U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
__________________
FORM 8-K
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the Securities Act of 1934
Date of Report (Date of earliest event reported):FEBRUARY 4, 2002
----------------
PERFORMANCE CAPITAL MANAGEMENT, LLC
-------------------------------------------------
(Exact name of registrant as specified in its charter)
CALIFORNIA 03-0375751
----------------- ------------ -------------------
(State or other (Commission (I.R.S. Employer
Jurisdiction File Number) Identification No.)
of incorporation)
222 SOUTH HARBOR BLVD., SUITE 400
ANAHEIM, CALIFORNIA 92805
---------------------------------------- ----------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (714) 502-3780
--------------------
Former Names and Addresses:
Performance Asset Management Fund III, Ltd., Performance Asset Management
Fund IV, Ltd.,
a California Limited Partnership* a California Limited Partnership*
4100 Newport Place, Suite 400 4100 Newport Place, Suite 400
Newport Beach, California 92660 Newport Beach, California 92660
* This report is being filed with the Commission by the Registrant as a
Successor Issuer to Performance Asset Management Fund III, Ltd. and Performance
Asset Management Fund IV, Ltd. by virtue of Rule 12g-3(a) under the Securities
Exchange Act of 1934, as amended. The Commission File Number of Performance
Asset Management Fund III, Ltd. was 0-28710 and its CIK was 0001021070 and the
Commission File Number of Performance Asset Management Fund IV, Ltd. was 0-28764
and its CIK was 0001022241.
INFORMATION INCLUDED IN THIS REPORT
Page No.
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Item 1. Changes in Control of Registrant . . . . . . . . . . . . . . . . . 1
Security Ownership of Certain Beneficial Owners and Management 3
Directors, Executive Officers, Promoters and Control Persons . 4
Description of Securities. . . . . . . . . . . . . . . . . . . 7
Market for Common Equity and Related Unit Holder Matters . . . 9
Recent Sales of Unregistered Securities. . . . . . . . . . . . 10
Indemnification of Members, Directors and Officers . . . . . . 10
Item 2. Acquisition or Disposition of Assets . . . . . . . . . . . . . . . 12
Description of Business. . . . . . . . . . . . . . . . . . . . 13
Description of Property. . . . . . . . . . . . . . . . . . . . 25
Management's Discussion and Analysis or Plan of Operation. . . 26
Certain Relationships and Related Transactions . . . . . . . . 30
Legal Proceedings. . . . . . . . . . . . . . . . . . . . . . . 30
Changes In and Disagreements with Accountants. . . . . . . . . 31
Item 3. Bankruptcy or Receivership . . . . . . . . . . . . . . . . . . . . 31
Item 4. Changes in Registrant's Certifying Accountant. . . . . . . . . . . 37
Item 7. Financial Statements and Exhibits. . . . . . . . . . . . . . . . . 37
SIGNATURES. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39
FINANCIAL STATEMENTS. . . . . . . . . . . . . . . . . . . . . . . . . . . . F-1
EXHIBIT INDEX
FORWARD-LOOKING STATEMENTS
--------------------------
Except for the historical information presented in this document, the matters
discussed in this Form 8-K, and specifically in the items entitled "Changes in
Control of Registrant", "Acquisition or Disposition of Assets" and "Financial
Statements and Exhibits", 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',
'expects', 'may', 'will', 'plan', '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 the Registrant. The reader is cautioned not to place undue reliance on
these forward-looking statements. These forward-looking statements involve risks
and uncertainties, including those identified within this Form 8-K and other
filings with the SEC by the Registrant. The actual results that the Registrant
achieves may differ materially from any forward-looking statements due to such
risks and uncertainties. These forward-looking statements are based on current
expectations, and the Registrant assumes no obligation to update this
information. Readers are urged to carefully review and consider the various
disclosures made by the Registrant in this Form 8-K and in the Registrant's
other reports filed with the Securities and Exchange Commission that attempt to
advise interested parties of the risks and factors that may affect the
Registrant's business.
ITEM 1. CHANGES IN CONTROL OF REGISTRANT
-----------------------------------------
Performance Capital Management, LLC ("PCMLLC") is a new entity that was formed
by a U.S. Chapter 11 Trustee and the Official Committee of Equity Security
Holders in January 2002 for the purpose of reorganizing six entities that had
voluntarily filed bankruptcy petitions in late December 1998 with the United
States Bankruptcy Court for the Central District of California, Santa Ana
Division (the "Bankruptcy Court"). Two of the six reorganized entities had a
class of limited partnership interests registered under Section 12(g) of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), prior to the
bankruptcy filings. PCMLLC is considered a successor entity to the six companies
emerging from bankruptcy, including two public companies. The Bankruptcy Court
order approving the Plan of Reorganization was entered on January 24, 2002 and,
following a ten day appeals period, became effective on February 4, 2002.
Performance Capital Management, Inc., a California corporation ("PCMInc."),
Performance Asset Management Fund, Ltd., a California limited partnership ("PAM
I"), Performance Asset Management Fund II, Ltd., a California limited
partnership ("PAM II"), Performance Asset Management Fund III, Ltd., a
California limited partnership ("PAM III"), Performance Asset Management Fund
IV, Ltd., a California limited partnership ("PAM IV"), and Performance Asset
Management Fund V, Ltd., a California limited partnership ("PAM V") (each of PAM
I through PAM V sometimes referred to as a "PAM Fund" and all collectively
referred to as the "PAM Funds"), filed separate bankruptcy petitions on December
22 and 23, 1998. On motion by
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the California Department of Corporations, the bankruptcy court replaced the
debtor-in-possession with a trustee on December 30, 1998.
Prior to the bankruptcy filing, Vincent Galewick was the sole or controlling
shareholder of PCMInc. and of the general partner of the PAM Funds. By early
2001, the trustee concluded that a viable business existed and he set out to
develop a plan to reorganize PCMInc. and the PAM Funds. As part of the plan, he
formed PCMLLC on January 14, 2002. On February 4, 2002, the effective date of
the Confirmation Plan, the assets and liabilities of PCMInc. and the PAM Funds
were transferred to PCMLLC. Upon confirmation of the Confirmation Plan, new
management was vested with authority to operate PCMLLC, and the Chapter 11
trustee remains available to provide his services to PCMLLC's Board as a
consultant. PCMInc. and the PAM Funds, which are still subject to the
jurisdiction of the bankruptcy court, will ultimately be dissolved.
Under the Plan of Reorganization, PCMLLC issued "LLC Units" to the PAM Funds,
which have now been distributed to the investors in the PAM Funds, all pursuant
to the exemption provided by Section 1145 of the Bankruptcy Code. PCMLLC issued
LLC Units to the PAM Funds based on the gross dollars (approximately $57.4
million) the investors had invested in the respective PAM Funds. As of March 17,
2003, PCMLLC had 2,903 Members and one Economic Interest Owner.
Two of the five PAM Funds had registered their limited partnership interests
under Section 12(g) of the Exchange Act. The following table summarizes
aggregated material economic facts about the investors in these two PAM Funds
(all amounts approximate):
PAM III PAM IV
-------------- --------------
FUNDS INVESTED $10.0 MILLION $28.6 MILLION
LLC Units issued 99,900 285,950
Percentage interest in PCMLLC Units 17% 50%
Capital returned pre-petition $ 3.7 million $ 6.9 million
Unreturned capital $ 6.3 million $21.7 million
Percentage interest in total unreturned capital 16.5% 57.0%
PCMLLC is the successor entity to the public companies PAM III and PAM IV.
The following information pertains to PCMLLC as successor entity to the PAM
Funds and PCMInc.
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SECURITY OWNERSHIP OF CERTAIN
BENEFICIAL OWNERS AND MANAGEMENT
To our knowledge, the following table sets forth information with respect to the
beneficial ownership of our securities as of March 17, 2003 by:
- - each person known by us to beneficially own more than 5% of our voting
securities;
- - each of our executive officers;
- - each of our directors; and
- - all of our executive officers and directors as a group.
Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission and includes voting or investment power with
respect to the securities. Unless otherwise indicated, the address for those
listed below is c/o Performance Capital Management, LLC, 222 South Harbor Blvd.,
Suite 400, Anaheim, California 92805. Except as indicated by footnote, and
subject to applicable community property laws, the persons named in the table
have sole voting power with respect to all LLC Units shown as beneficially owned
by them. The number of LLC Units entitled to vote outstanding as of March 17,
2003 was 547,828, excluding the 23,722 Economic Interest LLC Units outstanding.
Except as noted otherwise, the amounts reflected below are based upon
information provided to us.
NUMBER OF PERCENT OF
NAME OF BENEFICIAL OWNER UNITS OUTSTANDING
- -------------------------------------------------- --------- ------------
Larisa R. Gadd, Co-Chairperson of the Board 4,777 *
- -------------------------------------------------- --------- ------------
Lester T. Bishop, Co-Chairperson of the Board 398 *
- -------------------------------------------------- --------- ------------
Larry C. Smith, Director 995 *
- -------------------------------------------------- --------- ------------
David R. Barnhizer, Director 1,094 *
- -------------------------------------------------- --------- ------------
Rodney L. Woodworth, Director 2,239 *
- -------------------------------------------------- --------- ------------
Sanford A. Lakoff, Director 1,593 *
- -------------------------------------------------- --------- ------------
Robert R. Price, Director 0 *
- -------------------------------------------------- --------- ------------
David J. Caldwell, Chief Operations Officer 0 *
- -------------------------------------------------- --------- ------------
Edward M. Rucker, Accounting Manager 0 *
- -------------------------------------------------- --------- ------------
Darren S. Bard, Chief Information Officer 0 *
- -------------------------------------------------- --------- ------------
Wendy L. Curran, Chief Officer of Human Resources 0 *
- -------------------------------------------------- --------- ------------
William D. Constantino, Chief Legal Officer 0 *
- -------------------------------------------------- --------- ------------
ALL EXECUTIVE OFFICERS & DIRECTORS AS
A GROUP (12 Persons) 11,096 2.0%
- -------------------------------------------------- --------- ------------
<FN>
* Less than 1%.
Other than the changes described herein, we are not aware of any arrangements
that may result in a change in control of PCMLLC.
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DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS
On December 30, 1998, a bankruptcy trustee was appointed by the Bankruptcy
Court. The trustee was James J. Joseph, a Senior Trustee in the Central
District, Santa Ana division. During bankruptcy, the trustee managed the affairs
of the PAM Funds and PCMInc. All major actions taken by the trustee were
approved by the Bankruptcy Court. During the period between the confirmation
hearing date, December 21, 2001, and the Effective Date, February 4, 2002, the
trustee continued to operate the PAM Funds' and PCMInc.'s businesses and
administer their property subject to the provisions of the Bankruptcy Code and
with the powers and protections of a trustee in bankruptcy.
Pursuant to the reorganization plan, a new Board of Directors and new management
took control of PCMLLC on February 4, 2002, as a result of its emergence from
bankruptcy. The following table sets forth certain information with respect to
the directors and executive officers of PCMLLC as of March 17, 2003.
NAME AGE POSITION
- ---------------------- --- --------------------------------
Larisa R. Gadd . . . . 40 Co-Chairperson of the Board
- ---------------------- --- --------------------------------
Lester T. Bishop . . . 72 Co-Chairperson of the Board
- ---------------------- --- --------------------------------
Larry C. Smith . . . . 65 Director
- ---------------------- --- --------------------------------
David R. Barnhizer . . 59 Director
- ---------------------- --- --------------------------------
Rodney L. Woodworth. . 65 Director
- ---------------------- --- --------------------------------
Sanford A. Lakoff. . . 71 Director
- ---------------------- --- --------------------------------
Robert R. Price. . . . 50 Director
- ---------------------- --- --------------------------------
David J. Caldwell. . . 49 Chief Operations Officer
- ---------------------- --- --------------------------------
Edward M. Rucker . . . 56 Accounting Manager
- ---------------------- --- --------------------------------
Darren S. Bard . . . . 35 Chief Information Officer
- ---------------------- --- --------------------------------
Wendy L. Curran. . . . 38 Chief Officer of Human Resources
- ---------------------- --- --------------------------------
William D. Constantino 52 Chief Legal Officer
- ---------------------- --- --------------------------------
All of the current directors except Mr. Robert Price were appointed to the Board
of Directors on February 4, 2002. Mr. Price was appointed to the Board of
Directors in June 2002 following the resignation of Mr. Lawrence Dodson in May
2002. Directors of PCMLLC serve two-year terms. All directors hold office until
their respective successors are elected and qualified or until their earlier
death, resignation or removal. Executive officers are duly elected by the Board
of Directors to serve until their respective successors are elected and
qualified. Each officer of PCMLLC serves at the discretion of the Board of
Directors. There are no family relationships between or among any of our
directors or executive officers.
The following information with respect to the principal occupation or
employment, other affiliations and business experience during the last five
years of our directors and executive officers has been furnished to us by each
director and executive officer.
LARISA R. GADD. Ms. Gadd is currently working on obtaining a doctorate degree
in Natural Health and Healing from Clayton College of Natural Health. From 1987
to 1988, Ms. Gadd was an instructor at Chaffey College in Alta Loma in the area
of Social Sciences. She received a B.S. degree in Psychology and English from
the California State University, Fullerton in 1984 and a
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M.A. degree in Organizational and Applied Social Psychology from Claremont
Graduate School in 1986.
LESTER T. BISHOP. Mr. Bishop has taught kindergarten through 12th grade
students for the past 20 years. At the same time, Mr. Bishop owned solely and in
partnership with others a number of privately held businesses, including Whitiok
Day Camp, Good Time Promotions, Mall Munchies, Park Rivera Motel, and Imperial
Executive Suites. He has also owned and managed both residential and commercial
real estate. Mr. Bishop received a B.A. degree in Education from the University
of California, Los Angeles and a M.A. degree from the California State
University, Los Angeles in Educational Administration with advanced credentials
in reading, counseling and teacher effectiveness.
LARRY C. SMITH. Mr. Smith retired in 1994. Prior to retirement, from 1987 to
1994, Mr. Smith was Senior Systems Engineering Manager of TRW Space Systems, a
business unit of a held company. In that position, Mr. Smith managed the systems
engineering teams in support of classified satellite space systems development
and new satellite system studies. Mr. Smith is a registered U.S. Patent Agent
and holds three patents. Mr. Smith received a B.S. degree in Engineering from
the University of Washington and completed four years of graduate studies at the
University of California, Los Angeles in Control Systems and Electronics.
DAVID R. BARNHIZER. Mr. Barnhizer is currently Professor of Law at Cleveland
State University College of Law and has held that position since 1972. He
teaches or has taught courses dealing primarily with business and environmental
law. From 1997 to 1998, he was a Strategic Consultant to the Government of
Mongolia to the Mongolian Action Programme for the 21st Century. During that
same period, he was also a consultant on sustainable economic development and
the creation of a Central American trade zone to the U.N. Development Program.
From 1995 to 1997, he was a member of the Board of Editors for the Journal of
Legal Education. Mr. Barnhizer has published nine books / manuals and
approximately 30 professional articles. He received a Bachelor of Arts degree
from Muskingum College, a Juris Doctor degree from Ohio State University College
of Law, and a Master of Law degree from Harvard Law School.
