UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the quarterly period ended September 30, 2002
------------------
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the transition period from__________ to __________
Commission file number: 0 - 50235
---------------
PERFORMANCE CAPITAL MANAGEMENT, LLC
-----------------------------------
(Exact name of small business issuer as specified in its charter)
California 03-0375751
------------------------------ -------------------------------
State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization
222 South Harbor Blvd., Suite 400, Anaheim, California 92805
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(Address of principal executive offices)
(714) 502-3780
---------------------------
(Issuer's telephone number)
------------------------------------------------------------------------
(Former name, former address and former fiscal year, if changed since last
report.)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the issuer was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes [ ] No [X]
APPLICABLE ONLY TO CORPORATE ISSUERS
State the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practicable date: As of September 30, 2002, the issuer
had 571,550 LLC Units issued and outstanding.
Transitional Small Business Disclosure Format (Check one): Yes [ ] No [X]
PERFORMANCE CAPITAL MANAGEMENT, LLC
INDEX TO
QUARTERLY REPORT ON FORM 10-QSB
FOR THE QUARTER ENDED SEPTEMBER 30, 2002
PART I - FINANCIAL INFORMATION PAGE
Item 1 Financial Statements . . . . . . . . . . . . . . . . . . . . . . 1
Accountants' Review Report
Balance Sheet as of September 30, 2002 (unaudited)
Statements of Operations for the three months ended September 30,
2002 and the period from Inception (February 4, 2002)
to September 30, 2002 (unaudited)
Statement of Members' Equity for the period from Inception
(February 4, 2002) to September 30, 2002 (unaudited)
Statement of Cash Flows for the period from Inception
(February 4, 2002) to September 30, 2002 (unaudited)
Notes to the Financial Statements (unaudited)
Item 2 Management's Discussion and Analysis of Financial Condition and
Results of Operations. . . . . . . . . . . . . . . . . . . . . . 17
Item 3 Controls and Procedures. . . . . . . . . . . . . . . . . . . . . 21
PART II - OTHER INFORMATION
Item 6 Exhibits and Reports on Form 8-K . . . . . . . . . . . . . . . . 22
SIGNATURES. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
CERTIFICATIONS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
[MOORE STEPHENS WURTH FRAZER AND TORBET, LLP LETTERHEAD]
To the Board of Directors
Performance Capital Management, LLC
Anaheim, California
We have reviewed the accompanying balance sheet of Performance Capital
Management, LLC, as of September 30, 2002; and the related statements of
operations for the period from inception (February 4, 2002) through September
30, 2002 and the three months ended September 30, 2002; and the related
statements of members' equity and cash flows for the period from inception
(February 4, 2002) through September 30, 2002, in accordance with Statements on
Standards for Accounting and Review Services issued by the American Institute of
Certified Public Accountants. All information included in these financial
statements is the representation of the management of Performance Capital
Management, LLC.
A review consists principally of inquiries of Company personnel and analytical
procedures applied to financial data. It is substantially less in scope than an
audit in accordance with generally accepted auditing standards, the objective of
which is the expression of an opinion regarding the financial statements taken
as a whole. Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that should
be made to the accompanying financial statements in order for them to be in
conformity with generally accepted accounting principles.
/s/ Moore Stephens Wurth Frazer And Torbet, LLP
March 14, 2003
City of Industry, California
1
PERFORMANCE CAPITAL MANAGEMENT, LLC
BALANCE SHEET
AS OF SEPTEMBER 30, 2002
(See Accountants' Review Report)
--------------------------------
ASSETS
------
Cash and cash equivalents $1,834,693
Restricted cash 21,382
Other receivables 34,552
Purchased loan portfolios, net 3,891,678
Property and equipment, net 610,556
Deposits 52,517
Prepaid expenses and other assets 104,237
----------
Total assets $6,549,615
==========
LIABILITIES AND MEMBERS' EQUITY
-------------------------------
LIABILITIES:
Accounts payable $ 90,001
Pre-petition claims 212,252
Accrued liabilities 341,789
Income taxes payable 8,843
----------
Total liabilities 652,885
COMMITMENTS AND CONTINGENCIES -
MEMBERS' EQUITY 5,896,730
----------
Total liabilities and members' equity $6,549,615
==========
The accompanying notes are an integral part of this statement.
