advisor in connection with the proposed going private transaction.

 

During November 2019 and December of 2019, representatives of Lincoln met with members of the Company’s management team both in person at the Company’s executive offices and telephonically. Representatives of Lincoln also commenced a review of the Company and reviewed and analyzed the macroeconomic and competitive challenges facing the Company and the industries in which the Company operates.

 

In early December 2019, following discussions with defense counsel to the Company and Tannenbaum with respect to the Litten action, the Special Committee decided to form a subcommittee of the Special Committee dedicated to evaluating the Litten action as it related to the proposed transaction (the “Litten action subcommittee”). The Special Committee determined that Mr. Slackman, a named defendant in the Litten action, would not be a member of the subcommittee to the Special Committee and would not take part in these discussions because he was a defendant in the action. The members of the subcommittee were Mr. Monteleone and Mr. Bishop.

 

On December 4, 2019, the Special Committee (with Mr. Monteleone unavailable and absent) held a telephonic meeting, at which representatives of Tannenbaum and Lincoln were present. Representatives of Lincoln discussed their meetings with the Company’s management team and requested that the Company provide a seven-year forecast for fiscal years 2020-2026, for purposes of Lincoln’s preliminary analysis of the Company and the proposed transaction. The Special Committee informed the representatives of Lincoln that the Company ordinarily only prepares annual forecasts and the Company’s management team may not have the capabilities to provide a seven-year forecast. The Special Committee and representatives of Lincoln discussed the various segments of the Company’s business and the outlook for each segment. The Special Committee discussed that the personal injury division was not profitable. It was also noted, however, that GAR, as an ongoing business was somewhat profitable, with low to medium growth. The Special Committee noted that, although the Company may purchase new consumer receivable portfolios in future periods, it may not be able to purchase consumer receivable portfolios domestically at favorable prices or terms. There was also a discussion at the meeting between the Company and representatives of Lincoln about future projected expenses. The Special Committee noted that one of the benefits of the merger transaction would be that the public company expenses would be eliminated. Additionally, Mr. Slackman, Chair of the Special Committee, expressed his view that it would be unlikely that the Company could find a buyer for the portfolios for the consumer receivables collection business and that the net present value of cash flow is most relevant for ascertaining the value of the Company.

 

In discussing the requested forecast, Mr. Slackman suggested that the Chief Financial Officer (“CFO”) of the Company, Steven Leidenfrost, a disinterested party to the proposed transaction, have ultimate authority over the forecast, as opposed to Gary Stern, and that the former CFO of the Company, Bruce Foster, who had only left the Company in September 2019, could be available to help with preparing the forecast.

 

On December 9, 2019, the Company submitted its seven-year forecast (the “Initial Management Forecast”) to the Special Committee for its review. The Initial Management Forecast baseline projections were based on actual 2019 revenues for the first half of fiscal year 2019.

 

On December 10, 2019, the Special Committee held a telephonic meeting, at which representatives of Tannenbaum, representatives of Lincoln, Steven Leidenfrost, the Company’s CFO, and Monika Dasgupta, Controller of the Company, were present, to discuss the Initial Management Forecast. The Special Committee asked Steven Leidenfrost to provide the assumptions for the Initial Management Forecast. The Special Committee also discussed the treatment of certain expenses in the forecast. Additionally, Steven Leidenfrost noted that while management believed GAR would be profitable, it would not be experiencing meaningful growth.

 

 

On December 15, 2020, representatives of Tannenbaum spoke with the Company’s general counsel, Seth Berman, and its CFO, Steven Leidenfrost, to discuss Lincoln’s due diligence requests and, ongoing accounting matters such as the closing of the books and quarterly reporting, deferred tax assets and management forecasts and projections.

 

On December 16, 2019, the Special Committee held a telephonic meeting, at which representatives of Tannenbaum and Lincoln were present. The Special Committee members discussed with representatives of Lincoln and Tannenbaum the Initial Management Forecast and the Special Committee’s outlook for the Company. The Special Committee raised concerns about the Initial Management Forecast. The Special Committee discussed the viability of certain divisions of the Company, including GAR and the Five Star Veterans, Social Security and Disability claims business. In light of the fact that the Initial Management Forecast presented declining revenues and no growth assumptions, the discussion then turned to the possibility of cutting certain corporate expenses. Finally, the Special Committee discussed with representatives of Lincoln the appropriate metrics that should be used to value the Company. At the time of the meeting, members of the Special Committee expressed their view that it was premature to discuss a valuation for the Company until management addressed the Special Committee’s concerns with respect to the Initial Management Forecast.

 

On December 18, 2019, the Special Committee held a meeting at Tannenbaum’s offices in New York City, at which representatives of Tannenbaum and Lincoln were present. The Special Committee reviewed financial forecasts for the Company prepared by management of the Company. Representatives of Lincoln provided an update with respect to Lincoln’s preparation of a preliminary financial analysis of the Company.

 

On December 19, 2019, the board of directors met and determined that the compensation for the Special Committee members for their service on such committee would be $15,000 for Mr. Bishop and Mr. Monteleone, respectively, and $30,000 for Mr. Slackman, for his service as the chair of the Special Committee. This compensation is consistent with the amounts paid to the members of the Special Committee in their capacities as members of the board of directors, and consistent with past payment amounts to those directors who serve on special committees to the board of the directors.

 

Representatives of Lincoln also reported to the Special Committee that on December 17, 2019, as part of Lincoln’s review of the financial forecasts for the Company, and at the request of the Special Committee, representatives from Lincoln met with Ricky Stern and Gary Stern, as members of the Company’s executive team, and discussed the Company’s corporate expenses and allocation of costs. A principal concern raised by the members of the Special Committee with respect to the Initial Management Forecast was its projection of corporate and public company expenses throughout the business. This concern was due in large part to the lack of anticipated growth throughout the Company’s business segments projected over the 7 years forecasted which was not offset with meaningful reductions in corporate and public company expenses. The Special Committee reviewed and approved for Lincoln’s use an alternative forecast for corporate expenses for Lincoln to use along with the Initial Management Forecast in its preliminary financial analysis. At the end of the meeting, representatives of Lincoln informed the Special Committee that it would be preparing a preliminary financial analysis of the Company.

 

On December 27, 2019, the Litten action subcommittee, consisting of Messrs. Monteleone and Bishop, held a meeting at which representatives of Tannenbaum were present. The parties discussed a process for considering whether the claims in the Litten action had merit in order to determine whether any value should be placed on the action for the purposes of determining the overall value of the Company.

 

On December 30, 2019, the Special Committee held a telephonic meeting, at which representatives of Tannenbaum and Lincoln were present. At the meeting, representatives of Lincoln presented Lincoln’s preliminary financial analysis of the Company using the Initial Management Forecast and incorporating the alternative forecast for corporate expenses. Representatives of Lincoln reviewed with the Special Committee the methodologies in its preliminary financial analysis, including, among other things, a preliminary analysis of the high end of the equity value of the Company, the book value of the Company (which the presentation noted was for reference only), an illustrative perspective on potential negotiation positions, the Company’s corporate overhead expenses, the trading history of the Company’s common stock and an illustrative analysis of premiums paid in recent transactions in the diversified financials industry. After a review and discussion of Lincoln’s preliminary financial analysis, the Special Committee decided to indicate, in its negotiations with Gary Stern, that the book value of the Company was a factor that should be considered in valuing the Company, and at the conclusion of the meeting made the decision to discuss its views on value with Gary Stern and seek an increase in price with respect to the proposed transaction from Mr. Stern.

 

On December 31, 2019, Mr. Slackman had a teleconference with Gary Stern, his attorneys, including a representative of Moomjian, Waite & Coleman, LLP (“MWC”), and representatives of Tannenbaum and Lincoln. The parties discussed Lincoln’s preliminary financial analysis of the Company. Mr. Slackman informed Gary Stern that the book value of the Company was approximately $13.00 per share, and while the Special Committee understood that other factors would be considered when determining a reasonable price in the proposed transaction, the Special Committee requested that he increase his offer. Gary Stern disagreed with relative importance of book value, and stated he would not be interested in a transaction at more than $11.00 per share. Mr. Stern explained that the GAR business, the Company’s most profitable arm, had suffered a significant decline in the six months ended on December 31, 2019, which had not been considered in the Initial Management Forecast. Additionally, Mr. Stern did not agree that all of the Company’s expenses associated with being a public company would immediately cease following consummation of the proposed transaction, Directors and Officers (“D&O”) insurance and accountant costs would remain, and also that a high level of fixed costs would result in negative cash flow at some point during the seven year projection period. In addition, Mr. Stern stated that he disagreed with the numbers used in the GAR forecast of the Initial Management Forecast. Ricky Stern, the Chief Executive Officer of GAR, did not review the GAR portion of the Initial Management Forecast prior to its distribution to the Special Committee.

 

 

After Gary Stern left the meeting, Mr. Slackman discussed with the representatives from Tannenbaum and Lincoln the concerns Mr. Stern raised as to the possibility of outdated numbers and/or assumptions in the Initial Management Forecast, such as the absence of the latest actual cash collected for the fiscal period ending December 31, 2019. Of note was the fact that Mr. Stern had not reviewed the Initial Management Forecast prior to its distribution to the Special Committee. Since Mr. Stern was an integral part of the Company’s management team with overall oversight for its businesses as the President and Chief Executive Officer, the Special Committee viewed his understanding of the metrics and assumptions used in the Initial Management Forecast as important and not to be wholly disregarded, despite Mr. Stern’s position as the principal of the acquiror in the proposed merger. After a long discussion with the representatives from Tannenbaum and Lincoln, taking into account, among other things, the concerns raised as to the numbers and assumptions used in the Initial Management Forecast, as well as the concerns regarding projections of corporate and public company expenses, Mr. Slackman suggested that the Company should revise the Initial Management Forecast to include more accurate and supportable assumptions. The Company subsequently prepared and provided a revised forecast (the “First Revised Management Forecast”) to the Special Committee. Due to the material changes from the Initial Management Forecast reflected in the First Revised Management Forecast, representatives of Lincoln, at the request of the Special Committee, requested the Company’s management to provide a memorandum explaining how the First Revised Management Forecast was formulated.

 

On January 2, 2020, representatives of Lincoln, Tannenbaum and Lincoln’s outside counsel held a telephonic meeting at which the parties discussed the vetting process for the First Revised Management Forecast delivered by the Company to the Special Committee. Later that day, Steven Leidenfrost provided the Special Committee and representatives of Tannenbaum and Lincoln with the requested explanatory memo. The memorandum described the assumptions included in the First Revised Management Forecast and noted that it reflected actual cash collected related to GAR revenue for the six months ended December 31, 2019. The memorandum also explained that the First Revised Management Forecast projected reduced revenue for GAR and income (loss) before taxes. Additionally, the First Revised Management Forecast re-allocated a portion of the annual executive salary of GAR’s president as part of the Company’s corporate overhead expenses, and provided for a 2% growth rate for GAR beginning in 2022.

 

On January 3, 2020, the Special Committee held a telephonic meeting at which representatives of Tannenbaum and Lincoln were in attendance, and Steven Leidenfrost, Monika Dasgupta and Ricky Stern, members of the Company’s management team, joined the meeting. Prior to the management team joining the meeting, Mr. Slackman reported to the Special Committee his discussions with Gary Stern on December 31, 2019. The Special Committee, and representatives of Lincoln and Tannenbaum also discussed the importance of having the best currently available financial forecasts for the Company. The Special Committee members and representatives of Lincoln discussed the differences and similarities between the Initial Management Forecast and the First Revised Management Forecast. It was noted that, per the explanatory memorandum concerning the GAR segment provided to the Special Committee from the management team, the Initial Management Forecast and the First Revised Management Forecast included assumptions around direct expenses, but not corporate expenses. Also, the Initial Management Forecast and First Revised Management Forecast differed in that revenue and net income were lower in the First Revised Management Forecast. Representatives of Lincoln also reported at this meeting that Gary Stern told representatives of Lincoln and Mr. Slackman that he was willing to increase his offer from $10.75 to $11.00 per share. However, the Special Committee members expressed skepticism that $11.00 was the best and highest price per share that Gary Stern would offer, based on the previous preliminary financial analysis reviewed by the Special Committee. The Special Committee members questioned the appropriateness of a forecast that reduced revenue without also forecasting reduced expenses.

 

After the members of the management team joined the January 3, 2020 meeting, the Special Committee asked the management team to explain the differences between the Initial Management Forecast and the First Revised Management Forecast. The members of the management team explained that the First Revised Management Forecast reflected the most recent six-month trend for GAR revenue rather than the trend from the first six-months of fiscal 2019. The most recent six-month trend indicated that GAR’s revenue was trending lower. One contributing factor that the management team mentioned was the fact that there was an acceleration in processing disability benefit applications by the Federal government, and other industry factors, which were out of the Company’s control. The Special Committee requested that members of the management team produce a revised forecast and consider how it could reduce Company expenses in later years of the forecast so as to correlate to the reduction of revenue over the seven year period. The members of the management team agreed to prepare a revised forecast for the Company, noting that they had not considered the levels of operating expenses in light of the forecasted revenue, nor were future growth assumptions included. At the Special Committee’s suggestion, management agreed to also use a longer history of GAR’s cash collections and include future growth assumptions in the revised forecast.

 

On January 3, 2020, the Litten action subcommittee held a meeting, at which representatives of Tannenbaum were present. The parties further discussed the process of evaluating the Litten action. A representative from Tannenbaum advised that he would schedule calls with litigation counsel for the parties involved in the Litten action to discuss their respective positions concerning the lawsuit.

 

On January 6, 2020, in connection with the Litten action, representatives of Tannenbaum had a conference call with the Company’s litigation defense counsel, a representative from Pepper Hamilton LLP (now known as Troutman Pepper Hamilton Sanders LLP), and with a representative from Abrams & Bayliss LLP, the litigation defense counsel for Louis Piccolo, Mr. Slackman, Mark Levenfus and Bruce Foster. The parties discussed the merits of the claims alleged in the Litten action.

 

 

On January 6, 2020, the Company’s management team prepared revisions to the seven year forecast for GAR and presented the second revised consolidated seven year forecast for the Company (the “Second Revised Management Forecast”), along with an explanatory memorandum, to the Special Committee. The Special Committee noted that the Second Revised Management Forecast reflected updated financial information for GAR, but did not yet address the Special Committee’s concerns around the levels of forecasted operating expenses in light of a reduction in forecasted revenue or the need to include future growth initiatives

 

On or about January 8, 2020, a motion to dismiss the Litten action complaint was filed on behalf of all individual defendants and the Company as nominal defendant.

 

On January 9, 2020, representatives of Tannenbaum held a conference call with respect to the Litten action with plaintiff’s counsel, a representative from Faruqi & Faruqi, LLP. At the meeting, plaintiff’s counsel provided a general view of the Litten action. Plaintiff’s counsel noted that it was too early in the litigation process to state the damages or consider the monetary value of the claims.

 

On January 10, 2020, the Litten action subcommittee held a telephonic meeting, at which representatives of Tannenbaum were present. A representative from Tannenbaum explained that the role of the Litten action subcommittee was to evaluate the merits of the Litten action and, if it found the claims to have merit, attempt to assign some value to those claims in connection with the proposed transaction. There was then a discussion regarding the specific claims asserted by the plaintiff in the Litten action. Tannenbaum then reported on its January 6, 2020 conference call with certain defense counsel and its January 9, 2020 conference call with plaintiff’s counsel.

 

The Litten action subcommittee requested Tannenbaum to prepare a memorandum on behalf of the Special Committee, analyzing the merits and potential value, if any, of the Litten action.

 

On January 16, 2020, the Special Committee held a meeting, at which members of the Special Committee and representatives of Tannenbaum and Lincoln were present. At the meeting, representatives of Lincoln reviewed with the Special Committee its updated preliminary financial analysis of the Company using the Second Revised Management Forecast, including, among other things, an updated preliminary analysis of the equity value of the Company, the book value of the Company, and the Company’s corporate overhead expenses. Representatives of Lincoln also reviewed with the Special Committee a preliminary financial analysis of the Company on a sum-of-the-parts basis using the Second Revised Management Forecast for each of the Company’s business segments (including the Company’s corporate overhead). Lincoln’s updated preliminary financial analysis, which was based on market data through January 15, 2020, also reflected updated values for the Company’s cash and marketable securities as of such date. At the meeting, the Special Committee discussed the Initial Management Forecast, the First Revised Management Forecast and Second Revised Management Forecast, as well as the GAR projections set forth therein, and the Special Committee determined to instruct representatives of Lincoln to use the Second Revised Management Forecast going forward for purposes of Lincoln’s future analyses.

 

On January 17, 2020, Tannenbaum provided the Litten action subcommittee with the memorandum in which it evaluated the merits and value, if any, of the Litten action. Tannenbaum concluded that it believed the claims were unlikely to survive a motion to dismiss, and that there are likely no meaningful financial damages associated with the claims. Further, Tannenbaum concluded that it believed there was a reasonable basis for the Special Committee not to attribute value to the Litten action in evaluating an adequate offer price per share in the proposed transaction.

