Performance Capital Management 10Q 2008 Q3 Quarterly report

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2008

o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from__________ to __________

Commission file number: 0 – 50235

Performance Capital Management, LLC

(Exact name of registrant as specified in its charter)

	California		03-0375751
	State or other jurisdiction of incorporation or organization		(IRS Employer Identification No.)

7001 Village Drive. Suite 255, Buena Park, California 90621
	(Address of principal executive offices)


	(714) 736-3780
	(Registrant’s telephone number)


(Former name, former address and former fiscal year, if changed since last report.)

Indicate by check mark whether the registrant (1) filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer o		Accelerated filer o
Non-accelerated filer o		Smaller reporting company x

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes o No x

As of November 1, 2008, the registrant had 549,239 LLC Units issued and outstanding.

PERFORMANCE CAPITAL MANAGEMENT, LLC

Index to

Quarterly Report on Form 10-Q

For the Quarter Ended September 30, 2008

PART I – FINANCIAL INFORMATION		Page

Item 1	Consolidated Financial Statements

	Consolidated Balance Sheets as of September 30, 2008 (unaudited) and December 31, 2007	3

	Consolidated Statements of Operations for the three and nine months ended September 30, 2008 and 2007 (unaudited)	4

	Consolidated Statements of Members’ Equity for the nine months ended September 30, 2008 (unaudited) and the year ended December 31, 2007	5

	Consolidated Statements of Cash Flows for the nine months ended September 30, 2008 and 2007 (unaudited)	6

	Condensed Notes to the Consolidated Financial Statements (unaudited)	7

Item 2	Management’s Discussion and Analysis of Financial Condition and Results of Operations	20

Item 4T	Controls and Procedures	31

PART II – OTHER INFORMATION

Item 2	Member Forfeitures of Securities	32

Item 5	Other Information	32

Item 6	Exhibits	32

SIGNATURES		33

EXHIBITS

Index

PART I – FINANCIAL INFORMATION

ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS

PERFORMANCE CAPITAL MANAGEMENT, LLC AND SUBSIDIARY

CONSOLIDATED BALANCE SHEETS

AS OF SEPTEMBER 30, 2008 AND DECEMBER 31, 2007

	September 30,
	2008		December 31,
	(unaudited)		2007
ASSETS

Cash and cash equivalents	$	414,167	$	693,227
Restricted cash		414,466		397,393
Other receivables		9,947		16,655
Purchased loan portfolios, net		2,558,299		3,222,642
Property and equipment, net		387,036		365,727
Deposits		36,575		36,575
Prepaid expenses and other assets		63,313		107,074

Total assets	$	3,883,803	$	4,839,293


LIABILITIES AND MEMBERS' EQUITY

LIABILITIES:
Accounts payable	$	94,110	$	104,517
Accrued liabilities		516,567		601,243
Accrued interest		21,792		37,513
Notes payable		2,891,068		3,630,359
Income taxes payable		21,790		23,580
Total liabilities		3,545,327		4,397,212

COMMITMENTS AND CONTINGENCIES		-		-

MEMBERS' EQUITY		338,476		442,081

Total liabilities and members' equity	$	3,883,803	$	4,839,293

The accompanying notes are an integral part of these consolidated financial statements.

Index

PERFORMANCE CAPITAL MANAGEMENT, LLC AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF OPERATIONS

	For the three months ended			For the three months ended			For the nine months ended			For the nine months ended
	September 30, 2008			September 30, 2007			September 30, 2008			September 30, 2007

	(unaudited)			(unaudited)			(unaudited)			(unaudited)
REVENUES:

Portfolio collections, net	$	1,671,290		$	1,889,294		$	6,043,042		$	5,498,801
Portfolio sales, net		215,765			-			700,767			14,789

TOTAL NET REVENUES		1,887,055			1,889,294			6,743,809			5,513,590

OPERATING COSTS AND EXPENSES:
Salaries and benefits		824,729			994,094			2,791,919			3,155,046
General and administrative		681,385			807,217			2,235,856			2,312,240
Provision for portfolio impairment		408,000			-			1,384,000			-
Depreciation		27,469			24,954			79,507			74,649
Total operating costs and expenses		1,941,583			1,826,265			6, 491,282			5,541,935

INCOME (LOSS) FROM OPERATIONS		(54,528	)		63,029			252,527			(28,345	)

OTHER INCOME (EXPENSE):
Interest expense and other financing costs		(116,259	)		(160,794	)		(334,535	)		(448,275	)
Interest income		483			1,066			1,338			9,922
Other income		548			17,571			557			28,064
Total other income (expense), net		(115,228	)		(142,157	)		(332,640	)		(410,289	)

LOSS BEFORE INCOME TAX PROVISION		(169,756	)		(79,128	)		(80,113	)		(438,634	)

INCOME TAX PROVISION		5,790			-			23,390			13,600

NET LOSS	$	(175,546	)	$	(79,128	)	$	(103,503	)	$	(452,234	)

NET LOSS PER LLC UNIT – BASIC AND DILUTED	$	(0.32	)	$	(0.14	)	$	(0.19	)	$	(0.82	)

The accompanying notes are an integral part of these consolidated financial statements.

Index

PERFORMANCE CAPITAL MANAGEMENT, LLC AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF MEMBERS' EQUITY

													Total
	Member			Unreturned			Abandoned			Accumulated			Members'
	Units			Capital			Capital			Deficit			Equity
Balance, December 31, 2006		550,244		$	22,752,550		$	1,048,712		$	(22,097,635	)	$	1,703,627

Distributions to investors		-			(482,936	)		-			-			(482,936	)

Net loss		-			-			-			(452,234	)		(452,234	)

Balance, September 30, 2007		550,244			22,269,614			1,048,712			(22,549,869	)		768,457

Adjustment to repurchased units		16			1,706			(592	)		(1,114	)		-

Reinstatement of units to investors		199			17,338			(17,338	)		-			-

Member units returned by investors		(548	)		(21,164	)		21,164			-			-

Distributions to investors		-			(10,024	)		-			-			(10,024	)

Net loss		-			-			-			(316,352	)		(316,352	)

Balance, December 31, 2007		549,911			22, 257,470			1,051,946			(22,867,335	)		442,081

Member units returned by investors		(672	)		(28,954	)		28,954			-			-

Distributions to investors		-			(102	)		-			-			(102	)

Net loss		-			-			-			(103,503	)		(103,503	)

Balance, September 30, 2008		549,239		$	22,228,414		$	1,080,900		$	(22, 970,838	)	$	338,476

The accompanying notes are an integral part of these consolidated financial statements.

Index

PERFORMANCE CAPITAL MANAGEMENT, LLC AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF CASH FLOWS

	For the Nine Months			For the Nine Months
	Ended			Ended
	September 30, 2008			September 30, 2007
	(unaudited)			(unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss	$	(103,503	)	$	(452,234	)
Adjustments to reconcile net loss to net cash provided by operating activities:
Depreciation		79,507			74,649
Provision for Portfolio Impairment		1,384,000			-
(Increase) decrease in assets:
Other receivables		6,708			(1,157	)
Prepaid expenses and other assets		43,761			4,324
Advance on loan portfolio purchase		-			(410,811	)
Loan portfolios		(719,657	)		1,313,007
Deposits		-			42,373
Increase (decrease) in liabilities:
Accounts payable		(10,407	)		(45,346	)
Accrued liabilities		(84,676	)		199,949
Accrued interest		(15,721	)		(6,660	)
Income taxes payable		(1,790	)		(15,580	)
Net cash provided by operating activities		578,222			702,514

CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property and equipment		(100,816	)		(33,574	)

CASH FLOWS FROM FINANCING ACTIVITIES:
Net change in restricted cash		(17,073	)		(27,033	)
Borrowings on loans payable		2,575,060			1,396,825
Repayment of loans		(3,314,351	)		(1,914,298	)
Distributions to investors		(102	)		(482,936	)
Net cash used in financing activities		(756,466	)		(1,027,442	)

NET CHANGE IN CASH AND CASH EQUIVALENTS		(279,060	)		(358,502	)

CASH AND CASH EQUIVALENTS, beginning of period		693,227			689,888

CASH AND CASH EQUIVALENTS, end of period	$	414,167		$	331,386

SUPPLEMENTAL DISCLOSURE FOR CASH FLOW INFORMATION:

Income taxes paid	$	25,180		$	29,180
Interest paid	$	314,282		$	386,114

The accompanying notes are an integral part of these consolidated financial statements.

Index

PERFORMANCE CAPITAL MANAGEMENT, LLC AND SUBSIDIARY

CONDENSED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

Note 1 – Organization and Description of Business

Performance Capital Management, LLC (“PCM LLC”) and its wholly-owned subsidiary, Matterhorn Financial Services, LLC (“Matterhorn”) (collectively the “Company”, unless stated otherwise) are engaged in the business of acquiring assets originated by federal and state banks and other sources, for the purpose of generating income and cash flow from managing, collecting, or selling those assets. These assets consist primarily of non-performing credit card loan portfolios and are purchased and sold as portfolios (“portfolios”). Additionally, some of the loan portfolios are assigned to third-party agencies for collection. These condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and footnotes included in the Company's Annual Report on Form 10-KSB for the fiscal year ended December 31, 2007.

Reorganization under Bankruptcy

PCM LLC was formed under a Chapter 11 Bankruptcy Reorganization Plan (“Reorganization Plan”) and operating agreement. The Reorganization Plan called for the consolidation of five California limited partnerships and a California corporation into the new California limited liability company. The five California limited partnerships were formed for the purpose of acquiring investments in or direct ownership of non-performing credit card loan portfolios from financial institutions and other sources. The assets of the five limited partnerships consisted primarily of non-performing credit card loans, as well as cash. In late December 1998, these six entities voluntarily filed bankruptcy petitions, which were later consolidated into one case. PCM LLC was formed on January 14, 2002 and commenced operations upon the confirmation of the Reorganization Plan on February 4, 2002. The entities that were consolidated under the Reorganization Plan are as follows:

•

Performance Capital Management, Inc., a California corporation;

•

Performance Asset Management Fund, Ltd., a California limited partnership;

•

Performance Asset Management Fund II, Ltd., a California limited partnership;

•

Performance Asset Management Fund III, Ltd., a California limited partnership;

•

Performance Asset Management Fund IV, Ltd., a California limited partnership; and

•

Performance Asset Management Fund V, Ltd., a California limited partnership.

Wholly-owned Subsidiary

In July, 2004, the Company completed a credit facility (effective June 10, 2004) with Varde Investment Partners, L.P. (“Varde”), a participant in the debt collection industry, to augment portfolio purchasing capacity using capital provided by Varde. To implement the agreement, PCM LLC created a wholly-owned subsidiary, Matterhorn. The facility provides for up to $25 million of capital (counting each dollar loaned on a cumulative basis) over a five-year term ending in July 2009.