2
PERFORMANCE CAPITAL MANAGEMENT, LLC
STATEMENTS OF OPERATIONS
(See Accountants' Review Report)
--------------------------------
For the three months From Inception
ended (February 4, 2002) to
September 30, 2002 September 30, 2002
---------------------- --------------------
REVENUES:
Portfolio collections $ 2,153,589 $ 5,234,995
Portfolio sales 43,857 969,469
---------------------- --------------------
Total revenues 2,197,446 6,204,464
Less portfolio basis recovery 1,534,613 3,812,056
---------------------- --------------------
NET REVENUES 662,833 2,392,408
---------------------- --------------------
OPERATING COSTS AND EXPENSES:
Salaries and benefits 1,022,365 2,859,697
General and administrative 486,932 1,338,810
Depreciation 52,979 140,268
---------------------- --------------------
Total operating costs and expenses 1,562,276 4,338,775
---------------------- --------------------
LOSS FROM OPERATIONS (899,443) (1,946,367)
---------------------- --------------------
OTHER INCOME (EXPENSE):
Reorganization costs (22,026) (106,487)
Interest income 7,801 42,096
Other income 18,315 39,483
---------------------- --------------------
Total other income (expense) 4,090 (24,908)
---------------------- --------------------
LOSS BEFORE INCOME TAX PROVISION (895,353) (1,971,275)
INCOME TAX PROVISION 5,990 9,690
---------------------- --------------------
NET LOSS $ (901,343) $ (1,980,965)
====================== ====================
The accompanying notes are an integral part of this statement.
3
PERFORMANCE CAPITAL MANAGEMENT, LLC
STATEMENT OF MEMBERS' EQUITY
FROM INCEPTION (FEBRUARY 4, 2002) THROUGH SEPTEMBER 30, 2002
(See Accountants' Review Report)
--------------------------------
Total
Unreturned Accumulated Members'
Capital Deficit Equity
------------- ------------- -------------
Balance, February 4, 2002 $ 38,116,880 $(18,239,185) $ 19,877,695
Distribution to investors (12,000,000) - (12,000,000)
Net loss - (1,980,965) (1,980,965)
------------- ------------- -------------
Balance, September 30, 2002 $ 26,116,880 $(20,220,150) $ 5,896,730
============= ============= =============
The accompanying notes are an integral part of this statement.
4
PERFORMANCE CAPITAL MANAGEMENT, LLC
STATEMENT OF CASH FLOWS
FROM INCEPTION (FEBRUARY 4, 2002) THROUGH SEPTEMBER 30, 2002
(See Accountants' Review Report)
--------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (1,980,965)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation 140,268
Decrease in other receivable 56,507
Increase in other current assets (59,237)
Decrease in loan portfolios 871,528
Decrease in deposits 22,167
Decrease in accounts payable (144,324)
Decrease in pre-petition claims (672,022)
Increase in accrued liabilities 95,871
Increase in income taxes payable 8,843
-------------
Net cash used in operating activities (1,661,364)
CASH FLOW FROM INVESTING ACTIVITIES:
Additions to property and equipment (12,135)
CASH FLOWS FROM FINANCING ACTIVITIES:
Distribution to investors (12,000,000)
-------------
NET CHANGE IN CASH AND CASH EQUIVALENTS (13,673,499)
CASH AND CASH EQUIVALENTS, beginning of period 15,529,574
-------------
CASH AND CASH EQUIVALENTS, end of period $ 1,856,075
=============
SUPPLEMENTAL DISCLOSURE FOR CASH FLOW INFORMATION:
Income taxes paid $ 12,000
=============
Interest paid $ -
=============
The accompanying notes are an integral part of this statement.