RODNEY L. WOODWORTH. Mr. Woodworth retired in 1998. From 1988 to 1998, Mr.
Woodworth was the Senior Vice President of Operations at Zimmerman Holdings,
Inc., which is in the business of buying troubled manufacturing businesses,
turning them around, growing them and then selling them. Prior to working at
Zimmerman Holdings, Inc., he was the Senior Vice President of Fairchild
Industries and President of its Commercial and Industrial Products Group. Mr.
Woodworth is an alumni of the Stanford Graduate Business School and received a
B.S. degree in Mechanical Engineering from the California State Polytechnical
University, San Luis Obispo in 1960.
SANFORD A. LAKOFF. Mr. Lakoff is Research Professor of Political Science
Emeritus at the University of California, San Diego. He has taught at UCSD since
1974, when he was appointed Founding Chair of the Department of Political
Science. Mr. Lakoff has written or edited eleven books and published
approximately 50 scholarly articles as well as contributing to entries in the
Dictionary of the History of Ideas, the Encyclopedia of Democracy, the
Encyclopedia of U.S.
5
Foreign Relations, and the Encyclopedia of Nationalism. He received a B.A.
degree from Brandeis University in 1953. In 1959, he received his Ph.D. from
Harvard University.
ROBERT R. PRICE. Mr. Price is currently President and Chief Financial Officer
of Buy.com, Inc., a privately held Internet retailer, where he is responsible
for the day-to-day affairs of the company and reports directly to the company's
Founder, Chairman and CEO. Mr. Price is also responsible for Buy.com's overall
financial strategy and activities, corporate planning and analysis, and human
resources. Mr. Price joined Buy.com in February 2001, as Chief Financial
Officer, and served in that position until August 2001 when he was promoted to
President. From September 1995 to July 2000, Mr. Price worked at PairGain
Technologies, Inc., a publicly held telecommunications equipment manufacturer.
From January 2000 to July 2000, Mr. Price was Senior Vice President, Chief
Financial Officer, from January 1998 to January 2000, he was Vice President and
Corporate Controller, and from September 1995 to January 1998, he was Corporate
Controller of PairGain Technologies. Mr. Price received his B.S. in Business
Administration (emphasis in Accounting) from California Polytechnic University,
Pomona in 1974.
DAVID J. CALDWELL. Mr. Caldwell is a business operations professional with over
20 years of experience in the consumer credit card industry. Before becoming
Chief Operations Officer of PCMLLC on February 4, 2002, Mr. Caldwell was Vice
President of Operations of Performance Capital Management, Inc., one of the
predecessor companies to PCMLLC, from January 1998 to February 2002. As Chief
Operating Officer, Mr. Caldwell is responsible for the operational activities of
PCMLLC, including management of a collection center and the sales and
acquisitions of charged-off portfolios as well as the day-to-day operations of
the business. From 1975 to 1998, Mr. Caldwell worked in various capacities at
General Electric Capital Corporation, including Vice President of Recovery
Operations for the General Electric Capital Services division from March 1997 to
January 1998 and Vice President of Cardholder Operations for the Consumer Card
Services division of General Electric Capital Corporation from May 1994 to March
1997. As Vice President of Recovery Operations, he was responsible for the
successful operation of the Retailer Financial Services Recovery Operation,
including management of the recovery call center, bankruptcy collections,
payment processing unit, mailroom, facilities, petition processing, legal,
probate, compliance, outside attorney collections, skip tracing, and interface
with 12 outlying business centers. As Vice President of Cardholder Operations,
he was responsible for the successful operation of the G.E. Rewards Mastercard
call center, including managing over 500,000 incoming calls per month, leading a
workforce of 215 people, and overseeing a financial budget of $5 million. Mr.
Caldwell received a B.S. degree in Business Administration from Western Michigan
University in 1975.
EDWARD M. RUCKER. Before becoming the Accounting Manager of PCMLLC on February
4, 2002, Mr. Rucker was the Accounting Manager of Performance Capital
Management, Inc., one of the predecessor companies to PCMLLC, from October 2001
to February 2002. As Accounting Manager, Mr. Rucker has over responsibility for
preparing the company's accounting records and financial statements. From 1995
to August 2001, Mr. Rucker was Controller and the Chief Financial Officer of
Pickard Construction, Inc., a construction firm performing as general contractor
for major national firms. In that position, Mr. Rucker was responsible for the
entire accounting and related financial functions of the firm. Mr. Rucker is a
Certified Public
6
Accountant. Mr. Rucker received a B.S. degree in Accounting from the California
State University, Los Angeles in 1968.
DARREN S. BARD. Before becoming Chief Information Officer of PCMLLC on February
4, 2002, Mr. Bard was Manager of Reporting and Analysis of Performance Capital
Management, Inc., one of the predecessor companies to PCMLLC, from April 1998 to
February 2002. As Chief Information Officer, Mr. Bard manages the Information
Technology and Acquisitions/Sales Support Departments. Prior to becoming an
officer of Performance Capital Management, Inc., from April 1996 to April 1998,
Mr. Bard worked as Site Production Planning/Operations Manager at General
Electric Capital Corporation. In that position, he managed the Production
Planning Department of a site consisting of 30 salaried employees and more than
600 hourly employees. He received a B.A. degree from Ohio State University in
1991 in Psychology.
WENDY L. CURRAN. Before becoming Chief Officer of Human Resources of PCMLLC on
February 4, 2002, Ms. Curran was Director of Human Resources of Performance
Capital Management, Inc., one of the predecessor companies to PCMLLC, from June
1997 to February 2002. As Chief Officer of Human Resources, Ms. Curran manages
the Administration and Human Resources Departments, which entails implementing
and enforcing current company human resources policies, facilities management,
recruitment, providing training programs to build team work and management
skills, payroll processing, and administration of employee benefits. Ms. Curran
is certified in Human Resource Management in the State of California.
WILLIAM D. CONSTANTINO. Mr. Constantino has served as the Chief of Legal Affairs
of PCMLLC since it was formed in January 2002. Prior to that date, from July
2000 to January 2002, he served as Chief Legal Compliance Officer of Performance
Capital Management, Inc., one of the predecessor companies to PCMLLC. As
in-house counsel to PCMLLC, Mr. Constantino is responsible for ensuring that all
collection procedures comply with federal and state consumer protection laws,
assisting with the negotiation and purchase of portfolios, and is the general
legal resource for day-to-day corporate operations. From January 1999 to July
2000, Mr. Constantino practiced law as a sole practitioner specializing in all
aspects of insolvency law, including commercial and consumer collections,
bankruptcy law, and civil litigation. From January 1982 to December 1998, he was
managing partner in the Law Offices of Leibowitz and Constantino. That firm
specialized in insolvency law and consumer protection law. Mr. Constantino
received a B.S. degree in Business Administration from the State University of
New York, Albany in 1972 and a Juris Doctor degree from Western State University
of Law in 1979.
DESCRIPTION OF SECURITIES
Rights Associated with LLC Units
The membership interest in PCMLLC consists of a number of LLC Units. The LLC
Units are made up of Economic Rights and Member Rights. If transferred, the
Member LLC Units generally retain only Economic Rights, and not Member Rights,
and become Economic Interest LLC Units, unless the transfer of the entire Member
LLC Units is approved by the Board of Directors in writing. As of March 17,
2003, PMCLLC had 571,550 LLC Units issued and outstanding, including 23,722
Economic Interest LLC Units.
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Each Member LLC Unit includes the right to cast one vote on all issues that are
submitted to a vote of the members, the right to share in the net profits, net
losses and/or similar items of the company, to receive distributions from the
company pursuant to Article VIII of the Operating Agreement and to receive such
other distributions as may be appropriate pursuant to Article XI of the
Operating Agreement in light of the capital account associated with such Units,
and the right to demand information concerning the business and affairs of the
company. The Members also have a right to indemnification as disclosed in the
section of this report entitled "Indemnification of Members, Directors and
Officers."
No holder of Member LLC Units, acting solely in the capacity as a Member, has
the right to take part in the management of PCMLLC or to transact any business
on its behalf. Holders of Member LLC Units do have the right to vote upon the
following matters: (a) election of directors, except with respect to any
mid-term vacancy, which may be filled by the Board of Directors; (b) amendment
of the Articles of Organization; (c) Amendment of the Operating Agreement; (d)
dissolution of PCMLLC; (e) merger of PCMLLC; and (f) sale of all or
substantially all of the assets of PCMLLC.
Holders of Economic Interest LLC Units are entitled only to receive, to the
extent assigned, the distributions and allocations of income, gains, losses,
deductions, credit or similar items to which the assignor of the LLC Units would
be entitled. The holder of Economic Interest LLC Units does not have any Member
Rights, including, without limitation, the right to vote or participate in
management, or any right to information concerning the business and affairs of
PCMLLC.
Upon the approval of a majority of the Units, or upon the occurrence of an event
of dissolution, such as the sale of substantially all of the company's assets,
PCMLLC shall be dissolved and the assets liquidated. The members shall continue
to divide net profits and net losses during the winding-up period in the same
ratio as prior to dissolution. The Board of Directors shall take full account of
the company assets and liabilities, shall liquidate the assets and shall apply
and distribute the proceeds from the liquidation in the following order: (i) to
any creditors, (ii) for any reserves required by law, and (iii) to the members.
Capital Accounts
PCMLLC has established individual capital accounts for each Member. No Member is
entitled to receive any interest on their capital account.
Except for distributions, no Member may withdraw capital without the approval of
the Board of Directors.
Transfers of LLC Units
No member is entitled to transfer any of its LLC Units except with the prior
written approval of the Board of Directors. The transfers must not (i) result in
the company losing its status as a partnership for federal income tax purposes,
(ii) result in the violation of the Securities Act of 1933, as amended, or any
other applicable federal or state laws, (iii) constitute a violation of or a
default (or an event that, with notice or lapse of time or both, would
constitute a default) under,
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or result in an acceleration of any indebtedness or payment under, any contract,
agreement, note, mortgage, loan agreement, instrument, or document to which the
company is a party, or (iv) be a transfer to an individual who is not legally
competent or who has not achieved his or her majority under the law of the
applicable state (excluding trusts for the benefit of minors). A transferee of
Member LLC Units shall become a substitute member only after all of the
following conditions are satisfied:
1. the Board of Directors, in its sole discretion, approves in writing
admission of the transferee as a substitute Member; and
2. the transferor and transferee execute, acknowledge and file with
PCMLLC an instrument of assignment that is reasonably satisfactory to
the Board of Directors; and
3. the transferor and transferee execute and acknowledge such other
instruments with such additional convenants as the Board of Directors
may request and which shall include an instrument pursuant to which
the transferee agrees to be bound by the terms of the PCMLLC Operating
Agreement; and
4. the transferee pays to PCMLLC the reasonable costs and expenses
incurred by the company in connection with such transfer.
Transfers of Economic Interest
If a member who is an individual dies or is adjudged by a court of competent
jurisdiction to be incompetent to manage the member's person or property, or if
a member that is a corporation, trust or other entity dissolves or terminates,
the member's executor, administrator, guardian, conservator, or other legal
representative in the event the member is an individual, and such member's legal
representative or successor in the event the member is an entity, shall have
only Economic Rights, which entitles the holder to share in the income, gains,
losses, deductions, credits or similar items of, and to receive distributions
from, the company, but does not provide any other rights of a member, including,
without limitation, the right to vote or to participate in management.
MARKET FOR COMMON EQUITY AND RELATED UNIT HOLDER MATTERS
Market
There is no trading market for our securities at present and there has been no
trading market to date. We are not planning and do not intend to facilitate the
development of a trading market.
Holders
As of March 17, 2003, PCMLLC had 2,903 Members and one Economic Interest Owner
who is a non-voting LLC Unit holder.
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Distributions
Our Operating Agreement calls for us to make pro-rata cash distributions to our
Members based on their unreturned capital (certain investors received
approximately $19.3 million of payment from various PAM Funds prior to the
bankruptcy filing) until all Members receive their full capital investment back
without interest. Since February 4, 2002, we have made a $12 million
distribution to the Members. After all investor capital investments are paid
back, any further distributions are to be made, as determined by our Board of
Directors, in its sole and absolute discretion, pro rata based upon LLC Units
outstanding.
RECENT SALES OF UNREGISTERED SECURITIES
Set forth below is information regarding the issuance and sale of our securities
without registration from February 4, 2002 (Inception) through the fiscal year
ended December 31, 2002.
Under the Plan of Reorganization approved by the Bankruptcy Court, we issued
571,550 LLC Units to the PAM Funds, which were then distributed to the limited
partners of the PAM Funds, all pursuant to the exemption provided by Section
1145 of the Bankruptcy Code. We issued the LLC Units to the PAM Funds based on
the gross dollars (approximately $57.4 million) the partners had invested in the
respective PAM Funds.
INDEMNIFICATION OF MEMBERS, DIRECTORS AND OFFICERS
State of California
Section 17003(l) of Title 2.5 of the California Corporations Code provides that,
subject to the limited liability company's articles of organization and to
compliance with any other applicable laws, a limited liability company shall
have all of the powers of a natural person in carrying out its business
activities, including the power to indemnify and hold harmless any person.
Section 17155 of Title 2.5 of the California Corporations Code provides that,
except for a breach of fiduciary duty, the articles of organization or written
operating agreement of a limited liability company may provide for
indemnification of any person, including, without limitation, any manager,
member, officer, employee or agent of the limited liability company, against
judgments, settlements, penalties, fines or expenses of any kind incurred as a
result of acting in that capacity. A limited liability company shall have the
power to purchase and maintain insurance on behalf of any manager, member,
officer, employee or agent of the limited liability company against any
liability asserted against or incurred by the person in that capacity or arising
out of the person's status as a manager, member, officer, employee or agent of
the limited liability company.
Indemnification of Members, Directors and Officers
Article IX of the Operating Agreement of PCMLLC, a copy of which accompanies
this report as an exhibit, provides that any member, director or officer of
PCMLLC who was or is a party or is threatened to be made a party to, or
otherwise becomes involved in, any proceeding (including a proceeding by or in
the right of the company) by reason of the fact that such member, director or
officer is or was an agent of the company shall be indemnified to the fullest
extent permitted by
10
the laws of the State of California, or other applicable jurisdictions, by
PCMLLC against all expenses, amounts paid in settlement, judgments, fines,
penalties and ERISA excise taxes actually and reasonably incurred by or levied
against the member, director or officer in connection with the proceeding if the
member, director or officer acted in good faith and in a manner that the member,
director or officer reasonably believed to be in or not opposed to the best
interests of the company and, with respect to any criminal proceeding, had no
reasonable cause to believe the member's, director's or officer's conduct was
unlawful. A member, director or officer must be conclusively presumed to have
met the relevant standards of conduct, as defined by the laws of the State of
California or other applicable jurisdictions, for indemnification, unless and
until a court of competent jurisdiction, after all appeals, finally determines
to the contrary, and PCMLLC must bear the burden of proof of establishing by
clear and convincing evidence that the member, director or officer failed to
meet those standards of conduct.