 

On January 19, 2020, the Litten action subcommittee held a telephonic meeting, at which representatives from Tannenbaum attended. A discussion was held concerning the memorandum previously provided to the Litten action subcommittee. The subcommittee members advised Tannenbaum that they reviewed certain documents related to the transactions involved in the complaint. The subcommittee also agreed that no value should be attributed to the claims in the Litten action for the purpose of evaluating the going-private transaction.

 

A meeting of the full Special Committee was also held on January 19, 2020 following the meeting of the Litten action subcommittee, at which a representative of Tannenbaum was present. At the beginning of the meeting, Mr. Monteleone and Mr. Bishop, in their capacity as members of the Litten action subcommittee, stated that, in their view, no value should be attributed to the claims in the Litten action for the purpose of evaluating the going-private transaction. During the meeting, the Special Committee authorized Mr. Slackman to request that Gary Stern increase his offer of $11.00 per share. The Special Committee also authorized Mr. Slackman to preliminarily accept an offer that is no less than $11.00 per share as a basis to negotiate the merger agreement. Following the meeting, Mr. Slackman and Gary Stern discussed increasing Mr. Stern’s offer, and Mr. Stern agreed to offer $11.05 per share, which Mr. Slackman preliminarily accepted on behalf of the Special Committee as a basis to negotiate the merger agreement.

 

On January 20, 2020, counsel for the Stern Group, MWC, sent a draft merger agreement to Tannenbaum.

 

 

From January 20, 2020 until the execution of the merger agreement on April 8, 2020, the Special Committee, Mr. Stern and their respective legal advisors exchanged several drafts of, and engaged in numerous discussions and negotiations concerning the terms of, the merger agreement and the Stern Group voting agreement. Significant areas of discussion and negotiation included the amount of the merger consideration; the scope and terms of the representations, warranties and covenants, including the interim operating restrictions; the circumstances in which the Company would be permitted to terminate the agreement and the termination-related fees payable in connection therewith; and the consequences for certain breaches of the agreement.

 

On January 24, 2020, the Special Committee held a telephonic meeting, at which representatives of Tannenbaum were present. A representative from Tannenbaum discussed the most recent draft of the merger agreement, which he distributed to the Special Committee on January 23, 2020. The representative from Tannenbaum discussed the remaining open issues in the merger agreement and answered questions posed by the Special Committee members. Following the meeting, Tannenbaum distributed a revised draft of the merger agreement to MWC.

 

On January 30, 2020, representatives of Tannenbaum and Mr. Monteleone, in his capacity as a member of the Company's Audit Committee and the Special Committee, had a telephonic conference call. The membership of the Company's Audit Committee and the Special Committee consists of the same individuals, i.e., Messrs. Slackman, Monteleone and Bishop. These members, in their capacities as members of the Audit Committee and the Special Committee, requested the Company's management to prepare a new forecast and include in the forecast a business plan to address the previously requested growth initiatives, as the prior forecasts did not plan for any meaningful growth, which both the Special Committee and Audit Committee regarded as a concern for the future outlook of the Company, and to reflect the proper alignment of forecasted expenses with forecasted revenue in light of the projected decline in revenues and net income.

 

From February 3, 2020 through February 12, 2020, members of the Special Committee and representatives of Tannenbaum held numerous conversations with members of the Company’s management team to discuss the development of a new seven-year forecast for the Company and a new business plan. The new forecast would address the existing concerns of the Special Committee about expenses and future growth, and would include the available financial results of the first fiscal quarter of 2020.

 

On February 7, 2020, MWC sent a revised draft of the merger agreement to Tannenbaum.

 

On February 17, 2020, in light of the discussions between the members of the Special Committee and the Company’s management team between February 3, 2020 and February 12, 2020, Steven Leidenfrost distributed to the Special Committee and representatives of Tannenbaum, a third, and final, revised seven-year forecast (the “Final Management Forecast”) and supporting memorandum detailing assumptions used and processes utilized in developing such forecast. The Final Management Forecast included revenue associated with future growth plans, including plans for a new business segment to be involved in small business lending, and an alignment of forecasted operating expenses with forecasted revenue. As a result, the Final Management Forecast addressed the concerns raised by the Special Committee, as well as the Audit Committee. 

 

The Final Management Forecast was prepared by numerous members of the Company’s management team. David Cavill, Director of Business Intelligence prepared the Final Management Forecast for the Company’s Consumer Receivables business. Monika Dasgupta, Corporate Controller, prepared the Company’s business segments portion of the Final Management Forecast, including GAR, Five Star Veterans Disability LLC (“Five Star”) and Personal Injury, and corporate portion of the Final Management Forecast, which includes certain non-allocated administrative costs, interest income and various other non-operating income and expenses and assets including cash and cash equivalents, investments in equity securities and available-for-sale debt securities, settlement receivable, property and equipment, goodwill, deferred taxes and other assets. Ricky Stern, as Senior Vice President and President of GAR reviewed and approved the GAR and Five Star forecast. Lou Piccolo, a member of the Company’s board of directors who is not a member of the Special Committee provided consulting services to the Company in preparing the Small Business Lending business plan. Key assumptions and forecast information with respect to such Small Business Lending plan were reviewed with Gary Stern, in his capacity as the President and Chief Executive Officer of the Company. Gary Stern, in his role as President and Chief Executive Officer, provided strategic directions, and assumptions regarding the Personal Injury business, Consumer Receivables business and overhead expenses. Gary Stern also reviewed and approved the final forecasted results used in the Final Management Forecast. Steven Leidenfrost, Chief Financial Officer, reviewed the Final Management Forecast for accuracy within the forecasted worksheet, and overall reasonableness. Mr. Leidenfrost also reviewed and approved the assumptions used by David Cavill, Louis Piccolo and Monika Dasgupta.  Ricky Stern reviewed and approved the assumptions used for GAR and Five Star.

 

On February 18, 2020, the Special Committee and a representative from Tannenbaum held a telephonic meeting to discuss the Final Management Forecast and explanatory memorandum from Steven Leidenfrost on behalf of the Company.

 

On February 21, 2020, the Final Management Forecast was approved by the Special Committee for Lincoln’s use and shared with representatives of Lincoln.

 

On February 27, 2020, Seth Berman, general counsel to the Company, sent Tannenbaum a revised draft of the merger agreement, which included comments from the Company’s Accounting Department. Tannenbaum forwarded such draft to MWC.

 

On February 29, 2020, the Special Committee entered into an amendment (the “Engagement Letter Amendment No. 1”) to the engagement letter agreement with Lincoln, dated November 22, 2019 with Lincoln, to increase the fees to be paid to Lincoln as a result of the additional work conducted by Lincoln in connection with the several revised management forecasts that the Special Committee asked Lincoln to review.

 

 

On March 13, 2020, the Special Committee held a telephonic meeting, at which representatives of Tannenbaum and Lincoln were present. At the meeting, representatives of Lincoln reviewed with the Special Committee its updated preliminary financial analysis of the Company using the Final Management Forecast, including an updated preliminary financial analysis of the items Lincoln reviewed with the Special Committee in Lincoln’s previous presentation on January 16, 2020. Representatives of Lincoln also discussed with the Special Committee its preliminary financial analysis of the proposed small business lending segment, identified by Company management in the Final Management Forecast. Lincoln’s preliminary financial analysis, which was based on market data through March 12, 2020, also reflected the actual results of the Company, including its cash position, through December 31, 2019, and the value of the Company’s marketable securities as of March 12, 2020, which had increased significantly. The Special Committee then discussed with representatives of Lincoln the current offer price of $11.05 per share, as compared to the preliminary financial analysis in Lincoln’s presentation, which included an indicated equity value range for the Company of $11.28 to $11.68 per share. After discussion, the Special Committee determined that the current offer price of $11.05 per share was insufficient based on the improvement in the Company’s balance sheet. The Special Committee authorized Mr. Slackman and Mr. Monteleone to contact Gary Stern and request that his offer be increased.

 

Following the Special Committee meeting on March 13, 2020, Mr. Slackman, Mr. Monteleone and a representative of Lincoln had a telephonic meeting with Gary Stern to discuss the Special Committee’s determination that the $11.05 offer price was insufficient and to present the case to Mr. Stern for increasing his offer for the Company. Mr. Stern proposed $11.25 per share, and Messrs. Slackman and Monteleone told Mr. Stern that the Special Committee would not consider such price. Messrs. Slackman and Monteleone asked Mr. Stern to increase his $11.05 offer by $0.59 to $11.64 per share, but Mr. Stern was unwilling to agree to such an increase. Following an extensive discussion, Mr. Stern agreed to increase his offer to $11.47 per share, which reflected an increase of $0.42 per share that was equal to the per share increase in the cash and cash equivalents, investments and available-for-sale securities on the Company’s balance sheet as of December 31, 2019 as compared to September 30, 2019. Messrs. Slackman and Monteleone agreed to present this price to the Special Committee at its next meeting.

 

On March 16, 2020, the Special Committee held a telephonic meeting with representatives of Lincoln and Tannenbaum present. Mr. Slackman reported on the discussion with Gary Stern, in which he offered $11.47 per share. After much discussion, the Special Committee unanimously approved Mr. Stern’s latest offer of $11.47 per share. On March 16, 2020, a representative from Tannenbaum communicated to Mr. Stern’s counsel that the Special Committee supported Mr. Stern’s $11.47 per share offer.

 

On March 19, 2020, Mr. Stern called Mr. Slackman to discuss the impact of COVID-19 on the Company’s collection efforts with respect to several categories of receivables and Mr. Stern’s belief that an $11.47 per share offer price was not justified by the current operating and economic environment. Over the next several days, Mr. Stern’s counsel and lawyers from Tannenbaum had several teleconferences to discuss COVID-19, the merger process and the offer price. In the last of those discussions, Mr. Stern agreed that he would not withdraw his $11.47 offer or try to negotiate a lower price.

 

On March 26, 2020, the Special Committee held a telephonic meeting with representatives of Tannenbaum to discuss the state of the draft merger agreement and open issues therewith.

 

From April 3 through April 7, 2020, counsel for the Stern Group, the Company and the Special Committee continued to negotiate the merger agreement. At this time, certain open issues remained on the draft merger agreement, including the amount of the termination fees. On April 6, 2020, the members of the Special Committee were given a draft of the merger agreement and ancillary documents in substantially final form. On April 7, 2020, the parties came to an agreement on all of the open issues and a revised draft of the merger agreement was distributed to the members of the Special Committee, the Company, the Stern Group and each party’s respective legal and financial advisors.

 

On April 8, 2020, the Special Committee held a meeting at which representatives of Tannenbaum and Lincoln were present. Representatives of Tannenbaum discussed the process and procedures undertaken by the Special Committee and their fiduciary duties. Representatives of Lincoln delivered Lincoln’s opinion as to the fairness of the merger consideration of $11.47 per share in cash to be received by the holders of shares of Company common stock (other than Gary Stern and members of the Stern Group) in the proposed transaction. Following the delivery of Lincoln’s opinion, the Special Committee, after discussions on the merits of the proposed transaction, unanimously approved the resolution to recommend the board of directors approve the proposed transaction and determined that the merger and the other transactions contemplated by the merger agreement are advisable and are fair to, and in the best interests of, the Company and the Company stockholders (other than Gary Stern and members of the Stern Group).

 

 

Following the Special Committee meeting, the board of directors held a telephonic meeting to hear and discuss the Special Committee’s unanimous recommendation as to the proposed transaction. The board of directors thereafter (without the participation of Gary Stern) determined that the merger and the other transactions contemplated by the merger agreement are advisable and are fair to, and in the best interests of, the Company and the Company’s stockholders (other than Gary Stern and members of the Stern Group) and approved the merger agreement and the merger and the other transactions contemplated by the merger agreement. The board of directors also (without the participation of Gary Stern) resolved that the merger agreement be submitted for consideration by the stockholders of the Company at a special meeting of stockholders and recommended (without the participation of Gary Stern) that the stockholders of the Company vote to adopt the merger agreement.

 

Later that same day, the Company and Parent, Merger Sub and the applicable Stern Group members executed the merger agreement and the ancillary documents thereto.

 

On the evening of April 8, 2020, the Company issued a joint press release and filed a Current Report on Form 8-K announcing the merger transaction and the execution of the merger agreement.

 

In light of the execution of the merger agreement, on April 14, 2020, the parties to the Litten action entered into a joint stipulation and submitted a proposed order to stay proceedings in the Litten action until the earlier of: (i) an announcement by the Company of the completion or cancellation of the merger; or (ii) June 30, 2020. The court granted the parties’ stipulation and proposed order the same day.

 

On May 22, 2020, RBF Capital, LLC (“RBF”), a stockholder owning approximately 8.9% of the outstanding shares of the Company, provided the Company with an offer letter to buy the outstanding shares of the Company for $13.00 per share (“RBF Proposal”). This information was also disclosed in a Schedule 13D, filed on May 22, 2020.

 

On May 26, 2020, the Special Committee held a telephonic meeting, at which representatives of Tannenbaum were present. The Special Committee and representatives of Tannenbaum discussed the RBF Proposal. The Special Committee and Tannenbaum discussed the terms of the Agreement and Plan of Merger relating to other acquisition proposals and options for potential next steps in light of the RBF Proposal.  After lengthy discussions, it was determined that the representatives from Tannenbaum would have a discussion with counsel for each of the Stern Group and RBF and that the Special Committee would meet again on May 29, 2020.

 

Following the May 26, 2020 Special Committee meeting, representatives of Tannenbaum had separate discussions with RBF and its counsel, the Company’s counsel, and with the Stern Group’s counsel.

 

On May 28, 2020, the Company’s securities counsel received two letters and a draft complaint from attorneys for certain stockholders in connection with the Company's preliminary proxy statement, filed May 7, 2020, which were subsequently shared with the Special Committee.  The letters and draft complaint contained allegations regarding the adequacy of disclosures in the preliminary proxy statement, particularly with respect to the disclosures relating to financial projections.

 

On May 29, 2020, the Special Committee held a telephonic meeting, at which representatives of Tannenbaum were present. At the meeting, the Special Committee and representatives of Tannenbaum continued to discuss the RBF Proposal. The Special Committee discussed the potential re-engagement and role of Lincoln in connection with the RBF Proposal. Representatives from Tannenbaum then reported on their conversation with RBF and stated that RBF provided information concerning its background and how long it would take to conduct diligence, if the Company was willing to share information with RBF. The representatives of Tannenbaum then reported on their discussions with counsel for the Company, as well as counsel for the Stern Group.

 

The Special Committee also discussed how to ascertain whether the members of the Stern Group would be willing to sell their respective shares to a third party. After further discussion, the Special Committee asked representatives of Tannenbaum, as its counsel, to request counsel for the Stern Group to formally state whether or not the members of the Stern Group were interested in selling shares in response to the RBF Proposal. The Special Committee also requested that the Tannenbaum representatives ask counsel for the Stern Group whether the Stern Group was willing to have a discussion with RBF concerning its proposal. The Special Committee also discussed the potential outcomes of a vote of the Company’s minority stockholders with respect to the Stern Group’s current proposal in light of the RBF Proposal.

 

The Special Committee also discussed the two letters and draft complaint received by the Company, and shared with the Special Committee, from attorneys for certain stockholders concerning the adequacy of disclosures in the preliminary proxy statement. The Special Committee noted that those concerns would be considered in the amended proxy statement.

 

On May 29, representatives from Tannenbaum had a call with the Stern Group’s counsel to discuss the RBF Proposal and their position with respect thereto.

 

 

On June 1, 2020, the Special Committee received a formal letter from Mr. Stern, on behalf of the Stern Group and pursuant to the Special Committee’s request, which reiterated the Stern Group’s position stated in its original offer letter that the Stern Group was not interested in selling its shares in the Company or participating in a merger or other strategic transaction with a third party and would not vote its shares in favor of such a transaction

 

On June 2, 2020, the Special Committee held a telephonic meeting, at which representatives of Tannenbaum were present. During the meeting, the representatives of Tannenbaum reported on their discussions with the Stern Group’s counsel, as well as the June 1, 2020 letter from Mr. Stern. The Special Committee further discussed the Stern Group’s position, as set forth in the letter.

 

The Tannenbaum representatives also reported that the Stern Group’s counsel preferred that the Special Committee communicate with RBF with respect to the RBF Proposal rather than the Stern Group doing so. A representative of Tannenbaum requested that the Stern Group confirm in writing that it would not view the Special Committee’s communications with RBF to constitute a breach of the merger agreement, and counsel for the Stern Group agreed to provide such confirmation and did so in writing on June 2, 2020.  Following a discussion, the Special Committee determined by unanimous vote to authorize Mr. Slackman to conduct such discussions with RBF on behalf of the Special Committee, with Tannenbaum as counsel to the Special Committee, after the written confirmation was received from the Stern Group’s counsel.

 

The Special Committee and representatives of Tannenbaum also discussed various potential scenarios relating to the RBF Proposal, which would depend upon the outcome of the Special Committee’s discussions with representatives of RBF and the Stern Group. Additionally, there were discussions about the Special Committee’s duties and responsibilities in connection with responding to the RBF Proposal.