Varde is not under any obligation to make a loan to Matterhorn and Varde must agree on the terms for each specific advance under the loan facility. Under the terms of the facility, Varde will receive both interest and a portion of any residual collections on the portfolios acquired with a loan, after repayment of the purchase price (plus interest) to Varde and the Company and payment of servicing fees. Portfolios purchased using the facility will be owned by PCM LLC’s subsidiary, Matterhorn. Varde has a first priority security interest in Matterhorn's assets securing repayment of its loans.

Note 2 - Basis of Presentation

The unaudited consolidated financial statements have been prepared by the Company, pursuant to the rules and regulations of the Securities and Exchange Commission. The information furnished herein reflects all adjustments (consisting of normal recurring accruals and adjustments) which are, in the opinion of management, necessary to fairly present the operating results for the respective periods. Certain information and footnote disclosures normally present in annual consolidated financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been omitted pursuant to such rules and regulations. These consolidated financial

Index

PERFORMANCE CAPITAL MANAGEMENT, LLC AND SUBSIDIARY

CONDENSED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

Note 2 - Basis of Presentation (continued)

statements should be read in conjunction with the audited financial statements and footnotes for the year ended December 31, 2007, included in the Company's Current Report on Form 10-KSB filed with the Securities and Exchange Commission on March 31, 2008. The results for the nine months ending September 30, 2008 are not necessarily indicative of the results to be expected for the full year ending December 31, 2008.

Reporting Entity

PCM LLC is a successor entity of six companies emerging from bankruptcy (see Note 1). The accompanying balance sheets, statements of operations, members’ equity, and cash flows include balances and transactions since the emergence from bankruptcy. Matterhorn was consolidated in the financial statements as a wholly-owned subsidiary starting in the third quarter of 2004.

Transfer of Assets to Successor Company

Assets were transferred at historical carrying values and liabilities were assumed as required by the bankruptcy confirmation plan.

Note 3 - Summary of Significant Accounting Policies

Use of Estimates

In preparing financial statements in conformity with accounting principles generally accepted in the United States of America, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

Significant estimates have been made by management with respect to the timing and amount of collection of future cash flows from purchased loan portfolios. Among other things, the estimated future cash flows of the portfolios are used to recognize impairment in the purchased loan portfolios. Management reviews the estimate of future collections and it is reasonably possible that these estimates may change based on actual results and other factors. A change could be material to the financial statements.

Recent Accounting Pronouncements

In December 2007, Statement of Financial Accounting Standards No. 141(R), Business Combinations, was issued. SFAS No. 141R replaces SFAS No. 141, Business Combinations. SFAS 141R retains the fundamental requirements in SFAS 141 that the acquisition method of accounting (which SFAS 141 called the purchase method) be used for all business combinations and for an acquirer to be identified for each business combination. SFAS 141R requires an acquirer to recognize the assets acquired, the liabilities assumed, and any noncontrolling interest in the acquiree at the acquisition date, measured at their fair values as of that date, with limited exceptions. This replaces SFAS 141’s cost-allocation process, which required the cost of an acquisition to be allocated to the individual assets acquired and liabilities assumed based on their estimated fair values. SFAS 141R also requires the acquirer in a business combination achieved in stages (sometimes referred to as a step acquisition) to recognize the identifiable assets and liabilities, as well as the noncontrolling interest in the acquiree, at the full amounts of their fair values (or other amounts determined in accordance with SFAS 141R). SFAS 141R applies prospectively to business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008. An entity may not apply it before that date. The Company is currently evaluating the impact that adopting SFAS No. 141R will have on its consolidated financial statements.

Index

PERFORMANCE CAPITAL MANAGEMENT, LLC AND SUBSIDIARY

CONDENSED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

Note 3 - Summary of Significant Accounting Policies (continued)

In March 2008, the FASB issued SFAS No. 161, “Disclosures about Derivative Instruments and Hedging Activities – an amendment of FASB Statement No. 133” (“SFAS 161”), which changes the disclosure requirements for derivative instruments and hedging activities. Entities are required to provide enhanced disclosures about (a) how and why an entity uses derivative instruments, (b) how derivative instruments and related hedged items are accounted for under Statement 133 and its related interpretations, and (c) how derivative instruments and related hedged items affect an entity’s financial position, financial performance and cash flows. SFAS 161 is effective for financial statements issued for fiscal years and interim periods beginning after November 15, 2008. The Company has not determined the effect that the application of SFAS 161 will have on its consolidated financial statements.

In May 2008, the FASB issued SFAS No. 162, “The Hierarchy of Generally Accepted Accounting Principles.” This Statement identifies the sources of accounting principles and the framework for selecting the principles to be used in the preparation of financial statements of nongovernmental entities that are presented in conformity with generally accepted accounting principles (GAAP) in the United States (the GAAP hierarchy). This Statement will not have an impact on the Company’s consolidated financial statements.

In May 2008, the FASB issued SFAS No. 163, “Accounting for Financial Guarantee Insurance Contracts, an interpretation of FASB Statement No. 60.” The scope of this Statement is limited to financial guarantee insurance (and reinsurance) contracts, as described in this Statement, issued by enterprises included within the scope of Statement 60. Accordingly, this Statement does not apply to financial guarantee contracts issued by enterprises excluded from the scope of Statement 60 or to some insurance contracts that seem similar to financial guarantee insurance contracts issued by insurance enterprises (such as mortgage guaranty insurance or credit insurance on trade receivables). This Statement also does not apply to financial guarantee insurance contracts that are derivative instruments included within the scope of FASB Statement No. 133, “Accounting for Derivative Instruments and Hedging Activities.” This Statement will not have an impact on the Company’s consolidated financial statements.

Cash and Cash Equivalents

The Company defines cash equivalents as cash, money market investments, and overnight deposits with original maturities of less than three months. Cash equivalents are valued at cost, which approximates market. The Company maintains cash balances, which exceeded federally insured limits by approximately $17,000 as of September 30, 2008. The amount that exceeds federally insured limits has greatly been reduced from prior quarters because of the recent increase in the federally insured limits. The Company has not experienced any losses in such accounts. Management believes it is not exposed to any significant risks on cash in bank accounts.

Restricted cash consists principally of cash held in a segregated account pursuant to the Company’s credit facility with Varde. The Company and Varde settle the status of these funds on a monthly basis pursuant to the credit facility. The proportion of the restricted cash ultimately disbursed by Matterhorn to Varde and PCM LLC depends upon a variety of factors, including the portfolios from which the cash is collected, the size of servicing fees on the portfolios that generated the cash, and the priority of payments due on the portfolios that generated the cash. Restricted cash is not considered to be a cash equivalent.

Property and Equipment

Property and equipment are carried at cost and depreciation is computed over the estimated useful lives of the assets ranging from 3 to 7 years. The Company uses the straight-line method of depreciation. Property and equipment transferred under the Reorganization Plan were transferred at net book value. Depreciation is computed on the remaining useful life at the time of transfer.

The related cost and accumulated depreciation of assets retired or otherwise disposed of are removed from the accounts and the resultant gain or loss is reflected in earnings. Maintenance and repairs are expensed currently while major betterments are capitalized.

Index

PERFORMANCE CAPITAL MANAGEMENT, LLC AND SUBSIDIARY

CONDENSED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

Note 3 - Summary of Significant Accounting Policies (continued)

Long-term assets of the Company are reviewed annually as to whether their carrying value has become impaired. Management considers assets to be impaired if the carrying value exceeds the future projected cash flows from related operations. Management also re-evaluates the periods of amortization to determine whether subsequent events and circumstances warrant revised estimates of useful lives. As of September 30, 2008, management expects these assets to be fully recoverable.

Leases and Leasehold Improvements

PCM LLC accounts for its leases under the provisions of SFAS No. 13, “Accounting for Leases,” and subsequent amendments, which require that leases be evaluated and classified as operating leases or capital leases for financial reporting purposes. The Company’s office lease is accounted for as an operating lease. The office lease contains certain provisions for incentive payments, future rent increases, and periods in which rent payments are reduced. The total amount of rental payments due over the lease term is being charged to rent expense on a straight-line method over the term of the lease. The difference between the rent expense recorded and the amount paid is credited or charged to “Deferred rent obligation,” which is included in “Accrued liabilities” in the accompanying Consolidated Balance Sheets. In addition, leasehold improvements associated with this operating lease are amortized over the lease term.

Revenue Recognition

The Company accounts for its investment in purchased loan portfolios utilizing either the interest method or the cost recovery method with the provisions of the American Institute of Certified Public Accountant’s (AICPA) Statement of Position 03-03, “Accounting for Loans or Certain Securities Acquired in a Transfer” (“SOP 03-03”). Purchased loan portfolios consisted primarily of non-performing credit card accounts. The interest method is being used by the Company for the majority of portfolios purchased after December 31, 2006. However, if future cash flows cannot be reasonably estimated for a particular portfolio, the Company will use the cost recovery method. Application of the cost recovery method requires that any amounts received be applied first against the recorded amount of the portfolios; when that amount has been reduced to zero, any additional amounts received are recognized as net revenue. Acquired portfolios are initially recorded at their respective costs, and no accretable yield is recorded on the accompanying consolidated balance sheets.

Accretable yield represents the amount of income the Company expects to generate over the remaining life of its existing investment in loan portfolios based on estimated future cash flows. Total accretable yield is the difference between future estimated collections and the current carrying value of a portfolio. All estimated cash flows on portfolios where the cost basis has been fully recovered are classified as zero basis cash flows.

Commencing with portfolios acquired on or after January 1, 2007, in accordance with SOP 03-03, discrete loan portfolio purchases during a quarter, with the exception of those portfolios where the Company will continue to use the cost recovery method, are aggregated into pools based on common risk characteristics. The Company accounts for each static pool as a unit for the economic life of the pool (similar to one loan) for purposes of recognizing revenue from loan portfolios, applying collections to the cost basis of loan portfolios, and providing for loss or impairment.

Once a static pool is established, the portfolios are permanently assigned to the pool. The discount (i.e., the difference between the cost of each static pool and the related aggregate contractual loan balance) is not recorded because the Company expects to collect a relatively small percentage of each static pool’s contractual loan balance.

As a result, loan portfolios are recorded at cost at the time of acquisition. The use of the interest method was reflected for the first time in the Company’s report on Form 10-QSB for the period ended September 30, 2007.

Index

PERFORMANCE CAPITAL MANAGEMENT, LLC AND SUBSIDIARY

CONDENSED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

Note 3 - Summary of Significant Accounting Policies (continued)

The interest method applies an effective interest rate, or internal rate of return (“IRR”), to the cost basis of the pool, which is to remain unchanged throughout the life of the pool unless there is an increase in subsequent expected cash flows and is used for almost all loan portfolios purchased after December 31, 2006. The Company purchases loan portfolios usually in the late stages of the post charged off collection cycle. The Company can therefore, based on common characteristics, aggregate most purchases in a quarter into a common pool. Each static pool retains its own identity. Revenue from purchased loan portfolios is accrued based on a pool’s effective interest rate applied to the pool’s adjusted cost basis. The cost basis of each pool is increased by revenue earned and decreased by gross collections and impairments.