To the extent a member, director or officer is successful on the merits or
otherwise in defense of a proceeding, including any claim, issue or matter, the
member, director or officer must be indemnified against expenses actually and
reasonably incurred in connection therewith to the fullest extent permitted by
the laws of the State of California.
Payment of Expenses in Advance
Expenses incurred by a member, director or officer of PCMLLC in connection with
a proceeding will be paid by the company in advance of the final disposition of
the proceeding upon receipt of a written undertaking by or on behalf of the
member, director or officer to repay the amount if it is ultimately determined
that the member, director or officer is not entitled to be indemnified by the
company.
Indemnification of Other Agents
Except in the case of its members, directors and officers, PCMLLC may, but is
not obligated to, indemnify any other person who was or is a party or is
threatened to be made a party to, or otherwise becomes involved in, any
proceeding by reason of the fact that such person is or was an agent of the
company.
Limitations on Indemnification
No payments will be made by PCMLLC in the following cases:
1. To indemnify or advance funds to any person with respect to a
proceeding initiated or brought voluntarily by such person and not by way of
defense, except with respect to a proceeding brought to establish or enforce a
right to indemnification, otherwise than as required under California law,
unless the Board of PCMLLC determines otherwise. Such determination will be made
by (i) a majority vote of a quorum consisting of directors who are not parties
to the proceeding, or (ii) if a quorum is not obtainable, by a quorum of
disinterested directors who receive a written opinion from independent legal
counsel;
2. To indemnify or advance funds to any person for any expenses,
judgments, amounts paid in settlement, fines, penalties or ERISA excise taxes
resulting from the person's
11
conduct that is finally adjudged to have been willful misconduct, knowingly
fraudulent or deliberately dishonest; or
3. If a court of competent jurisdiction finally determines that any
indemnification or advance of expenses is unlawful.
Insurance
PCMLLC has the power to purchase and maintain insurance or make other financial
arrangements on behalf of any person who is or was an agent of the company
against any liability asserted against the person and incurred by the person in
any such capacity, or arising out of the person's status as an agent of the
company, whether or not PCMLLC would have the power to indemnify the person
against liability under the provisions of the Operating Agreement or California
law.
Heirs, Executors and Administrators
The indemnification and advancement of expenses will, unless otherwise provided
when authorized or ratified, continue as to a person who ceases to be an agent
of the company and will inure to the benefit of the person's heirs, executors
and administrators.
Notice from the Securities and Exchange Commission
Insofar as indemnification for liabilities arising under the Securities Act of
1933, as amended (the "Securities Act"), may be permitted to directors, officers
and controlling persons of PCMLLC, we have been advised that in the opinion of
the Securities and Exchange Commission such indemnification is against public
policy as expressed in the Securities Act and is, therefore, unenforceable.
ITEM 2. ACQUISITION OR DISPOSITION OF ASSETS
---------------------------------------------
Performance Capital Management, LLC ("PCMLLC") succeeded to the assets and
liabilities of the following five California limited partnerships and one
California corporation: Performance Capital Management, Inc., a California
corporation ("PCMInc.); 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.
We refer to each of the limited partnerships by its fund number; for example, we
refer to Performance Asset Management Fund III, Ltd., as "PAM III". We refer to
all of the limited partnerships as a group as the "PAM Funds".
12
PCMLLC was formed under a Chapter 11 Bankruptcy Reorganization Plan (the "Plan")
and Operating Agreement. The Plan called for the consolidation of the PAM Funds
and PCMInc. into the new California limited liability company. The PAM Funds
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 PAM Funds consisted primarily of non-performing
credit card loans, as well as cash. PCMInc. collected the portfolios for the PAM
Funds under joint venture agreements.
Under the Plan, PCMLLC succeeded to the assets and liabilities of PCMInc. and
the PAM Funds, and, as described in more detail below, will continue the
business of acquiring and collecting portfolios. PCMLLC issued "LLC Units" to
the PAM Funds, which were then distributed to the investors in the PAM Funds in
February 2003. PCMLLC issued LLC Units to the PAM Funds based on the gross
dollars (approximately $57.4 million) the investors had invested in the
respective PAM Funds. Our Operating Agreement calls for us to make pro rata cash
distributions to investors based on their unreturned capital until all investors
receive their full capital investment back without interest.
The following information pertains to PCMLLC as successor entity to the PAM
Funds and PCMInc.
DESCRIPTION OF BUSINESS
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 but we have also purchased
other forms of indebtedness, including automobile deficiencies and defaulted
judgments. These assets are typically purchased and sold as portfolios. 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
the portfolio, pay our collection and operating costs and still have a profit.
Organizational History
We conduct our business through Performance Capital Management, LLC ("PCMLLC"),
a California limited liability company formed January 14, 2002. On February 4,
2002, PCMLLC succeeded to the assets and liabilities of six entities pursuant to
a plan of reorganization that was confirmed and finalized by a bankruptcy court
effective February 4, 2002. For all practical purposes, we consider February 4,
2002, to be the inception of our business.
Performance Capital Management, LLC succeeded to the assets and liabilities of
five California limited partnerships and one California corporation:
- 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.
13
We refer to each of the limited partnerships by its fund number; for example, we
refer to Performance Asset Management Fund III, Ltd., as "PAM III". We refer to
all of the limited partnerships as a group as the "PAM Funds".
Performance Capital Management, Inc. and the PAM Funds, which were then
controlled by an individual named Vincent Galewick, filed separate voluntary
bankruptcy petitions on December 22 and 23, 1998. On motion by the
California Department of Corporations, the bankruptcy court replaced the
debtor-in-possession with a trustee, James Joseph, on December 30, 1998.
Prior to the bankruptcy filings, Mr. Galewick caused approximately $57.4 million
to be raised by the PAM Funds, of which approximately $49 million was used to
purchase loan portfolios. The PAM Funds typically purchased these credit card
portfolios from Performance Capital Management, Inc., often at a substantial
mark-up over Performance Capital Management, Inc.'s purchase price. Performance
Capital Management, Inc. also collected the portfolios under joint venture
agreements with the PAM Funds. Each PAM Fund's return was based on the
performance of the portfolios that it purchased. Performance Capital Management,
Inc.'s fees for collection services were reasonable given industry standards,
but its loan portfolio mark-ups and the management fees charged by the PAM
Funds' general partner were not.
By early 2001, the bankruptcy trustee concluded that a viable business existed
if the unreasonable mark-ups and management fees were eliminated, and he set out
to develop a plan to reorganize Performance Capital Management, Inc. and the PAM
Funds. Under the plan, our business entity, Performance Capital Management, LLC,
issued "LLC Units" to the PAM Funds, which were then distributed to the
investors in the PAM Funds in February 2003. We issued LLC Units to the PAM
Funds based on the gross dollars (approximately $57.4 million) the investors had
invested in the respective PAM Funds. Our Operating Agreement calls for us to
make pro rata cash distributions to investors based on their unreturned capital
until all investors receive their full capital investment back without interest.
As of our February 4, 2002, inception, we had approximately $38 million of
unreturned capital (certain investors had received approximately $19.3 million
of payments from the various PAM Funds prior to the bankruptcy filings). Note 1
to our financial statements provides financial details concerning the relative
amounts of capital raised and capital returned for each of the PAM Funds.
Following our February 4, 2002, emergence from bankruptcy, we made a $12 million
distribution based on unreturned capital, leaving us with approximately $26
million of unreturned capital to distribute to our investors. After all
investors' capital investments are paid back, any further distributions are to
be made based on LLC Units.
Due to a settlement with Mr. Galewick approved by the bankruptcy court, the
owners of Performance Capital Management, Inc., did not become investors in our
business entity, Performance Capital Management, LLC. Our investors consist only
of those people who invested in the PAM Funds, or their successors-in-interest.
14
Industry Overview
Some portion of all consumer lending transactions end up with the debtor not
honoring its payment obligations. Default rates vary depending on the type of
obligation, the originator of the credit and other factors, but "bad debt" is a
fact of life in consumer lending.
Beginning in the late 1980s, the financial services industry, specifically the
banking and savings and loan industry, underwent numerous changes due to
significant losses incurred during the 1980s. The strain on the Federal Savings
and Loan Insurance Corporation ("FSLIC") as a result of those losses caused not
only the dissolution of the FSLIC, but also a massive government bailout.
Billions of dollars in taxpayer loans were granted to regulators to assist in
paying depositors, as well as providing the capital necessary to clean up the
industry. This situation, better known as the "savings and loan crisis", forced
the restructuring of the entire federal banking and savings and loan industry.
In an attempt to curtail future losses, federal regulators revised requirements
and regulations relating to the reporting of debtor obligations as assets.
Enforcement of those revisions caused industry consolidation and invigorated a
market for debtor obligations that were "written off". As a result of these
regulations, after taking a loss on the "write off", lending institutions can
show income by selling debtor obligations carried at no value on their balance
sheets, instead of incurring further expense to run a personnel-intensive
collection department. An institution liquidating off-balance sheet assets
(i.e., those it has previously "written off") benefits to the extent that the
proceeds from such a sale go directly to the cash account on the balance sheet
without the removal of an on-balance sheet asset. The income from these sales is
of course less than the original "write off", but the ability to liquidate
portfolios of bad debt has become important both to the economics and the
reporting obligations of lending institutions.
The amount of debt available for sale in the industry continues to increase.
Financial institutions previously had forwarded their accounts after "write off"
to collection agencies for further collection activity as standard operating
procedure. After being at an agency for six to twelve months, accounts would be
returned to the financial institutions and then forwarded to another agency,
sometime as many as five times. Many institutions now sell these accounts to get
immediate revenue. In recent years, not only has the total amount of debt
continued to increase, but the percentage of debt that institutions "write off"
continues to increase. These factors continue to create market opportunities for
purchasers of distressed financial instruments, as more institutions discover
the advantages of selling their debts. According to information in the June 2002
issue of Collections & Credit Risk, an industry publication, the following
----------------------------
increases took place in the markets serviced by the debt collection industry:
- credit card charge-offs increased 6.59% in March 2002, from 4.74% in
March 2001, marking the highest rate of increase since February 1991;
- consumer credit outstanding was around $1.7 trillion for the first
quarter of 2002, an approximately 9% increase from 2001;
15
- the total distressed-debt market, from charge-offs to performing
loans, soared from $26 billion in 1998 to $115 billion in 2001, with
the charge-off market alone going from $20 billion to $60 billion.
Participants in the collection industry generally classify bad debts based on
the number of times a collection agency has worked a portfolio to try to collect
it. Portfolios that an institution has just written off and that have never been
worked by a collection agency are referred to as "fresh" paper. Portfolios that
have been worked by one collection agency are referred to as "primary" paper.
Similar terms describe paper worked by two (secondary), three (tertiary), four
(quaternary) and more collection agencies. As a general rule, a purchaser of a
portfolio will receive a greater percentage discount to the portfolio's face
value as it becomes less "fresh".
Participants in the collection industry purchase portfolios either to collect
them or to resell them. Many participants do both. A purchaser may perform the
collection activity itself, or it may contract out that function. Some industry
participants purchase portfolios principally with a view to reselling the
portfolios. For example, a purchaser might acquire a large portfolio and then
break it up into a number of smaller portfolios based on specific attributes for
sale (such as the state in which the debtor resides). Other industry
participants seeking to purchase bad debts with particular attributes would then
purchase these targeted portfolios at a slight premium, returning a profit to
the original purchaser.
MARKET FOCUS
We focus on acquiring portfolios that are not "fresh". We prefer to acquire
primary or secondary paper, based on our due diligence analysis of the
obligations included in the portfolio. We acquire portfolios principally with a
view to collect them, although we do sell certain portions of portfolios we
purchase, such as accounts from particular states where we do not collect, and
then collect the balance of the portfolio. 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.
We have established the infrastructure to collect portfolios. We have
approximately 51 employees who man phones contacting debtors, and we use a
"predictive dialing" telecommunications system (a "dialer") that helps to ensure
that our collectors spend their time on the phones talking to debtors, not
dialing numbers trying to reach them. Because we collect portfolios, we have
developed an experience history that helps us predict what the ultimate value of
a portfolio will be. We have a sophisticated data base to maintain our
experience history that allows us to manipulate variables to assist our due
diligence process when we acquire a new portfolio. We believe that collecting
our portfolios reinforces our ability to realistically assess the price we
should pay when we purchase additional portfolios.
PORTFOLIO ACQUISITION
Originating lenders or portfolio resellers typically sell loan accounts in bulk
portfolios that range in size from tens of thousands to multi-hundred million
dollars in outstanding principal balances. These portfolio sales primarily
consist of a large quantity of charged-off credit card contracts, and
16
to a lesser extent automobile deficiencies, secured and unsecured consumer
installment loans, commercial loans, and other forms of indebtedness. Although
we typically collect a relatively small percentage of the total outstanding
principal balances of most of the portfolios we purchase, we purchase most of
our portfolios at significant discounts that, coupled with effective collection
efforts, permit us to realize a profit.
As a successor to Performance Capital Management, Inc., institutions selling
distressed indebtedness recognize us as a reliable and competent purchaser of
portfolios. We rely on our own contacts and relationships to acquire portfolios,
as well as utilizing outside brokers.
We acquire portfolios without recourse to the seller of the portfolio. By
acquiring title to the debt and collecting it for our own account, we are able
to collect in more states than if we charged a fee to collect debts owned by
third parties.
Upon contacting or being contacted by a potential seller of portfolios, we
generally request certain data for due diligence purposes. We analyze a variety
of data as part of our due diligence process, including:
- the mix of the states in which the debtors are located;
- the average balances outstanding in the portfolio;
- the age of the indebtedness in the portfolio;
- the types of indebtedness in the portfolio (i.e., credit card versus
automobile, etc.);
- the originating lender of the indebtedness;
- the availability of documentation for the indebtedness;
- the date of the last payment on the indebtedness; and
- any prior attempts at collecting the portfolio.
By completing the due diligence process and considering the pertinent
information regarding a potential portfolio acquisition, we believe we develop a
good approximation of the value of the portfolio. We then offer to purchase the
portfolio on terms that we believe will enable us to recover the purchase price
of the portfolio, pay our collection and operating costs and have a profit left
over.
We purchase our portfolios for cash. At this time we do not use credit
arrangements to acquire portfolios or collect portfolios for third parties. We
anticipate that we will continue to purchase portfolios for our own account
using cash and then proceed to collect them, reselling some portions of our
portfolios from time to time as circumstances warrant.
Portfolio Processing
Once we acquire a portfolio we primarily focus on collecting it, although we
frequently sell certain portions of portfolios we purchase, such as accounts
from particular states where we do not collect, and then collect the balance of
the portfolio. In addition, 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
17
course. When we engage in these sales, we continue collecting the portfolio
right up until the closing of the sale.
Collecting a portfolio involves a rigorous campaign to locate and contact the
maximum number of individual debtors. We attempt to locate individual debtors by
continuously utilizing data from various third party data bases. Once we contact
a debtor, our collection representative begins negotiating various payment and
settlement options. These options can include payments in full for all
outstanding obligations, discounted settlements and short-term payment plans.