 

On June 4, 2020, the Special Committee held a telephonic meeting, at which representatives of Tannenbaum were present. At the meeting, the Special Committee discussed a draft non-disclosure agreement, to be executed by RBF and its affiliates and the Company, in connection with preliminary discussions regarding the RBF Proposal. Such draft agreement had been distributed to the Special Committee prior to the meeting. The Special Committee then discussed the potential role of Lincoln in assisting the Special Committee with evaluating the RBF Proposal, if they were to re-engage Lincoln. Among the topics that were discussed were whether or not the Special Committee should request an updated opinion from Lincoln in light of the RBF Proposal, as well as whether further information was needed from the Company.  Following this discussion, the Special Committee directed Mr. Slackman and the representatives from Tannenbaum to have a preliminary conversation with representatives of Lincoln to update them on the new developments concerning RBF. It was also decided that after Mr. Slackman conferred with RBF, the Special Committee should meet with representatives of Lincoln to discuss what further steps the Special Committee and Lincoln should take.

 

On June 4, 2020, the Company entered into a non-disclosure agreement with RBF and its affiliate, to govern any preliminary discussions between the Company and RBF and its affiliates.

 

On June 5, 2020, Mr. Slackman and a representative of Tannenbaum had a telephonic meeting with RBF and Richard Fullerton, President of RBF, and RBF’s counsel. During the meeting, Mr. Fullerton discussed some of the reasons why RBF was interested in acquiring the Company. Mr. Slackman and a representative from Tannenbaum informed the RBF representatives that Gary Stern reiterated to the Special Committee his previously stated position of not being willing to sell his shares in the Company to a third party. Mr. Fullerton inquired if that included the whole Stern Group or just Gary Stern and the representative of Tannenbaum reported that it included the entire Stern Group. Mr. Fullerton expressed his view that RBF raising its $13.00 per share offer would be futile in light of the Stern Group’s position.  Mr. Slackman and the representative of Tannenbaum asked Mr. Fullerton if RBF would be supportive of an increased offer from the Stern Group in light of their position that they did not intend to sell their shares  of the Company’s stock to a third party. Mr. Fullerton responded that there could be a number that RBF would be willing to sell at, but did not indicate what that number was. Mr. Slackman and the Tannenbaum representative then asked if the RBF team would be interested in joining a call hosted by the Special Committee with the Stern Group regarding the RBF Proposal and/or a potential increased offer that the Special Committee would seek from the Stern Group. The RBF team indicated that they would be interested in participating in such a discussion. 

 

 On June 8, 2020, the Special Committee held a telephonic meeting, at which representatives of Tannenbaum were present. Mr. Slackman and a representative of Tannenbaum reported on the call they had on June 5, 2020 with RBF and Richard Fullerton, President of RBF, and RBF’s counsel. Following the discussion of the RBF meeting, the Special Committee members authorized Mr. Slackman to participate in the call with the RBF team and the Stern Group, along with representatives from Tannenbaum.

 

The next item of discussion at this meeting was the re-engagement of Lincoln to advise the Special Committee in evaluating the RBF Proposal and to potentially render an opinion as to the fairness of the RBF Proposal.  The Special Committee determined that it would re-engage Lincoln and planned to hold a meeting at which representatives of Lincoln would be present to discuss with the Special Committee its request for an opinion with respect to the RBF Proposal.  The Special Committee authorized Mr. Slackman to reach out to representatives of Lincoln to express the Special Committee’s interest in re-engaging Lincoln and to ask representatives of Lincoln to propose terms to the Special Committee for Lincoln’s re-engagement.

 

 

The Special Committee also discussed different strategies for negotiating with both RBF and the Stern Group in light of the terms of the merger agreement.

 

On June 10, 2020, Mr. Slackman and a representative of Tannenbaum had a call with Gary Stern, counsel for the Stern Group, Richard Fullerton from RBF and its counsel, which was arranged at the request of the Special Committee. During the call, Mr. Fullerton explained why he did not believe $11.47 was adequate consideration in connection with the merger. Mr. Stern reiterated the Stern Group’s position that, even in light of RBF’s current $13.00 per share offer for the Company, the members of the Stern Group were not interested in selling their respective shares in the Company to a third party under any circumstances. After considerable discussion among the parties, the call ended with no agreement in place and no indication that RBF or the Stern Group were interested in continuing the discussions.

 

Following the meeting with the RBF team and the Stern Group team, a representative of Tannenbaum had a call with the Stern Group’s counsel, at which the representative from Tannenbaum asked if the Stern Group was receptive to increasing its offer above $11.47 per share. The Stern Group’s counsel reported that Mr. Stern might be receptive to offering a higher price closer to $13.00 per share or slightly more. During this call, the representative from Tannenbaum informed Stern Group’s counsel that the Special Committee intended to re-engage Lincoln as its financial advisor to assist it with the evaluation of RBF’s $13.00 per share offer and/or any other subsequent offer made by the Stern Group.

 

Later that same day, following the call with the Stern Group’s counsel, a representative of Tannenbaum and Mr. Slackman had a call with Mr. Fullerton from RBF. During this call, Mr. Fullerton informed Mr. Slackman and the representative of Tannenbaum that RBF disagreed with the $11.47 price as a fair price, and that RBF would support a $13.50 per share offer. Mr. Fullerton also indicated that RBF was open to a price below $13.50.

 

Also on June 10, 2020, following the call with Mr. Fullerton, Mr. Slackman had a call with Mr. Stern. During the call, Mr. Stern questioned why re-engaging Lincoln was required, to which Mr. Slackman advised Mr. Stern to talk to his counsel and have his counsel contact a representative of Tannenbaum. They also discussed the possibility of Mr. Stern raising his offer to $13.00 or more per share.

 

Later that day, the Special Committee received a letter from counsel to the Stern Group. The letter stated that Mr. Stern and the Stern Group believed that there was no reasonable basis for the Special Committee to conclude that the RBF Proposal constituted, or could reasonably be expected to lead to, a Superior Proposal, as that term is defined in the merger agreement. Thus, the Stern Group was ready, willing and able to proceed with the merger agreement on its current terms. Nevertheless, the letter stated that the Stern Group was prepared to increase its offer to $12.00 per share.  The letter further stated that if the Stern Group were to so increase its offer, it did not anticipate that the Special Committee would waste the parties’ time or the Company’s money consulting with a financial advisor given the increased amount of the offer over the $11.47 offer for which the Special Committee had already received a fairness opinion. 

 

On June 11, 2020, the Special Committee held a telephonic meeting, at which representatives of Tannenbaum were present. Mr. Slackman and a representative of Tannenbaum reported on the numerous discussions they had with members of the RBF team and the Stern Group team on June 10, 2020. The Special Committee then discussed the letter it received from the Stern Group’s counsel on June 10, 2020, regarding the $12.00 offer.  Representatives of Tannenbaum advised the Committee that they believed Mr. Stern’s counsel’s position was without merit, and that the Special Committee was not precluded under the merger agreement from considering the RBF Proposal or from seeking further advice from Lincoln.

 

At this meeting, the Special Committee also discussed when to re-engage Lincoln, and what Lincoln’s role would be with respect to advising the Special Committee in evaluating the RBF Proposal, or any new proposal by Mr. Stern.  The Special Committee discussed the proposed terms of Lincoln’s re-engagement, which had been set forth in a draft engagement letter and sent to the Special Committee members prior to the meeting. The Special Committee determined that it would re-engage Lincoln while the Special Committee simultaneously continued to try to negotiate a deal between Mr. Stern and RBF in which Mr. Stern would substantially increase his offer. The Special Committee determined to schedule a meeting at which representatives of Lincoln would be present to discuss with the Special Committee the RBF Proposal and whether the Special Committee would request an opinion with respect to the RBF Proposal. The Special Committee authorized Mr. Slackman to reach out to representatives of Lincoln to invite them to the next Special Committee meeting. 

 

The Special Committee asked a representative of Tannenbaum to talk to MWC, counsel to the Stern Group, to inquire as to whether the Stern Group would still consider making a $13.00 per share offer, since the representative from MWC indicated in the earlier call that he was willing to communicate that request to the Stern Group. Additionally, the Special Committee authorized Mr. Slackman and a representative of Tannenbaum to talk to RBF to determine what price per share it would consider fair and would support from the Stern Group.

 

 

On June 11, 2020, following the Special Committee meeting, representatives of Tannenbaum spoke to counsel for the Stern Group, to discuss a process for the Special Committee to operate as the negotiating agent to bring the Stern Group and RBF to a negotiated transaction at a price acceptable to the Special Committee and RBF.  Later that day, representatives of Tannenbaum spoke to counsel and asked whether the Stern Group would be agreeable to a price substantially in excess of $11.47 but less than the $13.50 per share price that RBF had asked for in an earlier call, if the Special Committee were to negotiate with RBF and get them to support an increased offer from the Stern Group. Counsel said the Stern Group was open to the Special Committee attempting to negotiate an increased price acceptable to the Stern Group and RBF.

             

On June 12, 2020, Mr. Slackman and a representative of Tannenbaum had a call with Richard Fullerton from RBF and his counsel, whereby, after an extensive discussion, Mr. Fullerton advised that he believed $13.10 would be a fair price that RBF would fully support, and he would agree to rescind the RBF Proposal and enter into a voting agreement at that price. Following this discussion, representatives from Tannenbaum had a call with Stern Group counsel, in which they informed Stern Group counsel that RBF would be agreeable to a $13.10 per share offer from the Stern Group. Stern Group counsel informed the representatives from Tannenbaum that they would discuss this price with Mr. Stern.

 

Between June 12 and 14, 2020, Mr. Slackman had a number of discussions with Louis Piccolo, a member of the board of directors. In his first discussion with Mr. Piccolo, in which Mr. Piccolo inquired about the status of the negotiations, Mr. Slackman explained why he thought Mr. Stern should increase his per share offer price.  Following this call, Mr. Piccolo spoke to Mr. Stern and reported to Mr. Slackman that Mr. Stern did not want to increase his offer above $12.00 per share. Mr. Slackman explained to Mr. Piccolo that Mr. Stern probably would not obtain the requisite votes of the minority stockholders to approve an offer price of $12.00, in light of the RBF Proposal of $13.00. Mr. Piccolo later informed Mr. Slackman that he had a further conversation with Mr. Stern in which Mr. Piccolo reiterated the points raised by Mr. Slackman in support of an increased offer by Mr. Stern.  Following these discussions, on June 14, 2020, Mr. Stern informed Mr. Slackman that he was open to increasing the Stern Group’s offer to $13.00 per share or higher.  

 

On the morning of June 15, 2020, a representative from Tannenbaum received an email from the Stern Group’s  counsel stating that Mr. Stern was not inclined to raise his offer to the levels being requested and that, if he were to raise his offer, he felt that $12.00 per share was a fair price, substantially higher than the price he originally offered and at the high end of the indicated equity value range of the Company included in Lincoln’s presentation to the Special Committee on April 8, 2020.  This email was shared with the members of the Special Committee.

 

Later that morning, a representative of Tannenbaum received another email from the Stern Group’s counsel stating that Mr. Stern believed that it might be helpful if the Special Committee could facilitate another all hands call with RBF to see if some resolution could be reached.  Following receipt of this email and the distribution of the email to the members of the Special Committee, Mr. Slackman called a representative from Tannenbaum to discuss the possibility of Mr. Slackman calling Mr. Stern to report their discussions with RBF and the $13.10 proposed offer price. The representative of Tannenbaum agreed that Mr. Slackman should call Mr. Stern to discuss and negotiate an increased offer price from Mr. Stern of $13.10 per share which the Special Committee believed was attractive and which Mr. Fullerton indicated was the minimum amount RBF would accept.

 

Immediately following this call, Mr. Slackman called Mr. Stern and described his call with RBF from Friday, June 12, 2020, and the $13.10 price point recommended by RBF. Mr. Slackman urged Mr. Stern to agree to the price of $13.10 per share and not continue to negotiate for a lower price. Mr. Stern acquiesced and stated he would have his lawyer contact representatives from Tannenbaum. Shortly thereafter, a representative of Stern Group’s counsel called a representative from Tannenbaum and informed him that the Stern Group was willing to increase its offer to $13.10 per share. 

 

Later in the day on June 15, 2020, the Special Committee held a telephonic meeting, at which representatives of Tannenbaum and Lincoln were present. Prior to representatives of Lincoln joining the meeting, Mr. Slackman and a representative from Tannenbaum reported to the Special Committee the foregoing discussions, leading up to the $13.10 offer made by the Stern Group. In the discussion that followed, the members of the Special Committee stated that the price of $13.10 per share was a very favorable price for the stockholders in light of the previous offer of $11.47 per share and the financial analyses that Lincoln had performed with respect to that offer. In the course of a discussion amongst the members of the Special Committee and the representatives of Tannenbaum, regarding the next steps, it was suggested that RBF should be asked to enter into a voting agreement in which it would agree to vote its shares in favor of the going private deal from the Stern Group at $13.10. 

 

After representatives of Lincoln joined the meeting, representatives from Lincoln and the Special Committee discussed the status of the Company’s financials for the quarter ended March 31, 2020.  The Special Committee then inquired about Lincoln delivering an updated opinion with respect to the fairness of the $13.10 per share offer from the Stern Group.  Representatives of Lincoln described the process for providing an updated opinion and also explained what information Lincoln would need from the Company in order to render an opinion. During the course of this meeting, members of the Special Committee and representatives of Lincoln discussed the assumptions set forth in the RBF Proposal in support of its assessment of the value of the Company.

 

After the representatives of Lincoln left the meeting, there was a further conversation about RBF’s valuation of the Company. It was decided that Mr. Slackman should request that representatives of Lincoln be ready to discuss RBF’s assumptions and assessment of the value of the Company at its next meeting with the Special Committee.

 

 

There was then further extensive discussion about the assumptions RBF was making in its Schedule 13D filing, and members of the Special Committee expressed the view that these assumptions were not applicable to evaluating the overall value of the Company, particularly to bidders other than RBF. In their discussions, members of the Special Committee noted, among other things, that because of the age of the portfolios being carried by the Company’s business segments, they would not be easy to price or sell. Mr. Monteleone noted, that while RBF was in a unique position to reduce costs by taking on some of the responsibilities of the Company’s current management, other acquirors of the Company would not necessarily be in a similar position to reduce such expenses. Additionally, it was noted by members of the Special Committee that the RBF Proposal was preliminary, and that due diligence outside of publicly available information had not yet been conducted by RBF, and as such, the offer was not necessarily a true or accurate indication of the value of the Company.

 

On June 15, 2020, following the Special Committee meeting, the Special Committee entered into a second amendment (the “Engagement Letter Amendment No. 2”) to the engagement letter agreement with Lincoln, dated November 22, 2019, and as amended on February 29, 2020, to increase the fees to be paid to Lincoln as a result of the additional work conducted by Lincoln related to the revised merger consideration of $13.10 per share offered by Mr. Stern and the Special Committee’s evaluation of such offer.  On June 17, 2020, the Company’s Chief Financial Officer informed representatives of Lincoln that following his review, the Final Management Forecast had been updated to include the Company’s actual results of the quarter ended March 31, 2020 and that there were no material changes to such Final Management Forecast.  The Company’s Chief Financial Officer provided a certificate to representatives of Lincoln on June 19, 2020 as to the assumptions used in the Final Management Forecast.

 

On June 19, 2020, the Special Committee held a telephonic meeting, at which representatives of Tannenbaum and Lincoln were present. Prior to representatives of Lincoln joining the meeting, representatives from Tannenbaum discussed the process going forward in light of the $13.10 per share offer made by Mr. Stern following the Special Committee’s negotiations with RBF. Additionally, prior to representatives of Lincoln joining the meeting, the Special Committee discussed the updated financial analysis prepared by Lincoln, which served as an update to the financial analysis presented to the Special Committee on April 8, 2020. The Special Committee noted that the updated financial analysis reflected that the range of values per share were $11.31 (low), $12.07 (mid), $12.91 (high), which were below the $13.10 price per share that the Stern Group was willing to offer. The Special Committee also discussed, among other things, the portion of the updated financial analysis which contained a summary of the key changes from the April 8, 2020 presentation by Lincoln. For further information regarding Lincoln's presentation to the Special Committee dated June 19, 2020, see “Special Factors -- Opinion of the Financial Advisor to the Special Committee of Our Board of Directors” beginning on page 36. 

 

Once representatives of Lincoln joined the meeting, representatives of Lincoln delivered to the Special Committee Lincoln’s opinion to the effect that, as of the date of such opinion and based upon and subject to the various assumptions made, procedures followed, matters considered and qualifications and limitations on the scope of review undertaken by Lincoln as set forth in its written opinion, the merger consideration of $13.10 per share in cash to be received by the holders of shares of Company common stock (other than Gary Stern and members of the Stern Group) in the proposed transaction, was fair, from a financial point of view, to the holders of such shares. Representatives of Lincoln also reviewed with the Special Committee the updated financial analysis.  The Special Committee and representatives of Lincoln discussed the assumptions identified by RBF at the time it made its offer of $13.00 per share, and it was noted that RBF had not conducted diligence outside of publicly available information. Prior to leaving the meeting, the Special Committee members then requested a written copy of Lincoln’s opinion.

