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 March 31, 2003
-----------------------
[ ] 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
------------------------------------------------------------------------
(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 [X] No [ ]
State the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practicable date: As of March 31, 2003, 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 MARCH 31, 2003
PART I - FINANCIAL INFORMATION PAGE
Item 1 Financial Statements
Accountants' Review Report . . . . . . . . . . . . . . . . . . . . .1
Balance Sheet as of March 31, 2003 (unaudited) and December
31, 2002 (audited) . . . . . . . . . . . . . . . . . . . . . . . . .2
Statements of Operations for the three months ended March 31,
2003 and the period from February 4, 2002 (Inception) to
March 31, 2002 (unaudited) . . . . . . . . . . . . . . . . . . . . .3
Statements of Members' Equity for the three months ended
March 31, 2003 (unaudited) and the year ended December 31,
2002 (audited) . . . . . . . . . . . . . . . . . . . . . . . . . . .4
Statements of Cash Flows for the three months ended
March 31, 2003 and the period from February 4, 2002 (Inception)
to March 31, 2002 (unaudited). . . . . . . . . . . . . . . . . . . .5
Notes to the Financial Statements (unaudited). . . . . . . . . . . .6
Item 2 Management's Discussion and Analysis of Financial Condition
and Results of Operations. . . . . . . . . . . . . . . . . . . . . 16
Item 3 Controls and Procedures. . . . . . . . . . . . . . . . . . . . . . 20
PART II - OTHER INFORMATION
Item 6 Exhibits and Reports on Form 8-K . . . . . . . . . . . . . . . . . 21
SIGNATURES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
CERTIFICATIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
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 March 31, 2003, and the related statements of operations,
members' equity and cash flows for the three months ended March 31, 2003 and the
period from inception (February 4, 2002) through March 31, 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 of interim financial information consists principally of applying
analytical procedures and making inquiries of persons responsible for financial
and accounting matters. 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 reviews, we are not aware of any material modifications that should
be made to the accompanying financial statements referred to above for them to
be in conformity with accounting principles generally accepted in the United
States of America.
We have previously audited, in accordance with auditing standards generally
accepted in the United States of America, the balance sheet of Performance
Capital Management, LLC as of December 31, 2002, and the related statements of
operations, members' equity and cash flows for the period from inception
(February 4, 2002) through December 31, 2002 (not presented herein); and in our
report dated March 20, 2003, we expressed an unqualified opinion on those
financial statements. In our opinion, the information set forth in the
accompanying balance sheet as of December 31, 2002, is fairly stated, in all
material respects, in relation to the balance sheet from which it has been
derived.
/s/ Moore Stephens Wurth Frazer And Torbet, LLP
May 12, 2003
City of Industry, California
1
PERFORMANCE CAPITAL MANAGEMENT, LLC
BALANCE SHEETS
AS OF MARCH 31, 2003 AND DECEMBER 31, 2002
(See Independent Accountants' Review Report)
--------------------------------------------
March 31, December 31,
2003 2002
(unaudited) (audited)
----------- -------------
ASSETS
------
Cash and cash equivalents $ 1,685,785 $ 850,139
Restricted cash 21,408 21,395
Other receivables 37,815 47,615
Contract receivable 103,048 -
Purchased loan portfolios, net 2,815,179 4,044,194
Property and equipment, net 531,136 578,963
Deposits 56,588 56,588
Prepaid expenses and other assets 97,724 69,187
----------- -------------
Total assets $ 5,348,683 $ 5,668,081
=========== =============
LIABILITIES AND MEMBERS' EQUITY
-------------------------------
LIABILITIES:
Accounts payable $ 174,718 $ 130,421
Pre-petition claims 107,685 139,737
Accrued liabilities 492,329 502,279
Income taxes payable 19,538 16,590
----------- -------------
Total liabilities 794,270 789,027
COMMITMENTS AND CONTINGENCIES - -
MEMBERS' EQUITY 4,554,413 4,879,054
----------- -------------
Total liabilities and members' equity $ 5,348,683 $ 5,668,081
=========== =============
The accompanying notes are an integral part of this statement.