Collections on each static pool are allocated to revenue and principal reduction based on the estimated IRR, which is the rate of return that each static pool requires to amortize the cost or carrying value of the pool to zero over its estimated life. Each pool’s IRR is determined by estimating future cash flows, which are based on historical collection data for pools with similar characteristics. Based on historical cash collections, each pool is given an expected life of 60 months. The actual life of each pool may vary, but will generally amortize in approximately 60 months, with some pools amortizing sooner and some amortizing later. Monthly cash flows greater than the recognized revenue will reduce the carrying value of each static pool and monthly cash flows lower than the recognized revenue will increase the carrying value of the static pool. Each pool is reviewed at least quarterly and compared to historical trends to determine whether each static pool is performing as expected. This comparison is used to determine future estimated cash flows. Subsequent increases in cash flows expected to be collected are generally recognized prospectively through an upward adjustment of the pool’s effective IRR over its remaining life. Subsequent decreases in expected cash flows do not change the effective IRR, but are recognized as an impairment of the cost basis of the pool, and are reflected in the consolidated statements of operations as an impairment expense with a corresponding valuation allowance offsetting the investment in purchased loan portfolios in the consolidated financial statements. If the cash flow estimates increase subsequent to recording an impairment, reversal of the previously recognized impairment is made prior to any increases to the IRR.

The cost recovery method prescribed by SOP 03-03 is used when collections on a particular portfolio cannot be reasonably predicted. Under the cost recovery method, no revenue is recognized until the Company has fully collected the cost of the portfolio.

Prior to January 1, 2007, revenue from all portfolios was accounted for using the cost recovery method of accounting in accordance with SOP 03-03 and prior to January 1, 2005, the Company accounted for its investment in purchased loan portfolios using the cost recovery method under the guidance of Practice Bulletin 6, “Amortization of Discounts on Certain Acquired Loans.” For the Company’s acquired portfolios prior to January 1, 2007, the cost recovery method of accounting was and continues to be used. Under the cost recovery method, cash receipts relating to individual loan portfolios are applied first to recover the cost of the portfolios, prior to recognizing any revenue. Cash receipts in excess of the cost of the purchased loan portfolios are then recognized as net revenue.

The Company provides a valuation allowance for an acquired loan portfolio when the present value of expected future cash flows does not exceed the carrying value of the portfolio. Over the life of the portfolio, the Company’s management will continue to review the carrying values of each loan for impairment. If net present value of expected future cash flows falls below the carrying value of the related portfolio, the valuation allowance is adjusted accordingly.

Loan portfolio sales occur after the initial portfolio analysis is performed and the loan portfolio is acquired. Portions of portfolios sold typically do not meet the Company’s targeted collection characteristics. Loan portfolios sold are valued at the lower of cost or market. The Company continues collection efforts for certain accounts in these portfolios right up until the point of sale. Proceeds from strategic sales of purchased loan portfolios are recorded as revenue when received.

Index

PERFORMANCE CAPITAL MANAGEMENT, LLC AND SUBSIDIARY

CONDENSED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

Note 3 - Summary of Significant Accounting Policies (continued)

Under the cost recovery method, when the Company sells all or a portion of a portfolio, to the extent of remaining cost basis for the portfolio, it reduces the cost basis of the portfolio by a pro rata percentage of the original portfolio cost. This method of accounting also applies to portfolios purchased and then immediately sold prior to being aggregated into a pool. Under the interest method, however, when the Company sells all or a portion of a portfolio in a pool, it reduces the cost basis of the pool by a pro rata percentage of the average portfolio cost in the pool. The Company’s policy does not take into account whether the portion of the portfolio being sold may be more or less valuable than the remaining accounts that comprise the portfolio.

Income Taxes

PCM LLC is treated as a partnership for Federal income tax purposes and does not incur Federal income taxes. Instead, its earnings and losses are included in the personal returns of its unit holders.

PCM LLC is also treated as a partnership for state income tax purposes. The State of California imposes an annual corporation filing fee and an annual limited liability company fee.

The operations of a limited liability company are generally not subject to income taxes at the entity level, because its net income or net loss is distributed directly to and reflected on the tax returns of its unit holders. The net tax basis of PCM LLC’s assets and liabilities is more than the reported amounts on the financial statements by approximately $481,000 for the 2007 tax year, due primarily to the timing differences of purchased loan portfolio loss reserves and impairments.

Members’ Equity

Members’ equity includes voting LLC units held by members and non-voting LLC units held by one economic interest owner. As of September 30, 2008, PCM LLC had 525,566 voting LLC units and 23,673 non-voting LLC units. Retired or abandoned capital represents LLC units that are either voluntarily returned to the Company by a member or LLC units that are redeemed and cancelled following a procedure authorized by PCM LLC’s plan of reorganization to eliminate the interests of PCM LLC members that PCM LLC has not been able to locate. In January 2008 and April 2008, one member voluntarily returned 99 LLC units and one member voluntarily returned 150 LLC units, respectively, to the Company. In July 2008 two members voluntarily returned 423 LLC units to the Company. The forfeited LLC units represented each member’s entire respective investment interest in the Company.

Note 4 – Fair Value of Financial Instruments

The Financial Accounting Standards Board (FASB) recently issued Statement of Financial Accounting Standard No. 157, “Fair Value Measurements” (“FAS 157”). FAS 157 defines fair value, provides guidance for measuring fair value and requires certain disclosures. It does not require any new fair value measurements, but rather applies to all other accounting pronouncements that require or permit fair value measurements. FAS 157 emphasizes that fair value is a market-based measurement, not an entity-specific measurement. Therefore, a fair value measurement would need to be determined based on the assumptions that market participants would use in pricing the asset or liability.

On January 1, 2008, the Company adopted FAS 157 for financial assets and liabilities. The Company will adopt the provisions of FAS 157 for non-financial assets and non-financial liabilities that are recognized and disclosed at fair value on a nonrecurring basis, for its fiscal year beginning January 1, 2009.

The fair values of the Company’s financial instruments reflect the amounts that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (i.e. the “exit price”). The statement utilizes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value into three broad levels. The following is a brief description of those three levels:

Index

PERFORMANCE CAPITAL MANAGEMENT, LLC AND SUBSIDIARY

CONDENSED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

Note 4 – Fair Value of Financial Instruments (continued)

Level 1: Observable inputs such as quoted prices (unadjusted) in active markets for identical assets or liabilities.

Level 2: Inputs other than quoted prices that are observable for the asset or liability, either directly or indirectly. These include quoted prices for similar assets or liabilities in active markets and quoted prices for identical or similar assets or liabilities in markets that are not active.

Level 3: Unobservable inputs that reflect the reporting entity’s own assumptions.

The Company’s financial instruments consist of the following:

Financial Instruments With Carrying Value Equal to Fair Value

Cash and cash equivalents

Other receivables

The fair value of cash and cash equivalents and other receivables approximates their respective carrying value.

Financial Instruments Not Required to Be Carried at Fair Value

Investment in loan portfolios, net

Long term debt

The Financial Accounting Standards Board (FASB) recently issued Statement of Financial Accounting Standard No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities” (“FAS 159”). The Company has elected not to adopt the provisions of FAS 159 for its fiscal year ended December 31, 2008. Therefore, the above instruments are not required to be recorded at their fair value. However, for disclosure purposes in connection with the provisions of Statement of Financial Accounting Standard No. 107, “Disclosures about Fair Value of Financial Instruments,” the Company is required to estimate the fair value of financial instruments when it is practical to do so. Borrowings under the Company’s revolving credit facility are carried at historical cost, adjusted for additional borrowings less principal repayments, which approximates fair value.

Historically, the Company has measured the fair value of its loan portfolios based on the discounted present value of the actual amount of money that the Company believed a loan portfolio would ultimately produce. Under FAS 157, the Company would have to attempt to determine the fair market value of hundreds of loan portfolios on a recurring basis. There is no active market for loan portfolios or observable inputs for the fair value estimation. Therefore, there is potential for a significant variance in the actual fair value of a loan portfolio and the Company’s estimate. Given this inherent uncertainty associated with measuring the fair value of its loan portfolios under FAS 157 and the excessive costs that would be incurred, the Company considers it not practical to measure the fair value of its loan portfolios.

Note 5 - Purchased Loan Portfolios

The Company acquires loan portfolios from federal and state banks and other sources. These loans are acquired at a substantial discount from the actual outstanding balance. The aggregate outstanding contractual loan balances at September 30, 2008 and December 31, 2007 totaled approximately $789 million and $796 million, respectively.

The Company initially records acquired loans at cost. To the extent that the cost of a particular loan portfolio exceeds the net present value of estimated future cash flows expected to be collected, a valuation allowance is recognized in the amount of such impairment.

Index

PERFORMANCE CAPITAL MANAGEMENT, LLC AND SUBSIDIARY

CONDENSED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

Note 5 - Purchased Loan Portfolios (continued)

The carrying amount of purchased loan portfolios included in the accompanying consolidated balance sheets is as follows:

	As of			As of
	Sept. 30, 2008			Dec. 31, 2007
Unrecovered cost balance, beginning of period	$	3,582,983		$	5,059,283
Valuation allowance, beginning of period		(360,341	)		(58,341	)
Net balance, beginning of period		3,222,642			5,000,942
Net portfolio activity		719,657			(1,476,300	)
Subtotal		3,942,299			3,524,642
Provision for portfolio impairment		(1,384,000	)		(302,000	)
Net balance, end of period	$	2,558,299		$	3,222,642

Purchases by Quarter

The following table summarizes portfolio purchases the Company made during each of the first, second and third quarters of 2008 and during the year ended December 31, 2007, that were accounted for using the interest method, and the respective purchase prices (in thousands):

For the three

For the year

months ended

ended

March 31, 2008

June 30, 2008

Sep. 30,2008

Dec. 31, 2007

Fair Value Date of Purchase

0.7 million

0.3 million

2.8 million

Forward Flow Allocation (Accretable Yield )

0.9 million

0.4 million

3.6 million

During the nine months ended September 30, 2008, the Company purchased $3.3 million of loan portfolios, $1.4 million of which was immediately sold after being purchased. The Company used the cost recovery method for a $62,000 portion of the $1.9 million net amount of the loan portfolios that the Company retained because that portion’s future collections could not be reasonably estimated. During the year ended December 31, 2007, the Company purchased $3.3 million of loan portfolios, $204,000 of which was immediately sold after being purchased. The Company used the cost recovery method for a $300,000 portion of the $3.1 net amount of the loan portfolios that the Company retained because that portion’s future collections could not be reasonably estimated.

Changes in Investment in Purchased Loan Portfolios

The Company utilizes the interest method for most loan portfolios purchased after December 31, 2006. Revenue related to the Company’s investment in purchased loan portfolios consists of two components: (i) revenue from those loan portfolios purchased in 2007 and 2008 that have a remaining book value and are accounted for on an accrual basis under the interest method (“Accrual Basis Portfolios”); and (ii) revenue from those portfolios that have no remaining cost basis that are accounted for under the cost recovery method of accounting for which every dollar of gross collections is recorded as zero basis revenue.