 

After representatives of Lincoln left the meeting, the Special Committee members continued to discuss the $13.10 offer.  It was noted that the Stern Group’s offer was above the high end of the range of values in the updated financial analysis and appeared to be a favorable price for stockholders.  After a lengthy discussion, the Special Committee, upon motion made and duly seconded, unanimously approved a resolution to recommend that the board of directors approve the proposed transaction at $13.10 per share and determined that the merger and the other transactions contemplated by the amended merger agreement were advisable and fair to, and in the best interests of, the Company and the Company’s stockholders (other than Gary Stern and members of the Stern Group).  Subsequently that day, the full board of directors of the Company met by teleconference, without the participation of Gary Stern, and determined that the merger and the other transactions contemplated by the amended merger agreement were advisable and fair to, and in the best interests of, the Company and the Company’s stockholders (other than Gary Stern and members of the Stern Group). 

 

On June 25, 2020, the Company, Parent and Merger Sub executed Amendment No. 1. Additionally, in connection with the execution of the Amendment No. 1, RBF entered into a Settlement and Voting Agreement with the Company (“RBF voting agreement”), pursuant to which RBF has, among other things, agreed to vote the shares of Common Stock beneficially owned by it, or that may become beneficially owned by it during the term of the agreement, in favor of adopting of the merger agreement, and any other matters necessary for consummation of the merger and the other transactions contemplated by the merger agreement.  RBF and its affiliates beneficially own 8.9% of the outstanding shares of the Company, or approximately 23.3% of the outstanding shares of Common Stock of the Company entitled to vote thereon not owned, directly or indirectly, by the Parent, the Stern Group, any officers and directors of the Company or any other person having an equity interest in, or any right to acquire an equity interest in, Merger Sub or any entity of which Merger Sub is a direct or indirect subsidiary.  Accordingly, RBF’s anticipated vote in favor of the merger represents approximately 46.6% of the vote required by holders of shares of Common Stock of the Company entitled to vote thereon not owned, directly or indirectly, by the Parent, the Stern Group, any officers and directors of the Company or any other person having an equity interest in, or any right to acquire an equity interest in, Merger Sub or any entity of which Merger Sub is a direct or indirect subsidiary.

 

On July 7, 2020, in light of the further developments since April 14, 2020 described herein, the parties to the Litten action submitted a joint stipulation extending the stay in that matter until the earlier of (i) an announcement by the Company of the completion or cancellation of the merger; or (ii) September 30, 2020, and the Court entered an order granting the parties’ joint stipulation on July 8, 2020.

 

Interests of Our Directors and Executive Officers in the Merger

 

Certain executive officers of the Company and members of our board of directors may be deemed to have interests in the merger that are different from or in addition to the interests of our stockholders generally. Our board of directors was aware of these interests and considered them, among other matters, in approving the merger agreement and the merger. Described below are the interests of the current executive officers of our management and members of our board of directors.

 

 

Ricky Stern and his father, through the Parent, would own the Company.

 

The dismissal of the Litten action for certain of the Company’s officers and directors, including Gary Stern, Ricky Stern, Mr. Slackman and Louis A. Piccolo.

 

 

With regard to our directors serving on the Special Committee and the Board (other than Mr. Stern), areas where their interests may differ from those of stockholders in general relate to the impact of the transaction on the directors’ outstanding equity awards and the provision of indemnification and insurance arrangements pursuant to the merger agreement and the Company’s certificate of incorporation, bylaws and indemnification agreements, which reflect the fact that, by their service on the Board, they may be subject to claims arising from such service. Because of their existing compensation arrangements, the differences in interests for our executive officers involve the possible receipt of the following types of payments and benefits that may be triggered by or otherwise relate to the merger:

 

 

cash payments under executive officer severance agreements;

 

the treatment of executive officer equity awards;

 

the provision of indemnification and insurance arrangements pursuant to the merger agreement; and

 

related benefits.

 

the provision of indemnification and insurance arrangements pursuant to the merger agreement; and

 

related benefits.

 

These interests are described in more detail below, and certain of them are quantified in the tables below. In addition, Parent has the right, under the merger agreement, to negotiate and enter into agreements with other executive officers prior to the closing of the merger pursuant to which our executive officers would roll over some or all of their shares of Common Stock or Company options into Parent equity interests, though no agreements, arrangements or understandings with respect to any such potential investment exist between the Parent Parties and any executive officer (other than Gary Stern and Ricky Stern) as of the date of this proxy statement.

 

Payments to the Special Committee

 

The members of the Special Committee evaluated and negotiated the merger agreement and evaluated whether the merger is in the best interests of the Company’s unaffiliated stockholders. Mr. Stern did not participate in the deliberations of the Special Committee regarding the merger agreement and the transactions contemplated by the merger agreement. The members of the Special Committee were aware of these differing interests and considered them, among other matters, in evaluating and negotiating the merger agreement and the merger and in recommending to the stockholders that the merger agreement be adopted. See “Special Factors—Background of the Merger” beginning on page 14 and “Special Factors—Reasons for the Merger and Recommendation of Our Board of Directors” beginning on page 29 for a further discussion of these matters. You should take these interests into account in deciding whether to vote “FOR” the proposal to adopt the merger agreement.

 

In consideration of the time and effort required of the members of the Special Committee in connection with evaluating strategic alternatives available to the Company, the proposed merger (including negotiating the terms and conditions of the merger agreement), and possible negotiations with parties making alternative acquisition proposals, the Board (excluding Gary Stern) determined that each member of the Special Committee received a $15,000, during the duration of their service on the Special Committee plus out of pocket expenses. The Chairman of the Special Committee received $30,000, plus out of pocket expenses. These fees are not dependent on the closing of the merger or on the Special Committee’s or the Board’s approval of, or recommendations with respect to, the merger or any other transaction. As of the date of the filing of this proxy statement, the aggregate amount paid to the Chairman of the Special Committee for his service on the Special Committee was approximately $30,000, and the aggregate amount paid to each of the other Special Committee members for their service on the Special Committee was approximately $15,000.

 

Payments to Directors and Executive Officers

 

Severance and Change-in-Control Benefits

 

None of our Named Executive Officers are currently providing services under an employment agreement, and upon a termination by the Company, they would not receive severance benefits pursuant to any formal plan or program currently in place. Prior to his resignation, Mr. Foster was a party to an employment agreement with us. His employment agreement provided for severance benefits upon an involuntary termination by the Company. However, no severance benefits became payable to Mr. Foster in connection with his voluntary resignation from the Company on September 22, 2019.

 

 

Outstanding Option Awards at Fiscal Year-End

 

The following table provides information on exercisable options held by the Named Executive Officers on June 30, 2020. As of June 30, 2020 none of the Named Executive Officers held unvested stock option or stock awards. More information can be found in the Company’s Annual Report on Form 10-K, for the fiscal year ended September 30, 2019, as amended.

 

   

Option Awards

 

Stock Awards

 

Name

 

Number of

Securities

Underlying

Unexercised

Options

(#)

Exercisable

   

Number of

Securities

Underlying

Unexercised

Options

(#)

Unexercisable

   

Option

Exercise Price

($)

 

Option

Expiration

Date

 

Number of

Shares or

Units of Stock

That

Have Not Vested

(#)

   

Market Value

of Shares or Units of Stock That

Have Not Vested ($)

 

Gary Stern

    60,000       -     $ 7.63  

12/15/20

    -       -  
      100,000       -     $ 7.77  

12/13/21

    -       -  
      50,000       -     $ 8.49  

12/12/23

    -       -  
                                -       -  

Ricky Stern

    10,000       -     $ 8.36  

12/22/21

    -       -  
      20,000       -     $ 9.57  

12/18/22

    -       -  
      20,000       -     $ 8.49  

12/12/23

    -       -  
                                -       -  

Seth Berman

    30,000       -     $ 7.63  

12/15/20

    -       -  
      30,000       -     $ 7.77  

12/13/21

    -       -  
      20,000       -     $ 9.57  

12/18/22

    -       -  
      20,000       -     $ 8.49  

12/12/23

    -       -  

 

The merger agreement provides that, unless otherwise agreed by Parent and a holder of outstanding options, as of the effective time of the merger, each of the outstanding options, whether vested or unvested, will be cancelled and will entitle the holder thereof to receive, as soon as reasonably practicable after the effective time (but in any event no later than the first payroll date after the effective time), an amount in cash equal to the product of (i) the total number of shares subject to the option immediately prior to the effective time times (ii) the excess, if any, of the per share merger consideration over the exercise price per share under such option, less any required withholding taxes.

 

The following table sets forth, as of June 30, 2020, for each of our directors and executive officers holding stock options: (a) the aggregate number of shares of Company common stock subject to vested stock options and the value of such vested stock options, on a pre-tax basis, at the per share merger consideration; (b) the aggregate number of unvested stock options that will vest in connection with the merger, assuming the director or executive officer remains employed by the Company at the effective time of the merger, and the value of those unvested stock options, on a pre-tax basis, at the per share merger consideration; (c) the aggregate number of shares of Company common stock subject to vested and unvested stock options for each individual, assuming the director or executive officer remains employed by the Company at the effective time of the merger; and (d) the aggregate amount of consideration that we expect to pay to all such individuals with respect to their stock options in connection with the merger.

 

   

Number of

Securities

Underlying

Unexercised

Options #

Exercisable

   

Options

Exercise

Price

   

Option

Expiration

   

Options

Exercise

 

   

Merger

Consideration

Price

   

Merger

Consideration

 

 

   

Merger

Compensation

 

 

 

Directors:

 

#

   

 

$

   

Date

   

 

Amount

   

 

$

   

Amount

   

Amount

 

Louis Piccolo

    30,000     $ 7.63    

12/15/2020

    $ 228,900.00     $ 13.10     $ 393,000.00     $ 164,100.00  
      35,000     $ 7.77    

12/13/2021

    $ 271,950.00     $ 13.10     $ 458,500.00     $ 186,550.00  
      37,500     $ 9.57    

12/18/2022

    $ 358,875.00     $ 13.10     $ 491,250.00     $ 132,375.00  

Total

    102,500                   $ 859,725.00             $ 1,342,750.00     $ 483,025.00  
                                                       

David Slackman

    30,000     $ 7.63    

12/15/2020

    $ 228,900.00     $ 13.10     $ 393,000.00     $ 164,100.00  
      5,000     $ 7.77    

12/13/2021

    $ 38,850.00     $ 13.10     $ 65,500.00     $ 26,650.00  
      7,500     $ 9.57    

12/18/2022

    $ 71,775.00     $ 13.10     $ 98,250.00     $ 26,475.00  

Total

    42,500                   $ 339,525.00             $ 556,750.00     $ 217,225.00  

Officers:

                                                     

Seth Berman

    30,000     $ 7.63    

12/15/2020

    $ 228,900.00     $ 13.10     $ 393,000.00     $ 164,100.00  
      30,000     $ 7.77    

12/13/2021

    $ 233,100.00     $ 13.10     $ 393,000.00     $ 159,900.00  
      20,000     $ 9.57    

12/18/2022

    $ 191,400.00     $ 13.10     $ 262,000.00     $ 70,600.00  
      20,000     $ 8.49    

12/12/2023

    $ 169,800.00     $ 13.10     $ 262,000.00     $ 92,200.00  

Total

    100,000                   $ 823,200.00             $ 1,310,000.00     $ 486,800.00  

Combined Total

    245,000                   $ 2,022,450.00             $ 3,209,500.00     $ 1,187,050.00  

 

 

Recommendation of Our Board of Directors

 

After deliberation and consultation with its legal advisors, and acting upon the recommendation of the Special Committee, which retained and was advised by its own financial and legal advisors, our board of directors has determined (without the participation of Gary Stern) that the merger agreement, the merger and the other transactions contemplated by the merger agreement are advisable and are fair to, and in the best interests of, our stockholders (other than Gary Stern and members of the Stern Group). Our board of directors recommends (without the participation of Gary Stern) that our stockholders vote FOR the proposal to adopt the merger agreement and FOR the adjournment proposal.

 

In considering the recommendation of our board of directors with respect to the merger agreement, you should be aware that certain of our directors and executive officers have interests in the merger that are different from, or are in addition to, the interests of our stockholders. Please see the section entitled “Special Factors—Interests of Our Directors and Executive Officers in the Merger” beginning on page 26 of this proxy statement.

 

Reasons for the Merger and Recommendation of Our Board of Directors

 

At a meeting held on June 19, 2020 our board of directors, acting upon the unanimous recommendation of the Special Committee, without the participation of Gary Stern, approved the merger agreement, as amended, the merger and the other transactions contemplated by the merger agreement and determined that the merger agreement, the merger and the other transactions contemplated by the merger agreement are advisable and are fair to, and in the best interests of, our stockholders (other than Gary Stern and members of the Stern Group), approved the execution and delivery by the Company of the merger agreement and the consummation of the merger transactions, resolved that the merger agreement be submitted for consideration by the stockholders at the virtual special meeting and recommended that our stockholders vote FOR adopting the merger agreement.

 

 

In making its recommendation, our board of directors (without the participation of Gary Stern) considered the recommendation of the Special Committee. In addition, our board of directors and the Special Committee consulted with our outside legal and financial advisors and our senior management team at various times, and considered a number of factors, in its analysis of the fairness of the merger to the unaffiliated stockholders, that they believed supported their decision to approve and recommend the merger and the merger agreement, including the following principal factors:

 

 

the merger consideration of $13.10 per share represents a premium of approximately 13.2% to the 30-trading day average stock price as of June 24, 2020, the last trading day before the merger was approved; 

 

 

the merger consideration of $13.10 per share represents a premium of approximately 51.5% to the 30-trading day average stock price as of April 7, 2020, the last trading day before the merger was announced.

 

 

the Company Common Stock traded as low as $6.51 during the 52 weeks prior to the announcement of the execution of the merger agreement Amendment No. 1 on June 25, 2020;

 

 

The fact that if the Company were to stay public, the stock price could experience significant declines and trade at prices substantially below the offer price for the foreseeable future;

 

 

the opinion of Lincoln delivered to the Special Committee on June 19, 2020, to the effect that, as of the date of such opinion and based upon and subject to the various assumptions made, procedures followed, matters considered and qualifications and limitations on the scope of review undertaken by Lincoln as set forth in its written opinion, the merger consideration of $13.10 per share in cash to be received by the holders of shares of Company common stock (other than Gary Stern and members of the Stern Group) in the proposed transaction, was fair, from a financial point of view, to the holders of such shares. A copy of such written opinion is included as Annex C to this proxy statement and described in the section entitled “Special Factors— Opinion of the Financial Advisor to the Special Committee of Our Board of Directors” beginning on page 36;

 

 

the fact that the merger consideration finally agreed to was the result of multiple negotiated increases with Mr. Stern from his initial offer of $10.75 per share;

 

 

the fact that the Special Committee and the board of directors believed that the $13.10 per share price to be paid in respect of each share of Company Common Stock was the highest price that Gary Stern would be willing to pay and represented the best value reasonably available to the Company’s unaffiliated stockholders; 

 

 

the fact that the Special Committee and the board of directors believed that the Company’s unaffiliated stockholders could not, as a practical matter, receive more than the Stern Group’s offer of $13.10 per share in light of the Stern Group’s advising the Special Committee in writing that they were not interested in selling any shares in the Company to a third party or participating in any merger or other strategic transaction involving any third party, and did not intend to vote in their capacity as stockholders in favor of any such transaction;

 

 

the fact that the $13.10 offer was above the high end of the range of indicated equity values provided in the updated financial analysis prepared by Lincoln and presented to the Special Committee on June 19, 2020;

 

 

the probability that it could take a considerable period of time, if ever, before the trading price of the Company common stock would reach and sustain at least the per share merger consideration value of $13.10, as adjusted for present value;

 

 

the Special Committee’s analyses that the merger is more favorable to the Company’s stockholders than the possible alternatives to the merger, including seeking to continue to execute the Company’s existing business plan;

 

 

the Special Committee’s consideration of the current state of the economy, the stock market and financial markets and its assessment of the state of the industry in which the Company operates, the competitive landscape, customer relationships, organic and non-organic growth opportunities, the capital expenditures that would be required to maintain or enhance the Company’s competitive position, the need to meet customer demands and the uncertainty surrounding forecasted economic conditions, both in the near term and the long term as well as generally and within the Company’s industry in particular, as compared to the certainty of all-cash merger consideration;

 

 

the likelihood that the merger would be completed based on, among other things (not in any relative order of importance):

 

 

o

Parent’s agreement to use its reasonable best efforts to take, or cause to be taken, all actions and to do, or cause to be done, all things necessary, proper or advisable under applicable law to consummate the merger and the other transactions contemplated by the merger agreement;

 

 

o

Parent’s offer not being subject to a financing contingency;

 

 

o

receipt of a debt commitment letter, as amended, the terms thereof and the reputation of the financial institution named therein, which increase the likelihood of the debt financing being available (see “The Merger—Financing the Merger” beginning on page 61

 

 

o

the likelihood and anticipated timing of completing the proposed merger in light of the scope of the conditions to completion, including that there were no anticipated significant regulatory approvals that are required to close the merger;

 

 

o

Mr. Stern’s execution of a limited guarantee in the Company’s favor, guaranteeing, subject to the limitations described therein, the payment of certain payment obligations that may be owed by Parent Parties pursuant to the merger agreement, including the payment of any reverse termination fee that may become payable following termination of the merger agreement in specified circumstances, subject to an overall cap of $600,000.