2
PERFORMANCE CAPITAL MANAGEMENT, LLC
STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31, 2003 AND FROM
FEBRUARY 4, 2002 (INCEPTION) TO MARCH 31, 2002
(See Independent Accountants' Review Report)
--------------------------------------------
March 31, March 31,
2003 2002
(unaudited) (unaudited)
------------ -----------
REVENUES:
Portfolio collections $ 2,639,618 $1,210,119
Portfolio sales 345,961 60,843
------------ -----------
Total revenues 2,985,579 1,270,962
Less portfolio basis recovery 1,578,966 899,587
------------ -----------
NET REVENUES 1,406,613 371,375
------------ -----------
OPERATING COSTS AND EXPENSES:
Salaries and benefits 1,120,108 797,977
General and administrative 545,693 384,012
Depreciation 51,501 34,387
------------ -----------
Total operating costs and expenses 1,717,302 1,216,376
------------ -----------
LOSS FROM OPERATIONS (310,689) (845,001)
------------ -----------
OTHER INCOME (EXPENSE):
Reorganization costs (23,523) (53,598)
Interest income 1,935 25,257
Other income 10,584 12,902
------------ -----------
Total other expense, net (11,004) (15,439)
------------ -----------
LOSS BEFORE INCOME TAX PROVISION (321,693) (860,440)
INCOME TAX PROVISION 2,948 2,948
------------ -----------
NET LOSS $ (324,641) $ (863,388)
============ ===========
The accompanying notes are an integral part of this statement.
3
PERFORMANCE CAPITAL MANAGEMENT, LLC
STATEMENTS OF MEMBERS' EQUITY
(See Independent 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 - (863,388) (863,388)
------------- ------------- -------------
Balance, March 31, 2002 26,116,880 (19,102,573) 7,014,307
Net loss - (2,135,253) (2,135,253)
------------- ------------- -------------
Balance, December 31, 2002 26,116,880 (21,237,826) 4,879,054
Net loss - (324,641) (324,641)
------------- ------------- -------------
Balance, March 31, 2003 $ 26,116,880 $(21,562,467) $ 4,554,413
============= ============= =============
The accompanying notes are an integral part of this statement.
4
PERFORMANCE CAPITAL MANAGEMENT, LLC
STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31, 2003 AND
FROM FEBRUARY 4, 2002 (INCEPTION) TO MARCH 31, 2002
(See Independent Accountants' Review Report)
--------------------------------------------
March 31, 2003 March 31, 2002
(unaudited) (unaudited)
---------------- ----------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (324,641) $ (863,388)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Depreciation 51,501 34,387
Decrease in other receivable 9,800 84,211
Increase in contract receivable (103,048)
Increase in other current assets (28,537) (38,615)
Decrease in loan portfolios 1,229,015 199,536
Increase (decrease) in accounts payable 44,297 (65,833)
Decrease in pre-petition claims (32,052) (2,394)
(Decrease) increase in accrued liabilities (9,950) 64,602
Increase in income taxes payable 2,948 2,948
---------------- ----------------
Net cash provided by (used in) operating activities 839,333 (584,546)
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property and equipment (3,674) -
CASH FLOWS FROM FINANCING ACTIVITIES:
Distribution to investors - (12,000,000)
---------------- ----------------
NET CHANGE IN CASH AND CASH EQUIVALENTS 835,659 (12,584,546)
CASH AND CASH EQUIVALENTS, beginning of period 871,534 15,529,574
---------------- ----------------
CASH AND CASH EQUIVALENTS, end of period $ 1,707,193 $ 2,945,028
================ ================
SUPPLEMENTAL DISCLOSURE FOR CASH FLOW INFORMATION:
Income taxes paid $ - $ 10,874
================ ================
Interest paid $ - $ -
================ ================
The accompanying notes are an integral part of this statement.
5
PERFORMANCE CAPITAL MANAGEMENT, LLC
NOTES TO THE FINANCIAL STATEMENTS
(See Independent 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 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 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. 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, 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.
6
PERFORMANCE CAPITAL MANAGEMENT, LLC
NOTES TO THE FINANCIAL STATEMENTS
(See Independent Accountants' Review Report)
--------------------------------------------
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
$57.4 million 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 Independent 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 For The Year Ended
December 31, 2002 (2,999)
---------
Members' Equity PCM, LLC
at December 31, 2002 4,879
Net Loss For The Three Months
Ended March 31, 2003 (325)
---------
Members' Equity PCM, LLC
at March 31, 2003 $ 4,554
=========
Performance Asset Management Fund III, Ltd. and Performance Asset Management
Fund IV, Ltd., were reporting entities under the Securities Exchange 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 Exchange Act of 1934, and therefore is
subject to the reporting requirements of the Securities Exchange 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 sheets, statements of operations, members'
equity, and cash flows include balances and transactions since the emergence
from bankruptcy.
8
PERFORMANCE CAPITAL MANAGEMENT, LLC
NOTES TO THE FINANCIAL STATEMENTS
(See Independent Accountants' Review Report)
--------------------------------------------
NOTE 2 - BASIS OF PRESENTATION (CONTINUED)
Transfer of Assets to Successor Company
- --------------------------------------------
Assets were transferred at historical carrying values and post-petition
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 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 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 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 portfolio 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 statement 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 which exceeded federally insured limits by approximately
$1,845,000 as of March 31, 2003. 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.
