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 June 30, 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
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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 [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 June 30, 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 JUNE 30, 2003
PART I - FINANCIAL INFORMATION PAGE
Item 1 Financial Statements
Independent Accountants' Review Report . . . . . . . . . . . 1
Balance Sheets as of June 30, 2003 (unaudited) and
December 31, 2002 (audited). . . . . . . . . . . . . . . . . 2
Statements of Operations for the three months ended
June 30, 2003 and 2002, the six months ended
June 30, 2003, and the period from February 4, 2002
(Inception) to June 30, 2002 (unaudited) . . . . . . . . . . 3
Statements of Members' Equity for the six months ended
June 30, 2003 (unaudited) and the year ended
December 31, 2002 (audited). . . . . . . . . . . . . . . . . 4
Statements of Cash Flows for the six months ended
June 30, 2003, and the period from
February 4, 2002 (Inception) to June 30, 2002 (unaudited). . 5
Condensed Notes to the Financial Statements (unaudited). . . 6
Item 2 Management's Discussion and Analysis of Financial Condition
and Results of Operations. . . . . . . . . . . . . . . . . . 13
Item 3 Controls and Procedures. . . . . . . . . . . . . . . . . . . 19
PART II - OTHER INFORMATION
Item 1 Legal Proceedings. . . . . . . . . . . . . . . . . . . . . . 20
Item 4 Submission of Matters to a Vote of Security Holders. . . . . 20
Item 5 Other Information. . . . . . . . . . . . . . . . . . . . . . 20
Item 6 Exhibits and Reports on Form 8-K . . . . . . . . . . . . . . 21
SIGNATURES. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
CERTIFICATIONS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
[MOORE STEPHENS WURTH FRAZER AND TORBET, LLP LETTERHEAD]
Independent Accountants' Review Report
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 June 30, 2003, and the related statements of operations
for the three and six months ended June 30, 2003, the three months ended June
30, 2002, and the period from inception (February 4, 2002) through June 30, 2002
and the related statements of members' equity and cash flows for the six months
ended June 30, 2003 and the period from inception (February 4, 2002) through
June 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 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
August 5, 2003
City of Industry, California
1
PERFORMANCE CAPITAL MANAGEMENT, LLC
BALANCE SHEETS
AS OF JUNE 30, 2003 AND DECEMBER 31, 2002
(See Independent Accountants' Review Report)
--------------------------------------------
December 31,
June 30, 2003 2002
(unaudited) (audited)
--------------- --------------
ASSETS
------
Cash and cash equivalents $ 1,733,739 $ 850,139
Restricted cash 21,408 21,395
Other receivables 33,881 47,615
Note receivable 51,524 -
Purchased loan portfolios, net 2,240,621 4,044,194
Property and equipment, net 479,459 578,963
Deposits 56,588 56,588
Prepaid expenses and other assets 85,872 69,187
--------------- --------------
Total assets $ 4,703,092 $ 5,668,081
=============== ==============
LIABILITIES AND MEMBERS' EQUITY
-------------------------------
LIABILITIES:
Accounts payable $ 89,634 $ 130,421
Pre-petition claims 120,000 139,737
Accrued liabilities 341,185 502,279
Income taxes payable 5,895 16,590
--------------- --------------
Total liabilities 556,714 789,027
COMMITMENTS AND CONTINGENCIES - -
MEMBERS' EQUITY 4,146,378 4,879,054
--------------- --------------
Total liabilities and members' equity $ 4,703,092 $ 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 JUNE 30, 2003 AND 2002, THE SIX MONTHS ENDED
JUNE 30, 2003, AND THE PERIOD FROM FEBRUARY 4, 2002 (INCEPTION) TO JUNE 30, 2002
(See Independent Accountants' Review Report)
--------------------------------------------
For the three For the three For the six From February 4,
months ended months ended months ended 2002 (inception) to
June 30, 2003 June 30, 2002 June 30, 2003 June 30, 2002
(unaudited) (unaudited) (unaudited) (unaudited)
--------------- --------------- --------------------- ------------------
REVENUES:
Portfolio collections $ 2,367,483 $ 1,871,287 $ 5,007,101 $ 3,081,406
Portfolio sales 159,763 864,769 505,724 925,612