 

 

 

o

the fact that the merger agreement provides that, in the event of a failure of the merger to be consummated under certain circumstances, Parent will pay the Company a $500,000 termination fee, as described under “The Merger Agreement – Termination Fees and Expenses – Parent Termination Fees” beginning on page 88; and

 

 

o

the Company’s ability, under certain circumstances pursuant to the merger agreement, to seek specific performance to prevent breaches of the merger agreement, as described under “The Merger Agreement – Specific Performance” beginning on page 89 and enforce specifically the terms of the merger agreement;

 

 

the ability of the Special Committee, prior to approval by the Company’s stockholders, to withhold, withdraw or modify its recommendation to stockholders concerning the transactions contemplated by the merger agreement in connection with a superior proposal or if any event or circumstance becomes known to the board of directors that is material to the Company and its subsidiaries, taken as a whole, that was not known or reasonably foreseeable (or the impact of which was not known or reasonably foreseeable) to the board of directors or the Special Committee, if the board of directors determines in good faith, after consultation with outside legal counsel and upon recommendation thereof by the Special Committee, that the failure to so withhold, withdraw or modify its recommendation would be reasonably likely to be inconsistent with its fiduciary duties (subject to Parent’s ability to terminate the merger agreement and collect the termination fee), as described under “The Merger Agreement—Restrictions on Solicitations of Other Offers” beginning on page 79;

 

 

the fact that the voting agreement entered into by the members of the Stern Group with Parent will terminate automatically if the merger agreement is terminated in accordance with its terms;

 

 

the fact that the largest unaffiliated stockholder, RBF, has entered into a voting agreement pursuant to which it will vote in favor of the transactions and further, that the voting agreement will terminate automatically if the merger agreement is terminated in accordance with its terms;

 

 

the rights of Company stockholders to demand appraisal of their shares and receive payment of the “fair value” of such shares pursuant to Section 262 of the DGCL if they comply in all respects with Section 262 of the DGCL and the absence of any closing conditions in the merger agreement related to the exercise of appraisal rights by Company stockholders;

 

 

the lack of anticipated growth in the Company’s forecasts and business plan over the next few years;

 

 

the fact that the consideration to be paid in the proposed merger is all cash, which provides certainty of value and liquidity to the unaffiliated stockholders and allows the unaffiliated stockholders not to be exposed to the risks and uncertainties relating to the prospects of the Company (including the prospects described in management’s projections summarized under “Special Factors—Management Estimates” beginning on page 45);

 

 

Tannenbaum advising the Special Committee that there is unlikely to be any merit to the Litten action, and as a result, the Litten action subcommittee determined to attribute no value to the Company in connection with the Litten action;

 

 

the unpredictable nature of several of the Company’s business segments;

 

 

the Company’s largest historical sources of revenue and cash-flow, consumer receivables, being in run-off and the portfolios shrinking each quarter as collections are made;

 

 

the value of the Company’s cash and cash-equivalents and securities held-for sale on its balance sheet;

 

 

the difficulty of continuing to service the Company’s business segments and portfolios while trying to reduce head-count and expenses while maintaining profitability;

 

 

the possibility that it could take a considerable period of time before, and that there could be significant uncertainty as to whether, the trading price of Company Common Stock would reach and sustain a trading price of at least equal to the per share merger consideration of $13.10, as adjusted for present value, following any withdrawal of the Stern Group’s offer;

 

 

the fact that the merger consideration of $13.10 per share for the Common Stock represents a premium of approximately 42% to the average price of our common stock during the 52 weeks prior to June 24, 2020.

 

 

 

the fact that after a long process, following the announcement of Gary Stern’s offer on November 1, 2019 until July 24, 2020, RBF’s $13.00 per share offer was made and no other unaffiliated third party offers were made to purchase the outstanding shares of the Company Common Stock, except for the RBF $13.00 per share offer, which RBF, despite negotiations with the Special Committee, did not raise;  

 

 

the fact that Mr. Stern and the members of the Stern Group are not interested in selling their shares in the Company or participating in a merger or other strategic transaction with a third party and have disclosed in writing that they would not vote their shares in favor of such a transaction; and

 

 

the fact that the merger and the merger agreement are subject to approval by the Company’s stockholders, including the holders of a majority of the outstanding shares of Common Stock entitled to vote thereon not owned, directly or indirectly, by the Parent, the Stern Group, any other officers and directors of the Company or any other person having an equity interest in, or any right to acquire an equity interest in, Merger Sub or any entity of which Merger Sub is a direct or indirect subsidiary.

 

The Special Committee and our board of directors (without the participation of Gary Stern) also weighed the factors described above against the following factors and risks that generally weighed against entering into the merger agreement (not in any relative order of importance):

 

 

the merger would preclude the Company’s stockholders from having the opportunity to participate in the future performance of the Company’s assets and any potential future appreciation of the value of our common stock;

 

 

the merger agreement imposes restrictions on soliciting competing acquisition proposals from third parties;

 

 

the termination fee to be paid to Parent under the circumstances specified in the merger agreement, which, while as a percentage of the equity value of the Company not owned by the Stern Group is within a customary range for similar transactions, may discourage other parties that might otherwise have an interest in a business combination with, or an acquisition of, the Company, or may reduce the price offered by such other parties in a competing bid (see “The Merger Agreement—Termination Fees and Expenses” beginning on page 88);

 

 

the Company’s large balance of cash and cash equivalents and available for sale debt securities;

 

 

the restrictions on the conduct of the Company’s business prior to the completion of the merger, which, subject to specific exceptions, could delay or prevent the Company from undertaking capital expenditures and business opportunities it would otherwise undertake absent the pending completion of the merger, as described under “The Merger Agreement—Conduct of Business Prior to Closing” beginning on page 76;

 

 

the fact that significant costs are involved in connection with entering into and completing the merger and substantial time and effort of management is required to complete the merger, potentially resulting in disruptions to the operation of the Company’s business;

 

 

the fact that the announcement and pendency of the merger, or failure to complete the merger, may cause substantial harm to relationships with the Company’s employees, suppliers and customers;

 

 

the fact that, while the Company expects that the merger will be consummated, there can be no assurance that all conditions to the parties’ obligations to complete the merger agreement will be satisfied, and, as a result, the merger may not be consummated;

 

 

the risk that the debt financing contemplated by the debt commitment letter will not be obtained, resulting in the Parent Parties’ not having sufficient funds to complete the transaction;

 

 

the effects that a failure to consummate the merger could have on the price of the Company’s common stock and on the market’s perceptions of the Company’s prospects;

 

 

the fact that certain key members of senior management might choose not to remain employed with the Company prior to the completion of the merger; and

 

 

the fact that the receipt of cash in exchange for shares of Company common stock pursuant to the merger generally will be a taxable transaction for U.S. federal income tax purposes for the Company’s stockholders that are U.S. holders (other than Gary Stern and members of the Stern Group).

 

 

In the course of reaching the determinations and decisions and making the recommendations described above, that the merger is substantively and procedurally fair to the Company’s unaffiliated stockholders, our board of directors (without the participation of Gary Stern) and the Special Committee also considered the following factors relating to the procedural safeguards that our board of directors and the Special Committee implemented to permit the Special Committee to effectively represent the interests of the Company’s unaffiliated stockholders:

 

 

the fact that the Special Committee, which consisted of three independent and disinterested directors, met, along with the independent legal counsel to the Special Committee and Special Committee’s independent financial advisors, twenty-five times between October 30, 2019, the date the committee was formed, and June 19, 2020;

 

 

the recognition by the Special Committee that it had the authority not to recommend the merger or any other transaction to the board of directors;

 

 

the recognition by the independent directors that they, collectively representing a majority of the board of directors, had the authority not to approve the merger or any other transaction;

 

 

the fact that, other than their receipt of board of directors’ fees and their interests described under “Special Factors - Interests of Our Directors and Executive Officers in the Merger” beginning on page 26, and the interests of Mr. Slackman relating to the dismissal of the Litten action, as described in “Special Factors - Background of the Merger” on page 14, members of the Special Committee do not have interests in the merger different from, or in addition to, those of the Company’s stockholders generally;

 

 

the Special Committee’s negotiations with both Mr. Stern and RBF, which, among other things, resulted in an increase in the offer price from $10.75 per share of Company common stock to $13.10 per share of Company common stock;

 

 

the Special Committee’s complete independence in selecting its own legal and financial advisors;

 

 

although the Special Committee and the Company did not retain any representative to act solely on behalf of the unaffiliated stockholders for purposes of negotiating a transaction or preparing a report, the fact that the Special Committee was advised by Lincoln, as financial advisor, and by Tannenbaum, as legal advisor;

 

 

the Special Committee’s causing of the management of the Company to revise and justify their forecasts on several occasions;

 

 

the extensive time permitted to conduct due diligence, investigate the value of the Litten action, and analyze and negotiate increases in the Stern Group’s various offers and the RBF $13.00 per share offer; and

 

 

the fact that each of the members of the Special Committee (comprised of all independent and disinterested directors) unanimously voted to recommend to the board of directors that it, and thereafter the board of directors (other than Gary Stern) unanimously voted to, approve and declare advisable the merger agreement, the merger and the transactions contemplated by the merger agreement, and declare that it is fair to and in the best interests of the Company and the unaffiliated stockholders of the Company that the Company enter into the merger agreement and consummate the merger on the terms and subject to the conditions set forth in the merger agreement.

 

In considering the recommendation of our board of directors with respect to the proposal to adopt the merger agreement, you should be aware that our directors and executive officers may have interests in the merger that are different from, or in addition to, yours. The Special Committee and our board of directors were aware of and considered these interests, among other matters, in evaluating and negotiating the merger agreement and the merger, and in recommending that the merger agreement be adopted by the stockholders of the Company. See the section entitled “Special FactorsInterests of Our Directors and Executive Officers in the Merger” beginning on page 26 of this proxy statement.

 

In the course of reaching its decision to recommend to the board of directors that it approve and declare advisable the merger agreement, the merger and the transactions contemplated therein, the Special Committee did not seek to determine a pre-merger going concern value for the Common Stock to determine the fairness of the merger consideration to the Company’s unaffiliated stockholders. Further, the Special Committee did not consider net book value, which is an accounting concept, as a primary factor in assessing the fairness of the merger to the Company and its unaffiliated stockholders, because of its belief that net book value is not a material indicator of the value of the Company as a going concern but rather is indicative of historical acquisition costs and therefore not a relevant measure in the determination of the fairness of the merger. Net book value does not take into account the prospects of the Company, contingent liabilities, market conditions, trends in the industries in which the Company operates, the business risks inherent in those industries or the probability that such net book value could be achieved in a liquidation or other similar restructuring. Further, the Special Committee did not believe that net book value on its own accurately reflects the Company’s present market value. The Special Committee believes that the trading price of the Common Stock represents the best available indicator of the Company’s going concern value and that the merger consideration is fair to the Company’s unaffiliated stockholders.

 

 

The Special Committee was not aware of any firm offers made by any unaffiliated person, other than the Stern Group, during the past two years for a merger, sale or other transfer of all or any substantial part of the Company’s assets, or purchase of the Company’s securities that would enable the holder to exercise control of the Company.

 

The foregoing discussion of the information and factors considered by the Special Committee and our board of directors in reaching their conclusions and recommendations in connection with the fairness of the merger to the Company’s unaffiliated stockholders are not intended to be exhaustive, but includes the material factors considered by the Special Committee and the board of directors. In view of the variety of factors considered in connection with its evaluation of the fairness of the merger and the complexity of these matters, the Special Committee and our board of directors did not find it practicable to, and did not attempt to, quantify or otherwise assign relative weights to the specific factors considered in reaching its determination and recommendation. In addition, individual directors may have given different weights to different factors. The Special Committee and our board of directors did not undertake to make any specific determination as to whether any factor, or any particular aspect of any factor, supported or did not support its ultimate determination. The Special Committee based its recommendation to our board of directors on the totality of the information presented and our board of directors considered all of the foregoing factors as a whole and based its recommendation on the totality of the information presented.

 

Based upon the foregoing, the board of directors and Special Committee believes that the merger agreement, the merger and the other transactions contemplated by the merger agreement, are fair to, and in the best interest of, the Company’s unaffiliated stockholders.

 

Purposes and Reasons of the Company for the Merger

 

The Company’s purpose for engaging in the merger is to enable its stockholders to receive $13.10 per share of Company Common Stock, which represents a premium of approximately 13.2% to the 30-trading day average stock price of $11.57 as of June 24, 2020, a premium of approximately 25.1% to the average closing share price of our common stock for the 90 days ended on June 24, 2020, a premium of approximately 42.0% to the average price of our common stock during the 52 weeks prior to June 24, 2020 and a premium of approximately 17.6% to the last trading day before the announcement that the Company, Parent and Merger Sub had entered into Amendment No. 1, of $11.14. The Company believes its long-term objectives can best be pursued as a private company. The Company has determined to undertake the merger at this time based on the conclusions, determinations and reasons of the Special Committee and the board of directors described in detail above under “Special FactorsBackground of the Merger” beginning on page 14 and “Special FactorsRecommendation of Our Board of Directors; Special FactorsReasons for the Merger and Recommendation of our Board of Directors” beginning on page 29.

 

Purposes and Reasons of the Parent Parties and the Stern Group for the Merger

 

Each of the Parent Parties and the Stern Group is making the statements included in this section solely for the purpose of complying with the requirements of Rule 13e-3 and related rules under the Exchange Act. The views of each of the Parent Parties and the Stern Group should not be construed as a recommendation to any Company stockholder as to how that stockholder should vote on the proposal to adopt the merger agreement.

 

If the merger is completed, the Company will become a wholly-owned subsidiary of Parent, and the Company Common Stock will cease to be publicly traded. The purpose of the merger is to effectuate the transactions contemplated by the merger agreement. Each of the Parent Parties and the Stern Group believe that structuring the transaction in such manner is preferable to other alternative transaction structures because (i) it will enable Parent to directly acquire all of the outstanding shares of the Company at the same time and (ii) it will allow the Company to cease to be a publicly registered and reporting company.

 

Each of the Parent Parties and the Stern Group believe that it is in the best interests of the Company to operate as a privately held entity. Given the changing nature of the Company’s business, particularly as it relates to the run-off of the consumer receivable portfolios, the increased regulatory scrutiny, and the high expense and declining benefit of being a public company without having been successful at unlocking stockholder value, the Parent Parties and the Stern Group believe that now is an opportune time to take the Company private.  The Parent Parties and the Stern Group believe that, as a privately held entity, the Company will have greater operational flexibility to pursue alternatives that it would not have as a public company, and management will be able to concentrate on long-term growth, reducing the focus on the quarter-to-quarter performance often emphasized by the public equity market’s valuation of the Common Stock. Each of the Parent Parties and the Stern Group also believe that the merger will provide the Company with flexibility to pursue transactions with a risk profile that may be unacceptable to many public stockholders, and that these transactions can be more effectively executed as a private company. As a result of being privately held, the Company will also enjoy certain additional efficiencies, such as a reduction of the time devoted by its management and certain other employees to compliance with the reporting and other requirements applicable to a public company.

 

 

Parent Parties’ and the Stern Group’s Position as to the Fairness of the Merger

 

Each of the Parent Parties and the Stern Group is making the statements included in this section solely for the purpose of complying with the requirements of Rule 13e-3 and related rules under the Exchange Act. The views of each of the Parent Parties and the Stern Group should not be construed as a recommendation to any Company stockholder as to how that stockholder should vote on the proposal to adopt the merger agreement.

 

The Parent Parties and the Stern Group have interests in the merger that are different from, and in addition to, those of the other security holders of the Company, including the interests that are described under “—Interests of Our Directors and Executive Officers in the Merger.” In light of these different interests, and the fact that Gary Stern is an officer and director of the Company and Ricky Stern is an officer of the Company, the board of directors established a Special Committee consisting solely of independent and disinterested directors who are not affiliated with any of the Stern Group or the Parent Parties, are not employees of the Company or any of its affiliates and have no financial interest in the merger different from, or in addition to, the Company’s stockholders (other than their interests described under “Special FactorsInterests of Our Directors and Executive Officers in the Merger” beginning on page 26) to negotiate with, among others, the Parent Parties, with the assistance of independent legal and financial advisors. None of the Parent Parties nor the Stern Group participated in the deliberations of the Special Committee or the board of directors regarding, or received advice from the Company’s legal advisors or financial advisors as to, the substantive or procedural fairness of the merger to the Company’s unaffiliated stockholders. For these reasons, each of the Parent Parties and the Stern Group does not believe that their interests in the merger influenced the decision of the Special Committee or the board of directors with respect to the merger agreement or the merger.