5
PERFORMANCE CAPITAL MANAGEMENT, LLC
NOTES TO THE FINANCIAL STATEMENTS
(See Accountants' Review Report)
--------------------------------
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 of non-performing
credit card loan portfolios and are purchased and sold as portfolios
("portfolios"). Additionally, some 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. 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,
6
PERFORMANCE CAPITAL MANAGEMENT, LLC
NOTES TO THE FINANCIAL STATEMENTS
(See Accountants' Review Report)
--------------------------------
NOTE 1 - ORGANIZATION AND DESCRIPTION OF BUSINESS, (CONTINUED)
Reorganization Under Bankruptcy, (continued)
- --------------------------------------------
PAMIV, and PAMV) collectively obtained 98.5% of the outstanding shares of PCM
INC. The minority interest of 1.5% was effectively eliminated in the bankruptcy
plan.
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 between the parties 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
============= ===================
7
PERFORMANCE CAPITAL MANAGEMENT, LLC
NOTES TO THE FINANCIAL STATEMENTS
(See Accountants' Review Report)
--------------------------------
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.
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 (288) (1,333) (2,424) (9,330) (2,561) (2,302) (18,238)
----------------------------------------------------------------------
Cash and Net Assets
Transferred to PCM LLC $ 1,213 $ 2,200 $ 3,847 $12,345 $ 2,575 $ (2,302) 19,878
===========================================================
2002 Distribution to Investors (12,000)
Net Loss (1,981)
---------
Members' Equity PCM, LLC
at September 30, 2002 $ 5,897
=========
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, statements of operations, members'
equity, and cash flows includes balances and transactions beginning February 4,
2002 through September 30, 2002.
8
PERFORMANCE CAPITAL MANAGEMENT, LLC
NOTES TO THE FINANCIAL STATEMENTS
(See Accountants' Review Report)
--------------------------------
NOTE 2 - BASIS OF PRESENTATION (CONTINUED)
Comparative Statements
- ----------------------
Management has elected not to present the accompanying financial statements 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.
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 FAS 141;
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 9.
9
PERFORMANCE CAPITAL MANAGEMENT, LLC
NOTES TO THE FINANCIAL STATEMENTS
(See Accountants' Review Report)
--------------------------------
NOTE 2 - BASIS OF PRESENTATION (CONTINUED)
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.
NOTE 3 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Use of Estimates
- ------------------
In preparing financial statements in conformity with accounting principles
generally accepted in the United States of America, management is required to
make estimates and assumptions that affect the reported amounts of assets and
liabilities, the disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
Significant estimates have been made by management with respect to the timing
and amount of collection of future cash flows from 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 revenue. Acquired portfolios are
initially recorded at there 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 do 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 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 $2.2 million as of September 30, 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.
10
PERFORMANCE CAPITAL MANAGEMENT, LLC
NOTES TO THE FINANCIAL STATEMENTS
(See Accountants' Review Report)
--------------------------------
NOTE 3 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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.
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 September 30, 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 Loans". 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.
Loan portfolio sales occur after the initial portfolio analysis is performed and
the loan portfolio is acquired. Portfolios sold typically do not meet PCM LLC's
targeted collection characteristics or are located in geographic areas where PCM
LLC is not licensed to collect. Loan portfolios sold are valued at the lower of
cost or market.
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 - 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
11
PERFORMANCE CAPITAL MANAGEMENT, LLC
NOTES TO THE FINANCIAL STATEMENTS
(See Accountants' Review Report)
--------------------------------
NOTE 4 - RECENT ACCOUNTING PRONOUNCEMENTS (CONTINUED)
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.
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.
12
PERFORMANCE CAPITAL MANAGEMENT, LLC
NOTES TO THE FINANCIAL STATEMENTS
(See Accountants' Review Report)
--------------------------------
NOTE 5 - 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 September 30, 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 September 30, 2002 was 20%. The estimated fair value of loan
portfolios was 14,000,000 at September 30, 2002.