--------------- --------------- --------------------- ------------------
Total revenues 2,527,246 2,736,056 5,512,825 4,007,018
Less portfolio basis recovery 1,124,448 1,377,856 2,703,414 2,277,443
--------------- --------------- --------------------- ------------------
NET REVENUES 1,402,798 1,358,200 2,809,411 1,729,575
--------------- --------------- --------------------- ------------------
OPERATING COSTS AND EXPENSES:
Salaries and benefits 1,060,572 1,039,355 2,180,680 1,837,332
General and administrative 530,238 467,866 1,075,931 851,878
Depreciation 51,677 52,902 103,178 87,289
--------------- --------------- --------------------- ------------------
Total operating costs and expenses 1,642,487 1,560,123 3,359,789 2,776,499
--------------- --------------- --------------------- ------------------
LOSS FROM OPERATIONS (239,689) (201,923) (550,378) (1,046,924)
--------------- --------------- --------------------- ------------------
OTHER INCOME (EXPENSE):
Reorganization costs (24,497) (30,863) (48,020) (84,461)
Interest income 3,914 9,038 5,850 34,295
Other income (expense) (9,304) 8,266 1,280 21,168
--------------- --------------- --------------------- ------------------
Total other expense, net (29,887) (13,559) (40,890) (28,998)
--------------- --------------- --------------------- ------------------
LOSS BEFORE INCOME TAX PROVISION (269,576) (215,482) (591,268) (1,075,922)
INCOME TAX PROVISION 4,547 752 7,496 3,700
--------------- --------------- --------------------- ------------------
NET LOSS $ (274,123) $ (216,234) $ (598,764) $ (1,079,622)
=============== =============== ===================== ==================
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
------------- ------------- -------------
(unaudited) (unaudited) (unaudited)
Balance, February 4, 2002 (audited) $ 38,116,880 $(18,239,185) $ 19,877,695
Distribution to investors (12,000,000) - (12,000,000)
Net loss - (1,079,622) (1,079,622)
------------- ------------- -------------
Balance, June 30, 2002 26,116,880 (19,318,807) 6,798,073
Net loss - (1,919,019) (1,919,019)
------------- ------------- -------------
Balance, December 31, 2002 (audited) 26,116,880 (21,237,826) 4,879,054
Distribution to investors (133,912) (133,912)
Net loss - (598,764) (598,764)
------------- ------------- -------------
Balance, June 30, 2003 $ 25,982,968 $(21,836,590) $ 4,146,378
============= ============= =============
The accompanying notes are an integral part of this statement.
4
PERFORMANCE CAPITAL MANAGEMENT, LLC
STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 2003 AND
THE PERIOD FROM FEBRUARY 4, 2002 (INCEPTION) TO JUNE 30, 2002
(See Independent Accountants' Review Report)
--------------------------------------------
For the six From February 4,
months ended 2002 (inception) to
June 30, 2003 June 30, 2002
(unaudited) (unaudited)
--------------- ---------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (598,764) $ (1,079,622)
Adjustments to reconcile net loss to net cash
provided by operating activities:
Depreciation 103,178 87,289
Decrease in other receivables 13,734 91,059
Increase in note receivable (51,524) -
Increase in prepaid expenses and other assets (16,685) (29,868)
Decrease in loan portfolios 1,803,573 1,085,268
Decrease in deposits - 22,167
Increase (decrease) in accounts payable (40,787) (3,175)
Decrease in pre-petition claims (19,737) (264,056)
(Decrease) increase in accrued liabilities (161,094) 136,379
(Decrease) increase in income taxes payable (10,695) 5,895
--------------- ---------------
Net cash provided by operating activities 1,021,199 51,336
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property and equipment (3,674) (8,458)
CASH FLOWS FROM FINANCING ACTIVITIES:
Distribution to investors (133,912) (12,000,000)
--------------- ---------------
NET CHANGE IN CASH AND CASH EQUIVALENTS 883,613 (11,957,122)
CASH AND CASH EQUIVALENTS, beginning of period 871,534 15,529,574
--------------- ---------------
CASH AND CASH EQUIVALENTS, end of period $ 1,755,147 $ 3,572,452
=============== ===============
SUPPLEMENTAL DISCLOSURE FOR CASH FLOW INFORMATION:
Income taxes paid $ - $ 11,720
=============== ===============
Interest paid $ - $ -
=============== ===============
The accompanying notes are an integral part of this statement.