 

None of the Parent Parties nor Stern Group has performed, or engaged a financial advisor to perform, any valuation or other analysis for the purposes of assessing the fairness of the merger to the Company’s unaffiliated stockholders. Based on the knowledge and analysis of each of the Parent Parties and the Stern Group of available information regarding the Company, as well as discussions with the Company’s senior management regarding the Company and its business and the factors considered by, and the analysis and resulting conclusions of, the Board and the Special Committee discussed under “Special FactorsReasons for the Merger and Recommendation of our Board of Directors” beginning on page 29, each of the Parent Parties and the Stern Group, believes that the merger is substantively and procedurally fair to the Company’s unaffiliated stockholders. In particular, each of the Parent Parties and the Stern Group believes that the proposed merger is substantively and procedurally fair to the Company’s unaffiliated stockholders based on its consideration of the following factors, among others:

 

 

the Special Committee determined, by unanimous vote of all members of the Special Committee, and the board of directors determined, by the vote of all members of the board of directors (other than Mr. Stern, who did not participate in such determination), that the transactions contemplated by the merger agreement, including the merger, are advisable and are fair to, and in the best interests of, the Company’s unaffiliated stockholders;

 

 

the current and historical market prices of the Common Stock, including the market performance of the Common Stock relative to the common stock of other participants in the industries in which the Company operates and general market indices, and the fact that the merger consideration of $13.10 per share for the Common Stock represents a premium of approximately 25.1% to the average closing share price of our common stock of $10.47 for the 90 days ended on June 24, 2020 and a premium of approximately 42.0% to the average price of our common stock of $9.22 during the 52 weeks prior to June 24, 2020;

 

 

the merger consideration of $13.10 per share represents a premium of approximately 51.5% to the 30-trading day average stock price as of April 7, 2020, the last trading day before the merger was announced.

 

 

the $13.10 per share merger consideration and the other terms and conditions of the merger agreement resulted from arm’s-length negotiations among the Parent Parties and their advisors, the Special Committee and its advisors, and RBF and its advisors;

 

 

the merger consideration is all cash, allowing the Company’s unaffiliated stockholders to immediately realize a certain and fair value for all of their shares of Common Stock and, as a result, to no longer be exposed to the various risks and uncertainties related to continued ownership of Common Stock;

 

 

notwithstanding that the opinion of Lincoln was provided solely for the information and assistance of the Special Committee and none of the Parent Parties are entitled to, and did not, rely on such opinions, the fact that the Special Committee received an opinion from Lincoln to the effect that, as of the date of such opinion and based upon and subject to the various assumptions made, procedures followed matters considered and qualifications and limitations on the scope of review undertaken by Lincoln as set forth in its written opinion, the $13.10 per share in cash to be received by the holders shares of Common Stock of the Company (other than Gary Stern and members of the Stern Group) in the proposed transaction, was fair, from a financial point of view, to the holders of such shares;

 

 

 

the fact that the Parent Parties have obtained committed debt financing for the merger from nationally recognized financing source with a limited number of conditions to the consummation of the debt financing and the absence of a financing condition in the merger agreement;

 

 

the merger agreement requires that it be adopted not only by the affirmative vote of the holders of at least a majority of the outstanding shares of the Common Stock, but also the affirmative vote of the holders of at least a majority of the outstanding shares of the Common Stock held by stockholders entitled to vote thereon other than the Parent Parties, the Stern Group and any other officers and directors of the Company or any other person having any equity interest in, or any right to acquire any equity interest in, Merger Sub or any person of which Merger Sub is a direct or indirect subsidiary;

 

 

the Special Committee consists solely of directors who are not officers or employees of the Company or any of its subsidiaries and are not affiliated with the Parent Parties or the Stern Group, and, other than receipt of reasonable and customary fees for attending meetings and their other interests described under “—Interests of Our Directors and Executive Officers in the Merger,” to the knowledge of the Parent Parties, such directors have no financial interest in the merger different from, or in addition to, the Company’s unaffiliated stockholders;

 

 

the Company’s ability, under certain circumstances, to terminate the merger agreement in order to enter into a definitive agreement providing for a superior proposal, subject to paying a termination fee of $400,000 (see “The Merger Agreement—Termination Fees and Expenses; Company Termination Fee” beginning on page 88);

 

 

the Special Committee retained and received advice from Lincoln, as financial advisor, and Tannenbaum, as legal advisor, each of which has extensive experience in transactions similar to the merger; and

 

 

the availability of appraisal rights under Delaware law to holders of Common Stock who do not vote in favor of the adoption of the merger agreement and who comply with all of the required procedures under Delaware law, which allows such holders to seek appraisal of the fair value of their stock as determined by the Court of Chancery of the State of Delaware.

 

The foregoing discussion of the factors considered by each of the Parent Parties and the Stern Group in connection with the fairness of the merger is not intended to be exhaustive but is believed to include material factors considered by them. The Parent Parties and the Stern Group did not find it practicable to, and did not, quantify or otherwise attach relative weights to the foregoing factors in reaching their position as to the fairness of the merger. Rather, each of the Parent Parties and the Stern Group made its fairness determination after considering all of the foregoing factors as a whole. The Parent Parties and the Stern Group believe these factors provide a reasonable basis upon which to form their belief that the merger is fair to the Company’s unaffiliated stockholders. This belief should not, however, be construed as a recommendation to any Company stockholder to vote in favor of the proposal to adopt the merger agreement. None of the Parent Parties nor the Stern Group make any recommendation as to how stockholders of the Company should vote their shares of Common Stock on the proposal to adopt the merger agreement.

 

Opinion of the Financial Advisor to the Special Committee of Our Board of Directors

 

On June 19, 2020, Lincoln rendered its opinion to the Special Committee of the board of directors of the Company to the effect that, as of the date of such opinion and based upon and subject to the various assumptions made, procedures followed, matters considered and qualifications and limitations on the scope of review undertaken by Lincoln as set forth in its written opinion, the merger consideration of $13.10 per share in cash to be received by the holders of shares of common stock of the Company (other than Gary Stern and members of the Stern Group) in the proposed transaction, was fair, from a financial point of view, to the holders of such shares.

 

 

Lincoln’s opinion was directed to the Special Committee (in its capacity as such) and only addressed the fairness, from a financial point of view, to the non-Stern Group holders of the merger consideration to be received by such stockholders in the proposed transaction and did not address any other aspect or implication of the proposed transaction, any related transaction or any other agreement, arrangement or understanding entered into in connection therewith or otherwise. The summary of Lincoln’s opinion in this proxy statement is qualified in its entirety by reference to the full text of its written opinion, which is attached as Annex C to this proxy statement and describes the procedures followed, assumptions made, qualifications and limitations on the review undertaken and other matters considered by Lincoln in connection with the preparation of its opinion. However, neither Lincoln’s opinion nor the summary of its opinion and the related analyses set forth in this proxy statement are intended to be, and do not constitute, advice or a recommendation to the Special Committee, any security holder of the Company or any other person as to how to act or vote with respect to any matter relating to the proposed transaction or otherwise.

 

In arriving at its Opinion, Lincoln, among other things:

 

 

discussed the terms and circumstances surrounding the proposed transaction with the Special Committee and its legal counsel, and certain members of management of the Company;

 

 

met with the Special Committee, and met with certain members of management of the Company at the Company’s offices in Englewood Cliffs, New Jersey, in each case to discuss the business, financial outlook and prospects of the Company;

 

 

reviewed the merger agreement and a draft of Amendment No. 1, dated June 18, 2020;

 

 

reviewed a letter addressed to Lincoln by management of the Company which contained, among other things, representations regarding the accuracy of the information, data and other materials (financial or otherwise) provided to, or discussed with, Lincoln by or on behalf of the Company, dated June 19, 2020;

 

 

reviewed the Company’s annual reports and audited financial statements on Form 10-K filed with the U.S. Securities and Exchange Commission (the “SEC”) for the fiscal years ended September 30, 2015 through September 30, 2019 and the Company’s unaudited interim financial statements on Form 10-Q filed with the SEC for the three and six months ended March 31, 2020;

 

 

reviewed the Company’s unaudited business segment financial statements and pro forma financial information for the fiscal years ended September 30, 2018 through September 30, 2019 and the three and six months ended March 31, 2020, which the Company’s management identified as being the most current financial statements available;

 

 

reviewed the Final Management Forecast for the Company and each of its business segments, provided to Lincoln by management of the Company and approved for Lincoln’s use by the Company and the Special Committee;

 

 

reviewed and discussed with the Special Committee the Final Management Forecast and certain extensions thereof through the fiscal year ending September 30, 2029 with respect to the Company’s consumer receivables segment, and through the fiscal year ending September 30, 2028 with respect to the Company’s corporate overhead (for purposes of this section, the “Extended Management Projections”);

 

 

reviewed the financial terms of the proposed transaction and compared those terms with the financial terms of certain business combinations and other transactions as of the date hereof, that Lincoln deemed relevant;

 

 

reviewed certain financial and other information for the Company, and compared that data and information with certain stock trading, financial and corresponding data and information for companies with publicly traded securities as of the date hereof, none of which is directly comparable to the Company, that Lincoln deemed relevant;

 

 

performed certain valuation and comparative analyses including a discounted cash flow analysis and an analysis of selected public companies that Lincoln deemed relevant; and

 

 

considered such other information, financial studies, analyses and investigations and financial, economic and market criteria that Lincoln deemed relevant.

 

 

In preparing its Opinion, Lincoln relied upon and assumed the accuracy and completeness of all of the financial, accounting, legal, tax and other information Lincoln reviewed, and Lincoln did not assume any responsibility for the independent verification of any of such information. With respect to the Final Management Forecast and other financial information provided to Lincoln by management of the Company, Lincoln assumed that they were reasonably prepared in good faith on a basis reflecting the best currently available estimates and judgments of the management of the Company as to the future financial results of the Company and the other matters covered thereby. With respect to the Extended Management Projections, Lincoln reviewed and discussed such projections and other financial information with the Special Committee, and Lincoln was advised by the Special Committee and assumed, that the Extended Management Projections were a reasonable basis upon which to evaluate the proposed transaction. At the direction of the Special Committee, Lincoln used the Final Management Forecast and the Extended Management Projections in performing its analyses and in arriving at its Opinion. Lincoln assumed no responsibility for the assumptions, estimates and judgments on which the Final Management Forecast, the Extended Management Projections, the interim financial statements and other financial information were based, and Lincoln expressed no opinion with respect to the Final Management Forecasts, the Extended Management Projections, or the interim financial statements and other financial information. In addition, Lincoln was not requested to make, and did not make, an independent evaluation or appraisal of the assets or liabilities (contingent, derivative, off-balance sheet or otherwise) of the Company or Parent, or any of their respective subsidiaries, nor was Lincoln furnished with any such evaluations or appraisals. Lincoln did not undertake an independent analysis of any potential or actual litigation, possible unasserted claims or other contingent liabilities, to which the Company was, is or may be a party or was, is or may be subject, or of any possible unasserted claims or other contingent liabilities to which the Company was, is or may be a party or was, is or may be subject. With regard to the information provided to Lincoln by the Company, Lincoln relied upon the assurances of management of the Company that they were unaware of any facts or circumstances that would make such information materially incomplete or misleading. Lincoln also assumed that there was no material change in the assets, liabilities, business, condition (financial or otherwise), results of operations or prospects of the Company since the date of the most recent financial statements made available to Lincoln. With the Special Committee’s consent, Lincoln also assumed that in the course of obtaining any necessary regulatory and third party consents, approvals and agreements for the proposed transaction, no modification, delay, limitation, restriction or condition would be imposed that would have an adverse effect on the Company or the proposed transaction, and that the proposed transaction would be consummated in accordance with the terms of the amended merger agreement and other documents made available to Lincoln, without waiver, modification or amendment of any term, condition or agreement therein that was material to Lincoln’s analysis.

 

Lincoln was not requested to, and did not, seek alternative candidates for a transaction with the Company. Lincoln relied upon the fact that the proposed transaction would be consummated in a manner that complies in all respects with all applicable federal and state statutes, rules and regulations. Representatives of the Company have advised Lincoln, and Lincoln further assumed, that the final terms of the draft Amendment No. 1 and the proposed transaction would not vary materially from those set forth in the copies or drafts, as applicable, reviewed by Lincoln. Lincoln’s Opinion was and is necessarily based on financial, economic, market and other conditions as they existed on and the information made available to Lincoln as of the date thereof. Although subsequent developments may affect Lincoln’s Opinion, Lincoln does not have any obligation to update, revise or reaffirm its Opinion. Lincoln’s opinion noted that, as the Special Committee was aware, the credit, financial and stock markets, and the industry in which the Company operates, have experienced and may continue to experience volatility and Lincoln expressed no view or opinion as to any potential effects of such volatility on the Company or the proposed transaction.

 

It is understood that Lincoln’s Opinion was for the use and benefit of the Special Committee in connection with the proposed transaction. Neither Lincoln’s Opinion nor any other advice or information provided by Lincoln, whether oral or written, may be disclosed, reproduced, disseminated, summarized, quoted from or referred to, in whole or in part, without Lincoln’s prior written consent, except that the Company may reproduce a copy of Lincoln’s Opinion in full in any document that is required to be filed with the SEC and required to be mailed by the Company to holders of shares of Company common stock relating to the proposed transaction. Lincoln’s Opinion only addressed the fairness from a financial point of view of the merger consideration to be received by the non-Stern Group holders in the proposed transaction and did not address any other terms, aspects or implications of the proposed transaction, or any agreements, arrangements or understandings entered into in connection with the proposed transaction or otherwise. In addition, Lincoln’s Opinion did not address the relative merits of the proposed transaction as compared to other transaction structures, transactions or business strategies that may be available to the Company or the Special Committee, nor did it address or constitute a recommendation regarding the decision of the Special Committee to recommend the proposed transaction, or the decision of the Board to authorize the execution of Amendment No. 1 or to engage in the proposed transaction. Lincoln’s Opinion was authorized for issuance by the Fairness Opinion Committee of Lincoln. Lincoln’s Opinion does not constitute advice or a recommendation to the Special Committee, the Company or any security holder as to how it should act or vote on any matter relating to the proposed transaction or otherwise. Lincoln expressed no opinion as to what the market price or value of the shares of Company common stock would be after the announcement of the proposed transaction. Lincoln also expressed no opinion about the amount or nature of the compensation to the Company’s officers, directors or employees, or class of such persons in connection with the proposed transaction relative to the merger consideration in the proposed transaction or otherwise.

 

 

Lincoln Presentations

 

Lincoln delivered presentations to the Special Committee on December 30, 2019, January 16, 2020, March 13, 2020, April 8, 2020 and June 19, 2020 (together, the “Lincoln Presentations”). The summaries of the Lincoln Presentations in this proxy statement are qualified in their entirety by reference to the full text of the Lincoln Presentations, copies of which have been attached as exhibits to the transaction statement on Schedule 13E-3. For further information regarding the Final Management Forecast and the Extended Management Projections, see the full text of the June 19, 2020 Lincoln Presentation, a copy of which has been attached as an exhibit to the transaction statement on Schedule 13E-3. 

 

Summary of Lincoln’s Financial Analysis

 

Set forth below is a summary of the material financial analyses in the June 19, 2020 Presentation reviewed by Lincoln with the Special Committee on June 19, 2020 in connection with rendering Lincoln’s Opinion. The following summary, however, does not purport to be a complete description of the analyses performed by Lincoln. The order of the analyses described and the results of these analyses do not represent relative importance or weight given to these analyses by Lincoln. Except as otherwise noted, the following quantitative information, to the extent that it is based on market data, is based on market data that existed on or before June 18, 2020 and is not necessarily indicative of then-current market conditions.

 

The following summary of Lincoln’s financial analyses includes information presented in tabular format. Several financial analyses were employed and no one method of analysis should be regarded as critical to the overall conclusion reached. Each analytical technique has inherent strengths and weaknesses, and the nature of the available information may further affect the relevance of particular techniques. Each of the analyses conducted was carried out to provide a particular perspective of the merger consideration. In order to fully understand the analyses, the tables must be read together with the full text of each summary. The tables are not intended to stand alone and alone do not constitute a complete description of Lincoln’s financial analyses. Considering the tables below without considering the full narrative description of Lincoln’s financial analyses, including the methodologies and assumptions underlying such analyses, could create a misleading or incomplete view of such analyses. Lincoln did not form a conclusion as to whether any individual analysis, when considered in isolation, supported or failed to support its opinion as to the fairness of the merger consideration. Lincoln did not place any specific reliance or weight on any individual analysis, but instead, concluded that its analyses, taken as a whole, supported its opinion.