Index

PERFORMANCE CAPITAL MANAGEMENT, LLC AND SUBSIDIARY

CONDENSED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

Note 5 - Purchased Loan Portfolios (continued)

Prior to January 1, 2007, the Company was not reasonably able to estimate the amount and timing of future cash collections on a pool of loan portfolios. All portfolios were accounted for using the cost recovery method (“Cost Recovery Portfolios”). Under the cost recovery method of accounting, no income is recognized until the purchase price of a Cost Recovery Portfolio has been fully recovered. As of September 30, 2008, the portfolios accounted for using the cost recovery method consisted of $527,000 in net book value of investment in loan, where future cash flows could not be reasonably estimated.

The activity in the loan portfolios in the accompanying consolidated financial statements is as follows:

	Three Months			Three Months			Nine Months			Nine Months
	Ended			Ended			Ended			Ended
	Sept. 30, 2008			Sept. 30, 2007			Sept. 30, 2008			Sept. 30,2007
Balance, beginning of period	$	3,063,357		$	4,526,210		$	3,222,642		$	5,000,942
Purchased loan portfolios		371,541			164,461			3,257,610			2,567,400
Collections on loan portfolios		(1,830,549	)		(2,751,537	)		(6,657,637	)		(9,063,594	)
Sales of loan portfolios		(281,646	)		(1,211	)		(2,092,275	)		(155,824	)
Revenue recognized on collections		1,671,290			1,889,294			6,043,042			5,498,801
Revenue recognized on sales		215,765			-			700,767			14,789
Cash collection applied to principal		(243,459	)		(139,282	)		(531,850	)		(174,579	)
Provision for portfolio impairment		(408,000	)		-			(1,384,000	)		-
Balance, end of period	$	2,558,299		$	3,687,935		$	2,558,299		$	3,687,935

Projected Amortization of Portfolios

As of September 30, 2008, the Company had approximately $2.6 million in investment in purchased loan portfolios, of which approximately $2.0 million is accounted for using the interest method. This balance will be amortized based upon current projections of cash collections in excess of revenue applied to the principal balance. The estimated amortization of the investment in purchased loan portfolios under the interest method is as follows:

For the Years Ended September 30,	Amortization
2009	$	673,000

2010	$	473,000

2011	$	396,000

2012	$	327,000

2013	$	163,000

	$	2,032,000

Index

PERFORMANCE CAPITAL MANAGEMENT, LLC AND SUBSIDIARY

CONDENSED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

Note 5 - Purchased Loan Portfolios (continued)

Accretable Yield

Accretable yield represents the amount of income recognized on purchased loan portfolios under the interest method that the Company can expect to generate over the remaining life of its existing pools of portfolios based on estimated future cash flows as of September 30, 2008. Changes in accretable yield for the nine months ended September 30, 2008 and the year ended December 31, 2007, were as follows:

	Nine months
	Ended			Year ended
	Sept. 30, 2008			Dec. 31, 2007
Balance at the be beginning of the period	$	2,523,000		$	-
Additions, net		2,321,000			3,628,000
Income recognized on portfolios, net		(981,000	)		(803,000	)
Provision for portfolio impairment and other adjustments		(653,000	)		(302,000	)
Balance at the end of the period	$	3,210,000		$	2,523,000

The valuation allowances related to the loan portfolios at September 30, 2008 and December 31, 2007 are as follows:

	Nine months ended
	Sept. 30, 2008			Dec. 31, 2007
Valuation allowance, beginning of period		$	360,341		$	58,341
Increase in valuation allowance due to portfolio impairment			1,384,000			302,000
Valuation allowance, end of period		$	1,774,341		$	360,341

Note 6 - Property and Equipment

Property and equipment is as follows:

	As of			As of
	Sept. 30, 2008			Dec. 31, 2007
Office furniture and equipment	$	432,139		$	432,139
Computer equipment		761,737			660,921
Leasehold improvements		113,502			113,502
Totals		1,307,378			1,206,562
Less accumulated depreciation		(920,342	)		(840,835	)
Property and equipment, net	$	387,036		$	365,727

Depreciation expense for the quarters ended September 30, 2008 and 2007 amounted to approximately $27,000 and $25,000, respectively. Depreciation expense for the nine months ended September 30, 2008 and 2007 amounted to approximately $80,000 and $75,000, respectively.

Index

PERFORMANCE CAPITAL MANAGEMENT, LLC AND SUBSIDIARY

CONDENSED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

Note 7 – Notes Payable

In 2004, the Company entered into an agreement for a credit facility with Varde that provides for up to $25 million of capital (counting each dollar loaned on a cumulative basis) over a five-year term ending in July 2009. In June 2007, the Company entered into an amendment to the agreement with Varde that extends the maturity date for principal and any other accrued but unpaid amounts on each loan from up to two years to up to three years for portfolio purchases using the credit facility made on or after the effective date of the amendment.

In connection with the amendment, on November 27, 2007, the Company entered into a letter agreement with Varde that modified the loan terms of five of its pre-amendment loans by extending the loan repayment periods for those loans from two to three years. The percentage of the principal balance that is required to be paid on the scheduled due dates varies with each loan. The other outstanding Varde loans are already on three-year terms since they were made on or after the effective date of the amendment, with the exception of a loan made on November 11, 2007 with an original principal amount of approximately $240,000, that has a term of two and one-half years.

PCM LLC’s wholly-owned subsidiary Matterhorn owed approximately $2.9 million and $3.6 million at September 30, 2008 and December 31, 2007, respectively, under the facility in connection with its purchase of certain charged-off loan portfolios. The total amount borrowed under the facility was approximately $16.8 million and $14.3 million at September 30, 2008 and December 31, 2007, respectively.

Each loan has minimum payment threshold points, a term of up to three years and bears interest at the rate of 12% per annum. These obligations are scheduled to be paid in full on dates ranging from October 2008 to September 2011, with the approximate following principal payments due:

Twelve Months Ending
Sept. 30,
2009	$	1.4	million
2010	$	0.8	million
2011	$	0.7	million

Once all funds (including funds invested by the Company) invested in a portfolio financed by Varde have been repaid (with interest) and all servicing fees have been paid, Varde will begin to receive a residual interest in collections of that portfolio. Depending on the performance of the portfolio, these residual interests may never be paid, they may begin being paid a significant time later than Varde’s loan is repaid (i.e., after the funds invested by the Company are repaid with interest), or, in circumstances where the portfolio performs extremely well, the loan could be repaid early and Varde could conceivably begin to receive its residual interest on or before the date that the loan obligation was originally scheduled to be paid in full. Varde has a first priority security interest in all the assets of Matterhorn, securing repayment of its loans and payment of its residual interest. PCM LLC, our parent operating company, has guaranteed certain of Matterhorn's operational obligations under the loan documents. The amount of remaining available credit under the facility was approximately $8.2 million and $10.7 million at September 30, 2008 and December 31, 2007, respectively. The assets of Matterhorn that provide security for Varde's loan were carried at a cost of approximately $2.0 million at September 30, 2008.

A Matterhorn loan portfolio that was purchased using Varde financing in June 2007 did not generate enough collection revenue to meet its first minimum principal threshold point in December 2007 that was called for under the loan agreement with Varde. In March 2008, the Company made a remedial payment of approximately $16,000 to Varde to cover the difference. This loan portfolio again failed to meet its minimum principal threshold point in June 2008, as called for under the loan agreement with Varde, by approximately $60,000. The Company is exploring selling a portion of this portfolio to bring the loan in compliance with the minimum principal threshold amount. Another loan portfolio that was purchased using Varde financing in November 2007 did not generate enough collection revenue to

Index

PERFORMANCE CAPITAL MANAGEMENT, LLC AND SUBSIDIARY

CONDENSED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

Note 7 – Notes Payable (continued)

meet its first minimum principal threshold point in May 2008 that was called for under the loan agreement with Varde. In June 2008, the Company made a remedial payment of approximately $22,000 to Varde to cover the difference.

Under one of the Company’s loan agreements with Varde that was entered into in April 2005, the Company was required to pay the balance of the loan in full by the due date of April 30, 2008. The portfolio continues to generate revenue through collections but at a slower rate than forecasted. After discussions with Varde regarding the timing of the payments, the Company requested and Varde agreed to an amendment to the loan terms that extended the maturity date of the loan from 36 months to 42 months, from April 2008 to October 2008. Under the revised loan terms, considering the portfolio’s cash collections through April 2008, the principal balance of the loan did not meet the April 2008 required minimum principal threshold point by approximately $45,000. As of November 12, 2008, there was an outstanding balance owing on the loan of $15,000. The Company has not received a notice of default from Varde and anticipates paying this loan off in full in 2008.

Note 8 - Commitments and Contingencies

Lease Commitments

On July 17, 2006, PCM LLC entered into an Office Lease Agreement to lease office space in Buena Park, California. PCM LLC is using the leased premises as its principal executive offices and operating facility.

The term of the lease is 87 months and commenced on December 1, 2006, and will expire on February 28, 2014. PCM LLC has an option to renew the lease for one additional five-year term at the then prevailing "fair market rental rate" at the end of the term.

The base rent will increase on a yearly basis throughout the term. Future minimum lease commitments under the Buena Park lease for the twelve months ended September 30, will be:

Year ending	Approximate Annual
September 30	Lease Commitments
2009	$	346,000
2010	$	355,000
2011	$	355,000
2012	$	360,000
2013	$	364,000
Thereafter	$	152,000

In addition to the base rent, PCM LLC must pay its pro rata share of the increase in operating expenses, property taxes and property insurance for the building above the total dollar amount of operating expenses, property taxes and property insurance for the 2006 base calendar year.

The building lease contains provisions for incentive payments, future rent increases, or periods in which rent payments are reduced. As the Company recognizes rent expense on a straight-line basis, the difference between the amount paid and the amount charged to rent expense is recorded as a liability. The amount of deferred rent liability at September 30, 2008 and December 31, 2007 was $202,000 and $222,000, respectively. Rental expense for the three months ended September 30, 2008 and 2007 amounted to approximately $80,000 for each quarterly period. Rental expense for the nine months ended September 30, 2008 and 2007 amounted to approximately $241,000 and $240,000, respectively. PCM LLC is obligated under two five-year equipment leases, one expiring in 2009 with minimum payments of $4,800 per year and the other lease expiring in 2011 with minimum payments of $3,900 per year.

Index

PERFORMANCE CAPITAL MANAGEMENT, LLC AND SUBSIDIARY

CONDENSED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

Note 9 - Earnings Per LLC Unit

Basic and diluted earnings per LLC unit are calculated based on the weighted average number of LLC units issued and outstanding, 549,571 for the nine months ended September 30, 2008 and 550,244 for the nine months ended September 30, 2007.