Because the cost basis for each account is usually only a fraction of the debt
obligation, our collection representatives can usually offer more attractive
settlement and payment options to individual debtors than the originating lender
or contingent collection firms that have to share recoveries with the owner of
the debt. Sometimes we send portfolios (or portions of portfolios) to third
party collection agencies. We use third party collection agencies primarily in
six states where we do not collect because of certain licensing requirements.
In contrast to many other purchasers of distressed indebtedness, we collect the
majority of the portfolios we acquire, rather than using traditional third-party
servicing. We have a fully operational collection facility employing
approximately 51 full-time collectors. We have computer technology and equipment
that aid in the collection and servicing of distressed loan Portfolios. We
utilize collection Dakcs software and a dialer to maximize the efficiency of our
collectors by automatically sifting out calls where a live person does not
answer, enabling our collectors to spend their time talking to live debtors
rather than dialing numbers where there is no answer, a busy signal or an
answering machine. Our Dakcs/dialer system has the flexibility to control for
all types of variables in the way it places calls, for example, being sensitive
to the effect of time zones and controlling for particular state laws that
impose blackout times. We believe that this technology, which is
industry-standard for sophisticated collectors, provides us with the ability to
compete effectively in the collection industry. We also resort to legal process
to aid in collecting our portfolios when the circumstances of a particular
account warrant. We do not have a set policy regarding when to initiate legal
process; we exercise our judgement based on a variety of factors to determine
when we believe using legal process is appropriate.
Competition
Most of the top 50 purchasers of bad debt maintain well-established collections
operations and service and collect the bad debt that they purchase. A secondary
source of competition for distressed asset portfolios is companies that buy debt
in bulk and divide it up into smaller portfolios that are then resold to
collection agencies, private investors and attorneys. Traditional collection
agencies and attorneys purchase bad debt to diversify their operations and add
debt they own to contingency collection work for others.
A number of national companies exist that buy large portfolios and resell and/or
attempt to collect on them for certain period and then resell them. In November
of 2002, Portfolio Recovery Associates went public with a $45 million IPO. They
joined NCO Portfolio Management as one of the few publicly traded companies.
There are also, however, a number of private companies with substantial funding
that are buying large block portfolios. We are attempting to compete with some
of these larger companies by joining together with other firms to bid on some
large
purchases. This is a fairly recent event and we have actually only completed one
purchase to date. In any case, to date we have been able to buy national
portfolios directly from original creditors.
18
Intellectual Property
We have licenses for the software used in our telecommunications and data base
systems. We maintain our data base and our system for performing due diligence
as trade secrets. We do not intend to seek any sort of copyright or business
process patent protection. We have a policy in our employee handbook that
prohibits employees from disclosing trade secrets as a condition of employment.
Government Regulation
Certain of our operations are subject to the Fair Debt Collection Practices Act,
or FDCPA, and comparable statutes existing in many states. Under the FDCPA, a
debt collector is restricted in the methods it uses to collect consumer debt.
For example, a debt collector (1) is limited in communicating with persons other
than the consumer about the consumer's debt, (2) may not telephone at
inconvenient hours, and (3) must provide verification of the debt at the
consumer's request. Requirements under state collection agency statutes vary,
with most requiring compliance similar to that required under the FDCPA. In
addition, some states and certain municipalities require debt collectors to be
licensed with the appropriate authorities before collecting debts from debtors
within those jurisdictions. Our policy is to comply with the provisions of the
FDCPA, comparable state statutes and applicable licensing requirements. We have
established policies and procedures to reduce the likelihood of violations of
the FDCPA and related state statutes. For example, our account representatives
receive training on these policies and must pass a test on the FDCPA, and our
collectors work in an open environment which allows managers to monitor their
interaction with debtors.
In addition to the FDCPA, we are subject to the Fair Credit Reporting Act, or
FCRA. The FCRA is a federal statute that regulates the activities of consumer
reporting agencies, the users of reports, and those whose furnish information to
consumer reporting agencies, and provides rights to consumers affected by such
reports. As a user of credit reports and a furnisher of information, we have
developed policies and procedures to ensure compliance with the FCRA to reduce
the likelihood of erroneous information reporting and to respond quickly to
inquiries by credit agencies and account holders.
We are subject to the provisions of the Gramm-Leach-Bliley Act, as well as
comparable privacy statutes existing in some states. This federal statute
requires that we advise our debtors about our privacy policy the first time we
contact them and once a year for every year that they remain one of our debtors.
If we change our privacy policy, we must promptly notify our debtors of the
change. This legislation requires that we provide our debtors with specific
information about our privacy policy. We do not disclose non-public information
about our debtors except as permitted by law. We do not sell or otherwise share
information about our debtors with outside marketers.
19
Employees
As of March 17, 2003, we had 93 full-time employees and 2 part-time employees
classified as follows: 4 full-time executive officers; and 21 full time and 2
part time administrative personnel, and 68 collection personnel.
We believe that our ability to attract, hire, and retain qualified personnel now
and in the future is important to our success. We believe that our employee
relations are good. None of our employees are represented by a collective
bargaining unit.
Research and Development
We have had no research or development activities since inception.
Environmental Matters
Our current operations do not involve activities that materially affect the
environment. We dispose of ordinary hazardous substances commonly found in an
office environment in substantial compliance with environmental laws.
Risk Factors
Members and prospective purchasers of our securities should carefully consider
the following risk factors in addition to the other information appearing in
this Form 8-K.
WE MAY NOT BE ABLE TO COLLECT SUFFICIENT AMOUNTS ON OUR DEFAULTED LOAN
PORTFOLIOS TO FUND OUR OPERATIONS
Our business consists of acquiring and servicing primarily loan portfolios that
debtors have failed to pay and that the credit originator has deemed
uncollectible and has charged-off. The credit originators generally make
numerous attempts to recover on their defaulted loans, often using a combination
of in-house recovery efforts and third-party collection agencies. These
defaulted loans are difficult to collect and we may not collect a sufficient
amount to cover our investment associated with purchasing the defaulted loan
portfolios and the costs of running our business.
WE MAY NOT BE ABLE TO PURCHASE DEFAULTED LOANS AT APPROPRIATE PRICES, AND A
DECREASE IN OUR ABILITY TO PURCHASE PORTFOLIOS OF LOANS COULD ADVERSELY AFFECT
OUR ABILITY TO GENERATE REVENUE
If one or more credit originators stops selling defaulted loans to us and we are
otherwise unable to purchase defaulted loans from credit originators at
appropriate prices, we could lose a potential source of income and our business
may be materially harmed.
The availability of loan portfolios at prices that generate an appropriate
return on our investment depends on a number of factors both within and outside
of our control, including the following:
20
- the continuation of current growth trends in the levels of loan
obligations;
- sales of loan portfolios by credit originators; and
- competitive factors affecting potential purchasers and credit
originators of loans.
Because of the length of time involved in collecting defaulted loans on acquired
portfolios and the volatility in the timing of our collections, we may not be
able to identify trends and make changes in our purchasing strategies in a
timely manner.
We are currently party to one "forward flow contract." A forward flow contract
is an arrangement in which we agree to purchase defaulted loans based on
specific parameters from a third-party supplier on a periodic basis at a set
price over a specified time period. To the extent that we are unable to renew or
replace the purchased volume represented by our forward flow contract once it
expires, we could lose a potential source of income and our business may be
materially harmed.
LIMITED OPERATING HISTORY
We have only been operating as a consolidated entity since February 2002. As a
result, our business model is still in an evolving stage. The limited operating
history means we do not have the benefit of the many years of experience that
some other companies have and can use to modify their business plans and
optimize their business strategies. Our limited operating history makes an
evaluation our business and prospects difficult. See the section of this report
entitled "Management's Discussion and Analysis of Financial Condition and
Results of Operation".
OUR GROWTH AND OPERATING RESULTS COULD BE IMPAIRED IF WE ARE UNABLE TO MEET OUR
FUTURE CAPITAL NEEDS
Our ultimate success depends on our ability to continue to generate revenue
through our operations. If our operations are impaired for any reason, we do not
have another source of funding readily available to fund our continued
operations. There is no assurance that funds will be available from any source
or, if available, that they can be obtained on terms acceptable to us. If
unavailable, our operations could be severely limited, and we may not be able to
implement our business plan in a timely manner or at all. We may not be able to
access capital markets due to the lack of liquidity of our securities. If equity
financing is used to raise additional working capital, the ownership interests
of our existing LLC Unit holders will be diluted.
WE MAY NOT BE ABLE TO MAKE FUTURE DISTRIBUTIONS AND OUR INVESTORS MAY NOT
RECOVER THEIR ENTIRE CAPITAL CONTRIBUTIONS
Despite the directive in our Operating Agreement requiring us to make sufficient
distributions to our LLC Unit holders to ensure a full return of their capital
contributions to the PAM Funds, our operations may not produce enough income to
enable us to make those distributions. In such a case, our LLC Unit holders may
not recover the full amount of their investments in the PAM Funds.
21
THERE IS NO MARKET FOR OUR SECURITIES AND OUR OPERATING AGREEMENT RESTRICTS THE
TRANSFER OF OUR SECURITIES
There is no trading market for our securities at present and there has been no
trading market to date. We are not planning and do not intend to facilitate the
development of a trading market. The ability to sell LLC Units is also
restricted by our Operating Agreement. These factors make our securities very
illiquid.
WE EXPERIENCE HIGH EMPLOYEE TURNOVER RATES AND MAY NOT BE ABLE TO HIRE AND
RETAIN ENOUGH SUFFICIENTLY TRAINED EMPLOYEES TO SUPPORT OUR OPERATIONS
The debt servicing and collection industry is very labor intensive and, similar
to other companies in our industry, we typically experience a high rate of
employee turnover. Our annual turnover rate, excluding those employees that do
not complete our eight day training program, was 250%. We compete for qualified
personnel with companies in our industry and in other industries. Our growth
requires that we continually hire and train new collectors. A higher turnover
rate among our collectors will increase our recruiting and training costs and
limit the number of experienced collection personnel available to service our
defaulted consumer receivables. If this were to occur, we would not be able to
service our loan portfolios effectively and this would reduce our ability to
continue our growth and operate.
WE SERVE MARKETS THAT ARE HIGHLY COMPETITIVE AND MAY BE UNABLE TO COMPETE WITH
BUSINESSES THAT MAY HAVE GREATER RESOURCES THAN WE HAVE
We face competition in the market we serve from new and existing providers of
debt collection management services, including other purchasers of defaulted
loan portfolios, third-party contingent fee collection agencies and credit
originators that manage their own defaulted credit rather than outsourcing it.
The debt collection industry is highly fragmented and competitive, consisting of
several thousand consumer and commercial agencies, most of which compete in the
contingent fee business.
We face bidding competition in our acquisition of defaulted loan portfolios, and
we also compete on the basis of reputation, industry experience and performance.
Some of our current competitors and possible new competitors may have
substantially greater financial, personnel and other resources, greater
adaptability to changing market needs, longer operating histories and more
established relationships in the industry than we currently have. In the future,
we may not have the resources or ability to compete successfully. As there are
few significant barriers for entry to the industry, there can be no assurance
that additional competitors with greater resources than ours will not enter our
market. Moreover, there can be no assurance that institutions will continue to
sell their defaulted debt at recent levels or at all, or that we may continue to
offer competitive bids for defaulted debt portfolios. If we are unable to
develop and expand our business or adapt to changing market needs as well as our
current or future competitors are able to do, we may experience reduced access
to defaulted debt portfolios at appropriate prices and reduced profitability.
22
WE MAY NOT BE SUCCESSFUL AT ACQUIRING LOANS OF NEW ASSET TYPES
We may pursue the acquisition of loan portfolios of asset types in which we have
little current experience. We may not be successful in completing any
acquisitions of loans of these asset types and our limited experience in these
asset types may impair our ability to collect on these loans. This may cause us
to pay too much for these loans and consequently we may not generate a profit
from these portfolio acquisitions.
OUR COLLECTIONS MAY DECREASE IF BANKRUPTCY FILINGS INCREASE
During times of economic recession, the amount of defaulted loans generally
increases, which contributes to an increase in the amount of personal bankruptcy
filings. Under certain bankruptcy filings, a debtor's assets are sold to repay
credit originators, but since the defaulted consumer receivables we purchase are
generally unsecured we often would not be able to collect on those loans. We
cannot insure that our collections experience would not decline with an increase
in bankruptcy filings. If our actual collection experience with respect to a
defaulted debt portfolio is significantly lower than projected when we purchased
the portfolio, our financial condition and results of operations could
deteriorate.
WE MAY NOT BE ABLE TO CONTINUALLY REPLACE OUR DEBT PORTFOLIOS WITH ADDITIONAL
DEBT PORTFOLIOS SUFFICIENT TO OPERATE EFFICIENTLY AND PROFITABLY
To operate profitably, we must continually acquire and service a sufficient
amount of defaulted debt to generate revenue that exceeds our expenses. Fixed
costs such as salaries and lease or other facility costs constitute a
significant portion of our overhead and, if we do not continually replace the
debt portfolios we service with additional portfolios, we may have to reduce the
number of our collection personnel. We would then have to rehire collection
staff as we obtain additional debt portfolios. These practices could lead to:
- low employee morale;
- fewer experienced employees;
- higher training costs;
- disruptions in our operations;
- loss of efficiency; and
- excess costs associated with unused space in our offices.
Furthermore, heightened regulation of the credit card and consumer lending
industry may result in decreased availability of credit to consumers,
potentially leading to a future reduction in defaulted debt available for
purchase from credit originators. We cannot predict how our ability to identify
and purchase debt and the quality of the debt would be affected if there is a
shift in consumer lending practices, whether caused by changes in the
regulations or accounting practices applicable to credit originators, a
sustained economic downturn or otherwise.
23
OUR OPERATIONS COULD SUFFER FROM TELECOMMUNICATIONS OR TECHNOLOGY DOWNTIME OR
INCREASED COSTS
Our success depends in large part on sophisticated telecommunications and
computer systems. The temporary or permanent loss of our computer and
telecommunications equipment and software systems, through casualty or operating
malfunction, could disrupt our operations. In the normal course of our business,
we must record and process significant amounts of data quickly and accurately to
access, maintain and expand the databases we use for our collection activities.
Any failure of our information systems or software or our backup systems would
interrupt our business operations and harm our business. Our headquarters is
located in a region that is susceptible to earthquake damage, which may increase
the risk of disruption of information systems and telephone service for
sustained periods.
Further, our business depends heavily on services provided by various local and
long distance telephone companies. A significant increase in telephone service
costs or any significant interruption in telephone services could reduce our
profitability or disrupt our operations and harm our business.
WE MAY NOT BE ABLE TO SUCCESSFULLY ANTICIPATE, MANAGE OR ADOPT TECHNOLOGICAL
ADVANCES WITHIN OUR INDUSTRY
Our business relies on computer and telecommunications technologies and our
ability to integrate these technologies into our business is essential to our
competitive position and success. Computer and telecommunications technologies
are evolving rapidly and are characterized by short product life cycles. We may
not be successful in anticipating, managing or adopting technological changes on
a timely basis.