5
PERFORMANCE CAPITAL MANAGEMENT, LLC
CONDENSED 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 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, 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
CONDENSED NOTES TO THE FINANCIAL STATEMENTS
(See Independent Accountants' Review Report)
--------------------------------------------
NOTE 1 - ORGANIZATION AND DESCRIPTION OF BUSINESS (CONTINUED)
Pre-Petition Operations
- ------------------------
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.
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
CONDENSED 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
2003 Distribution to Investors (134)
Net Loss For The Six Months
Ended June 30, 2003 (599)
---------
Members' Equity PCM, LLC
at June 30, 2003 $ 4,146
=========
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 under 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.
8
PERFORMANCE CAPITAL MANAGEMENT, LLC
CONDENSED NOTES TO THE FINANCIAL STATEMENTS
(See Independent Accountants' Review Report)
--------------------------------------------
NOTE 2 - BASIS OF PRESENTATION
Interim Condensed Financial Statements
- --------------------------------------
These interim condensed financial statements have been prepared using generally
accepted accounting principles in the United States. The interim financial
statements include all adjustments, consisting solely of normal recurring
adjustments, which in management's opinion are necessary for fair presentation
of the financial results for interim periods. The financial statements have been
prepared consistent with the accounting policies described in the Company's
annual audited financial statements. Reference should be made to those
statements included with the Company's annual report filed on Form 10-KSB.
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.
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 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.
9
PERFORMANCE CAPITAL MANAGEMENT, LLC
CONDENSED NOTES TO THE FINANCIAL STATEMENTS
(See Independent Accountants' Review Report)
--------------------------------------------
NOTE 3 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Over the life of the portfolio, the Company's management continues to review the
carrying values of each loan for impairment. If the present value of expected
future cash flows falls 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.
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 net 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 portions of purchased loan portfolios in excess
of their cost basis are recorded as net revenue when received.
NOTE 4 - 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 June 30, 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 June 30, 2003 and December 31, 2002 was 20%. The
estimated fair value of loan portfolios was $15,900,000 and $15,000,000 at June
30, 2003 and December 31, 2002, respectively.
NOTE 5 - 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 June 30, 2003 and December 31, 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.
10
PERFORMANCE CAPITAL MANAGEMENT, LLC
CONDENSED NOTES TO THE FINANCIAL STATEMENTS
(See Independent Accountants' Review Report)
--------------------------------------------
NOTE 5 - PURCHASED LOAN PORTFOLIOS (CONTINUED)
The carrying amount of loans included in the accompanying balance sheets are as
follows:
As of As of
June 30, 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 (1,803,573) (719,012)
---------------- -------------------
Net balance, end of period $ 2,240,621 $ 4,044,194
================ ===================
The activity in the loan portfolios in the accompanying financial statements is
as follows:
Three months Three months Six months From February 4,
ended ended ended 2002 (Inception) to
June 30, 2003 June 30, 2002 June 30, 2003 June 30, 2002
-------------- -------------- -------------------- ------------------
Purchased loan portfolios 549,890 492,125 899,841 1,192,175
Collections on loan portfolios (2,367,483) (1,871,287) (5,007,101) (3,081,406)
Sales of loan portfolios (159,763) (864,769) (505,724) (925,612)
Revenue recognized on collections 1,392,762 524,431 2,744,271 873,782
Revenue recognized on sales 10,036 833,769 65,140 855,793
-------------- -------------- -------------------- -----------------
Net portfolio activity (574,558) (885,731) (1,803,573) (1,085,268)
============== ============== ==================== =================
The valuation allowance related to the loan portfolios had a balance of
$5,472,952 at June 30, 2003 and December 31, 2002.