9
PERFORMANCE CAPITAL MANAGEMENT, LLC
NOTES TO THE FINANCIAL STATEMENTS
(See Independent 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 March 31, 2003, 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, net of cost basis
recovery, are recorded as net 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 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.
10
PERFORMANCE CAPITAL MANAGEMENT, LLC
NOTES TO THE FINANCIAL STATEMENTS
(See Independent Accountants' Review Report)
--------------------------------------------
NOTE 4 - 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 did not 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 adoption of this statement did not have a significant impact on the
financial condition or results of operations of the Company.
In November 2002, the FASB issued Interpretation No. 45, Guarantor's Accounting
and Disclosure Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness of Others (FIN 45). FIN 45 requires the recognition of certain
guarantees as liabilities at fair market value and is effective for guarantees
issued or modified after
11
PERFORMANCE CAPITAL MANAGEMENT, LLC
NOTES TO THE FINANCIAL STATEMENTS
(See Independent Accountants' Review Report)
--------------------------------------------
NOTE 4 - RECENT ACCOUNTING PRONOUNCEMENTS (CONTINUED)
December 31, 2002. The Company has adopted the disclosure requirement of FIN 45
and does not expect the impact of the fair market value requirement to have a
material impact on its financial condition or results of operations of the
Company.
In December 2002, the FASB issued Statement of Financial Accounting Standards
No. 148 "Accounting for Stock-Based Compensation - Transition and Disclosure".
The statement allows for the Company's current method of accounting for stock
options to continue. Effective for interim periods beginning after December 15,
2002, disclosure will be required for information on the fair value of stock
options and the effect on earnings per share (in tabular form) for both interim
and annual reports. The adoption of this statement did not have a significant
impact on the financial condition or results of operations of the Company.
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 March 31, 2003 and
2002 are as follows. The carrying amount of cash and cash equivalents,
restricted cash and liabilities approximate 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 March 31, 2003 and December 31, 2002 was 20%. The estimated
fair value of loan portfolios was $16,600,000 and $15,000,000 at March 31, 2003
and December 31, 2002, respectively.
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 March 31, 2003 and December 31, 2002 totaled
approximately $1.1 billion and $1.1 billion, respectively.
The Company initially records acquired loans at cost. To the extent that the
cost of a particular loan portfolio exceeds the discounted present value of 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 sheets are as
follows:
As of As of
March 31, 2003 December 31, 2002
------------------ -------------------
Unrecovered cost balance,
beginning of period $ 9,517,146 $ 10,236,158
Valuation allowance,
beginning of period (5,472,952) (5,472,952)
------------------ -------------------
Net balance, beginning of period 4,044,194 4,763,206
Net portfolio activity (1,229,015) (719,012)
------------------ -------------------
Net balance, end of period $ 2,815,179 $ 4,044,194
================== ===================
12
PERFORMANCE CAPITAL MANAGEMENT, LLC
NOTES TO THE FINANCIAL STATEMENTS
(See Independent Accountants' Review Report)
--------------------------------------------
NOTE 6 - PURCHASED LOAN PORTFOLIOS (CONTINUED)
The activity in the loan portfolios in the accompanying financial statements is
as follows:
Three months From February 4,
ended 2002 (Inception) to
March 31, 2003 March 31, 2002
--------------------- ------------------
Purchases of loan portfolios $ 349,951 $ 700,050
Collections on loan portfolios (2,639,618) (1,210,120)
Sales of loan portfolios (345,961) (60,843)
Revenue recognized on collections 1,351,509 349,352
Revenue recognized on sales 55,104 22,024
--------------------- ------------------
Net portfolio activity $ (1,229,015) $ (199,537)
===================== ==================
The valuation allowance related to the loan portfolios in the accompanying
financial statements are as follows:
As of As of
March 31, 2003 December 31, 2002
----------------- ------------------
Valuation allowance, beginning of period $ 5,472,952 $ 5,472,952
Change in valuation allowance - -
----------------- ------------------
Valuation allowance, end of period $ 5,472,952 $ 5,472,952
================= ==================
NOTE 7 - OTHER RECEIVABLES
Other receivables consist of collections on portfolios received by a third party
collection agency.
NOTE 8 - CONTRACT RECEIVABLE
The Company has a contract receivable related to the sale of loan portfolios
from a third party in the amount of $103,048 as of March 31, 2003. This contract
is non-interest bearing and payable in six equal monthly installments commencing
on April 15, 2003 and is secured by a letter of credit.