NOTE 6 - 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
contractual loan balances at September 30, 2002 totaled approximately $1.1
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
September 30, 2002 is as follows:
Unrecovered cost balance,
beginning of period $ 10,236,158
Valuation allowance,
beginning of period (5,472,952)
-----------------
Net balance, beginning of period 4,763,206
Net portfolio activity (871,528)
-----------------
Net balance, end of period $ 3,891,678
=================
The activity in the loan portfolios in the accompanying financial statements for
the period ended September 30, 2002 is as follows:
Three months From February 4,
ended 2002 (Inception) to
September 30, 2002 September 30, 2002
--------------------- -------------------
Purchased loan portfolios $ 1,748,354 $ 2,940,528
Collections on loan portfolios (2,153,589) (5,234,995)
Sales of loan portfolios (43,857) (969,469)
Revenue recognized on collections 648,747 1,522,529
Revenue recognized on sales 14,086 869,879
--------------------- ------------------
Net portfolio activity $ 213,741 $ (871,528)
===================== ==================
13
PERFORMANCE CAPITAL MANAGEMENT, LLC
NOTES TO THE FINANCIAL STATEMENTS
(See Accountants' Review Report)
--------------------------------
NOTE 6 - PURCHASED LOAN PORTFOLIOS (CONTINUED)
The valuation allowance related to the loan portfolios at September 30, 2002 is
as follows:
Valuation allowance, beginning of period $ 5,472,952
Change in valuation allowance -
----------------
Valuation allowance, end of period $ 5,472,952
================
NOTE 7 - OTHER RECEIVABLES
Other receivables of $34,552 consist of collections on portfolios received by a
third party collection agency.
NOTE 8 - PROPERTY AND EQUIPMENT
Property and equipment at September 30, 2002 is as follows:
Office furniture and equipment $ 247,849
Computer equipment 465,993
Leasehold improvements 36,982
-----------------
Totals 750,824
Less accumulated depreciation 140,268
-----------------
Property and equipment, net $ 610,556
=================
Depreciation expense for the quarter ended September 30, 2002 and the period
from inception to September 30, 2002 amounted to $52,979 and $140,268
respectively.
NOTE 9 - 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 $212,252 remains outstanding as of September 30, 2002. These claims
are summarized as follows:
Public relations $ 23,925
Rent and real estate commissions 82,680
Reserve for claims 70,450
Other 35,197
----------------
Total $ 212,252
================
NOTE 10 - 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.
14
PERFORMANCE CAPITAL MANAGEMENT, LLC
NOTES TO THE FINANCIAL STATEMENTS
(See Accountants' Review Report)
--------------------------------
NOTE 10 - COMMITMENTS AND CONTINGENCIES (CONTINUED)
Lease Commitments (continued)
- -------------------------------
Future minimum lease commitments as of September 30, 2002 are as follows:
Year ending
September 30,
--------------
2003 $ 295,000
2004 303,000
2005 311,000
2006 320,000
2007 54,000
Thereafter -
Rental expense for the quarter ended September 30, 2002 and the period from
inception to September 30, 2002 was $76,154 and $274,104.
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. 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.
Contingencies
- -------------
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. At September 30,
2002 the balance remaining of this provision is $70,450 which is included in the
pre-petition claims on the accompanying balance sheet.
15
PERFORMANCE CAPITAL MANAGEMENT, LLC
NOTES TO THE FINANCIAL STATEMENTS
(See Accountants' Review Report)
--------------------------------
NOTE 11 - SUBSEQUENT EVENTS
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. PCM LLCs management does not believe that this claim will
be found to be valid by the court and has not accrued for it as of September 30,
2002. Management does not believe the ultimate outcome of this claim will have
a material adverse affect on the Company's financial position.