Note 10 - Employee Benefit Plans

The Company has a defined contribution plan (the “Plan”) covering all eligible full-time employees of PCM LLC (the “Plan Sponsor”) who are currently employed by the Company and have completed six months of service from the time of enrollment. The Plan was established by the Plan Sponsor to provide retirement income for its employees and is subject to the provisions of the Employee Retirement Income Security Act of 1974, as amended (ERISA).

The Plan is a contributory plan whereby participants may contribute a percentage of pre-tax annual compensation as outlined in the Plan agreement and as limited by Federal statute. Participants may also contribute amounts representing distributions from other qualified defined benefit or contribution plans. The Plan Sponsor does not make matching contributions.

Index

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Except for the historical information presented in this document, the matters discussed in this Form 10-Q, and specifically in the section entitled “Management's Discussion and Analysis of Financial Condition and Results of Operations,” or otherwise incorporated by reference into this document contain “forward-looking statements” (as such term is defined in the Private Securities Litigation Reform Act of 1995). These statements can be identified by the use of forward-looking terminology such as “believes,” “intends,” “plans,” “expects,” “may,” “will,” “should,” or “anticipates” or the negative thereof or other variations thereon or comparable terminology, or by discussions of strategy that involve risks and uncertainties. The safe harbor provisions of Section 21E of the Securities Exchange Act of 1934, as amended, and Section 27A of the Securities Act of 1933, as amended, apply to forward-looking statements made by Performance Capital Management, LLC. You should not place undue reliance on these forward-looking statements due to their inherent uncertainty. Forward-looking statements involve risks and uncertainties. The actual results that we achieve may differ materially from any forward-looking statements due to such risks and uncertainties. These forward-looking statements are based on current expectations, and we assume no obligation to update this information. Readers are urged to carefully review and consider the various disclosures made by us in this report on Form 10-Q and in our other reports filed with the Securities and Exchange Commission that attempt to advise interested parties of the risks and factors that may affect our business.

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with the unaudited consolidated financial statements and accompanying notes and the other financial information appearing elsewhere in this report and with the financial information contained in our report on Form 10-KSB for the year ended December 31, 2007. The Form 10-KSB contains a general description of our industry and a discussion of recent trends affecting the industry.

OVERVIEW

We acquire assets originated by federal and state banking and savings institutions, loan agencies, and other sources, for the purpose of generating income and cash flow from collecting or selling those assets. Typically, these assets consist of charged-off credit card contracts. These assets are typically purchased and sold as portfolios. We purchase portfolios using our own cash resources and funds borrowed from a third party. In 2007, we began entering into fee-based third-party collection arrangements. In September 2008, however, our Board of Directors took action to terminate our third-party collections program due to lack of sufficient volume to justify the costs associated with it.. We do not anticipate resuming third party collection activities in the immediate future.

Before purchasing a portfolio, we conduct due diligence to assess the value of the portfolio. We try to purchase portfolios at a substantial discount to the actual amount of money that they will ultimately produce, so that we can recover the cost we pay for portfolios, repay funds borrowed to purchase portfolios, pay our collection and operating costs and still have a profit. We believe that market conditions currently make it difficult, although not impossible, to purchase portfolios at prices that will permit us to accomplish these objectives. We record our portfolios at cost based on the purchase price. We reduce the cost bases of our portfolios or pools: (i) based on collections under the cost recovery revenue recognition method; and (ii) by amortizing over the life expectancy of the pool under the interest revenue recognition method, which we are using for the majority of our loan portfolios purchased in 2007 and thereafter. The cost basis of a portfolio or pool is also reduced by sales of all or a portion of a portfolio and by impairment of the net realizable value of a portfolio.

We frequently sell certain portions of portfolios we purchase, in many instances to retain those accounts that best fit our collection profile and to reduce our purchase commitment by reselling the others. We then collect those accounts we retain as a distinct portfolio. We do not generally purchase loan portfolios solely with a view to their resale, and for this reason we generally do not show portfolios on our balance sheet as “held for investment.” From time to time we sell some of our portfolios either to capitalize on market conditions, to dispose of a portfolio that is not performing or to dispose of a portfolio whose collection life, from our perspective, has run its course. At times we also sell portions of portfolios to cover shortfalls in principal payments on the loans used to purchase the portfolios. When we engage in portfolio sales, we continue collecting the accounts right up until the closing of the sale.

Index

Historically, we have measured the fair value of our loan portfolios based on the discounted present value of the actual amount of money that we believed a loan portfolio would ultimately produce. The Financial Accounting Standards Board (FASB), however, recently issued Statement of Financial Accounting Standard No. 157, “Fair Value Measurements” (“FAS 157”). FAS 157 defines fair value, provides guidance for measuring fair value, and requires certain disclosures. It does not require any new fair value measurements, but rather applies to all other accounting pronouncements that require or permit fair value measurements. FAS 157 emphasizes that fair value is a market-based measurement, not an entity-specific measurement. Therefore, a fair value measurement would need to be determined based on the assumptions that market participants would use in pricing the asset or liability.

Under FAS 157, we would have to attempt to determine the fair market value of hundreds of loan portfolios on a recurring basis. There is no active market for loan portfolios or observable inputs for the fair value estimation. Therefore, there is potential for a significant variance in the actual fair value of a loan portfolio and our estimate. Given this inherent uncertainty associated with measuring the fair value of our loan portfolios under FAS 157 and the excessive costs that would be incurred, we consider it not practical to measure the fair value of our loan portfolios.

We earn revenues from collecting our portfolios and from selling our portfolios or portions of our portfolios. Under the cost recovery method, we recognize gross revenue when we collect an account and when we sell a portfolio or a portion of it. Under the interest method of accounting, portfolio collection revenue is accrued based on each pool’s effective interest rate applied to the pool’s adjusted cost basis. The cost basis of each pool is increased by revenue earned and decreased by gross collections and impairments.

On our statement of operations, when using the cost recovery method, we reduce our total revenues by the cost basis recovery of our portfolios to arrive at net revenue. For collections revenue, we reduce the cost basis of the portfolio dollar-for-dollar until we have completely recovered the cost basis of the portfolio. Alternatively, the interest method applies an effective interest rate, or internal rate of return (“IRR”), to the cost basis of the pool, which remains unchanged throughout the life of the pool unless there is an increase in subsequent expected cash flows. We use the interest method of accounting for most of our loan portfolios purchased after December 31, 2006.

Under the cost recovery method, when we sell all or a portion of a portfolio, to the extent of remaining cost basis for the portfolio, it reduces the cost basis of the portfolio by a pro rata percentage of the original portfolio cost. This method of accounting also applies to portfolios purchased and then immediately sold prior to being aggregated into a pool. Under the interest method, however, when we sell all or a portion of a portfolio in a pool, it reduces the cost basis of the pool by a pro rata percentage of the average portfolio cost in the pool. Our policy does not take into account whether the portion of the portfolio we are selling may be more or less valuable than the remaining accounts that comprise the portfolio.

For those portfolios where we are using the cost recovery method of accounting, our net revenues from portfolio collections may vary from quarter to quarter because the number and magnitude of portfolios where we are still recovering costs may vary, and because the return rates of portfolios whose costs we have already recovered in full may vary. Similarly, our net revenues from portfolio sales may vary from quarter to quarter depending on the number and magnitude of portfolios (or portions) we decide to sell and the market values of the sold portfolios (or portions) relative to their cost bases.

We generally collect our portfolios over periods of time ranging from three to seven years, with the bulk of a portfolio's yield coming in the first three years we collect it. If we succeed in collecting our portfolios, we will recover the cost we paid for them, repay the loans used to purchase them, pay our collection and operating costs, and still have excess cash.

Historically, our statement of operations has generally reported proportionately low net revenues in periods that have substantial collections of recently purchased portfolios, due to the “front-loaded” cost basis recovery associated with portfolios where we use the cost basis recovery method. As a result, during times of rapid growth in our portfolio purchases (and probably for several quarters thereafter), our statement of operations has shown a net loss. The use of the interest method of accounting as of January 1, 2007, eliminates this front-loading effect by amortizing the portfolio loan costs over the expected life of the loan portfolio. More collections from older portfolios whose cost bases have been completely recovered, along with the use of the interest method of accounting, may contribute to our statement of operations reporting a lower net loss or possibly net income, assuming our portfolios perform over time as anticipated and we collect them in an efficient manner.

Index

Our operating costs and expenses consist principally of salaries and benefits and general and administrative expenses. Fluctuations in our salaries and benefits correspond roughly to fluctuations in our headcount. Our general and administrative expenses include non-salaried collection costs, legal collections costs and telephone, rent and professional expenses. Fluctuations in telephone and collection costs generally correspond to the volume of accounts we are attempting to collect. Professional expenses tend to vary based on specific issues we must resolve. Interest and financing costs tend to decrease as the amount we borrow decreases.

BASIS OF PRESENTATION

We present our financial statements based on February 4, 2002, the date we emerged from bankruptcy, being treated as the inception of our business. In our emergence from bankruptcy, we succeeded to the assets and liabilities of six entities that were in bankruptcy. The equity owners of these entities approved a reorganization plan under which the owners of these six entities agreed to receive ownership interests in Performance Capital Management, LLC, in exchange for their ownership interests in the predecessor entities. Our consolidated financial statements include the accounts of our parent operating company, Performance Capital Management, LLC, and its wholly-owned special purpose subsidiary Matterhorn Financial Services LLC, a California limited liability company (“Matterhorn”). All significant intercompany balances and transactions have been eliminated.

CRITICAL ACCOUNTING POLICIES

Investments in Portfolios

We present investments in portfolios on our consolidated balance sheet at the lower of cost, market, or estimated net realizable value. As discussed above, we reduce the cost basis of a portfolio or a pool on a proportionate basis when we sell a portion of the portfolio, and we treat amounts collected on a portfolio or pool as a reduction to the carrying basis of the portfolio (i) on an individual portfolio basis using the cost recovery method and (ii) over the life of the pool using the interest method. When we present financial statements, we assess the estimated net realizable value of our portfolios or pools each quarter on a portfolio-by-portfolio basis under the cost recovery method or on a pooling basis under the interest method of accounting, and we reduce the value of any portfolio or pool that has suffered impairment because its cost basis exceeds its estimated net realizable value. Estimated net realizable value represents management’s estimates, based upon present plans and intentions, of the discounted present value of future collections. We must make assumptions to determine estimated net realizable value, the most significant of which are the magnitude and timing of future collections and the discount rate used to determine present value. Our calculation of net realizable value does not take into account the cost to collect the future cash streams. Using the cost recovery method, once we write down a particular portfolio we do not increase it in subsequent periods if our plans and intentions or our assumptions change. Using the interest method, if the cash flow estimates increase subsequent to recording an impairment, a reversal of the previously recognized impairment is made prior to any increases to the IRR.