NOTE 9 - PROPERTY AND EQUIPMENT
Property and equipment is as follows:
As of As of
March 31, 2003 December 31, 2002
------------------ ------------------
Office furniture and equipment $ 272,111 $ 269,685
Computer equipment 467,242 465,994
Leasehold improvements 36,982 36,981
------------------ ------------------
Totals 776,335 772,660
Less accumulated depreciation 245,199 193,697
------------------ ------------------
Property and equipment, net $ 531,136 $ 578,963
================== ==================
13
PERFORMANCE CAPITAL MANAGEMENT, LLC
NOTES TO THE FINANCIAL STATEMENTS
(See Independent Accountants' Review Report)
--------------------------------------------
NOTE 9 - PROPERTY AND EQUIPMENT (CONTINUED)
Depreciation expense for the three months ended March 31, 2003 and the period
from inception (February 4, 2002) to March 31, 2002 amounted to $51,501 and
$34,387 respectively.
NOTE 10 - PRE-PETITION CLAIMS
Under the Reorganization Plan PCM LLC was required to pay certain allowed
pre-petition claims and professional fees totaling to approximately $1,400,000
of which $884,274 remained outstanding at inception (February 4, 2002). At
March 31, 2003 all of these claims had been paid or settled except for
approximately $28,000 which was related primarily to operating expenses. At
March 31, 2003, the Company has approximately $108,000 accrued to cover the
pre-petition claims and related expenses.
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.
Future minimum lease commitments as of March 31, 2003 are as follows:
Year ending
March 31,
------------
2004 $ 299,000
2005 307,000
2006 316,000
2007 214,000
Thereafter -
Rental expense for the three months ending March 31, 2003 and the period from
inception (February 4, 2002) to March 31, 2002 was $77,581 and $95,069,
respectively.
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 through March 2003 and April through May
2003 was approximately $7,146,200 and $3,453,900 respectively. The amounts paid
for these purchases in December 2002 through March 2003 and April through May
2003 was approximately $357,000 and $172,700 respectively. The Company did not
exercise its option to extend the term of the agreement.
14
PERFORMANCE CAPITAL MANAGEMENT, LLC
NOTES TO THE FINANCIAL STATEMENTS
(See Independent Accountants' Review Report)
--------------------------------------------
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. 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.
Claims
- ------
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 March 31, 2003, the Company has accrued approximately $108,000 to cover these
pre-petition claims and related expenses.
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 LLC's Management intends to contest this claim
vigorously. However, management believes the potential range of a loss would be
between zero and $75,000 and has accrued $60,000 for it as of March 31, 2003.
15
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 results of
operations 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 10-KSB
filed with the Securities and Exchange Commission on April 28, 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
16
for the portfolio, we reduce the cost basis of the portfolio by a percentage of
the original portfolio cost.
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
audited financial statements contained in our annual report for 2002 on Form
10-KSB, 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
17
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 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
COMPARISON OF RESULTS FOR THE QUARTER ENDED MARCH 31, 2003, TO THE PERIOD FROM
FEBRUARY 4, 2002, TO MARCH 31, 2002
The following discussion compares our results from the quarter ended March 31,
2003, to the period from February 4, 2002, to March 31, 2002. We generally
refer to the approximately two-month period in February and March of 2002 as the
comparable period for the prior year. The comparable period from 2002 is not a
full quarter because we present our financial statements based on our February
4, 2002, emergence from bankruptcy being treated as the inception of our
business. As you read the following discussion, please keep in mind that the
comparable period for the prior year covers a time period slightly less than
two-thirds that of the first quarter of 2003.
Our net loss decreased to approximately $325,000 for the quarter ended March 31,
2003, from approximately $863,000 for the comparable period for the prior year.
Our operating activities provided cash of approximately $839,000 for the quarter
ended March 31, 2003, as compared to using cash of approximately $585,000 for
the comparable period for the prior year.
Revenue
- -------
Our net revenues increased to approximately $1.4 million for the quarter ended
March 31, 2003, from approximately $371,000 for the comparable period for the
prior year. The following table presents a comparison of the components of our
revenues for the quarter ended March 31, 2003, to the comparable period for the
prior year, as well as presenting net revenue as a percentage of the
corresponding total revenue (approximate amounts due to rounding):
Total Collections Sales
--------- -------------------- ------------------
3/31/03 3/31/02 3/31/03 3/31/02 3/31/03 3/31/02
--------- --------- --------- --------- --------- -------
($ in millions) ($ in millions) ($ in millions)
Total revenues $ 3.0 $ 1.3 $ 2.6 $ 1.3 $ 0.4 *
Less basis recovery (1.6) (0.9) (1.3) (0.9) (0.3) *
--------- --------- --------- --------- ---------
Net revenues $ 1.4 $ 0.4 $ 1.3 $ 0.4 $ 0.1 *
========= ========= ========= ========= =========
Net revenue percentage 47.1% 29.2% 51.2% 28.9% 15.9% *
* De minimis amounts of sales revenue for period ended March 31, 2002,
included with collections revenue.