NOTE 11 - SUBSEQUENT EVENTS (CONTINUED)
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
April and May 2003 will be approximately $3.0 million in "Approximate Current
Balances", at a cost of approximately $150,000.
16
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Except for the historical information presented in this document, the matters
discussed in this Form 10-QSB, and specifically in "Management's Discussion and
Analysis of Financial Condition and Results of Operations," or otherwise
incorporated by reference into this document contain "forward looking
statements" (as such term is defined in the Private Securities Litigation Reform
Act of 1995). These statements can be identified by the use of forward-looking
terminology such as "believes," "plans," "expects," "may," "will," "intends,"
"should," or "anticipates" or the negative thereof or other variations thereon
or comparable terminology, or by discussions of strategy that involve risks and
uncertainties. The safe harbor provisions of Section 21E of the Securities
Exchange Act of 1934, as amended, and Section 27A of the Securities Act of 1933,
as amended, apply to forward-looking statements made by Performance Capital
Management, LLC. You should not place undue reliance on forward-looking
statements. Forward-looking statements involve risks and uncertainties. The
actual results that we achieve may differ materially from any forward-looking
statements due to such risks and uncertainties. These forward-looking statements
are based on current expectations, and we assume no obligation to update this
information. Readers are urged to carefully review and consider the various
disclosures made by us in this report on Form 10-QSB and in our other reports
filed with the Securities and Exchange Commission that attempt to advise
interested parties of the risks and factors that may affect our business.
The following discussion and analysis of our financial condition and plan of
operation should be read in conjunction with the unaudited financial statements
and accompanying notes and the other financial information appearing elsewhere
in this report and with the financial information contained in our Form 8-K
filed on April 2, 2003.
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 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.
17
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 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.
18
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. 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.
OPERATING RESULTS
For the period from February 4, 2002 (inception) to September 30, 2002, we
incurred a net loss of approximately $2.0 million. We had negative cash flows
from operations of approximately $1.7 million.
Revenue
- -------
We reported gross revenues in the amount of approximately $6.2 million during
the period from February 4, 2002 (inception) to September 30, 2002. After taking
into account the aggregate cost basis recovery of the portfolios we collected
and sold, we reported net revenues in the amount of $2.4 million. We derived
approximately $1.5 million of our net revenues from approximately $5.2 million
of portfolio collections. We expect our portfolio collections to increase in
the coming year because we acquired a substantial amount of new portfolios
toward the end of 2002. We expect these increased collections to result in
increased net revenues, but we cannot predict the magnitude of this increase
because we cannot precisely predict the mix of our collections between our old
portfolios (which generally have smaller cost basis recovery, if any) and our
new portfolios (which "front-load" their cost basis recovery). As a general
rule, it takes about one year for us to recover the cost basis of a new
portfolio, so we do not expect new portfolios to begin making significant
contributions to net revenues until the third and fourth quarters of 2003. We
derived approximately $870,000 of our net revenues from sales of portfolios. We
sold a substantial number of old portfolios, some of whose collection lives,
from our perspective, had run their course, and some to capitalize on market
conditions. Having now disposed of many of the old portfolios we no longer
wanted to collect, we do not expect net revenues from portfolio sales to be as
large in the coming year. We anticipate having more sales of portions of new
portfolios in 2003 than we had in 2002, but smaller net revenues from sales of
portfolios due to the cost basis recovery associated with new portfolio sales.
During the quarter ended September 30, 2002, we derived most of our net revenues
from collections.
Operating Expenses
- -------------------
Our general and administration expenses were approximately $1.3 million for the
period from February 4, 2002 (inception) to September 30, 2002. Our salaries and
benefits expenses during that same period were approximately $2.9 million. Our
operating expenses may increase somewhat in 2003, but at this time we do not
expect these increases to be substantial.