NOTE 6 - 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 June
30, 2003 all of these claims had been paid or settled except for approximately
$120,000 which was related primarily to operating expenses. At June 30, 2003,
the Company has approximately $120,000 accrued to cover the pre-petition claims
and related expenses.
11
PERFORMANCE CAPITAL MANAGEMENT, LLC
CONDENSED NOTES TO THE FINANCIAL STATEMENTS
(See Independent Accountants' Review Report)
--------------------------------------------
NOTE 7 - 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 June 30, 2003 are as follows:
Year ending
June 30,
---------
2004 $301,000
2005 $311,000
2006 $318,000
2007 $134,000
Thereafter -
Rental expense for the three months ended June 30, 2003 and 2002 amounted to
$77,450 and $102,881 respectively. Rental expense for the six months ended June
30, 2003 and the period from February 4, 2002 (Inception) to June 30, 2002
amounted to $155,029 and $197,950 respectively.
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 access to the business for a period of three
years, including 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. As of June 30, 2003, most of these issues
have been resolved by settlement agreements. PCM LLC management has actively
resolved these actions. The Company has accrued approximately $120,000 as of
June 30, 2003 to cover the remaining pre-petition claims and related expenses.
12
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," "plan," 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
13
remaining cost basis 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 the
appropriate matching percentages, due to the distressed nature of the portfolio
assets and the lack of assurance that projected collections will actually occur.
14
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 QUARTERS ENDED JUNE 30, 2003, AND 2002
The following discussion compares our results for the quarter ended June 30,
2003, to the quarter ended June 30, 2002. Our net loss increased to
approximately $274,000 for the quarter ended June 30, 2003, from approximately
$216,000 for the quarter ended June 30, 2002.
Revenue
- -------
Our net revenues were approximately $1.4 million for each of the quarters ended
June 30, 2003 and 2002. The following table presents a comparison of the
components of our revenues for the quarter ended June 30, 2003, to the quarter
ended June 30, 2002, as well as presenting net revenue as a percentage of the
corresponding total revenue (approximate amounts due to rounding):
Total Collections Sales
-------------------- -------------------- --------------------
6/30/03 6/30/02 6/30/03 6/30/02 6/30/03 6/30/02
--------- --------- --------- --------- --------- ---------
($in millions) ($in millions) ($in millions)
Total revenues $ 2.5 $ 2.7 $ 2.4 $ 1.9 $ 0.2 $ 0.8
Less basis recovery (1.1) (1.4) (1.0) (1.4) (0.2) -
--------- --------- --------- --------- --------- ---------
Net revenues $ 1.4 $ 1.4 $ 1.4 $ 0.5 $ - $ 0.8
========= ========= ========= ========= ========= =========
Net revenue percentage 55.5% 49.6% 58.8% 28.0% 6.3% 96.4%
Portfolio collections continue to provide most of our total 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 collections from recently purchased portfolios and increased efficiency
in collection procedures for both recently purchased and older portfolios. 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 bases
while simultaneously exploiting our recently purchased portfolios.
Our total and net revenues from portfolio sales declined dramatically. During
the quarter ended June 30, 2002, 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. These old portfolio sales generated
substantial net revenues because almost all of these portfolios had low or
fully-amortized cost bases due to prior collection activities. These old
portfolio sales resulted in unusually high net revenues for portfolio sales
during the quarter ended June 30, 2002. Net revenues from portfolio sales were
not as large in the quarter ended June 30, 2003, because these sales consisted
principally of portions of newly acquired portfolios, which generally have high
cost bases that must be recovered against sale proceeds. 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.