While we believe that our existing information systems are sufficient to meet
our current demands and continued expansion, our future growth may require
additional investment in these systems. We depend on having the capital
resources necessary to invest in new technologies to acquire and service debt.
We cannot ensure that adequate capital resources will be available to us at the
appropriate time.
OUR SENIOR MANAGEMENT TEAM IS IMPORTANT TO OUR CONTINUED SUCCESS AND THE LOSS OF
ONE OR MORE MEMBERS OF SENIOR MANAGEMENT COULD NEGATIVELY AFFECT OUR OPERATIONS
The loss of the services of one or more of our executive officers or key
employees could disrupt our operations. We have employment agreements with David
Caldwell, our Chief Operations Officer, William Constantino, our Chief Legal
Officer, Darren Bard, our Chief Information Officer, and Wendy Curran, our Chief
Officer of Human Resources. However, these agreements do not and will not assure
the continued services of these officers. Our success depends on the continued
service and performance of our executive officers, and we cannot guarantee that
we will be able to retain those individuals. The loss of the services of one or
more of our executive officers could seriously impair our ability to continue to
acquire or collect on debt and to manage and expand our business. We do no
currently maintain key man life insurance for our officers.
24
OUR ABILITY TO RECOVER OUR DEFAULTED DEBT PORTFOLIOS MAY BE LIMITED UNDER
FEDERAL AND STATE LAWS
Federal and state laws may limit our ability to recover and enforce our debt
portfolios regardless of any act or omission on our part. Some laws and
regulations applicable to credit card issuers may preclude us from collecting on
defaulted loan portfolios we purchase if the credit card issuer previously
failed to comply with applicable law in generating or servicing those loans.
Collection laws and regulations also directly apply to our business. Additional
consumer protection and privacy protection laws may be enacted that would impose
additional requirements on the enforcement of and collection on consumer credit
card debt. Any new laws, rules or regulations that may be adopted, as well as
existing consumer protection and privacy protection laws, may adversely affect
our ability to collect on our debt portfolios and may harm our business. In
addition, federal and state governmental bodies are considering, and may
consider in the future, other legislative proposals that would regulate the
collection of our debt portfolios. Although we cannot predict if or how any
future legislation would impact our business, our failure to comply with any
current or future laws or regulations applicable to us could limit our ability
to collect on our defaulted loan portfolios, which could reduce our
profitability and harm our business.
LIMITED LIABILITY OF OUR EXECUTIVE OFFICERS AND DIRECTORS MAY DISCOURAGE
SHAREHOLDERS FROM BRINGING A LAWSUIT AGAINST THEM.
Our Operating Agreement contains provisions that limit the liability of our
directors for monetary damages and provide for indemnification of our officers
and directors. These provisions may discourage Members from bringing a lawsuit
against our officers and directors for breaches of fiduciary duty and may also
reduce the likelihood of derivative litigation against our officers and
directors even though such action, if successful, might otherwise have benefited
the Members. In addition, a Member's investment in PCMLLC may be adversely
affected to the extent that costs of settlement and damage awards against our
officers or directors are paid by PCMLLC pursuant to the indemnification
provisions of our Operating Agreement. The impact on a Member's investment in
terms of the cost of defending a lawsuit may deter the Member from bringing suit
against one of our officers or directors. We have been advised that the SEC
takes the position that these provisions do not affect the liability of any
officer or director under applicable federal and state securities laws.
DESCRIPTION OF PROPERTY
Our principal executive offices and primary operations facility are located in
approximately 14,000 square feet of leased space in Anaheim, California. The
term of the lease is five years commencing on December 1, 2001. A security
deposit of $50,357 was paid upon execution of the lease on October 24, 2001. The
monthly lease rate for year two of the lease is approximately $23,000. We will
pay a monthly lease rate of approximately $23,780, $24,479 and $25,178 for the
third, fourth and fifth years, respectively, of the lease. We do not consider
any specific leased or owned facility to be material to our operations. We
believe that equally suitable alternative facilities are available in the area
where we currently do business.
25
MANAGEMENT'S DISCUSSION AND ANALYSIS
OR PLAN OF OPERATION
The following discussion should be read in conjunction with our audited Balance
Sheet included herein. Certain statements contained herein may constitute
forward-looking statements, as discussed at the beginning of this report on Form
8-K. Our actual results could differ materially from the results anticipated in
the forward-looking statements as a result of a variety of factors, including
those discussed in our filings with the Securities and Exchange Commission and
in the subsection above entitled "Risk Factors".
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, but we have also purchased
other forms of indebtedness, including automobile deficiencies and defaulted
judgments. These assets are typically purchased and sold as portfolios.
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 the portfolio, pay our collection and operating costs and
still have a profit. We record our portfolios at cost based on the purchase
price. We reduce the cost bases of our portfolios on a portfolio-by-portfolio
basis based on collections, sales of some or all of the portfolio and impairment
of net realizable value.
We frequently sell certain portions of portfolios we purchase, such as accounts
from particular states where we do not collect, and then collect the balance of
the 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. When we engage in these sales, we continue
collecting the portfolio right up until the closing of the sale.
We refer to the discounted present value of the actual amount of money that we
believe a portfolio will ultimately produce as the "fair value" of the
portfolio. If we conduct our business successfully, the aggregate fair value of
our portfolios should be substantially greater than the aggregate cost basis of
our portfolios presented on our balance sheet. We must make assumptions to
determine fair value, the most significant of which are the magnitude and timing
of future collections and the discount rate used to determine present value.
Because of the inherent uncertainty associated with predicting future events,
our determinations of fair value at any particular point in time are only
estimates, and actual fair value could ultimately vary significantly from our
estimate.
We earn revenues from collecting our portfolios and from selling our portfolios
or portions of our portfolios. We recognize gross revenue when we collect an
account and when we sell a portfolio or a portion of it. On our income statement
we reduce our gross revenues by the cost
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basis recovery of our portfolios to arrive at net revenue. For collections, we
reduce the cost basis of the portfolio dollar-for-dollar until we have
completely recovered the cost basis of the portfolio. When we sell a portfolio
or a portion of it, to the extent of remaining cost basis for the portfolio, we
reduce the cost basis of the portfolio by a percentage of the original portfolio
cost. "Face amount" means the entire amount of a debt that we purchase, which
usually significantly exceeds the amount of the debt that we will ultimately
collect.
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.
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, 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.
Basis of Presentation
We present our financial statements based on our emergence 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. As discussed in more detail in Note 2 to our
financial statements, we do not present comparative financial information for
the predecessor entities in bankruptcy because we believe it would be
prohibitively expensive, if not impossible, to reconstruct accurate
accrual-based consolidated financial information for the six entities that were
in bankruptcy, and any financial statements developed for prior bankrupt periods
would not provide meaningful information sufficient to justify the cost.
Critical Accounting Estimates
We present investments in portfolios on our balance sheet at the lower of cost,
market, or estimated net realizable value. As discussed above, we reduce the
cost basis of a portfolio on a proportionate basis when we sell a portion of the
portfolio, and we treat amounts collected on a portfolio as a reduction to the
carrying basis of the portfolio on an individual portfolio basis. When we
present financial statements we assess the estimated net realizable value of our
portfolios on a portfolio-by-portfolio basis, and we reduce the value of any
portfolio 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
27
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. Once we write down a particular portfolio, we do not increase it in
subsequent periods if our plans and intentions or our assumptions change.
We present the fair value of our portfolios only in the notes to our financial
statements, not in the basic financial statements themselves. In order to
understand our financial statements the reader must understand the concepts
involved in estimation of the fair value of our portfolios, as discussed in the
section above entitled "Overview". Because of the inherent uncertainty
associated with predicting future events, our determinations of fair value at
any particular point in time are only estimates, and actual fair value could
ultimately vary significantly from our estimate.
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. We believe this method of accounting for the amortization of the
purchase price of our portfolios is conservative and minimizes the effect of
estimation on our results of operations. This policy has the effect of
"front-loading" expenses, however, and 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. Although this accounting policy
may be criticized for not matching portfolio cost basis to revenue on a
proportionate basis over the life of the portfolio, we believe a policy grounded
in conservatism is preferable to a policy of attempting to estimate the
appropriate matching percentages, due to the distressed nature of the portfolio
assets and the lack of assurance that projected collections will actually occur.
When we sell a portfolio or a portion of it, to the extent of remaining cost
basis for the partfolio, we reduce the cost basis of the portfolio by a
percentage of the original portfolio cost. 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. We believe our policy,
which is grounded in this objective measure for cost basis recovery, is
preferable to a policy that would attempt to estimate whether a portion of a
portfolio being sold is more or less valuable than the remaining accounts that
comprise the portfolio, because our policy minimizes the effect of estimation on
our results of operations.
Liquidity and Capital Resources
At February 4, 2002, we had approximately $15.5 million of cash and cash
equivalents. Subsequent to that date, we used approximately $12.0 million for a
distribution to our Members. At February 4, 2002, we had total liabilities of
approximately $1.4 million.
Our portfolios provide our principal source of liquidity. Over time, we expect
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. At February 4,
2002, we estimated the fair value of our portfolios at approximately $12
million, which exceeded the cost basis of our portfolios of approximately $4.8
million at February 4, 2002, by approximately $7.2 million. We used a discount
rate of 20% to determine fair value of our portfolios. If we assessed collection
risk as greater for our
28
portfolios, and instead used a discount rate of 25%, our estimate of fair value
would have been $11,200,000 at February 4, 2002. If we assessed collection risk
as lower and used a discount rate of 15%, our estimate of fair value would have
been $12,800,000 at February 4, 2002. Our estimate of fair value also would
change if we revised our projections of the magnitude and timing of future
collections. Because of the inherent uncertainty associated with predicting
future events, our determinations of fair value at any particular point in time
are only estimates, and actual fair value could ultimately vary significantly
from our estimate.
We plan to realize the difference between fair value and cost basis over time as
we collect our portfolios. We generally collect our portfolios over periods of
time ranging from 3 years to 7 years. If we succeed in collecting our portfolios
and realize the difference between fair value and cost basis of our portfolios,
we will recover the cost we paid for them, pay our collection and operating
costs, and still have excess cash. We plan to use some of the excess cash we
generate to make distributions to our members and interest holders. We
anticipate making our first distribution (not counting the initial $12 million
distribution made shortly after emergence from bankruptcy) during the second
quarter of 2003, based on excess cash generated through March 31, 2003.
We plan to reinvest the balance of our excess cash, and the cash generated by
collecting the cost basis of our portfolios, in acquisition of additional
portfolios to continue growing the fair value of our portfolios on a quarter to
quarter basis. In general, we expect this increase in portfolio fair value to
result in a corresponding increase in the cost basis of our portfolios presented
on our balance sheet. The magnitude and timing of our collections could cause
cost basis to decline in some quarters when fair value actually increases,
however, because we "front-load" our cost basis recovery instead of matching
portfolio cost basis recovery to revenue on a proportionate basis over the life
of the portfolio.
Our Board of Directors has described this strategy as having two parts:
- Provide an annuity without impairing the value of the business; and
- Grow the business to increase the annuity.
We do not have any lines of credit or other debt financing available to us at
this time. We do not have any plans to raise equity capital. Based on our cash
position and current financial resources, and assuming our operating results
continue to increase at projected levels, we believe we have adequate capital
resources to continue our business as presently conducted for the foreseeable
future.
We do not have any contractual commitments to make capital expenditures, and we
have not budgeted any capital expenditures for the coming year. 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, which we do not
anticipate having to replace within the next year.
29
Recent Accounting Pronouncements
We continue to assess the effects of recently issued accounting standards. The
impact of all recently adopted and issued accounting standards has been
disclosed in the footnotes to our audited Balance Sheet, Note 5.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
No transactions with management or other parties occurred since February 4, 2002
(inception) that would otherwise be reported under this section.
It is our current policy that all transactions with officers, directors, 5% Unit
holders and their affiliates be entered into only if they are approved by a
majority of the disinterested directors, are on terms no less favorable to
PCMLLC than could be obtained from unaffiliated parties, and are reasonably
expected to benefit PCMLLC.
LEGAL PROCEEDINGS
In March 2003, Michael Cushing filed a Motion for Allowance and Payment of
Chapter 11 Claim with the United States Bankruptcy Court for the Central
District of California, Santa Ana Division (the "Bankruptcy Court"). The claims
pertaining to PCMLLC amount to $170,000 in aggregate. Mr. Cushing alleges that
the claims were filed for review during the bankruptcy proceedings. The claims
were not, however, made known to us during the six-month period we had to object
to them and were not on the claims list filed with the Bankruptcy Court. On
March 17, 2003, we filed a motion with the Bankruptcy Court opposing the claims.
We object to Mr. Cushing's claims as they were not on the Bankruptcy Court's
register as claims against PCMInc. or the PAM Funds. A hearing was held on March
27, 2003. Following the hearing, the Bankruptcy Court issued its order providing
that the period to object to claims is reopened for a period of 30 days, or
until April 27, 2003. PCMLLC intends to prepare and file an objection to Mr.
Cushing's claims. Management does not believe that this claim will be found to
be valid by the court and has not accrued for it as of February 4, 2002.
Management does not believe the ultimate outcome of this claim will have a
material effect on our financial position.
In February 2001, a Consent Decree was entered in United States District Court
for the Central District of California in an action involving the United States
of America v. Performance Capital Management, Inc. Under the terms of the
Consent Decree PCMInc. had a civil penalty pursuant to Section 621(a) of the
Fair Credit Reporting Act, 15 U.S.C. (section symbol) 1681s(a) of $2,000,000
waived. The Consent Decree basically had PCMInc. and its successors agree to
follow the provisions of the Fair Credit Reporting Act. The Consent Decree
ordered, among other specifics, that PCMInc. and its successors, officers,
employees, et al, are (a) enjoined from failing to report correct delinquency
dates to consumer reporting agencies, (b) enjoined from failing to properly
investigate consumer disputes and verify, correct or delete the reporting of
such information to consumer reporting agencies within the time set forth in the
Fair Credit Reporting Act, (c) enjoined from failing to report accounts as
"disputed" to consumer reporting agencies when consumers dispute accounts either
in writing, orally, or by electronic means, and (d) enjoined from failing to
comply in any other respect with the Fair Credit Reporting Act.
30
The Consent Decree provides for a period of three years access to the business,
all computerized databases, the right to inspect and copy all relevant
documents, and the right to interview officers and employees of PCMLLC.
Except as described above, to the knowledge of our executive officers and
directors, neither we nor our subsidiaries are party to any legal proceeding or
litigation and none of our property is the subject of a pending legal proceeding
and our executive officers and directors know of no other threatened or
contemplated legal proceedings or litigation.
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
See Item 4 in this report on Form 8-K.
ITEM 3. BANKRUPTCY OR RECEIVERSHIP
-----------------------------------
(B) CONFIRMATION OF PLAN OF REORGANIZATION
(1) & (2) Identity of the Court and Date of the Order
As previously reported in reports on Form 8-K dated February 1, 1999 and filed
on February 10, 1999 by Performance Asset Management Fund III, Ltd. and
Performance Asset Management Fund IV, Ltd., respectively, 10 related entities
filed for voluntary reorganization with the United States Bankruptcy Court for
the Central District of California, Santa Ana Division (the "Bankruptcy Court"),
under Chapter 11 of the Bankruptcy Code (the "Chapter 11 Cases") on December 22
and 23, 1998. The Chapter 11 cases were consolidated for purposes of
administration under case number SA 98-27040-RA.