We account for our investment in loan portfolios in accordance with the provisions of The American Institute of Certified Public Accountants, or AICPA, previously issued SOP, 03-03, “Accounting for Loans or Certain Securities Acquired in a Transfer” (“SOP 03-03”), using either the interest method or the cost recovery method. SOP 03-03 addresses accounting for differences between initial estimated cash flows expected to be collected from purchased loans, or “pools,” and subsequent changes to those estimated cash flows. For portfolios purchased on or before December 31, 2006, and for portfolios purchased after that date where the amount and timing of future cash collections on a pool of loans are not reasonably estimable, we account for such portfolios using the cost recovery method. If the accounts in these portfolios have different risk characteristics than those included in other portfolios acquired during the same quarter, or the necessary information is not available to estimate future cash flows, then they are not aggregated with other portfolios and they are accounted for under the cost recovery method.

Under the cost recovery method, when we collect an account in a portfolio, we reduce the cost basis of the portfolio dollar-for-dollar until we have completely recovered the cost basis of the portfolio. This method has the effect of “front-loading” expenses, which may result in a portfolio initially showing no net revenue for a period of time and then showing only net revenue once we have recovered its entire cost basis.

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For the majority of portfolios purchased after December 31, 2006, we use the interest method. The interest method applies an effective interest rate, or internal rate of return (“IRR”) to the cost basis of the pool, which is to remain level, or unchanged throughout the life of the pool unless there is an increase in subsequent expected cash flows. Subsequent increases in cash flows expected to be collected generally are recognized prospectively through an upward adjustment of the pool’s effective interest rate over its remaining life. Subsequent decreases in expected cash flows do not change the effective interest rate, but are recognized as an impairment of the cost basis of the pool, and are reflected in the consolidated statements of operations as a reduction in revenue with a corresponding valuation allowance offsetting the investment in loan portfolios in the consolidated statements of financial condition. If the cash flow estimates increase subsequent to recording an impairment, reversal of the previously recognized impairment is made prior to any increases to the IRR. Any change to our estimates could be material to our financial statements.

We account for each static pool as a unit for the economic life of the pool (similar to one loan) for recognition of revenue from loan portfolios, for collections applied to the cost basis of loan portfolios and for provision for loss or impairment. Revenue from loan portfolios is accrued based on each pool’s effective interest rate applied to each pool’s adjusted cost basis. The cost basis of each pool is increased by revenue earned and decreased by gross collections and impairments.

Credit Facility

As discussed in greater detail below, our credit facility with Varde Investment Partners, L.P. (“Varde”) provides for up to $25 million of capital (counting each dollar loaned on a cumulative basis) over a five-year term ending in July 2009. The facility provides for Varde to receive a residual interest in portfolio collections after all funds invested in the portfolio have been repaid (with interest) and all servicing fees have been paid. We do not record a liability for contingent future payments of residual interests due to the distressed nature of the portfolio assets and the lack of assurance that collections sufficient to result in a liability will actually occur. When such payments actually occur, we will reflect them in our statement of operations as other financing costs. For the foreseeable future, we intend to continue seeking new portfolio purchases using our loan facility with Varde.

OPERATING RESULTS

For ease of presentation in the following discussions of “Operating Results” and “Liquidity and Capital Resources”, we round amounts less than one million dollars to the nearest thousand dollars and amounts greater than one million dollars to the nearest hundred thousand dollars.

Comparison of Results for the Quarters Ended September 30, 2008 and 2007

The following discussion compares our results for the three months ended September 30, 2008, to the three months ended September 30, 2007. We had a net loss of $176,000 for the three months ended September 30, 2008, as compared to a net loss of $79,000 for the three months ended September 30, 2007.

Revenue

Our gross collections from portfolios are decreasing significantly as we experience the effects of fewer portfolio purchases and lower than projected performance of our portfolios due in large part to a significant slow down in the economy. While prices of loan portfolios have fallen recently, our low cash reserves have prevented us from capitalizing on the availability of lower cost portfolios. In addition, the downturn in the economy appears to have resulted in a decrease in debtor liquidity, which generally has the effect of reducing the number of collectable accounts and increasing the time and resources it takes to collect amounts owed. In the three months ended September 30, 2007, our gross collections on loan portfolios were $2.8 million due principally to the relatively large portfolio purchases we made in 2005 and the first quarter of 2006. In the three months ended September 30, 2008, our gross collections on loan portfolios were $1.8 million, a $921,000 decrease over the third quarter of 2007.

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Our consolidated statement of operations, however, shows comparable total net revenues of $1.9 million for the three months ended September 30, 2008 and 2007. The total net revenues reflected on our consolidated statement of operations remained relatively even despite the decrease in gross collections due to the following:

The effect of using the interest method of accounting, which recognizes net revenue over the life of the portfolio, as opposed to the cost recovery method, which postpones recognition of revenue until after the cost of the portfolio has been fully recovered;

In the third quarter of 2007, most of the collections revenue was generated from portfolios purchased prior to 2007 and therefore accounted for using the cost recovery method, and a higher amount of loan portfolios were fully recovered in the second quarter of 2008 than in the same period in 2007, thereby reducing the amount of cost recovery applied against gross collections; and

A period-to-period increase in net revenues from portfolio sales of $216,000, with $216,000 generated during the three months ended September 30, 2008, as compared to no portfolio sales revenues generated during the same three months ended in 2007.

Portfolio collections provided 88.6% of our total net revenues for the three months ended September 30, 2008, and 100% of our total net revenues for the three months ended September 30, 2007, due to a period-to-period increase in portfolio sales. The decrease in net revenues from portfolio collections does not, however, take into consideration the $408,000 provision for portfolio impairment under operating costs and expenses, which is the result of lower than projected portfolio performance and which results in a net loss of $176,000. Also, if we exclude the effect of portfolio sales, our net loss for the three months ended September 30, 2008 increases to a net loss of $391,000, as compared to a net loss of $79,000 for the three months ended September 30, 2007.

In the three months ended September 30, 2008, we generated $73,000 in net revenue from our third-party collections program (and $245,000 for the nine months ended September 30, 2008). In September 2008, however, our Board of Directors decided to terminate our third-party collections program due to lack of sufficient volume to justify the costs associated with it. We do not anticipate resuming third party collection activities in the immediate future.

During 2007, we substantially increased our legal collections efforts in an attempt to generate revenue from accounts we believe might otherwise not be collectible. The level of our expenditures on legal collections in 2008, however, has been significantly lower than the level of expenditures we made in 2007 due to the amount of revenue generated from such efforts in 2008 in relation to the expenditures.

We primarily utilize a network of third party law firms on a contingent fee basis for our legal collections. Legal collections tend to have longer time horizons but are expected to contribute to an increase in returns over two to five years. The method used to select accounts for legal collections is a critical component of a successful legal collections program. If accounts that have a higher likelihood of being collected using legal process are accurately selected, overall collection efficiency should increase. We do not have a set policy regarding when to initiate legal process. Given the varying nature of each case, we exercise our business judgment following an analysis of accounts using computer-based guidance to determine when we believe using legal process is appropriate (i.e., where a debtor has sufficient assets to repay the indebtedness and has, to date, been unwilling to pay). Once a judgment is obtained, the primary methods for collecting on the judgment are liens on property and garnishment, both of which have a long time horizon for collection.

With all of our collections efforts, we are keenly aware that claims based on the Fair Debt Collection Practices Act (“FDCPA”) and comparable state statutes may result in lawsuits, including class action lawsuits, which could be material to Performance Capital Management due to the remedies available under these statutes, including punitive damages. No such lawsuits have been filed against Performance Capital Management.

Net revenues from portfolio sales of $216,000 in the third quarter of 2008 was the result of selling older portfolio accounts. We may engage in further sales to capitalize on market conditions, dispose of a portfolio that is not performing or dispose of a portfolio whose collection life, from our perspective, has run its course. At times we also sell portions of portfolios to cover shortfalls in principal payments on the loans used to purchase the portfolios. We continue collection efforts for certain accounts in these portfolios right up until the point of sale. We anticipate continuing to sell portions of newly acquired portfolios from time to time, but do not expect to generate substantial net revenues from these sales.

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Operating Expenses

Our total operating costs and expenses increased to $1.9 million in the three months ended September 30, 2008 from $1.8 million in three months ended September 30, 2007, a $115,000 increase, due to a third quarter 2008 impairment expense of $408,000, which resulted from actual portfolio collections coming in at a slower rate than forecasted using the interest method. The effect of the portfolio impairment of $408,000 was offset by a decrease in general and administrative expenses of $126,000 and salaries and benefits of $169,000.

Our ratio of operating costs and expenses to gross collections (i.e., excluding the effect of portfolio sales), a measure of collection efficiency, was 106.1% for the quarter ended September 30, 2008 as compared to 66.4% for the quarter ended September 30, 2007. The decline in collection efficiency is the result of a decrease in gross collection revenues outpacing our efforts to decrease operating costs and expenses. In addition, the provision for portfolio impairment of $408,000 for the quarter ended September 30, 2008 contributed to increased operating costs and expenses.

Our interest expense and other financing costs were $116,000 and $161,000 in the three months ended September 30, 2008 and 2007, respectively, a $45,000 decrease. The decrease was due primarily to paying down debt owed to Varde. The amount we owed to Varde was $2.9 million at September 30, 2008, compared to $3.9 million at September 30, 2007.

Total salaries and benefits expenses together with total general and administrative expenses decreased to $1.5 million for the three months ended September 30, 2008, compared to $1.8 million for the three months ended September 30, 2007. This decrease in expenses associated with collecting portfolios is the result of a decrease in portfolio purchases as well as a reduction in collection and administrative personnel. In 2008, we are seeing that our operating expenses, excluding impairment charges, continue to remain below our 2007 level of operating expenses due to our efforts to adjust our infrastructure to correspond to our portfolio purchases and other collection activities.

Comparison of Results for the Nine Months Ended September 30, 2008 and 2007

The following discussion compares our results for the nine months ended September 30, 2008, to the nine months ended September 30, 2008. We had a net loss of $104,000 for the nine months ended September 30, 2008, as compared to a net loss of $452,000 for the nine months ended September 30, 2007.

Revenue

As discussed above in the quarter-to-quarter comparison, our gross collections from portfolios are decreasing significantly as we experience the effects of fewer portfolio purchases, lower than projected performance of our portfolios and a significant slow down in the economy. The decrease in debtor liquidity from a down economy has the effect of reducing the number of collectable accounts and increasing the time it takes to collect amounts owed. In the nine months ended September 30, 2007, our gross collections on loan portfolios were $9.1 million due principally to the relatively large portfolio purchases we made in 2005 and the first quarter of 2006. In the nine months ended September 30, 2008, our gross collections on loan portfolios were $6.7 million, a $2.4 million decrease over the same period in 2007.