15
Operating Expenses
- -------------------
Our total operating costs and expenses increased slightly for the quarter ended
June 30, 2003, although total operating costs and expenses were approximately
$1.6 million for each of the quarters ended June 30, 2003 and 2002. The
approximately $80,000 increase was due principally to the increase in our
general and administrative expenses. Our ratio of operating costs and expenses
to total revenues increased to 65.0% for the quarter ended June 30, 2003, from
approximately 57.0% for the quarter ended June 30, 2002. The ratio for the
quarter ended June 30, 2002, is somewhat skewed by the significant net revenues
from sales of old portfolios, which we do not expect to recur at those levels.
Otherwise, our ratio would have improved in 2003 from 2002, due principally to
improved collection performance. Our general and administration expenses
increased to approximately $530,000 for the quarter ended June 30, 2003, from
approximately $468,000 for the quarter ended June 30, 2002. Our general and
administrative expenses for the quarter ended June 30, 2003, include annual
meeting costs that were not present in the quarter ended June 30, 2002. Our
salaries and benefits expenses increased to approximately $1.1 million for the
quarter ended June 30, 2003, from approximately $1.0 million for the quarter
ended June 30, 2002. Although our headcount has decreased, expenses associated
with bonuses due to increased productivity and with employee turnover resulted
in a slight increase in our salaries and benefits expense. Our operating
expenses may increase somewhat in 2003, but at this time we do not expect these
increases to be substantial.
COMPARISON OF RESULTS FOR THE SIX MONTHS ENDED JUNE 30, 2003, TO THE PERIOD FROM
FEBRUARY 4, 2002, TO JUNE 30, 2002
The following discussion compares our results from the six months ended June 30,
2003, to the period from February 4, 2002, to June 30, 2002. We generally refer
to the approximately five-month period from February to June of 2002 as the
comparable period for the prior year. The comparable period from 2002 is not a
full six months 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 of just under five
months, about one month less than the six-month period ended June 30, 2003.
Our net loss decreased to approximately $599,000 for the six months ended June
30, 2003, from approximately $1.1 million for the comparable period for the
prior year. Our operating activities provided cash of approximately $1.0 million
for the six months ended June 30, 2003, as compared to providing cash of
approximately $51,000 for the comparable period for the prior year.
Revenue
- -------
Our net revenues increased to approximately $2.8 million for the six months
ended June 30, 2003, from approximately $1.7 million for the comparable period
for the prior year. The following table presents a comparison of the components
of our revenues for the six months ended June 30, 2003, to the comparable period
for the prior year, as well as presenting net revenue as a percentage of the
corresponding total revenue (approximate amounts due to rounding):
Total Collections Sales
-------------------- -------------------- --------------------
6/30/03 6/30/02 6/30/03 6/30/02 6/30/03 6/30/02
--------- --------- --------- --------- --------- ---------
($in millions) ($in millions) ($in millions)
Total revenues $ 5.5 $ 4.0 $ 5.0 $ 3.1 $ 0.5 $ 0.9
Less basis recovery (2.7) (2.3) (2.3) (2.2) (0.4) (0.1)
--------- --------- --------- --------- --------- ---------
Net revenues $ 2.8 $ 1.7 $ 2.7 $ 0.9 $ 0.1 $ 0.8
========= ========= ========= ========= ========= =========
Net revenue percentage 51.0% 43.2% 54.8% 28.4% 12.9% 92.4%
Portfolio collections continue to provide most of our total 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 collections from recently purchased portfolios and increased
efficiency in collection procedures for both recently purchased and older
portfolios. Our net revenues from portfolio collections (as well as the
corresponding percentage of net revenues to total revenues) increased
16
principally due to maintaining collection trends on our older portfolios with
low or fully-amortized cost bases while simultaneously exploiting our recently
purchased portfolios.