On January 24, 2002, the Bankruptcy Court entered an order (the "Confirmation
Order") confirming the Joint Chapter 11 Plan of Reorganization of Performance
Capital Management, LLC., et al., (the "Plan"). Six of the eleven entities that
filed for voluntary reorganization - Performance Capital Management, Inc., a
California corporation ("PCMInc."), Performance Asset Management Fund, Ltd., a
California limited partnership ("PAM I"), Performance Asset Management Fund II,
Ltd., a California limited liability partnership ("PAM II"), Performance Asset
Management Fund III, Ltd., a California limited partnership ("PAM III"),
Performance Asset Management Fund IV, Ltd., a California limited partnership
("PAM IV"), and Performance Asset Management Fund V, Ltd., a California limited
partnership ("PAM V") (each of PAM I through Pam V sometimes referred to as a
"PAM Fund" and collectively referred to as the "PAM Funds") (collectively, the
PAM Funds and PCMInc. are referred to as the "Plan Debtors") - emerged from
their cases under Chapter 11 of the Bankruptcy Code pursuant to the terms of the
Plan as one consolidated entity named Performance Capital Management, LLC
("PCMLLC"). The other four entities - Vision Capital Services Corporation, a
California corporation, Income Network Company, Inc., a California corporation,
Performance Development Inc., a California corporation, Atlas Equity Inc., a
California corporation (dba Performance Telecom, dba Performance Communications
Services, dba Allen Richards & Associates) - had their cases dismissed or were
liquidated (collectively referred to as the
31
"Liquidating Debtors"). Copies of the Plan and the Confirmation Order are
included as Exhibits 2.1 and 99.1, respectively, to this report on Form 8-K.
PCMInc. and the PAM Funds are presently inactive, with no staff or employees.
The general partner of the PAM Funds is NOD, Inc. The PAM Funds will be
dissolved since the distribution to the limited partners of the PAM Funds of
their PCMLLC Unit distributions occurred in February 2003.
On December 26, 2002, the Bankruptcy Court entered an order to modify the Plan
of Reorganization in response to a motion filed by PCMLLC to amend the company's
Operating Agreement. The material amendments to the Operating Agreement were as
follows:
- Section 4.6 is amended to add that Members shall have the right to
vote upon the election of any successor Director, except with respect
to any midterm vacancy on the Board of Directors which may be filled
by the Board of Directors;
- Section 4.7.4 is amended to change the voting requirements for
approving future amendments to the Operating Agreement from the
current unanimous vote to that of a majority of a quorum, with a
quorum being fixed as the number of Members present in person or by
proxy whose aggregate percentage interests exceed 33 1/3% of the
aggregate percentage interests of all Members entitled to vote at a
meeting of the Members;
- Section 4.7.4 is further amended to change the voting requirements for
approving changes to the Articles of Organization of PCMLLC, from a
unanimous vote to a majority of the aggregate percentage interests of
all Members;
- Section 5.2.7 is added and governs the filling of vacancies on the
Board of Directors; and
- Section 6.3 is added and governs the transfer of a Membership interest
to a third party and the rights of such transferee.
A copy of the First Amendment to the Operating Agreement is included as
Exhibit 3.3 to this report on Form 8-K.
(3) PLAN SUMMARY
The following is a summary of the matters contemplated by the Plan and only
highlights the substantive provisions of the Plan. It is not intended to be a
full description of or a substitute to the Plan and is qualified in its entirety
by the full text of the Plan.
Classification and Treatment of Claims and Equity Security Interests
- --------------------------------------------------------------------
The principal provisions of the Plan with respect to the classification and
treatment of claims and equity security interests are as follows:
- Generally, the Plan provides for the consolidation of the Plan Debtors
into a new entity to be known as Performance Capital Management, LLC,
a California limited liability company;
32
- PCMLLC will conduct the same type of businesses as conduced by the
Plan Debtors prior to the confirmation of the Plan;
- In consideration for the contribution by the PAM Funds of sums
sufficient to pay the allowed claims against PCMInc., PCMInc. is
required to contribute its property to PCMLLC;
- As part of its formation, PCMLLC will issue membership interests to
the PAM Funds. The PAM funds must re-distribute the PMCLLC Units to
their limited partners;
- No distributions will be made, and no rights will be retained, on
account of any claim or equity security interest that is not an
allowed claim or an allowed equity security interest;
- All allowed claims of creditors are to be paid in full after the
Effective Date, or February 4, 2002, without interest;
- The Plan requires that certain allowed Administrative Expense Claims
shall be paid on the Effective Date or as soon thereafter as is
reasonably practicable;
- Ordinary Course Administrative Claims will be paid in accordance with
the terms and conditions of the particular transaction that gave rise
to the claim;
- Administrative Tax Claims will be allowed only if the proper filings
are timely made and the Bankruptcy Court allows the claim to be paid;
- Professional-Fee Claims will be allowed only if the proper filings are
timely made and the Bankruptcy Court allows the claim to be paid;
- Holders of Class 1 Priority Unsecured Claims are entitled to receive
payment in full as soon as practicable after the Effective Date, with
interest;
- Holder of Class 2 Secured Claims retains its rights in the real
property held by PCM, which is securing the obligation and which
remains unaltered by the provisions of the Plan;
- Holders of Class 3 of General Unsecured Claims against the PAM Funds
are entitled to receive payment in full as soon as practicable after
the Effective Date, without interest;
- Holders of Classes 4 through 8 of General Unsecured Claims against the
PAM Funds are entitled to receive payment in full as soon as
practicable after the Effective Date, with interest at the rate of
4.4% per annum commencing on December 23, 1998;
- Class 9 PCMInc. Equity Security Holders arising from their ownership
of PCMInc. Equity Security Interests remain unaltered and unaffected
and they are unimpaired and not entitled to vote on the Plan;
33
- Holders of Classes 10 through 14, the five PAM Funds, are entitled, on
the Effective Date, to each receive an amount of PCMLLC Units equal to
the total number of PCMLLC Units currently authorized by PCMLLC
multiplied by the fraction obtained by dividing the total cash
investment made by the limited partners in each PAM Fund by the total
cash investment made by the limited partners in all of the PAM Funds
combined (fractional Units to be rounded up or down by PCMLLC to the
nearest full unit);
- As soon as practicable thereafter, the PAM Funds will distribute their
PCMLLC Units to their respective limited partners in an amount equal
to the number of PCMLLC Units held by all of the PAM Funds multiplied
by the fraction obtained by dividing total cash investment made by
each limited partner in each such PAM Fund by the total cash
investment of all the limited partners in all of the PAM Funds
(fractional Units to be rounded up or down by PCMLLC to the nearest
full unit);
- As soon as practicable after the Effective Date, the PAM Funds are
collectively holding approximately $16.6 million of which not less
than $12 million and as much as $13 million, within the sole
discretion of PCMLLC, will be made available for distribution by
PCMLLC to the PAM Funds limited partners (each limited partner will
participate from this cash fund in the ratio that each limited
partner's unreturned capital bears to the total unreturned capital of
all the limited partners);
- Any and all further distributions to be made by PCMLLC shall be made
as provided for in the Operating Agreement, which Operating Agreement
provides for distributions based on the ratio of a limited partner's
unreturned capital to all of the limited partners' unreturned capital
until all of the limited partners have received all unreturned
capital; thereafter distributions to the limited partners will be
based on the number of PCMLLC Units held by each of the limited
partners;
- Class 15 interests of NOD, Inc. as general partner of each of the PAM
Funds remains unaltered and, on the Effective Date, shall resign and
shall have no interest or claim against PCMLLC, the PAM Funds, the
limited partners or the Trustee;
Means of Effectuating the Provisions of the Plan
- -------------------------------------------------------
- Consolidation of Plan Debtors. On or soon after the Effective Date of
-----------------------------
the Plan, the assets of PCMInc. and the PAM Funds will be consolidated
with the formation of PCMLLC, and in consideration for the
contribution of the Plan Debtors' property(except its ownership
interest in PCMInc.) to PCMLLC, each of the PAM Funds will receive the
initial PCMLLC Units and the debts and obligations of the PAM Funds
and PCMInc. as fixed by the Plan will be assumed and paid by PCMLLC.
The trustee is authorized to execute all documents necessary to
effectuate the consolidation.
- Exchange of Partnership Interests and Issuance of PCMLLC Membership
----------------------------------------------------------------------
Interests. As soon as practicable after the Effective Date, each of
---------
the PAM Funds shall distribute their respective initial PCMLLC Units
their limited partners, rounded to the nearest whole LLC Unit. As of
the Effective Date and notwithstanding whether a limited partner of
the
34
PAM Funds has voted for or against the Plan, each holder of a
PCMLLC Unit will be deemed to have executed the Operating Agreement
and, further, will be deemed to have consented to each and every
provision of the Operating Agreement and deemed to have agreed to be
bound thereby. To the extent that the exchange of limited partnership
interests and the issuance and transfer of LLC Units is subject to
Section 5 of the Securities Act of 1933 or any state or local law
requiring registration for offer or sale of a security or registration
or licensing of an issuer or underwriter of, or broker or dealer in a
security, such law shall not and does not apply in that Section
1145(a)(i) of the Bankruptcy Code exempts the Plan Debtors and/or
PCMLLC from such compliance.
- Funding for the Plan. The Plan will be funded by cash on hand and
-----------------------
cash from operations of PCMLLC.
- PCMLLC Management. After the Effective Date, management of PCMLLC
------------------
will have such powers and duties typically provided by and for the
officers, directors and management of a limited liability company as
organized under the laws of the State of California. The initial
officers shall be the following: David Caldwell shall be the Chief
Operating Officer; Darren Bard shall be the Information Officer; Wendy
Curran shall be Chief Human Resources Officer; and William Constantino
shall be Chief of Legal Affairs. The Trustee, James J. Joseph, shall
be available to provide his services to the Board of Directors as a
consultant. There shall be a Board of Directors consisting of eight
directors with the powers and duties of a Board of Directors as
detailed in the Operating Agreement or as otherwise provided by the
laws of the State of California. The initial directors of PCMLLC shall
be the following: David Barnhizer; Lester T. Bishop; Larissa Gadd;
Phillip H. Kief; Sanford A. Lakoff; Larry C. Smith; and Rodney L.
Woodworth.
- Procedures for Resolving and Treating Disputed Claims and Disputed
----------------------------------------------------------------------
Equity Interests. No distribution will be made under the Plan on
-----------------
account of any disputed claim or equity security interest, unless and
until the claim becomes an Allowed Claim, as that term is defined in
the Plan, or the equity interest becomes an Allowed Equity Security
Interest, as that term is defined in the Plan. From and after the
Effective Date, any and all claims and defenses to any claims will be
transferred to PCMLLC. PCMLLC will be the owner and entitled to
initiate and prosecute any objection to a claim.
- Objections to Claims and Equity Security Interests. Except as
--------------------------------------------------------
otherwise provided for Administrative Claims, objections to any claim
or equity security interest must be filed and served upon the holder
of such claim or equity security interests on or before the expiration
of the sixth month after the Effective Date, unless extended by an
Order of the Bankruptcy Court.
- Disbursing Agent. PCMLLC will act as the Disbursing Agent for the
-----------------
purpose of making all distributions to claimants and/or creditors
provided for under the Plan. The Disbursing Agent will serve without
bond and will receive no compensation for distribution services
rendered and expenses incurred pursuant to the Plan.
35
(4) Securities Issued Under the Plan
Upon implementation of the Plan, PCMLLC issued a total of 571,550 LLC Units to
the following members:
MEMBER'S NAME NUMBER OF LLC UNITS PERCENTAGE INTEREST
- -------------------------------- ------------------- --------------------
Performance Asset Management
Fund, Ltd., a California limited
liability partnership 52,050 9%
- -------------------------------- ------------------- --------------------
Performance Asset Management
Fund II, Ltd., a California
limited liability partnership 76,700 14%
- -------------------------------- ------------------- --------------------
Performance Asset Management
Fund III, Ltd., a California
limited liability partnership 99,900 17%
- -------------------------------- ------------------- --------------------
Performance Asset Management
Fund IV, Ltd., a California
limited liability partnership 285,950 50%
- -------------------------------- ------------------- --------------------
Performance Asset Management
Fund V, Ltd., a California
limited liability partnership 56,950 10%
- -------------------------------- ------------------- --------------------
Total 571,550 100%
- -------------------------------- ------------------- --------------------
As soon as practicable after the Effective Date, the PAM Funds will distribute
their PCMLLC Units to their respective limited partners in an amount equal to
the number of PCMLLC Units held by all of the PAM Funds multiplied by the
fraction obtained by dividing total cash investment made by each limited partner
in each such PAM Fund by the total cash investment of all the limited partners
in all of the PAM Funds (fractional Units to be rounded up or down by PCMLLC to
the nearest full unit).
(5) FINANCIAL INFORMATION
A consolidated audited balance as of February 4, 2002, and the notes thereto, of
PCMLLC accompanies this report on Form 8-K and is incorporated herein by
reference.
36
ITEM 4. CHANGES IN REGISTRANT'S CERTIFYING ACCOUNTANT
------------------------------------------------------
Since coming out of bankruptcy in February 2002, PCMLLC's principal independent
accountant has been Moore Stephens Wurth Frazer & Torbet, LLP of Orange,
California. Effective January 13, 2003, the Audit Committee of PCMLLC approved
the engagement of Moore Stephens Wurth Frazer & Torbet, LLP as the company's
independent accountants to audit its financial statements as of February 4, 2002
and for the year ended December 31, 2002 and to review its interim financial
statements during that period.
Prior to engaging Moore Stephens Wurth Frazer & Torbet, LLP, PCMLLC, or someone
on its behalf, did not consult with the new accountants regarding the
application of accounting principles to a specific completed or contemplated
transaction, or the type of audit opinion that might be rendered on PCMLLC's
financial statements, and no written or oral advice was provided by the new
accountants that was an important factor considered by PCMLLC in reaching a
decision as to an accounting, auditing or financial reporting issue. PCMLLC has
furnished the above disclosure, made in response to Item 304(a) of Regulation
S-B, to Moore Stephens Wurth Frazer & Torbet, LLP for its review.
ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS
------------------------------------------
(a) FINANCIAL STATEMENTS OF BUSINESS ACQUIRED.
The following audited financial statements as required by Regulation S-B,
Item 310(c) are included with this report:
Balance Sheet (audited) as of February 4, 2002 (inception)
(b) PRO FORMA FINANCIAL INFORMATION
The pro forma financial information required by Regulation S-B, Item 310(d)
is not materially different from the audited balance sheet provided with this
report.