Portfolio collections continue to provide most of our total and net revenues. We
showed substantial improvements in both total revenues and net revenues from
portfolio collections. Our total revenues from portfolio collections increased
principally due to increased efficiency in collection procedures. Our net
revenues from portfolio collections (as well as the corresponding percentage of
net revenues to total revenues) increased principally due to maintaining
collection trends on our older portfolios with low or fully - amortized cost
basis while simultaneously exploiting our new portfolios. We anticipate
continuing to sell portions of newly acquired portfolios from time to time, but
we do not expect to generate substantial net revenues from these sales.
18
Operating Expenses
- -------------------
Our total operating costs and expenses increased to approximately $1.7 million
for the quarter ended March 31, 2003, from approximately $1.2 million for the
comparable period for the prior year. Taking into account the shorter time
period in 2002, our operating costs and expenses remained about the same. Our
ratio of operating costs and expenses to total revenues decreased to 57.5% for
the quarter ended March 31, 2003, from approximately 95.7% for the comparable
period for the prior year. This improvement was due principally to improved
collection performance. Our general and administration expenses increased to
approximately $546,000 for the quarter ended March 31, 2003, from approximately
$384,000 for the comparable period for the prior year. Our salaries and benefits
expenses increased to approximately $1.1 million for the quarter ended March 31,
2003, from approximately $798,000 for the comparable period for the prior year.
Taking into account the shorter time period in 2002, both of these expense
categories remained about the same. 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
Our cash and cash equivalents increased approximately $836,000 during the
quarter ended March 31, 2003, to a balance of approximately $1.7 million at
March 31, 2003. During the quarter ended March 31, 2003, our portfolio
collections and sales generated approximately $3.0 million of cash, and we used
approximately $1.8 million for operating and other activities and approximately
$350,000 to purchase new portfolios.
During the three-month period ended March 31, 2003, we made progress toward, but
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. While an improvement over the previous three-month period, our cost
recovery of approximately $1.6 million plus our operating and other expenses of
approximately $1.7 million exceeded our collections and sales of approximately
$3.0 million by approximately $311,000. On a cash basis, our collections and
sales of approximately $3.0 million exceeded our new portfolio acquisitions of
approximately $350,000 plus our cash operating and other costs of approximately
$1.8 million. This cash increase of approximately $836,000 was principally due
to our decision to build cash at this time rather than aggressively acquire new
portfolios. We acquired a substantial amount of new portfolios during the second
half of 2002, and in the first quarter of 2003 we focused on improving our
liquidity following those acquisitions so that we can begin to make
distributions to our unit holders. Our portfolio acquisition strategy for 2003
will depend principally on market conditions.
During the quarter ended March 31, 2003, we believe we continued to improve the
balance between our new and old portfolios. In addition, we believe that our
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, have begun to show results. We had a
successful first quarter from a cash flow standpoint, and we made substantial
progress toward achieving results consistent with our business plan.
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 March 31, 2003, increased $1.6 million to
$16.6 million from $15.0 million at December 31, 2002. At the same time, the
cost basis of our portfolios decreased to approximately $2.8 million at March
31, 2003, from approximately $4.0 million at December 31, 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 and because
newly acquired portfolios generally provide an increase in fair value
substantially greater than the increase in cost basis recorded on our balance
sheet. 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.
19
We used a discount rate of 20% to determine the fair values of our portfolios at
March 31, 2003, and December 31, 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%).
March 31, 2003 December 31, 2002
--------------- ------------------
Higher collection risk (25% discount rate) $ 15.5 million $ 14.2 million
Assumed collection risk (20% discount rate) $ 16.6 million $ 15.0 million
Lower collection risk (15% discount rate) $ 18.0 million $ 15.9 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 made our first distribution of $135,000 (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 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
- 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.
20
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
- ------- -------------------------------------------------------------------------------------------
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 March 31, 2003.
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
May 19, 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: May 19, 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: May 19, 2003 /s/ Edward M. Rucker
------------ ---------------------------
Edward M. Rucker
Accounting Manager
25
EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION
- ------- -------------------------------------------------------------------------------------------
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