LIQUIDITY AND CAPITAL RESOURCES
At September 30, 2002, we had approximately $1.9 million of cash and cash
equivalents. During the period ended September 30, 2002, we used approximately
$12.0 million for a distribution to our members, approximately $4.9 million for
operating and other activities and approximately $2.9 million to purchase new
portfolios. We funded these uses of cash principally through our opening cash
balance of approximately $15.5 million at February 4, 2002, and approximately
$6.2 million of proceeds from collecting and selling portfolios.
During the period ended September 30, 2002, we did not achieve results
consistent with our business plan: to recover the cost we pay for our
portfolios, pay our collecting and operating costs and still have a profit. Our
cost recovery of approximately $3.8 million plus our operating and other
expenses of approximately $4.4 million exceeded our collections and sales of
approximately $6.2 million by approximately $2.0 million. On a cash basis, our
new portfolio acquisitions of approximately $2.9 million plus our cash operating
and other costs of approximately $4.9 million exceeded our collections and sales
of approximately $6.2 million by approximately $1.6 million. This $1.6 million
cash deficit was funded by the approximately $3.5 million of opening cash we had
(after allowing for the $12 million used to pay a distribution). We spent this
money to acquire new portfolios because we believe it is important to our
long-term success to constantly reinvest in new portfolios. We continued to
acquire new portfolios in the fourth quarter of 2002.
19
By the end of 2002, we believe we achieved a better balance between new and old
portfolios than we had on emergence from bankruptcy. In addition, we have put
in place procedures to ensure that our collectors continue to focus collection
efforts on older portfolios that still have returns to yield, rather than
focusing just on the most recently acquired portfolios. With these improvements
in our portfolio balance and with our new procedures in place, we believe that
in 2003 we will achieve results consistent with our business plan, at least on a
cash basis.
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. Our estimate of
the fair value of our portfolios at September 30, 2002, increased $2.0 million
to $14.0 million from $12.0 million at February 4, 2002. At the same time, the
cost basis of our portfolios decreased to approximately $3.9 million at
September 30, 2002, from approximately $4.8 million at February 4, 2002. Our
estimate of fair value increased despite this decline in cost basis because we
believe recently purchased portfolios will provide better collection ratios than
some of the older portfolios we inherited from our PAM Fund predecessors. We
believe portfolio cost basis will continue to decline in the near term because
we do not expect the magnitude of new portfolio acquisitions to be as large in
2003 as it was in 2002. Due to factors such as the fair value of a new
portfolio being greater than its purchase price, the availability of new
portfolios, market pricing conditions for new portfolios and the timing of
distributions to our members, we believe it is difficult to assess whether the
fair value of our portfolios will also decrease.
We used a discount rate of 20% to determine the fair values of our portfolios at
September 30, 2002, and February 4, 2002. The following table sets forth
alternative estimates of fair value if we assessed collection risk as higher
(using a discount rate of 25%) or lower (using a discount rate of 15%).
September 30, 2002 February 4, 2002
------------------- -----------------
Higher collection risk (25% discount rate) $ 13.1 million $ 11.2 million
Assumed collection risk (20% discount rate) $ 14.0 million $ 12.0 million
Lower collection risk (15% discount rate) $ 14.8 million $ 12.8 million
Our estimates of fair values 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 three to seven years, with the bulk of a portfolio's yield
coming in the first three years we collect it. If we succeed in collecting our
portfolios 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. In the near term we plan to use
some of our cash collections representing cost basis recovery to make
distributions to our members and interest holders. Ultimately we plan to
generate excess cash and use some of it 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 cash collected through March 31,
2003.
In the near term, we plan to reinvest some of our opening cash and our cash
collections representing cost basis recovery to acquire additional portfolios to
continue growing the fair value of our portfolios on a quarter to quarter basis.
Ultimately we plan to reinvest all of the cash representing cost basis recovery,
plus a portion of excess cash, to acquire additional portfolios.
Our Board of Directors has described this strategy as having two parts:
- Provide an annuity without impairing the value of the business; and
20
- Grow the business to increase the annuity.
Due to factors such as the availability of new portfolios, market pricing
conditions for new portfolios and the timing of distributions to our members, we
may not achieve increases in fair value each quarter.