(c) EXHIBITS
Exhibit
Number Description
- ------ -----------
2.1 Joint Chapter 11 Plan of Reorganization Proposed by Chapter 11 Trustee
and the Official Committee of Equity Security Holders effective
February 4, 2002
2.2 First Amended Disclosure Statement Describing Joint Chapter 11 Plan
Proposed by Chapter 11 Trustee and the Official Committee of Equity
Security Holders approved on October 12, 2001
3.1 Performance Capital Management, LLC Articles of Organization
37
3.2 Operating Agreement for Performance Capital Management, LLC
3.3 First Amendment to Operating Agreement for Performance Capital
Management, LLC
4.1 Specimen Performance Capital Management, LLC Unit Certificate
4.2 Specimen Performance Capital Management, LLC Economic Interest
Unit Certificate
4.3 Provisions in the Operating Agreement for Performance Capital
Management, LLC pertaining to the rights of LLC Unit holders (see
Exhibit 3.2 and 3.3)
23.1 Consent of Independent Auditors
99.1 Order Confirming Joint Chapter 11 Plan Proposed by Chapter 11 Trustee
and the Official Committee of Equity Security Holders entered on
January 24, 2002
99.2 Order on Motion of Performance Capital Management, LLC, successor to
Chapter 11 Debtor, to Modify Confirmed Chapter 11 Plan of
Reorganization entered on December 26, 2002
38
SIGNATURES
----------
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended,
the registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
PERFORMANCE CAPITAL MANAGEMENT, LLC
March 31, 2003 By: /s/ David J. Caldwell
- -------------------- ----------------------------------
(Date) David J. Caldwell
Its: Chief Operations Officer
39
INDEX TO FINANCIAL STATEMENTS
Independent Auditors' Report dated March 14, 2003 . . . . . . . . F-1
Balance Sheet as of February 4, 2002 (audited). . . . . . . . . . F-2
Notes to Financial Statement. . . . . . . . . . . . . . . . . . . F-3
INDEPENDENT AUDITORS' REPORT
- ------------------------------
To the Board of Directors
Performance Capital Management, LLC
We have audited the accompanying balance sheet of Performance Capital
Management, LLC as of February 4, 2002, the Company's inception date. This
financial statement is the responsibility of the Company's management. Our
responsibility is to express an opinion on this financial statement based on our
audit.
We conducted our audit in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
balance sheet presentation. We believe that our audit of the balance sheet
provides a reasonable basis for our opinion.
In our opinion, the balance sheet referred to above presents fairly, in all
material respects, the financial position of Performance Capital Management, LLC
as of February 4, 2002 in conformity with accounting principles generally
accepted in the United States of America.
As discussed in Note 4 to the financial statement, the accompanying financial
statement as of February 4, 2002 has been restated for the correction of an
error.
/s/ MOORE STEPHENS WURTH FRAZER AND TORBET, LLP
March 14, 2003
City of Industry, California
F-1
PERFORMANCE CAPITAL MANAGEMENT, LLC
BALANCE SHEET
AS OF FEBRUARY 4, 2002
----------------------
ASSETS
------
Cash and cash equivalents $15,501,207
Restricted cash 28,367
Other receivables 91,059
Purchased loan portfolios, net 4,763,206
Property and equipment 738,687
Other assets and deposits 119,684
-----------
Total assets $21,242,210
===========
LIABILITIES AND MEMBERS' EQUITY
-------------------------------
LIABILITIES:
Accounts payable $ 234,323
Pre-petition claims 884,274
Accrued liabilities 245,918
-----------
Total liabilities 1,364,515
COMMITMENTS AND CONTINGENCIES -
MEMBERS' EQUITY 19,877,695
-----------
Total liabilities and members' equity $21,242,210
===========
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THIS STATEMENT.
F-2
PERFORMANCE CAPITAL MANAGEMENT, LLC
NOTES TO FINANCIAL STATEMENT
AS OF FEBRUARY 4, 2002
----------------------
NOTE 1 - ORGANIZATION AND DESCRIPTION OF BUSINESS
Performance Capital Management, LLC ("PCM LLC" or the "Company") is 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.
Reorganization Under Bankruptcy
- -------------------------------
PCM LLC was formed under a Chapter 11 Bankruptcy Reorganization Plan and
operating agreement. The 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 general partner for the partnerships was Performance Development,
Inc., a California corporation ("PDI"). PDI was removed as general partner
during bankruptcy. The assets of the five limited partnerships consisted
primarily of non-performing credit card loans, as well as cash. PCM LLC was
formed on January 14, 2002 and commenced operations upon the confirmation of its
Bankruptcy Reorganization Plan ("Reorganization Plan") on February 4, 2002. The
entities that were consolidated under the Reorganization Plan are as follows:
Performance Asset Management Fund , Ltd.,- (PAM), a California limited
partnership, formed in 1991. Units in PAM were sold in a private placement
offering. PAM raised $5,205,000 in gross proceeds from the sale of its
partnership units. PAM was not subject to the reporting requirements of the
Securities and Exchange Commission.
Performance Asset Management Fund II , Ltd.,- (PAMII), a California
limited partnership, formed in 1992. Units in PAMII were sold in a private
placement offering. PAMII raised $7,670,000 in gross proceeds from the sale of
its partnership units. PAMII was not subject to the reporting requirements of
the Securities and Exchange Commission.
Performance Asset Management Fund III, Ltd.,- (PAMIII), a California
limited partnership, formed in 1992. Units in PAMIII were sold in a
private placement offering pursuant to Regulation D promulgated by the
Securities and Exchange Commission on a "best efforts" basis. PAMIII raised
$9,990,000 in gross proceeds from the sale of its partnership units. PAMIII was
a public limited partnership that was subject to the reporting requirements of
the Securities and Exchange Commission.
Performance Asset Management Fund IV, Ltd., - (PAMIV), a California
limited partnership, formed in 1992. Units in PAMIV were sold in an intrastate
offering to residents of California, pursuant to the provisions of Section
3(A)(11) of the Securities Act of 1933. PAMIV raised $28,595,000 in gross
proceeds from the sale of its partnership units. PAMIV was a public limited
partnership that was subject to the reporting requirements of the Securities and
Exchange Commission.
Performance Asset Management Fund V, Ltd., - (PAMV), a California limited
partnership, formed in 1994. Units in PAMV were sold in a private placement
offering. PAMV raised $5,965,000 in gross proceeds from the sale of its
partnership units. The proceeds were used to pay organizational costs and then
to purchase and collect loan portfolios. PAMV was not subject to the reporting
requirements of the Securities and Exchange Commission.
Performance Capital Management, Inc. (PCM INC), a California corporation
incorporated in January 1993. PCM INC identified potential portfolio
acquisitions, performed due diligence in conjunction with potential portfolio
acquisitions, acquired portfolios, and through joint ventures with the limited
partnerships (PAM, PAMII, PAMIII, PAMIV, and PAMV) collected and sold acquired
portfolios. The limited partnerships (PAM, PAMII, PAMIII, PAMIV, and PAMV)
collectively owed 98.5% of the outstanding shares of PCM INC. The minority
interest of 1.5% was effectively eliminated in the bankruptcy plan.
F-3
NOTE 1 - ORGANIZATION AND DESCRIPTION OF BUSINESS, (CONTINUED)
Pre-Petition Operations
- ------------------------
At all times before the bankruptcy Vincent Galewick was the sole or controlling
shareholder of PCM INC and PDI, which served as general partner of the limited
partnerships (PAM, PAMII, PAMIII, PAMIV, and PAMV). A total of approximately
$57,450,000 was raised over the period 1991 to 1994 by selling limited
partnership interests in PAM, PAMII, PAMIII, PAMIV, and PAMV. Approximately $8.7
million was deducted for brokerage and organizational expenses. Approximately
$49 million was used to purchase non-performing credit card loan portfolios.
These portfolios were typically purchased by the limited partnerships from PCM
INC. PCM INC also collected the portfolios under joint venture agreements
between itself and the limited partnerships.
In the normal course of business, loan portfolios would be purchased,
collections would be made and in some cases the portfolios were sold. PCM INC
was in the business of managing these loan portfolios.
PCM INC generally charged a "mark-up" to the limited partnerships for portfolios
purchased for the limited partnerships. This markup averaged 35% above the
price PCM INC paid for the portfolios on the open market. PCM INC was also
contractually entitled to receive 45% of all monies collected on the portfolios.
In addition, PDI, former general partner of the limited partnerships, received a
management fee from the limited partnerships ranging from 2 to 2 1/2% of the net
asset value of the loan portfolio on an annual basis and 10% of the amount of
any distributions to the limited partners.
Numerous issues and claims were settled by the bankruptcy. This settlement
referred to as "Intercompany Settlement" removed Mr. Galewick from any further
role in the affairs of PCM INC and the limited partnerships, transferred to the
Trustee all claims of Mr. Galewick and others against the limited partners and
controlling interest in PCM INC thereby according the limited partners control
over the entity which administered their assets. The Trustee and a committee of
equity security holders representing the PAM Funds released any claims of the
debtor's estate against Mr. Galewick and Mr. Galewick's affiliates. Inter-debtor
claims were released and withdrawn. Mr. Galewick received consideration from the
bankruptcy estates of the limited partners. As part of the settlement, PDI was
removed as general partner and the Trustee resigned as Trustee for PDI, thus
returning control of PDI to Mr. Galewick.
The following is a summary of the ownership interest of Performance Capital
Management, LLC pursuant to the terms of the Reorganization Plan:
Member's Number of Number of Percentage
Name Investors PCM LLC Units Interest in PCM LLC
- -------- --------- ------------- -------------------
PAM 370 52,050 9
PAMII 459 76,700 14
PAMIII 595 99,900 17
PAMIV 1153 285,950 50
PAMV 327 56,950 10
------------- -------------------
Totals 571,550 100
============= ===================
F-4
NOTE 1 - ORGANIZATION AND DESCRIPTION OF BUSINESS, (CONTINUED)
The Reorganization Plan calls for distributions to be made first to the LLC
Members to the extent of and in proportion to their unreturned Capital
Contributions; and thereafter to the LLC Members in proportion to their
respective percentage ownership interest. Subsequent to February 4, 2002, the
Company distributed $12 million to its members.
The combination of the Partnerships and PCM INC is summarized as follows (in
thousands):
PAM PAMII PAMIII PAMIV PAMV PCM INC Total
-------- -------- -------- -------- -------- --------- ---------
Sale of Limited
Partnership Units $ 5,205 $ 7,670 $ 9,990 $28,595 $ 5,965 $ 57,425
Distributions
to Investors (3,704) (4,137) (3,719) (6,920) (829) (19,309)
-------- -------- -------- -------- -------- ---------
Unreturned Capital 1,501 3,533 6,271 21,675 5,136 38,116
Accumulated Deficit (201) (1,226) (2,235) (8,854) (2,407) (2,302) (17,225)
Restatement - Note 4 (87) (107) (189) (476) (154) (1,013)
-------- -------- -------- -------- -------- ---------
Cash and Net Assets
Transferred to PCM LLC $ 1,213 $ 2,200 $ 3,847 $12,345 $ 2,575 $ (2,302) $ 19,878
======== ======== ======== ======== ======== ========= =========
Performance Asset Management Fund III, Ltd. and Performance Asset Management
Fund IV, Ltd. were reporting entities under the Securities Act of 1934. PAM,
PAMII, PAMV, and PCM INC were not reporting entities. It has been determined
that Performance Capital Management, LLC is a "successor company" under rule 12g
3 of the Securities Act of 1934 and therefore is subject to the reporting
requirements of the Securities Act of 1934. PCM LLC's LLC Units are not publicly
traded securities. The Reorganization Plan placed certain restrictions on the
transfer of members' interests.
NOTE 2 - BASIS OF PRESENTATION
Reporting Entity
- ----------------
The Company is a successor entity of six companies emerging from bankruptcy (see
Note 1). The accompanying balance sheet includes balances as of February 4,
2002.
Comparative Statements
- ----------------------
Management has elected not to present the accompanying financial statement on a
comparative basis because several entities shared operating expenses and
professional fees during the duration of bankruptcy proceedings that were not
included in the final bankruptcy plan. Further, current management did not take
control of the operations until the Reorganization Plan was confirmed on
February 4, 2002. Current management is not capable of arriving at the
estimates for many of the assertions contained in the financial statements for
prior periods. The cost and effort to reconstruct these financial statements, if
such reconstruction is even possible, would outweigh any benefit that investors
may derive. The estimates necessary to prepare prior year financial statements
for the successor entity would be so significant that management believes a
comparative presentation would be misleading. Prior period financial information
is available in the bankruptcy filings with Central District Court of California
Case No. SA 98-27040-RA.
F-5
NOTE 2 - BASIS OF PRESENTATION (CONTINUED)
Fresh Start Accounting
- ------------------------
Statement of Position 90-7 issued by the American Institute of Certified Public
Accountants ("SOP 90-7") addresses accounting for companies in reorganization
under the bankruptcy code. For certain entities, SOP 90-7 requires "fresh start
accounting", which records a revaluation of assets to fair values and an
adjustment of liabilities to present values.
SOP 90-7 also requires the following procedures for entities that adopt fresh
start accounting:
1. The reorganization value of the entity should be allocated to the entity's
assets following APB No. 16;
2. Liabilities other than deferred taxes should be stated at present values of
amounts to be paid using current interest rates;
3. Deferred taxes should be presented in conformity with generally accepted
accounting principles. Benefits realized from preconfirmation net operating
loss carryforwards should reduce reorganization value in excess of amounts
allocable to identifiable assets and other intangibles until exhausted and
be reported as a direct addition to paid-in capital thereafter;
4. Changes in accounting principles that will be required for the emerging
entity within the twelve months following the adoption of fresh start
accounting should be adopted at the same time fresh starting accounting is
adopted.
SOP 90-7 also requires the following disclosure in the initial financial
statements after fresh start accounting has been adopted:
1. Adjustments to the historical amounts of individual assets and liabilities;
2. The amount of debt forgiveness;
3. The amount of prior retained earnings or deficit eliminated; and
4. Other important matters in determining reorganization value.
Management reviewed these requirements and determined that fresh start
accounting was not applicable because assets exceeded liabilities prior to
confirmation of the plan and existing limited partners retained a majority
interest in the successor entity.
For entities that do not meet the requirements for fresh start accounting, SOP
90-7 requires that liabilities compromised by a confirmed bankruptcy plan be
stated at present value of amounts to be paid, using current interest rates.
Debt forgiveness, if any, should be reported as an extraordinary item.
As part of the Reorganization Plan, no debt forgiveness existed and all
liabilities subject to compromise are presented on the face of the accompanying
balance sheet as pre-petition claims with disclosures required by SOP 90-7
presented in Note 10.
Transfer of Assets to Successor Company
- --------------------------------------------
Assets were transferred at historical carrying values and postpetition
liabilities were assumed as required by the bankruptcy confirmation plan.
F-6
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. 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 non-performing credit card
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.
Purchased Loan Portfolios
- ---------------------------
Purchased loan portfolios consisted primarily of non-performing credit card
accounts. For substantially all of the Company's acquired portfolios, future
cash flows cannot be reasonably estimated in order to record an accretable yield
consistently. Therefore, the Company utilizes the cost recovery method as
required by AICPA Practice Bulletin 6. 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 revenues. Acquired portfolios are
initially recorded at their respective costs, and no accretable yield is
recorded on the accompanying balance sheet.