 

For purposes of its analyses, Lincoln reviewed a number of financial metrics including:

 

 

EBIT—means earnings before interest and taxes;

 

 

EBITDA—generally, the amount of the relevant company’s earnings before interest, taxes, depreciation and amortization for a specified time period;

 

 

Enterprise value—generally, the value as of a specified date of the relevant company’s outstanding equity securities (taking into account its options and other outstanding convertible securities) plus the value as of such date of its net debt (the value of its outstanding indebtedness, preferred stock and capital lease obligations less the amount of cash on its balance sheet); and

 

 

Equity Value—generally, the value as of a specified date of the relevant company’s outstanding equity securities (taking into account its options and other outstanding convertible securities).

 

Sum-of-the-parts Analysis

 

Lincoln performed a sum-of-the-parts financial analysis to determine a range of indicated equity values for the Company and a range of indicated values per share of Company common stock. Lincoln calculated these indicated value ranges by performing a discounted cash flow analysis for each of the business segments of the Company based on the Final Management Forecast and the Extended Management Projections, as applicable, approved for Lincoln’s use by the Special Committee. Lincoln also performed a selected public companies / M&A transactions analysis to determine a range of indicated enterprise values for the Personal Injury Claims segment and a selected public companies analysis to determine a range of indicated enterprise values for the Social Security Disability Advocacy/GAR segment.

 

 

Lincoln derived the range of indicated equity values of the Company by calculating (i) the value of the March 31, 2020 balances of Company’s cash and cash equivalents, investments and available for sale securities using market prices as of June 18, 2020, plus (ii) the indicated enterprise value ranges for each of the business segments of the Company (consumer receivables, personal injury claims, GAR/social security disability advocacy and small business lending), minus corporate overhead expenses (with and without the effect of corporate taxes), plus (iii) the value of the Company’s other assets (the present value of the tax benefits of the Company’s net operating losses, the Company’s 49% ownership interest in a joint venture with Serlefin Peru, the Company’s settlements receivable relating to a lawsuit filed by the Company against a third-party servicer, and the Company’s other assets). The resulting low, midpoint and high equity values for the Company were then divided by the number of fully-diluted shares outstanding to determine a range of indicated values per share of Company common stock. This analysis resulted in the following range of indicated equity values per share of Company common stock, compared to the merger consideration of $13.10 per share.

 

Low

Midpoint

High

$11.31

$12.07

$12.91

 

 

Discounted Cash Flow Analysis - Consumer Receivables Segment

 

Lincoln performed a discounted cash flow analysis of the projected unlevered free cash flows of the Consumer Receivables business segment of the Company based on the Final Management Forecast and the Extended Management Projections, as applicable, for the fiscal years ending September 30, 2020 through September 30, 2029. Lincoln defines “free cash flow” as the cash generated by the Consumer Receivables business segment that is available either to reinvest, service debt or to distribute to stockholders. Lincoln calculated the Consumer Receivables business segment’s projected unlevered free cash flows by taking its earnings before interest and taxes (“EBIT”), subtracting taxes, adding back depreciation, and subtracting the change in working capital and capital expenditures. The projected unlevered free cash flows were then discounted to their net present value using an estimate of the Company’s weighted average cost of capital of 14.0% and applying a range of plus-or-minus 2.5% to derive an illustrative range of discount rates of 11.5% to 16.5%. Based on discussions with Company management, the Consumer Receivables business segment, which had not made any new portfolio purchases in several years, was assumed for purposes of this analysis to be liquidated at the end of fiscal year 2029 following its substantially complete run-off. Accordingly, no terminal value calculation was included in Lincoln’s discounted cash flow analysis for the Consumer Receivables business segment.

 

Based on these assumptions, Lincoln’s discounted cash flow analysis indicated an estimated enterprise value range for the Consumer Receivables business segment of approximately $16.3 million to $17.8 million.

 

Discounted Cash Flow Analysis - Personal Injury Claims Segment (Simia Capital, LLC and Sylvave, LLC)

 

Lincoln performed a discounted cash flow analysis of the projected unlevered free cash flows of the Personal Injury Claims business segment which includes legal entities Simia Capital, LLC (“Simia”) and Sylvave, LLC (“Sylvave”) based on the Final Management Forecast for the fiscal years ending September 30, 2020 through September 30, 2024. Lincoln defines “free cash flow” as the cash generated by Simia and Sylvave that is available to reinvest, service debt or to distribute to stockholders. Lincoln calculated Simia and Sylvave’s projected unlevered free cash flows by taking the total amount of principal and interest collections from Simia’s and Sylvave’s portfolio, and subtracting operating expenses and pro forma taxes for the business segment. The projected unlevered free cash flows were then discounted to their net present value using an estimate of the Company’s weighted average cost of capital of 14.0% and applying a range of plus-or-minus 2.5% to derive an illustrative range of discount rates of 11.5% to 16.5%. Based on discussions with Company management, Simia and Sylvave, which have had no new personal injury claims portfolio fundings in several years, were assumed for purposes of this analyses to be fully wound down by the end of fiscal year 2024. Accordingly, no terminal value calculation was included in Lincoln’s discounted cash flow analysis for Simia and Sylvave.

 

Based on these assumptions, Lincoln’s discounted cash flow analysis indicated an estimated enterprise value range for Simia and Sylvave of approximately $2.95 million to $3.15 million.

 

Selected Public Companies Analysis - Personal Injury Claims Segment (Arthur Funding)

 

Lincoln reviewed and compared certain financial information of the Personal Injury Claims business segment legal entity Arthur Funding, LLC (“Arthur Funding”) to corresponding financial multiples, metrics and ratios for publicly traded companies in the specialty finance industry:

 

 

The tables below identify the companies reviewed and summarize certain observed trading multiples of the selected public companies as of June 18, 2020.

 

Company Name

Market

Capitalization

Equity Value as a Multiple of:

  ($ millions)

Book Value

Tangible Book Value

LTM Earnings

Arrow Global Group PLC

199.4 0.76x NMF 5.4x

Axactor SE

130.6 0.39x 0.52x 5.9x

Cembra Money Bank AG

2,951.1 2.62x 3.40x 17.6x

Collection House Limited

103.3 0.86x 1.06x NMF

Credit Acceptance Corporation

7,740.0 3.93x 3.93x 20.0x

Encore Capital Group, Inc.

1,163.5 1.26x NMF 10.6x

KRUK Spolka Akcyjna

521.5 1.11x 1.17x

18.9x

PRA Group, Inc.

1,775.2 1.62x 2.67x

19.4x

Average

1,823.1 1.57x 2.12x

13.9x

Median

842.5 1.18x 1.92x

17.6x

Note: “NMF” means not meaningful figure.

Source: S&P Capital IQ and public filings.

 

None of the selected public companies were identical to Arthur Funding. As a result, a complete valuation analysis cannot be limited to a quantitative review of the selected public companies, but also requires complex considerations and judgments concerning differences in financial and operating characteristics of such companies, as well as other factors that could affect their value relative to that of Arthur Funding. Although none of these selected public companies is directly comparable to Arthur Funding, Lincoln selected these companies for its analysis based on their geographic footprint, relative size, historical and projected financial performance and profitability, to that of Arthur Funding. For purposes of its analysis, Lincoln used certain publicly available historical financial data for the selected public companies. This analysis produced valuation multiples of selected financial metrics which Lincoln utilized to estimate the enterprise value of Arthur Funding.

 

Selected M&A Transactions Analysis - Personal Injury Claims Segment (Arthur Funding)

 

Lincoln reviewed publicly available information related to the precedent acquisition transactions in the specialty finance industry listed in the table below, including each transaction’s equity value as a multiple of book value and last-twelve-month earnings. The selection of these transactions was based, among other things, on the target company’s industry, the relative size of the transaction compared to the proposed transaction, and the availability of public information related to the selected transaction.

 

Date

Target

Acquiror

Equity

Value

Equity Value as a

Multiple of:

      ($ millions)

Book

Value

LTM

Earnings

July 2014

Aktiv Kapital ASA

Portfolio Recovery Associates, Inc. (aka PRA Group, Inc.)

872.6

2.02x

6.1x

June 2013

Asset Acceptance Capital Corp.

Encore Capital Group, Inc.

215.2

1.43x

36.6x

March 2012

Aktiv Kapital ASA

Geveran Trading Co., Ltd.

1,416.3

0.94x

5.4x

Average

   

834.7

1.46x

16.0x

Median

   

872.6

1.43x

6.1x

Source: S&P Capital IQ and public filings.

 

No company or transaction utilized in the precedent transactions analysis was identical or directly comparable to Arthur Funding or the proposed transaction.

 

 

In order to estimate a range of indicated equity values for Arthur Funding, Lincoln applied a selected range of book value multiples of 1.25x to 1.50x to Arthur Funding’s book value of $519,900 as of June 15, 2020. Arthur Funding’s book value represents the Company’s investment in Arthur Funding as of such date. This analysis resulted in an indicated equity value range for Arthur Funding of approximately $0.65 million to $0.78 million. The indicated equity value range for Arthur Funding was equivalent to the indicated enterprise value range for Arthur Funding on account of Arthur Funding having no segment-level leverage.

 

Valuation multiples were selected, in part, by taking into consideration historical and projected financial performance metrics of Arthur Funding relative to such metrics of the selected public companies and selected M&A transactions, and other factors including, but not limited to, geographic footprint, relative size, historical and projected financial performance and profitability, the length of time Arthur Funding has been originating new business, and Arthur Funding’s revenue and earnings composition.

 

Lincoln calculated an indicated enterprise value range for the Personal Injury Claims business segment by adding the indicated value ranges for the Simia, Sylvave and Arthur Funding legal entities that were derived using the discounted cash flows analysis, selected public companies analysis, and selected M&A transactions analysis described above. Based on these analyses, this resulted in a range of indicated enterprise values for the Personal Injury Claims business segment of approximately $3.6 million to $3.9 million.

 

Discounted Cash Flow Analysis - Social Security Disability Advocacy Segment (GAR)

 

Lincoln performed a discounted cash flow analysis of the projected unlevered free cash flows of the Social Security Disability Advocacy business segment of the Company, or GAR, based on the Final Management Forecast for the fiscal years ending September 30, 2020 through September 30, 2026. Lincoln defines “free cash flow” as the cash generated by GAR that is available either to reinvest, service debt or to distribute to stockholders. Lincoln calculated GAR’s projected unlevered free cash flows by taking its earnings before interest and taxes (“EBIT”), subtracting taxes, adding back depreciation, and subtracting the change in working capital and capital expenditures. Lincoln calculated the terminal value of GAR using an assumed perpetuity growth rate of 2.0%, based on discussions with Company management regarding its view of the long-term growth rate of GAR. The projected unlevered free cash flows for the fiscal years ending September 30, 2020 through September 30, 2026 and terminal value of GAR as of September 30, 2026 were then discounted to their net present value using an estimate of the Company’s weighted average cost of capital of 14.0% and applying a range of plus-or-minus 1.5% to derive an illustrative range of discount rates of 12.5% to 15.5%. The net present values of the unlevered free cash flows and the terminal value of GAR were then added together to determine a range of indicated enterprise values for GAR.

 

Based on these assumptions, Lincoln’s discounted cash flow analysis indicated an estimated enterprise value range for GAR of approximately $7.8 million to $10.1 million.

 

Selected Public Companies Analysis - Social Security Disability Advocacy Segment (GAR)

 

Lincoln reviewed and compared certain financial information of GAR to corresponding financial multiples, metrics and ratios for the selected public companies listed above in the Selected Public Companies Analysis - Personal Injury Claims Segment (Arthur Funding).

 

In order to estimate a range of indicated enterprise values for GAR based on the selected public companies analysis, Lincoln applied a selected range of enterprise value to EBITDA multiples of 5.0x to 6.0x to GAR’s projected fiscal year 2021 EBITDA of approximately $1.3 million. This analysis resulted in an indicated enterprise value range for GAR of approximately $6.3 million to $7.6 million.

 

Valuation multiples were selected, in part, by taking into consideration historical and projected financial performance metrics of GAR relative to such metrics of the selected public companies, including, but not limited to, the size of GAR on a revenue and EBITDA basis, historical and projected EBITDA margins compared to the selected public companies, and historical and projected revenue and EBITDA growth compared to the selected public companies.

 

 

None of the selected public companies were identical to GAR. As a result, a complete valuation analysis cannot be limited to a quantitative review of the selected public companies, but also requires complex considerations and judgments concerning differences in financial and operating characteristics of such companies, as well as other factors that could affect their value relative to that of GAR. Although none of these selected public companies is directly comparable to GAR, Lincoln selected these companies for its analysis based on their geographic footprint, relative size, historical and projected financial performance and profitability, to that of GAR. For purposes of its analysis, Lincoln used certain publicly available historical financial data for the selected public companies summarized below. This analysis produced valuation multiples of selected financial metrics which Lincoln utilized to estimate the enterprise value of GAR. These valuation multiples are set forth below. The estimated 2021 enterprise value to EBITDA multiples for the selected public companies in this analysis ranged from a low of 1.8x to a high of 4.2x, with a median of 3.6x.

 

Company Name

Enterprise Value

Enterprise Value as a Multiple of:

  ($ millions)

LTM EBITDA

2020 EBITDA

2021 EBITDA

LTM Revenue

Arrow Global Group PLC

N/A

NMF

NMF

NMF

NMF

Axactor SE

1,254.8

4.3x

7.9x

4.2x

4.27x

Cembra Money Bank AG

N/A

NMF

NMF

NMF

NMF

Collection House Limited

208.7

1.6x

2.0x

1.8x

1.64x

Credit Acceptance Corporation

N/A

NMF

NMF

NMF

NMF

Encore Capital Group, Inc.

4,395.4

3.3x

3.1x

2.8x

3.26x

KRUK Spolka Akcyjna

1,132.8

4.1x

4.6x

3.6x

4.10x

PRA Group, Inc.

4,585.0

4.4x

4.4x

4.0x

4.43x

Average

2,315.3

3.5x

4.4x

3.3x

3.54x

Median

1,254.8

4.1x

4.4x

3.6x

4.10x

Note: “N/A” means not available; “NMF” means not meaningful figure.

Source: S&P Capital IQ and public filings.

 

Lincoln calculated an indicated enterprise value range for GAR of approximately $6.4 million to $8.1 million by calculating the average of the range of enterprise values that were derived from the discounted cash flows analysis and selected public companies analysis of GAR described above.

 

Discounted Cash Flow Analysis - Small Business Lending Segment

 

Lincoln performed a discounted cash flow analysis of the projected unlevered free cash flows of the Small Business Lending business segment of the Company based on the Final Management Forecast for the fiscal years ending September 30, 2021 through September 30, 2026. Lincoln defines “free cash flow” as the cash generated by the Small Business Lending business segment that is available either to reinvest, service debt or to distribute to stockholders. Lincoln calculated the Small Business Lending business segment’s projected unlevered free cash flows by taking its earnings before interest and taxes (“EBIT”), subtracting taxes and subtracting the Company’s net investment in the Small Business Lending segment. Lincoln calculated the terminal value of the Small Business Lending business segment using a terminal book value multiple of 1.50x, based on an analysis of selected public companies in the small business lending industry. The projected unlevered free cash flows for the fiscal years ending September 30, 2021 through September 30, 2026 and terminal value of Small Business Lending as of September 30, 2026 were then discounted to their net present value using a range of discount rates of 17.5% to 22.5% based on an estimate of venture-like rates of return given the uncertainty and risk associated with the early-stage development nature of the Small Business Lending business segment. The net present values of the unlevered free cash flows and the terminal value of the Small Business Lending business segment were then added together to determine a range of indicated enterprise values for the Small Business Lending business segment.

 

 

This analysis indicated an estimated enterprise value range for the Small Business Lending business segment of approximately $20,000 to $2.57 million.

 

Discounted Cash Flow Analysis - Corporate Overhead

 

Lincoln performed a discounted cash flow analysis of the projected unlevered free cash flows related to the Company’s corporate overhead expenses, with and without the effect of corporate taxes, based on the Final Management Forecast and the Extended Management Projections, as applicable, for the fiscal years ending September 30, 2020 through September 30, 2028. Lincoln defines “free cash flow” as the cash generated (or used by) the Company related to its corporate overhead expenses that is available either to reinvest, service debt or to distribute to stockholders. Lincoln calculated the projected unlevered free cash flows related to the Company’s corporate overhead expenses by taking its earnings before interest and taxes (“EBIT”) (which for corporate overhead expenses was a negative number), subtracting taxes, adding back depreciation, and subtracting capital expenditures and the change in working capital. The projected unlevered free cash flows were then discounted to their net present value using an estimate of the Company’s weighted average cost of capital of 14.0% and applying a range of plus-or-minus 2.5% to derive an illustrative range of discount rates of 11.5% to 16.5%. Based on discussions with the Special Committee and with the Special Committee’s approval, Lincoln assumed that the Company would cease operating when each of the Company’s consumer receivables segment and Simia and Sylvave segments have liquidated, and the Company’s other business segments have matured and would be able to be sold to facilitate a wind down of the Company. Accordingly, no terminal value calculation was included in Lincoln’s discounted cash flow analysis for corporate overhead expenses of the Company.