Although our total revenues from portfolio sales declined somewhat, our net
revenues from portfolio sales declined dramatically. During the quarter ended
June 30, 2002, 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. These old portfolio sales generated
substantial net revenues because almost all of these portfolios had low or
fully-amortized cost bases due to prior collection activities. These old
portfolio sales resulted in unusually high net revenues for portfolio sales,
principally during the quarter ended June 30, 2002. Net revenues from portfolio
sales were not as large in the six months ended June 30, 2003, because these
sales consisted principally of portions of newly acquired portfolios, which
generally have high cost bases that must be recovered against sale proceeds. 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.
Operating Expenses
- -------------------
Our total operating costs and expenses increased to approximately $3.4 million
for the six months ended June 30, 2003, from approximately $2.8 million for the
comparable period for the prior year. Taking into account the shorter time
period in the comparable period for the prior year, our total operating costs
and expenses remained roughly the same. Our ratio of operating costs and
expenses to total revenues decreased to 60.9% for the six months ended June 30,
2003, from approximately 69.3% for the comparable period for the prior year.
The ratio for the comparable period for the prior year is somewhat skewed by the
significant net revenues from sales of old portfolios, which we do not expect to
recur at those levels. Otherwise, the improvement in 2003 from 2002 was due
principally to improved collection performance. Our general and administration
expenses increased to approximately $1.1 million for the six months ended June
30, 2003, from approximately $852,000 for the comparable period for the prior
year. Our general and administrative expenses for the six months ended June 30,
2003, include annual meeting costs that were not present in the comparable
period for the prior year. Our salaries and benefits expenses increased to
approximately $2.2 million for the six months ended June 30, 2003, from
approximately $1.8 million for the comparable period for the prior year.
Although our headcount has decreased, expenses associated with bonuses due to
increased productivity and with employee turnover resulted in a slight increase
in our salaries and benefits expense. 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 $884,000 during the six
months ended June 30, 2003, to a balance of approximately $1.8 million at June
30, 2003. During the six months ended June 30, 2003, our portfolio collections
and sales generated approximately $5.5 million of cash, and we used
approximately $3.6 million for operating and other activities, approximately
$900,000 to purchase new portfolios and approximately $135,000 for distributions
to unit holders.
During the six-month period ended June 30, 2003, we continued making 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. Our cost basis recovery of approximately $2.7
million plus our operating and other expenses of approximately $3.4 million
exceeded our total revenues from collections and sales of approximately $5.5
million by approximately $550,000. On a cash basis, our collections and sales of
approximately $5.5 million exceeded the sum of our new portfolio acquisitions of
approximately $900,000 plus our cash operating and other costs of approximately
$3.6 million plus distributions of $135,000. This cash increase of approximately
$884,000 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 six months of
2003 we focused on improving our liquidity following those acquisitions so that
we can sustain distributions to our unit holders while simultaneously acquiring
portfolios that we believe are available on good economic terms. Our portfolio
acquisition strategy for the balance of 2003 will depend principally on market
conditions.
During the six months ended June 30, 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
17
the most recently acquired portfolios, have begun to show results. We had a
successful first six months 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 June 30, 2003, increased $900,000 to $15.9
million from $15.0 million at December 31, 2002. At the same time, the cost
basis of our portfolios decreased to approximately $2.2 million at June 30,
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.
We used a discount rate of 20% to determine the fair values of our portfolios at
June 30, 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%).
June 30, 2003 December 31, 2002
--------------- ------------------
Higher collection risk (25% discount rate) $ 14.8 million $ 14.2 million
Assumed collection risk (20% discount rate) $ 15.9 million $ 15.0 million
Lower collection risk (15% discount rate) $ 17.1 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 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. The fair value of our
portfolios declined during the second quarter to $15.9 million at June 30, 2003,
from $16.6 million at March 31, 2003, due principally to collections outpacing
new portfolio acquisitions.
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
18
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.