The Company provides a valuation allowance for acquired loan portfolios when the
present value of expected future cash flows does not exceed the carrying values
of the portfolios.
Over the life of the portfolio, the Company's management continues to review the
carrying values of each loan for impairment. If net estimated cash flows fall
below the carrying value of the related portfolio, the valuation allowance is
adjusted accordingly. Adjustments to the valuation allowance are recorded in
the results of operations as a provision for losses on loan portfolios.
Cash in Bank Accounts and Cash Equivalents
- ------------------------------------------
PCM LLC 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 at one bank in amounts which exceeded federally insured limits by
approximately $15.3 million dollars as of February 4, 2002. 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.
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. PCM LLC 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.
F-7
NOTE 3 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Property and Equipment (continued)
- -------------------------------------
Long-term assets of PCM LLC 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 February 4, 2002, management expects these assets to be fully recoverable.
Revenue Recognition
- --------------------
Revenue is accounted for using the cost recovery method of accounting in
accordance with Practice Bulletin No. 6, "Amortization of Discounts on Certain
Acquired Loan". Under the cost recovery method of accounting, all 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
cost of purchased loan portfolios are then recognized as net revenue.
Proceeds from strategic sales of purchased loan portfolios are recorded as
revenue when received.
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 members.
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.
NOTE 4 - RESTATEMENT OF FINANCIAL STATEMENT AND RECLASSIFICATION
In February 2003, our independent auditors informed us that, based on their
further review, they no longer considered our methodology for determining the
valuation allowance for purchased loan portfolios appropriate under generally
accepted accounting principle guidelines. Further review by us with our
independent auditors led us to conclude that we should change our method of
determining the valuation allowance for purchased loan portfolios. The change
resulted in an increase in the valuation allowance for purchased loan portfolios
of approximately $882,000 at February 4, 2002. Further, a valuation allowance of
$131,000 was established for other assets. Our February 4, 2002 financial
statement and the accompanying notes have been restated for a correction of an
error due to these changes. The other asset was previously included with
purchased loan portfolios and has been reclassified to other assets and deposits
on the accompanying balance sheet.
NOTE 5 - RECENT ACCOUNTING PRONOUNCEMENTS
During June of 2001, the FASB issued Statement of Financial Accounting Standards
No. 141, "Business Combinations" ("FAS 141") and Statement of Financial
Accounting Standards No. 142, "Goodwill and Other Intangible Assets" ("FAS
142").
FAS 141 requires use of the purchase method of accounting for all business
combinations initiated after June 30, 2001, provides specific guidance on how to
identify the accounting acquirer in a business combination, provides specific
criteria for recognizing intangible assets apart from goodwill and requires
additional financial statement disclosures regarding business combinations. FAS
141 will impact the Company's accounting for any business combinations it may
enter into in the future. However, FAS 141's adoption did not have an impact on
the Company's financial condition or results of operations.
F-8
NOTE 5 - RECENT ACCOUNTING PRONOUNCEMENTS (CONTINUED)
FAS 142 addresses the accounting for goodwill and other intangible assets after
their initial recognition. FAS 142 changes the accounting for goodwill and other
intangible assets by replacing periodic amortization of the asset with an annual
test of impairment of goodwill at either the reporting segment level or one
level below, providing for similar accounting treatment for intangible assets
deemed to have an indefinite life. Assets with finite lives will be amortized
over their useful lives. FAS 142 also provides for additional financial
statement disclosures about goodwill and intangible assets. FAS 142 will impact
the Company's accounting for any business combinations it may enter into in the
future. However, FAS 142's adoption did not have an impact on the Company's
financial condition or results of operations.
In June 2001, the FASB issued Statement of Financial Accounting Standards No.
143, "Accounting for Asset Retirement Obligations" ("FAS 143"). FAS 143 changes
the recorded amount of liabilities associated with asset retirements and
requires the accretion of interest expense over the remaining life of the asset.
FAS 143 also requires additional disclosure regarding asset retirement
obligations. This Statement is effective for fiscal years beginning after June
15, 2002. The adoption of this statement did not have an impact on the
Company's financial condition or results of operations.
In August 2001, the FASB issued Statement of Financial Accounting Standards No.
144, "Accounting for the Impairment or Disposal of Long-Lived Assets" ("FAS
144"). FAS 144 retains the existing requirements to recognize and measure the
impairment of long-lived assets to be held and used or to be disposed of by
sale. However, FAS 144 changes the scope and certain measurement requirements of
existing accounting guidance. FAS 144 also changes the requirements relating to
reporting the effects of a disposal or discontinuation of a segment of a
business. This Statement is effective for fiscal years beginning after December
15, 2001. The adoption of this statement did not have a significant impact on
the financial condition or results of operations of the Company.
In April 2002, the FASB issued Statement of Financial Accounting Standards No.
145 "Rescission of Statements No. 4, 14 and 64, Amendment of FASB Statement No.
13 and Technical Corrections." ("FAS 145"). This Statement rescinds SFAS No. 4,
"Reporting Gains and Losses from Extinguishment of Debt," and an amendment of
that Statement, SFAS No. 64, "Extinguishments of Debt Made to Satisfy
Sinking-Fund Requirements." This Statement also rescinds SFAS No. 44,
"Accounting for Intangible Assets of Motor Carriers." This Statement amends SFAS
No. 13, "Accounting for Leases," to eliminate any inconsistency between the
required accounting for sale-leaseback transactions and the required accounting
for certain lease modifications that have economic effects that are similar to
sale-leaseback transactions. FAS 145 also amends other existing authoritative
pronouncements to make various technical corrections, clarify meanings, or
describe their applicability under changed conditions. This Statement is
effective for fiscal years beginning after May 15, 2002. The adoption of this
statement is not expected to have a significant impact on the financial
condition or results of operations of the Company.
In June 2002, the FASB issued Statement of Financial Accounting Standards No.
146, "Accounting for Costs Associated with Exit or Disposal Activities." The
standard requires companies to recognize costs associated with exit or disposal
activities when they are incurred rather than at the date of commitment to an
exit or disposal plan. Examples of costs covered by the standard include lease
termination costs and certain employee severance costs that are associated with
restructuring, discontinued operations, plant closing, or other exit or disposal
activity. Previous accounting guidance was provided by EITF Issue No. 94-3,
"Liability Recognition for Certain Costs, Employee Termination Benefits and
Other Costs to Exit an Activity (including Certain Costs Incurred in a
Restructuring)." SFAS No. 146 replaces EITF 94-3 and is to be applied
prospectively to exit or disposal activities initiated after December 31, 2002.
The Company will comply with this pronouncement beginning in 2003. The adoption
of this statement is not expected to have a significant impact on the financial
condition or results of operations of the Company.
F-9
NOTE 6 - FAIR VALUE OF FINANCIAL INSTRUMENTS
The estimated fair value and the methods and assumptions used to estimate the
fair values of the financial instruments of the Company as of February 4, 2002
are as follows. The carrying amount of cash and cash equivalents, restricted
cash and liabilities approximates the fair value. The fair value of purchased
loan portfolios was determined based on both market pricing and discounted
expected cash flows. The discount rate is based on an acceptable rate of return
adjusted for the risk inherent in the loan portfolios. The discount rate
utilized at February 4, 2002 was 20%. The estimated fair value of loan
portfolios was $12,000,000 at February 4, 2002.
NOTE 7 - PURCHASED LOAN PORTFOLIOS
The Company acquires portfolios of non-performing credit card loans from federal
and state banks and other sources. These loans are acquired at a substantial
discount from the actual outstanding balance. The aggregate outstanding balance
at February 4, 2002 was approximately $1.3 billion.
The Company initially records acquired loans at cost. To the extent that the
cost of a particular loan portfolio exceeds the estimated amount of money
expected to be collected, a valuation allowance is recognized in the amount of
such impairment.
The carrying amount of loans included in the accompanying balance sheet at
February 4, 2002 is as follows:
Unrecovered cost balance $ 10,236,158
Valuation allowance (5,472,952)
---------------
Net balance $ 4,763,206
===============
NOTE 8 - OTHER RECEIVABLES
Other receivables consist of monies due to the Company from PCM INC and the PAM
Funds as of February 4, 2002.
NOTE 9 - PROPERTY AND EQUIPMENT
Property and equipment at February 4, 2002 is as follows:
Office furniture and equipment $ 245,088
Computer equipment 456,617
Leasehold improvements 36,982
-------------
Totals 738,687
Less accumulated depreciation -
------------
Property and equipment, net $ 738,687
============
F-10
NOTE 10 - PRE-PETITION CLAIMS
Under the Reorganization Plan, PCM LLC is required to pay certain allowed
pre-petition claims and professional fees totaling to approximately $1,400,000
of which $884,274 remains outstanding as of February 4, 2002. These claims are
summarized as follows:
Accounting fees $ 31,584
Collection expense 29,530
Improvements 176,310
Legal fees 31,722
Mailing expense 24,524
Office supplies 7,258
Other 74,760
Portfolio settlement 37,620
Public relations 76,986
Rent and real estate commissions 82,680
Reserve for claims 200,000
Telephone 9,854
Wages and other labor 101,446
---------------
Total $ 884,274
===============
NOTE 11 - COMMITMENTS AND CONTINGENCIES
Lease Commitments
- ------------------
The Company currently leases office space in Anaheim, California under a
non-cancelable five year operating lease. Under the lease agreement, PCM LLC
must pay a basic monthly rental charge plus a portion of the building's common
area expenses.
Prior to the Company moving to its current location, the Company leased office
space in Irvine, California under a non-cancelable operating lease expiring on
April 30, 2002.
Future minimum lease commitments as of February 4, 2002 are as follows:
Year ending
December 31,
-------------
2002 $ 301,000
2003 297,000
2004 305,000
2005 314,000
2006 295,000
Thereafter -
F-11
NOTE 11 - COMMITMENTS AND CONTINGENCIES (CONTINUED)
Consent Decree - Fair Credit Reporting Act
- ------------------------------------------------
In February 2001, a Consent Decree was entered in United States District Court
in an action United States of America v. Performance Capital Management, Inc.
(One of the entities that formed Performance Capital Management, LLC, see Note
1). Under the terms of the Consent Decree, PCM INC had a civil penalty pursuant
to Section 621(a) of the Fair Credit Reporting Act, 15 U.S.C. (section symbol)
1681s(a) of $2,000,000 waived. The Consent Decree basically had PCM INC and its
successors agree to follow the provisions of the Fair Credit Reporting Act. The
Consent Decree ordered, among other specifics, that PCM INC and its successors,
officers, employees, et al, are 1.) enjoined from failing to report correct
delinquency dates to consumer reporting agencies; 2.) enjoined from failing to
properly investigate consumer disputes and verify, correct or delete the
reporting of such information to consumer reporting agencies within the time set
forth in the Fair Credit Reporting Act; 3.) enjoined from failing to report
accounts as "disputed" to consumer reporting agencies when consumers dispute
accounts either in writing, orally, or by electronic means; and 4) enjoined from
failing to comply in any other respect with the Fair Credit Reporting Act.
The Consent Decree provides for a period of three years access to the business,
all computerized databases, right to inspect and copy all relevant documents and
the right to interview officers and employees.
Claim
- -----
PCM LLC is involved in various legal actions primarily arising from PCM Inc. and
the partnerships Chapter 11 filing. Many of these issues have been resolved by
settlement agreements. PCM LLC management has actively resolved these actions.
At February 4, 2002, a provision was established of $200,000 which has been
included in the pre-petition claims line item in the accompanying balance sheet.
NOTE 12 - OTHER MATTERS
Upon emergence from bankruptcy, the Company determined that PAMIII and PAMIV did
not file their monthly reports to the U.S. Bankruptcy Court with the Securities
and Exchange Commission under Forms 8-K. As the successor entity to PAMIII and
PAMIV, the Company is preparing, with assistance of securities counsel, the
Forms 8-K that include the monthly reports and intends to file them shortly.
Upon emergence from bankruptcy, the Company, as successor entity to PAMIII and
PAMIV, has not filed the following Exchange Act filings:
Form 10-QSB for the period ended March 31, 2002;
Form 10-QSB for the period ended June 30, 2002; and
Form 10-QSB for the period ended September 30, 2002.
The Company is preparing, with the assistance of securities counsel, the Forms
10-QSB and intends to file them shortly.
NOTE 13 - SUBSEQUENT EVENTS
Distribution
- ------------
In accordance with the Company's Reorganization Plan, the Company distributed
$12 million to its members in March 2002.
F-12
NOTE 13 - SUBSEQUENT EVENTS (CONTINUED)
Claim
- -----
In December 2002, a bankruptcy claim totaling approximately $170,000 was brought
to the attention of the Company. This claim was not on the final claims list
filed with the court. PMC LLC's management does not believe that this claim will
be found to be valid by the court and has not accrued for it as of February 4,
2002. Management does not believe the ultimate outcome of this claim will have a
material adverse affect on the Company's financial position.
Purchase Commitment
- --------------------
In December 2002, the Company entered into an agreement that commits the Company
to purchase loan portfolios. The initial term of the agreement is 6 months
(December 2002 - May 2003) and the Company has the right to extend the term for
an additional 6 months if it expresses the desire to do so by April 15, 2003.
Under the terms of the agreement, the Company will pay 5% of the "Approximate
Current Balance", as defined in the agreement. The "Approximate Current
Balances" purchased in December 2002 and January, February, and March 2003 were
approximately $2,274,000, $2,326,000, $1,151,100 and $1,395,100 respectively.
The amounts paid for these purchases were $113,689, $116,297, $57,555, and
$69,756, respectively. Under the terms of the agreement, the commitment for
March, April, and May 2003 will be approximately $3.0 million in "Approximate
Current Balances", at a cost of approximately $150,000.
F-13
INDEX TO EXHIBITS
-----------------
Exhibit
Number Description
- ------ -----------
2.1 Joint Chapter 11 Plan of Reorganization Proposed by Chapter 11 Trustee
and the Official Committee of Equity Security Holders effective
February 4, 2002
2.2 First Amended Disclosure Statement Describing Joint Chapter 11 Plan
Proposed by Chapter 11 Trustee and the Official Committee of Equity
Security Holders approved on October 12, 2001
3.1 Performance Capital Management, LLC Articles of Organization
3.2 Operating Agreement for Performance Capital Management, LLC
3.3 First Amendment to Operating Agreement for Performance Capital
Management, LLC
4.1 Specimen Performance Capital Management, LLC Unit Certificate
4.2 Specimen Performance Capital Management, LLC Economic Interest
Unit Certificate
4.3 Provisions in the Operating Agreement for Performance Capital
Management, LLC pertaining to the rights of LLC Unit holders (see
Exhibit 3.2 and 3.3)
23.1 Consent of Independent Auditors
99.1 Order Confirming Joint Chapter 11 Plan Proposed by Chapter 11 Trustee
and the Official Committee of Equity Security Holders entered on
January 24, 2002
99.2 Order on Motion of Performance Capital Management, LLC, successor to
Chapter 11 Debtor, to Modify Confirmed Chapter 11 Plan of
Reorganization entered on December 26, 2002