 

Based on these assumptions, Lincoln’s discounted cash flow analysis indicated an estimated enterprise value range for the corporate overhead expenses of the Company (pre-tax) of approximately $(26.2) million to $(29.6) million, and an estimated enterprise value range for the corporate overhead expenses of the Company (post-tax) of approximately $(18.6) million to $(21.0) million, resulting in an overall range (calculated by taking the low end of the pre-tax range and the high end of the post-tax range) of approximately $(21.0) million to approximately $(26.2) million. 

 

Other Presentations by Lincoln

 

December 30, 2019 Presentation

 

The December 30 Presentation referenced, for informational purposes, among other things: (i) an overview of Lincoln’s valuation methodology; (ii) a preliminary analysis of the high end of the equity value of the Company, which resulted in an indicated equity value of $11.76 per share; (iii) a preliminary analysis of the book value of the Company (for reference only), which resulted in an indicated equity value of $13.23 per share; (iv) an illustrative perspective on potential negotiation positions; and (v) a preliminary analysis of the Company’s corporate overhead expenses.

 

January 16, 2020 Presentation

 

The January 16 Presentation referenced, for informational purposes, among other things: (i) preliminary analyses that were substantially similar to those contained in the December 30 Presentation and updated based on then-current market information; (ii) a preliminary financial analysis of the Company on a sum-of-the-parts basis using the Second Revised Management Forecast for each of the Company’s business segments (including an analysis of the Company’s corporate overhead expenses, without the effect of corporate taxes), which resulted in an indicated equity value range of $10.72 to $10.93 per share; and (iii) updated values for the Company’s cash and marketable securities based on market data available as of January 15, 2020.

 

March 13, 2020 Presentation

 

The March 13 Presentation referenced, for informational purposes, among other things: (i) preliminary analyses that were substantially similar to those contained in the January 16 Presentation and updated based on then-current market information; (ii) a per-share value bridge from the January 16 Presentation; (iii) updated values for the Company’s cash and marketable securities based on market data available as of March 12, 2020; and (iv) a preliminary financial analysis of a new potential business segment, small business lending, identified by Company management in the Final Management Forecast. The preliminary financial analysis resulted in an indicated equity value range for the Company of $11.28 to $11.68 per share.

 

April 8, 2020 Presentation

 

The April 8 Presentation referenced, among other things: (i) analyses that were substantially similar to those contained in the June 19 Presentation (except that the estimated enterprise value range for the corporate overhead expenses of the Company was calculated without the effect of corporate taxes) and based on then-current market information and the Final Management Forecast; and (ii) updated values for the Company’s cash and marketable securities based on market data available as of April 6, 2020. The financial analysis resulted in an indicated equity value range for the Company of $11.32 to $11.70 per share.

 

Miscellaneous

 

Lincoln and its affiliates provide a range of investment banking and financial advisory services and, in that regard, may in the future provide investment banking and other financial services to the Company, Gary Stern or members of the Stern Group or their respective affiliates, for which Lincoln and its affiliates would expect to receive customary compensation. During the two year period prior to the date of its opinion and other than in connection with services to the Special Committee related to the proposed transaction, Lincoln and its affiliates have not been engaged to provide investment banking or financial advisory services to the Company, Gary Stern or the Stern Group, and Lincoln has not received any compensation from the Company, Gary Stern or the Stern Group during such period for any such services. Lincoln will receive a fee of $350,000 from the Company for its services related to the proposed transaction, $100,000 of which was paid upon the execution of Lincoln’s engagement letter, $75,000 of which was paid upon the execution of the Engagement Letter Amendment No. 1, $100,000 of which was paid upon Lincoln informing the Special Committee that Lincoln was prepared to render an opinion on April 8, 2020, $37,500 of which was paid upon the execution of the Engagement Letter Amendment No. 2, and $37,500 of which was paid upon Lincoln informing the Special Committee that Lincoln was prepared to render an opinion on June 19, 2020. No portion of Lincoln’s fees are contingent upon the consummation of the proposed transaction. Furthermore, in connection with bankruptcies, restructurings, distressed situations and similar matters, Lincoln and certain of its affiliates may have in the past acted, may currently be acting and may in the future act as financial advisor to debtors, creditors, equity holders, trustees, agents and other interested parties (including, without limitation, formal and informal committees or groups of creditors) that may have included or represented and may include or represent, directly or indirectly, or may be or have been adverse to, the Company, Gary Stern or members of the Stern Group, other participants in the proposed transaction or certain of their respective affiliates or security holders, for which advice and services Lincoln and its affiliates have received and may receive compensation.

 

 

 Management Estimates

 

We do not, as a matter of course, publicly disclose financial projections as to future financial performance, earnings or other results (other than guidance regarding revenue and earnings per share for the current year) and are especially cautious of making financial projections because of unpredictability of the underlying assumptions and estimates. However, in connection with the evaluation of a possible transaction, we provided our board of directors, the Special Committee and Lincoln with certain management estimates, which contained certain non-public financial forecasts that were prepared by our management, which we may refer to as Management Estimates.

 

A summary of the financial projections included in the Final Management Forecast, which we also refer to as the Management Estimates has been included below. This summary is not being included in this document to influence your decision whether to vote for or against the proposal to adopt the merger agreement, but is being included because these Management Estimates, as well as the Initial Management Forecast, First Revised Management Forecast and Second Revised Management Forecast (the “Preliminary Forecasts”), were made available to our board of directors, the Special Committee and Lincoln. The inclusion of this information should not be regarded as an indication that our board of directors or its advisors or any other person considered, or now considers, such Management Estimates and Preliminary Forecasts to be material or to be necessarily predictive of actual future results, and this information should not be relied upon as such. Our management’s internal financial projections, upon which the Management Estimates and the Preliminary Forecasts were based, are subjective in many respects. There can be no assurance that these financial forecasts will be realized or that actual results will not be significantly higher or lower than forecasted.

 

In addition, the Management Estimates and the Preliminary Forecasts were not prepared with a view toward public disclosure or toward complying with generally accepted accounting principles in the United States of America, which we may refer to in this proxy statement as GAAP, the published guidelines of the SEC regarding projections and the use of non-GAAP financial measures or the guidelines established by the American Institute of Certified Public Accountants for preparation and presentation of prospective financial information. Neither our independent registered public accounting firm, nor any other independent accountants, have compiled, examined or performed any procedures with respect to the Management Estimates, nor have they expressed any opinion or any other form of assurance on such information or its achievability.

 

The Final Management Forecast, which was utilized by the Special Committee’s financial advisor in analyzing the offer of the Stern Group, was prepared by numerous members of the Company’s management team. David Cavill, Director of Business Intelligence prepared the Final Management Forecast for the Company’s Consumer Receivables business. Monika Dasgupta, Corporate Controller, prepared the Company’s business segments portion of the Final Management Forecast, including GAR, Five Star and Personal Injury, and corporate portion of the Final Management Forecast, which includes certain non-allocated administrative costs, interest income and various other non-operating income and expenses and assets including cash and cash equivalents, investments in equity securities and available-for-sale debt securities, settlement receivable, property and equipment, goodwill, deferred taxes and other assets. Ricky Stern, as Senior Vice President and President of GAR reviewed and approved the GAR and Five Star forecast. Lou Piccolo, a member of the Company’s board of directors who is not a member of the Special Committee provided consulting services to the Company in preparing the Small Business Lending business plan. Key assumptions and forecast information with respect to such Small Business Lending plan were reviewed with Gary Stern, in his capacity as the President and Chief Executive Officer of the Company. Gary Stern, in his role as President and Chief Executive Officer, provided strategic directions, and assumptions regarding the Personal Injury business, Consumer Receivables business and overhead expenses. Gary Stern also reviewed and approved the final forecasted results used in the Final Management Forecast. Steven Leidenfrost, Chief Financial Officer, reviewed the Final Management Forecast for accuracy within the forecasted worksheet, and overall reasonableness. Mr. Leidenfrost also reviewed and approved the assumptions used by David Cavill, Louis Piccolo and Monika Dasgupta.  Ricky Stern reviewed and approved the assumptions used for GAR and Five Star.

 

The Management Estimates, and the Preliminary Forecasts, were based on a number of variables and assumptions that are inherently uncertain and may be beyond our control. Our management team believes that the assumptions that our management used as a basis for this projected financial information were reasonable at the time our management prepared the Management Estimates and the Preliminary Forecasts, given the information our management had at the time. Important factors that may affect actual results and cause these Management Estimates not to be achieved include, but are not limited to, risks and uncertainties relating to our business (including its ability to achieve strategic goals, objectives and targets over the applicable periods), industry performance, the regulatory environment, general business and economic conditions and other factors described or referenced under “Risk Factors” in our Annual Report on Form 10-K for the year ended September 30, 2019 and Form 10-Q for the six months ended March 31, 2020. In addition, the Management Estimates reflect assumptions that are subject to change and do not reflect revised prospects for our business, changes in general business or economic conditions, or any other transaction or event that has occurred or that may occur and that was not anticipated at the time the financial forecasts were prepared. Accordingly, there can be no assurance that the Management Estimates will be realized or that our future financial results will not materially vary from the Management Estimates.

 

 

Those assumptions included, but were not limited to:

 

Consumer Receivables (Finance Income)

 

 

The Company recognizes revenue on a cost recovery method in accordance with Generally Accepted Accounting Principles (GAAP). Under the cost recovery method no income is recognized until the cost of the portfolio has been fully recovered. Once a consumer receivables portfolio cost has been recovered all consumer receivable cash collections are recognized as revenue (Finance Income) when received.

 

Finance Income reflects actual results through March 31, 2020. 

 

No new consumer receivable portfolios were assumed to be purchased through the 2026 forecast period. As a result, forecasted finance income through 2026 is expected to decline each forecast year as the existing consumer receivables portfolios wind down. Forecasted revenues through 2026 (Finance Income) are an estimate of monthly collections for consumer receivables over the estimated collection period of seven years.

 

Finance Income was computed using the Company’s proprietary forecasting model for domestic consumer receivables and Serlefin’s performance model for international consumer receivables. Certain assumptions used in these models were developed based on historical performance of several consumer receivable categories (credit card, telecom, personal loan, etc.). In addition, the age of the customer account and the number of months from purchase of the portfolio are factored into the model. The proprietary forecasting model is adjusted annually based on actual performance unless there is an impairment of a portfolio, which results in a portfolio adjustment during the year. 

 

Personal Injury

 

The Company’s personal injury claims business segment is comprised of purchased interests in personal injury claimants who are a party in personal injury claims litigation.

 

 

Personal Injury claims revenue reflects actual results through March 31, 2020.

 

The Company historically funded personal injury claims in Simia and Silvave.  These entities are no longer funding any new advances, but continue to collect on outstanding personal injury claim advances. Forecasted revenue for the remainder of fiscal year 2020 (April – September 30, 2020) for Simia and Sylvave is $588,000.

 

Arthur Funding is the vehicle through which the Company will continue funding its personal injury claims business. The Company’s investment in the Arthur Funding personal injury claims portfolio is projected to be:

 

o

$250,000 per quarter for the third and fourth quarters of fiscal 2020.

 

o

$500,000 per quarter for the first and second quarters of fiscal 2021.

 

o

$750,000 per quarter for the third and fourth quarters of fiscal 2021.

 

o

$1,000,000 per quarter starting in fiscal 2022 for an annual total of $4,000,000 per year, through 2026.

 

Management estimates that a personal injury claims advance will be recovered in 24 months from the date of the advance.

 

Open personal injury claims revenue is estimated and accrued based on the expected realization for each individual personal injury claims advance. An outstanding advance is charged interest at a 17.5% interest rate every six months compounded every six months. 

 

Bad debt expense for Arthur Funding is estimated to be 5% of the funded personal injury claim amount.

 

Social Security Disability Advocacy (GAR and Five Star)

 

 

GAR and Five Star revenue reflects actual results through March 31, 2020.

 

GAR revenues for 2020 were forecasted based on annualizing actual revenues from July 2019 through December 2019, which averaged approximately $317,000 per month. Management believes this estimate better reflects the actual performance of GAR. 

 

GAR revenues for 2021 were forecasted based on a monthly average of $371,000 per month.

 

Five Star revenue was expected to be: $150,000 in 2020; $75,000 in 2021 and $0 in 2022 and thereafter.

 

GAR revenue forecasts 2% growth per year starting in 2022, reflecting an approximate 2% growth rate in the overall economy.

 

 

Small Business Lending

 

 

Management’s revenue estimates are based on an assumption that each advance will be recovered at 117% of the original advance amount based on a five - month recovery period.

 

Individual advances are not expected to exceed $50,000.

 

Bad debt expense was determined to be 5% of aggregate advances made in each year of the forecast.

 

In addition to bad debt expense, overhead expenses for this business include salaries for up to three individuals and advertising/marketing costs (including the costs of out-sourcing the financial operations of this business).

 

Other Income

 

 

The forecast for other income (dividends and interest from the Company’s investments in available for sale debt securities (primarily US Treasuries) and equity securities) is based on the estimated dollar amount of U.S. Treasury investments held at September 30 of each forecast year, multiplied by an assumed U.S. Treasury rate of 1.6%.

 

                Income Taxes Expense

 

 

Income tax expense reflects actual results through March 31, 2020

 

 

The Company used a total tax rate of 30.0% (21.0% federal and 9.0% for state income taxes) in determining forecasted income tax expense.

 

Overall Assumptions

 

 

The forecast was prepared with the assumption that the Company remains a public company for the entirety of the forecast period.

 

 

Management Estimates (June 19, 2020)

 

Asta Funding, Inc. & Subsidiaries

Consolidated Income Statement

 

   

FY 2020

   

FY 2021

   

FY 2022

   

FY 2023

   

FY 2024

   

FY 2025

   

FY 2026

 
                                                         

Finance Income

  $ 10,267,000     $ 7,889,000     $ 6,138,000     $ 5,022,000     $ 4,214,000     $ 2,915,000     $ 2,239,000  

Personal injury claims income

    776,000       661,000       1,739,000       2,344,000       2,370,000       2,361,000       2,361,000  

Small Business Lending Fee Income

    -       923,000       2,407,000       4,087,000       5,549,000       5,857,000       6,197,000  

Disability fee income

    3,684,000       4,528,000       4,542,000       4,633,000       4,726,000       4,821,000       4,917,000  
                                                         

Total Revenue

    14,727,000       14,001,000       14,826,000       16,086,000       16,859,000       15,954,000       15,714,000  
                                                         

Other Income

    1,089,000       1,067,000       965,000       901,000       837,000       773,000       693,000  
                                                         
                                                         
    $ 15,816,000     $ 15,068,000     $ 15,791,000     $ 16,987,000     $ 17,696,000     $ 16,727,000     $ 16,407,000  
                                                         
                                                         

Expenses

  $ 13,080,000     $ 12,759,000     $ 13,305,000     $ 13,995,000     $ 13,790,000     $ 13,509,000     $ 13,603,000  
                                                         
                                                         

Income before taxes

    2,736,000       2,309,000       2,486,000       2,992,000       3,906,000       3,218,000       2,804,000  
                                                         

Income tax expense (benefit)

    919,000       693,000       746,000       898,000       1,172,000       965,000       841,000  
                                                         
                                                         

Net income

  $ 1,817,000     $ 1,616,000     $ 1,740,000     $ 2,094,000     $ 2,734,000     $ 2,253,000     $ 1,963,000  

 

 

Asta Funding, Inc.

Balance Sheet

 

   

FY 2020

   

FY 2021

   

FY 2022

   

FY 2023

   

FY 2024

   

FY 2025

   

FY 2026

 
   

9/30/2020

   

9/30/2021

   

9/30/2022

   

9/30/2023

   

9/30/2024

   

9/30/2025

   

9/30/2026

 

ASSETS

                                                       

CASH AND CASH EQUIVALENTS

  $ 1,947,000     $ 1,931,000     $ 2,220,000     $ 1,853,000     $ 1,258,000     $ 1,680,000     $ 1,746,000  
                                                         

INVESTMENTS

    8,111,000       8,234,000       8,234,000       8,234,000       8,234,000       8,234,000       8,234,000  
                                                         

AVAILABLE-FOR-SALE SECURITIES

    65,216,000       64,556,000       58,816,000       55,212,000       52,044,000       46,312,000       40,500,000  
                                                         

CONSUMER RECEIVABLES

    817,000       313,000       57,000       (32,000 )     (32,000 )     (32,000 )     (32,000 )
                                                         

INVESTMENT IN PERSONAL INJURY CLAIMS

    3,543,000       5,368,000       8,315,000       8,492,000       7,693,000       7,702,000       7,713,000  
                                                         

EQUITY METHOD INVESTMENT (SERLEFIN)

    223,000       223,000       223,000       223,000       223,000       223,000       223,000  
                                                         

ACCOUNTS RECEIVABLE - GAR

    212,000       212,000       212,000       212,000       212,000       212,000       212,000  
                                                         

DUE FROM THIRD PARTY COLLECTION AGENCIES AND ATTORNEYS

    464,000       142,000       109,000       88,000       72,000       49,000       38,000  
                                                         

INVESTMENT IN SMALL BUSINESS LENDING

          2,485,000       7,673,000       14,508,000       22,752,000       30,991,000       39,096,000  
                                                         

SETTLEMENTS RECEIVABLE

    319,000