Our consolidated statement of operations, however, shows an increase in total net revenues of $1.2 million to $6.7 million for the nine months ended September 30, 2008, from $5.5 million for the three months ended September 30, 2007. The increase in total net revenues reflected on our consolidated statement of operations despite a decrease in gross collections was due to the following:

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In the first three quarters of 2007, most of the collections revenue was generated from portfolios purchased prior to 2007 and therefore accounted for using the cost recovery method, and in the first three quarters of 2008, a higher amount of these loan portfolios were fully recovered than in the same period in 2007, thereby reducing the amount of cost recovery applied against gross collections; and

A period-to-period increase in net revenues from portfolio sales of $686,000, with $701,000 generated during the nine months ended September 30, 2008 as compared to $15,000 generated during the nine months ended September 30, 2007.

Portfolio collections provided 89.6% of our total net revenues for the nine months ended September 30, 2008, and 99.7% of our total net revenues for the nine months ended September 30, 2007 due to a period-to-period increase in portfolio sales. The increase in net revenues from portfolio collections does not, however, take into consideration the $1.4 million provision for portfolio impairment under operating costs and expenses, which is the result of lower than projected portfolio performance. Also, if we exclude the effect of portfolio sales, our net loss for the nine months ended September 30, 2008 increases to a net loss of $804,000, as compared to a net loss of $467,000 for the nine months ended September 30, 2007.

We purchased $3.3 million of new portfolios ($3.1 million after considering the portion that was immediately sold) in the year ended December 31, 2007, as compared to $4.2 million of portfolio purchases in the year ended December 31, 2006. In the first nine months of 2008, we purchased $1.9 million of loan portfolios, net of the $1.4 million portion that was sold immediately after its purchase. If we are unable to acquire new portfolios that meet our criteria for generating net income, we expect our cash collection revenues to continue to decline, which decreases the amount of funds we have available to purchase new loan portfolios and pay our operating expenses. We expect our portfolio purchases in 2008 to be lower than our portfolio purchases in 2007. In an effort to offset relatively lower overall portfolio purchases in 2006 and 2007 and maintain collection efficiency, we began implementing other collection strategies in 2007, such as serving as a third-party collection agency and expanding use of the judicial process to collect specific accounts determined to be suitable for such an approach, as well as improving the accuracy of debtor contact information contained in our databases, but have not realized significant gains from these strategies to date. Due to lack of sufficient volume to justify the costs associated with our third party collections program, in September 2008, our Board of Directions decided to eliminate the program and focus our resources on collecting our and Matterhorn’s portfolios. In addition, we have scaled back our in-house legal collections program. Most of our legal collections are now being handled by third party law firms, which are generally paid on a contingency basis.

Net revenues from portfolio sales of $701,000 in the first nine months of 2008 was primarily the result of selling older portfolio accounts where the initial purchase costs have been fully recovered. We may engage in further sales to capitalize on market conditions, dispose of a portfolio that is not performing or dispose of a portfolio whose collection life, from our perspective, has run its course. At times we also sell portions of portfolios to cover shortfalls in principal payments on the loans used to purchase the portfolios. We continue collection efforts for certain accounts in these portfolios right up until the point of sale. We anticipate continuing to sell portions of newly acquired portfolios from time to time, but do not expect to generate substantial net revenues from these sales.

During the nine months ended September 30, 2008, we generated positive cash flow from operating activities of $578,000, as compared to $703,000 in the same period in 2007, a $124,000 decrease. We paid down third-party loans by $3.3 million and borrowed $2.6 million for new portfolios. At the same time, total members’ equity decreased by $104,000 in the nine months ended September 30, 2008, which is the amount of net loss for the nine months ended September 30, 2008.

The net loss in the nine months ended September 30, 2008 was $104,000 as compared to a $452,000 net loss in the nine months ended September 30, 2007. The net loss decreased due to recent sales of loan portfolios and the use of the interest method of accounting, which recognizes revenue over the life of a loan portfolio instead of waiting to recognize it until the cost of a portfolio has been fully recovered, and not to income generated from operations. As discussed previously, if we exclude the effect of portfolio sales, we would have incurred a net loss of $804,000 in the nine months ended September 30, 2008.

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Operating Expenses

Our total operating costs and expenses increased to $6.5 million in the nine months ended September 30, 2008 from $5.5 million in nine months ended September 30, 2007, a $949,000 increase, due to an impairment expense of $1.4 million, which resulted from actual portfolio collections coming in at a slower rate than forecasted using the interest method. The effect of the portfolio impairment of $1.4 million was somewhat offset by the $363,000 decrease in salaries and benefits expenses and a $76,000 decrease in general and administrative expenses primarily associated with the decrease in legal collections costs.

Our ratio of operating costs and expenses to gross collections (i.e., excluding the effect of portfolio sales), a measure of collection efficiency, was 97.5% for the nine months ended September 30, 2008 as compared to 61.1% for nine months ended September 30, 2007. The decline in collection efficiency is the result of the $1.4 million provision for portfolio impairment and lower collections revenues.

Our interest expense and other financing costs were $335,000 and $448,000 in the nine months ended September 30, 2008 and 2007, respectively, a $114,000 decrease. The decrease was due primarily to paying down the debt that is owed to Varde. The Varde debt was $2.9 million at September 30, 2008, as compared to $3.6 million at December 31, 2007.

The total of salaries and benefits together with general and administrative expenses in the nine months ended September 30, 2008 was $5.0 million compared to $5.5 million in the nine months ended September 30, 2007. The decrease was due primarily to a reduction in collection and administrative personnel resulting in a decrease in salaries and benefits expenses of $363,000 and a decrease in general and administrative expenses of $76,000. In 2008, we expect our operating expenses, excluding impairment charges, to remain at or below our 2007 level of operating expenses due to our efforts to adjust our infrastructure to the level of our portfolio purchases and other collection activities. If we continue to incur significant portfolio impairments, however, decreases in our operating expenses will be largely offset by such impairments.

LIQUIDITY AND CAPITAL RESOURCES

Our cash and cash equivalents decreased during the first nine months of 2008. Cash and cash equivalents, including restricted cash, was $829,000 at September 30, 2008 compared to a balance of $1.1 million at December 31, 2007. Restricted cash was $414,000 at September 30, 2008, compared to $397,000 at December 31, 2007. During the nine months ended September 30, 2008, our portfolio collections and sales generated $6.8 million of cash, we borrowed $2.6 million, and we used $6.8 million for operating and other activities, $1.9 million for purchases of new portfolios (net of the $1.4 million portion that was immediately sold), and $3.3 million to repay loans.

Historically, our primary sources of cash have been cash flows from operations and borrowings. Recently, cash has been used for acquisitions of loan portfolios, repayments of borrowings, purchases of property and equipment, growing our third party and legal collections programs and general working capital.

The net loss of $104,000 in the nine months ended September 30, 2008 was offset by net revenues from portfolio sales of $701,000 due to the sale of older portfolios whose cost bases had been fully recovered, which generated total proceeds in the first nine months of 2008 of $2.1 million, $1.4 million of which was from portfolios that were sold immediately after purchase (compared to total proceeds from portfolio sales of $155,000 in the first nine months of 2007). Without these sales, we would have incurred a net loss of $804,000.

The cash we generate from portfolio collections has been steadily declining. Gross portfolio cash collections decreased by $2.4 million to $6.7 million for the nine months ended September 30, 2008, as compared to $9.1 million for the nine months ended September 30, 2007. We can attribute the significant decline to fewer portfolio purchases and the underperformance of our portfolios (collections coming in at a slower rate than we projected). The slower rate of collections can largely be attributed to a slow down in the economy, which has contributed to debtors’ inability to pay or a delay in payments.

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The reasons for the problems being experienced not only by PCM but throughout this industry include the credit crunch, the mortgage meltdown, and the rise in unemployment, inflation, foreclosures, and bankruptcy filings. As a result, the most recent issue of the collection industry magazine Credit & Collection Risk reports, “over-leveraged consumers – burdened by too much credit card and mortgage debt – cannot repay their creditors.” Bankruptcy filings increased by 48% in April from the same period a year ago. Foreclosures in the first quarter of 2008 rose 112% from the first quarter of 2007. In March 2008, the unemployment rate hit 5.1%, the highest mark since 2005, and is now forecast to rise above 6%. Many agencies report that recoveries on debt are down by an average of 20% this year over last – a drop consistent with our own collection experience in that period.

Looking ahead, Credit & Collection Risk concludes, “it is hard to predict when the economy might improve”. Most observers are reported to believe that stabilization will take between six and 18 months. Optimistic projections suggest a recovery is possible beginning in mid-2009.

The cash constraint has a compounding effect because it results in (i) further reducing our loan portfolio purchases and (ii) increasing our use of financing to purchase portfolios, which commensurately increases the transactional costs of a portfolio purchase. We expect this trend to continue unless the economy improves, our portfolio collections commensurately improve and we are able to purchase additional portfolios at reasonable prices. If cash collections continue to decline, we may be unable to recover the cost we pay for our portfolios, repay funds borrowed to purchase portfolios and pay our collecting and operating costs, which could result in a material reduction in our operations or an inability to continue our operations.

In the meantime, we have begun instituting cost-cutting and capital preservation measures in an effort to address the lower cash collections by foregoing payment of regular distributions to our unit holders, purchasing portfolios with borrowed funds, increasing portfolio sales, eliminating third-party collections, outsourcing more of our legal collections, and reducing salaries and benefits through a reduction in our administrative and collection personnel. Our goal is to achieve at least break-even results until economic conditions improve enough for us to secure additional capital and increase our portfolio purchases and collections.

Beginning in April 2003, we began making quarterly distributions to our unit holders. We made a distribution of $161,000 in each of January 2007, April 2007 and July 2007 relating to quarters ended December 31, 2006, March 31, 2007, and June 30, 2007, respectively. In order to provide additional working capital necessary to run our business, however, our Board of Directors decided to forego payment of regular distributions to our unit holders beginning in the third quarter of 2007. Any determination with regard to the payment of future distributions is at the discretion of our Board of Directors and will depend upon our future earnings, financial condition, applicable distribution restrictions and capital requirements and other factors deemed relevant by our Board of Directors. In addition to foregoing distributions to our unit holders, we will continue to monitor our collections infrastructure to maximize efficiencies in an effort to maintain or reduce expenses.

In the first nine months of 2008, we have reduced our collection and administrative staff in an effort to align our operating expenses to our lower collections revenues resulting primarily from fewer portfolio purchases. As of March 1, 2008, we had a total of 83 full-time employees and 3 part-time employees. As of September 15, 2008, we had a total of 61 full-time employees and 4 part-time employees. Our reduction in collections staff, however, must take into consideration the significant upfront investment in recruiting and training collection personnel and the need to retain enough collectors to effectively service our portfolios. In an effort to reduce costs associated with fluctuations in the number of collection personnel we employ, we may increase our use of third-party collection agencies to service portions of our loan portfolios when the volume of our loan portfolios exceeds the capacity of our existing collections infrastructure to service them.