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 cash in excess of our collection and operating
costs and our cost basis recovery and to use some of the excess cash to make
distributions to our members and interest holders. We have made the following
distributions (not counting the initial $12 million distribution made shortly
after emergence from bankruptcy) based on results through the specified
quarters:
For the Approximate Timing Gross Amount of
Quarter Ended of Payment Distribution Paid
------------- ------------------- -----------------
June 30, 2003 July 2003 $ 165,000
March 31, 2003 April 2003 $ 135,000
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. To maximize the return on our infrastructure, we are also considering
whether there might be ways to increase the volume of accounts we service other
than through new portfolio acquisitions.
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.
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.
19
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
In March 2003, Michael Cushing filed a Motion for Allowance and Payment of
Chapter 11 Claim with the United States Bankruptcy Court for the Central
District of California, Santa Ana Division (the "Bankruptcy Court"). The claims
pertaining to Performance Capital Management, LLC amounted to $170,000 in
aggregate. On March 17, 2003, we filed a motion with the Bankruptcy Court
opposing the claims. A hearing was held on March 27, 2003. Following the
hearing, the Bankruptcy Court issued its order providing that the period to
object to claims is reopened for a period of 30 days, or until April 27, 2003.
On July 3, 2003, the Bankruptcy Court issued a final order awarding Mr. Cushing
a total of $170,000 in settlement of his claims. The remaining outstanding
balance to be paid on this claim as of June 30, 2003, was $100,000.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On June 9, 2003, we held our annual meeting of members in Anaheim, California.
At the meeting, our members were asked to vote on the election of directors to
the Board of Directors. All of the directors nominated for election served as
directors immediately prior to the annual meeting. The following directors were
elected by our members as a result of the following votes:
DIRECTORS VOTES "FOR" ELECTION VOTES "WITHHELD"
- --------------------- -------------------- ----------------
Class I
Larisa Gadd 215,831 4,756
Rodney Woodworth 216,327 4,260
Robert R. Price 215,980 4,607
Class II
Lester T. Bishop 216,129 4,458
Larry C. Smith 216,228 4,359
David Barnhizer 215,184 5,403
Sanford Lakoff 216,327 4,260
In addition to the election of directors, the following matters were voted upon
at the annual meeting:
- To approve the Second Amendment to the Operating Agreement to provide
for classes and staggered terms for Performance Capital Management,
LLC directors. The votes were cast as follows: 214,691 in favor of the
amendment; 1,765 against the amendment; and 4,131 abstaining.
- To ratify the board of directors' selection and appointment of Moore
Stephens Wurth Frazer and Torbet, LLP, as independent auditors for
Performance Capital Management, LLC for the fiscal year ending
December 31, 2003. The votes were cast as follows: 216,902 in favor of
ratification; 449 against ratification; and 3,236 abstaining.
No other matters were submitted to our members at the annual meeting.
ITEM 5. OTHER INFORMATION
Effective July 14, 2003, Mr. Robert Price resigned as a director of Performance
Capital Management, LLC. We intend to find someone to succeed Mr. Price as our
audit committee financial expert.
20
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
A report on Form 8-K dated February 4, 2002 was filed with the SEC on April 2,
2003. The report contained Item 1 disclosure regarding a change in control, Item
2 disclosure regarding acquisition of assets, Item 3 disclosure regarding
bankruptcy proceedings, Item 4 disclosure regarding changes in independent
accountants and Item 7 disclosure regarding financial statements and exhibits.
The following financial statements were filed with the report: Independent
Auditors' Report dated March 14, 2003; Balance Sheet as of February 4, 2002
(audited); and Notes to Financial Statement.
No other reports on Form 8-K were filed during the three months ended June 30,
2003.
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
August 12, 2003 By: /s/ David J. Caldwell
- --------------------- ---------------------------------------
(Date) Name: David J. Caldwell
Its: Chief Operations Officer
21
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: August 12, 2003 /s/ David J. Caldwell
------------------ ------------------------------------
David J. Caldwell
Chief Operations Officer
22
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: August 12, 2003 /s/ Edward M. Rucker
------------------ ------------------------------------
Edward M. Rucker
Accounting Manager
23
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