In general, we expect increases 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 purchasing patterns could reinforce this divergence. A decrease
in the magnitude of new portfolio acquisitions (i.e., failing to reinvest all of
cash collections representing cost basis recovery) may still result in a fair
value increase because new portfolios generally have a fair value that exceeds
their purchase price.
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.
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 unaudited Financial Statements, Note 4.
ITEM 3. CONTROLS AND PROCEDURES
(a) Evaluation of disclosure controls and procedures.
Our principal executive officer and principal financial officer, based on their
evaluation of our disclosure controls and procedures (as defined in Exchange Act
Rules 13a -14 (c)) as of a date within 90 days prior to the filing of this
Quarterly Report on Form 10-QSB, have concluded that our disclosure controls and
procedures are adequate and effective for the purposes set forth in the
definition in Exchange Act rules.
(b) Changes in internal controls.
There were no significant changes in our internal controls or in other factors
that could significantly affect our internal controls subsequent to the date of
their evaluation.
21
PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
EXHIBIT
NUMBER DESCRIPTION
- ------------ -----------------------------------------------------------------
10.1 Employment Agreement dated July 31, 2002 between Performance
Capital Management, LLC and David J. Caldwell
10.2 Employment Agreement dated July 31, 2002 between Performance
Capital Management, LLC and William D. Constantino
10.3 Employment Agreement dated July 31, 2002 between Performance
Capital Management, LLC and Darren S. Bard
10.4 Employment Agreement dated July 31, 2002 between Performance
Capital Management, LLC and Wendy L. Curran
99.1 Certification of Principal Executive Officer Pursuant to 18
U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
99.2 Certification of Principal Financial Officer Pursuant to 18
U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
(b) REPORTS ON FORM 8-K
No reports on Form 8-K were filed during the three months ended September 30,
2002.
22
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
PERFORMANCE CAPITAL MANAGEMENT, LLC
April 24, 2003 By: /s/ David J. Caldwell
- ---------------------- ----------------------------------------
(Date) Name: David J. Caldwell
Its: Chief Operations Officer
23
CERTIFICATIONS
CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER
PURSUANT TO SECTION 302 OF THE
SARBANES-OXLEY ACT OF 2002
I, David J. Caldwell, certify that:
1. I have reviewed this quarterly report on Form 10-QSB of Performance Capital
Management, LLC;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this quarterly report is being
prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent
functions):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether there were significant changes in internal controls or
in other factors that could significantly affect internal controls subsequent to
the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
Date: April 24, 2003 /s/ David J. Caldwell
----------------- --------------------------------
David J. Caldwell
Chief Operations Officer
24
CERTIFICATION OF PRINCIPAL FINANCIAL OFFICER
PURSUANT TO SECTION 302 OF THE
SARBANES-OXLEY ACT OF 2002
I, Edward M. Rucker, certify that:
1. I have reviewed this quarterly report on Form 10-QSB of Performance Capital
Management, LLC;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this quarterly report is being
prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent
functions):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether there were significant changes in internal controls or
in other factors that could significantly affect internal controls subsequent to
the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
Date: April 24, 2003 /s/ Edward M. Rucker
----------------- --------------------------------
Edward M. Rucker
Accounting Manager
25
EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION
- ------------ -----------------------------------------------------------------
10.1 Employment Agreement dated July 31, 2002 between Performance
Capital Management, LLC and David J. Caldwell
10.2 Employment Agreement dated July 31, 2002 between Performance
Capital Management, LLC and William D. Constantino
10.3 Employment Agreement dated July 31, 2002 between Performance
Capital Management, LLC and Darren S. Bard
10.4 Employment Agreement dated July 31, 2002 between Performance
Capital Management, LLC and Wendy L. Curran
99.1 Certification of Principal Executive Officer Pursuant to 18
U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
99.2 Certification of Principal Financial Officer Pursuant to 18
U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002