Our portfolios provide our principal long-term source of liquidity. Our purchase of portfolios is limited by the amount of cash reserves and borrowed funds we have available and the availability of reasonably priced portfolios. Over time, our goal is to convert our portfolios to cash in an amount that equals or exceeds the cost basis of our portfolios. In addition, some portfolios whose cost bases we have completely recovered will continue to return collections to us. Many factors, including the state of the economy, paying too much for a portfolio, the liquidity of debtors, and our ability to hire and retain qualified collectors, may impact our ability to collect an amount of cash necessary to recover the cost we pay for our portfolios, repay funds borrowed to purchase portfolios, pay our collecting and operating costs and still have a profit. Fluctuations in these factors cause a negative impact on our business and materially impact our expected future cash flows. Although non-cash items, the provision for portfolio impairment of $381,000 in the first quarter of 2008, $595,000 in the second quarter of 2008 and $408,000 in the third quarter of 2008 reveal a continued decline in the performance of our portfolios as compared with our projections. We periodically assess the timing and amount of our portfolio cash collections estimates under the interest method of accounting and make adjustments to those estimates in an effort to align our projections to the factors, including those discussed above, that determine what we can expect to collect on our portfolios.

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During the first nine months of 2008, we purchased $1.9 million (net of that portion that was immediately sold) of loan portfolios, $414,000 of which was purchased for our own account. This compares with net purchases in the first nine months of 2007 of $2.6 million, $854,000 of which was purchased for our own account. Our assessment of market conditions, as well as the amount of liquid cash and other financial resources we have available to us, will continue to direct whether and when we purchase portfolios.

In an attempt to operate as efficiently as possible, we continue to focus on becoming more sophisticated in determining which portfolios or portions of portfolios provide the greatest return and which bring collection efficiency down and to shift our collections efforts accordingly. We use a dialer to assist our collectors with focusing on portfolios that continue to show results. By monitoring the results of calls originated through our dialer, we are able to identify portfolios that require more cost to collect than others. At times, generally where we have worked to collect portfolios over an extended period of time, we determine that some of our portfolios’ collection lives have run their course. We sold a number of older portfolios identified by this process in the first half of 2008. We believe this process of constantly evaluating portfolio returns against costs of collection should continue to improve the balance between our new and old portfolios. We will continue to sell portfolios or portions of portfolios if we believe market conditions are acceptable and portfolio performance is not up to our expectations.

Based on our cash position and current financial resources, we believe we have adequate capital resources to continue our business for the next twelve months. We plan to continue to use the Varde credit facility to maximize the return on our infrastructure, to reduce variable costs required to collect each dollar of revenue and to focus our efforts and resources on generating collections revenues. If, however, such efforts, along with our cost containment measures, do not provide sufficient capital to meet expected and unexpected operating costs and expenses, as well as cover shortfalls in principal payments owed to Varde, we may engage in further sales of portfolios or portions of portfolios to third parties and/or borrow against our unencumbered portfolios to generate supplemental capital. If these efforts fail, we may not be able to continue our operations.

Credit Facility

Our agreement with Varde provides us with a source of capital to purchase new portfolios. The agreement provides up to $25 million of capital (counting each dollar loaned on a cumulative basis) over a five-year term. We will never have outstanding indebtedness approaching the full $25 million at any one time, due to the cumulative nature of the facility. At September 30, 2008, Matterhorn owed $2.9 million under the facility in connection with purchases of certain charged-off loan portfolios. Under the credit facility, Varde has a first priority security interest in Matterhorn’s assets. The assets of Matterhorn that provide security for Varde's loan were carried at a cost of $2.3 million at September 30, 2008. The loan advances have minimum payment threshold points with terms of up to three years and bear interest at the rate of 12% per annum. These obligations are scheduled to be repaid in full on dates ranging from October 2008 to September 2011. Once all funds (including those invested by us) invested in a portfolio financed by Varde have been repaid (with interest) and all servicing fees have been paid, Varde will begin to receive a residual interest in collections of that portfolio. Depending on the performance of the portfolio, these residual interests may never be paid, they may begin being paid a significant time later than Varde’s loan is repaid (i.e., after the funds invested by us are repaid with interest), or, in circumstances where the portfolio performs extremely well, the loan could be repaid early and Varde could conceivably begin to receive its residual interest on or before the date that the loan obligation was originally scheduled to be paid in full. The amount of remaining available credit under the facility at September 30, 2008 was $8.2 million. Matterhorn has borrowed a total of $16.8 million, with $2.9 million outstanding at September 30, 2008.

There can be no assurance that Varde will advance any new money under the facility, because in each instance Varde must approve of the portfolio(s) we propose to acquire and the terms of the acquisition.

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The percentage of funds that we contributed to a portfolio purchase using the Varde credit facility in 2007 was lower in proportion to the purchase price than in 2006 and 2007, which would generally result in larger loans and commensurately higher interest expense and other financing costs per loan. However, with fewer recent portfolio purchases, our interest expense and other financing costs have decreased commensurately. We expect this to continue to be the case in 2008 unless we are able to sufficiently increase our cash reserves and thereby increase our portfolio purchases.

In June 2007, we entered into an amendment to the Master Loan Agreement with Varde to extend the maturity date for principal and any other accrued but unpaid amounts on each loan purchased on or after the effective date of the amendment from up to two years to up to three years. This change was made to allow more time for a portfolio purchased using the Varde facility to generate sufficient collection revenues to pay the balance of the Varde loans, including interest expense and other financing costs, in full by their due dates.

On November 27, 2007, we entered into a letter agreement with Varde that modified the loan terms of five of our outstanding loans by extending the loan repayment periods from two to three years, with scheduled minimum payments of principal and interest due every six months during the term. The percentage of the principal balance that is required to be paid on the scheduled due dates varies with each loan. The five loans had an unpaid principal balance of $2.3 million at December 31, 2007. The loans continue to bear interest at the rate of 12% per annum. The other outstanding Varde loans are already on three-year terms since they were made on or after the effective date of the amendment to the Master Loan Agreement with the exception of a loan made on November 11, 2007, with an original principal amount of $240,000, that has a term of two and one-half years.

Under one of the Company’s loan agreements with Varde that was entered into in April 2005, the Company was required to pay the balance of the loan in full by the due date of April 30, 2008. The portfolio continues to generate revenue through collections but at a slower rate than forecasted. After discussions with Varde regarding the timing of the payments, the Company requested and Varde agreed to an amendment to the loan terms that extended the maturity date of the loan from 36 months to 42 months, from April 2008 to October 2008. Under the revised loan terms, considering the portfolio’s cash collections through April 2008, the principal balance of the loan is below the April 2008 minimum payment threshold by $45,000. As of November 12, 2008, there was an outstanding balance owing on the loan of $15,000. The Company has not received a notice of default from Varde and anticipates paying off this loan in 2008.

A Matterhorn loan portfolio that was purchased using Varde financing in June 2007 did not generate enough collection revenue to meet its first minimum principal threshold point in December 2007 that was called for under the loan agreement with Varde. In March 2008, the Company made a remedial payment of $16,000 to Varde to cover the difference. This loan portfolio again failed to meet its minimum principal threshold point in June 2008, as called for under the loan agreement with Varde, by $60,000. The Company is exploring selling a portion of this portfolio to bring the loan in compliance with the minimum principal threshold amount.

Another loan portfolio that was purchased using Varde financing in November 2007 did not generate enough collection revenue to meet its first minimum principal threshold point in May 2008 that was called for under the loan agreement with Varde. In June 2008, the Company made a remedial payment of approximately $22,000 to Varde to cover the difference.

Future Cash Expenditures

We plan to continue making expenditures on our legal collections efforts in 2008, but the level of our expenditures on legal collections going forward is expected to be significantly lower than the level of expenditures we made in 2007. We may from time to time acquire capital assets on an as needed basis. Our most significant capital assets are our dialer and our telephone switch. We are currently in the process of replacing our dialer due to the manufacturer of the dialer no longer supporting the system. We expect the new dialer to perform as well or better than our current dialer. We have spent $88,000 as of September 30, 2008, and anticipate spending an additional approximately $15,000 to $18,000 for the new dialer in 2008.

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ITEM 4T. CONTROLS AND PROCEDURES

In accordance with the Exchange Act, we carried out an evaluation, under the supervision and with the participation of management, including our Chief Operations Officer and our Accounting Manager, of the effectiveness of our disclosure controls and procedures as of the end of the period covered by this report. In designing and evaluating disclosure controls and procedures, our management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives. Further, the design of a control system must reflect the fact that there are resource constraints. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, may be detected. Based on this evaluation, our Chief Operations Officer and our Accounting Manager concluded that our disclosure controls and procedures were effective as of September 30, 2008, to provide reasonable assurance that information required to be disclosed in our reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms.

There has been no change in our internal controls over financial reporting that occurred during the quarter ended September 30, 2008 that has materially affected, or is reasonably likely to materially affect, our internal controls over financial reporting.

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PART II – OTHER INFORMATION

ITEM 2. MEMBER FORFEITURES OF SECURITIES

In July 2008, two members voluntarily returned 423 LLC units to the Company. The forfeited LLC units represented each member’s entire respective investment interest in the Company.

ITEM 5. OTHER INFORMATION

Departure of Chief Officer of Legal Affairs

In October 2008, Mr. William D. Constantino informed the Board of Directors of Performance Capital Management, LLC (the “Company”) that he would resign from his position as Chief Officer of Legal Affairs of the Company, and its subsidiary, effective November 14, 2008 to pursue other career opportunities. Mr. Constantino will be assisting the Company in transitioning matters prior to his departure. Mr. Constantino has no disagreement with the Company on any matter relating to the Company's operations, policies or practices.

ITEM 6. EXHIBITS

An Exhibit Index precedes the exhibits following the signature page and is incorporated herein by reference.

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

	PERFORMANCE CAPITAL MANAGEMENT, LLC


November 18, 2008	By:	/s/ David J. Caldwell
(Date)		Name: David J. Caldwell
		Its: Chief Operations Officer

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EXHIBIT INDEX

Exhibit Number		Description
3.1		Performance Capital Management, LLC Articles of Organization (1)

3.2		Operating Agreement for Performance Capital Management, LLC (1)

3.3		First Amendment to Operating Agreement for Performance Capital Management, LLC (1)

3.4		Second Amendment to Operating Agreement for Performance Capital Management, LLC (2)

3.5		Third Amendment to Operating Agreement for Performance Capital Management, LLC (3)

31.1		Certification of Chief Operations Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

31.2		Certification of Accounting Manager pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

32.1		Certification of Chief Operations Officer and Accounting Manager pursuant to 18 U.S.C. Section 1350

(1) Filed on April 2, 2003 as an exhibit to our report on Form 8-K dated February 4, 2002 and incorporated herein by reference.

(2) Filed on November 14, 2003 as an exhibit to our report on Form 10-QSB for the period ended September 30, 2003 and incorporated herein by reference.

(3) Filed on August 14, 2006 as an exhibit to our report on Form 10-QSB for the period ended June 30, 2006, and incorporated herein by reference.

Positive
Negative
Uncertain
Constraining
Legalese
Litigous
Readability	H.S. sophomore Avg

Performance Capital Management Inactive 10-Q2008 Q3 Quarterly report

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