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, 2004
-------------------
[ ] 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
incorporation or organization (IRS Employer Identification No.)
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 [ ]
Check whether the registrant filed all documents and reports required to be
filed by Section 12, 13 or 15(d) of the Exchange Act after the distribution of
securities under a plan confirmed by a court. 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, 2004, the issuer had
570,916 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, 2004
PART I - FINANCIAL INFORMATION Page
Item 1 Financial Statements
Report of Independent Registered Public Accounting Firm . . .1
Balance Sheets as of June 30, 2004 (unaudited)
and December 31, 2003 (audited) . . . . . . . . . . . . . . . . . .2
Statements of Operations for the three and six months
ended June 30, 2004 and 2003 (unaudited). . . . . . . . . . . . . .3
Statements of Members' Equity for the six months ended
June 30, 2004 (unaudited) and the year ended
December 31, 2003 (audited). . . . . . . . . . . . . . . . . . .4
Statements of Cash Flows for the six months ended
June 30, 2004 and 2003 (unaudited). . . . . . . . . . . . . . . . .5
Condensed Notes to the Financial Statements (unaudited) . . .6
Item 2 Management's Discussion and Analysis of Financial
Condition and Results of Operations . . . . . . . . . . . . . . 14
Item 3 Controls and Procedures . . . . . . . . . . . . . . . . . . . . 21
PART II - OTHER INFORMATION
Item 1 Legal Proceedings. . . . . . . . . . . . . . . . . . . . . . . . 22
Item 2 Changes in Securities and Small Business Issuer
Purchases of Equity Securities. . . . . . . . . . . . . . . . . . 22
Item 4 Submission of Matters to a Vote of Security Holders . . . 22
Item 6 Exhibits and Reports on Form 8-K . . . . . . . . . . . . . . 23
SIGNATURES. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
[MOORE STEPHENS WURTH FRAZER AND TORBET, LLP LETTERHEAD]
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
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, 2004, and the related statements of operations
for the three and six months ended June 30, 2004 and 2003, and statements of
members' equity and cash flows for the six months ended June 30, 2004 and 2003.
All information included in these financial statements is the representation of
the management of Performance Capital Management, LLC.
We conducted our review in accordance with the standards of the Public Company
Accounting Oversight Board (United States). 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 conducted in accordance with the
standards of the Public Company Accounting Oversight Board, 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, 2003, and the related statements of
operations, members' equity and cash flows for the year ended December 31, 2003
(not presented herein); and in our report dated February 20, 2004 and April 9,
2004, 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, 2003, 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
July 23, 2004
Orange, California
1
PERFORMANCE CAPITAL MANAGEMENT, LLC
BALANCE SHEETS
AS OF JUNE 30, 2004 AND DECEMBER 31, 2003
June 30, December 31,
2004 2003
(unaudited) (audited)
------------ ----------
ASSETS
------
Cash and cash equivalents $ 2,295,218 $1,007,949
Restricted cash 21,474 21,448
Other receivables 6,330 14,492
Purchased loan portfolios, net 1,474,320 2,081,496
Property and equipment, net 328,710 397,924
Deposits 56,588 56,588
Prepaid expenses and other assets 106,328 135,738
------------ ----------
Total assets $ 4,288,968 $3,715,635
============ ==========
LIABILITIES AND MEMBERS' EQUITY
-------------------------------
LIABILITIES:
Accounts payable $ 77,699 $ 68,735
Accrued liabilities 365,913 313,352
Income taxes payable 15,790 15,790
------------ ----------
Total liabilities 459,402 397,877
COMMITMENTS AND CONTINGENCIES - -
MEMBERS' EQUITY 3,829,566 3,317,758
------------ ----------
Total liabilities and members' equity $ 4,288,968 $3,715,635
============ ==========
The accompanying notes are an integral part of these financial statements.
See Report of Independent Registered Public Accounting Firm.
2
PERFORMANCE CAPITAL MANAGEMENT, LLC
STATEMENTS OF OPERATIONS
For the three For the three For the six For the six
months ended months ended months ended months ended
June 30, 2004 June 30, 2003 June 30, 2004 June 30, 2003
(unaudited) (unaudited) (unaudited) (unaudited)
--------------- --------------- --------------- ---------------
REVENUES:
Portfolio collections $ 2,273,717 $ 2,367,483 $ 4,725,087 $ 5,007,101
Portfolio sales 975,393 159,763 2,757,457 505,724
--------------- --------------- --------------- ---------------
Total revenues 3,249,110 2,527,246 7,482,544 5,512,825
Less portfolio basis recovery 1,402,401 1,124,448 3,228,628 2,703,414
--------------- --------------- --------------- ---------------
NET REVENUES 1,846,709 1,402,798 4,253,916 2,809,411
--------------- --------------- --------------- ---------------
OPERATING COSTS AND EXPENSES:
Salaries and benefits 975,742 1,060,572 2,090,202 2,180,680
General and administrative 640,581 530,238 1,217,951 1,075,931
Depreciation 44,185 51,677 89,358 103,178
--------------- --------------- --------------- ---------------
Total operating costs and expenses 1,660,508 1,642,487 3,397,511 3,359,789
--------------- --------------- --------------- ---------------
INCOME (LOSS) FROM OPERATIONS 186,201 (239,689) 856,405 (550,378)
--------------- --------------- --------------- ---------------
OTHER INCOME (EXPENSE):
Reorganization costs (26,166) (24,497) (35,003) (48,020)
Interest income 3,192 3,914 5,583 5,850
Other income (expense) 22,197 (9,304) 29,214 1,280
--------------- --------------- --------------- ---------------
Total other expense, net (777) (29,887) (206) (40,890)
--------------- --------------- --------------- ---------------
INCOME (LOSS) BEFORE INCOME TAX
PROVISION 185,424 (269,576) 856,199 (591,268)
INCOME TAX PROVISION 5,790 4,547 17,390 7,496
--------------- --------------- --------------- ---------------
NET INCOME (LOSS) $ 179,634 $ (274,123) $ 838,809 $ (598,764)
=============== =============== =============== ===============
NET INCOME (LOSS) PER MEMBER
UNIT - BASIC AND DILUTED $ 0.31 $ (0.48) $ 1.47 $ (1.05)
=============== =============== =============== ===============
The accompanying notes are an integral part of these financial statements.
See Report of Independent Registered Public Accounting Firm.
3
PERFORMANCE CAPITAL MANAGEMENT, LLC
STATEMENTS OF MEMBERS' EQUITY
Total
Member Unreturned Abandoned Accumulated Members'
Units Capital Capital Deficit Equity
-------- ------------ ----------- ------------- -----------
Balance, December 31, 2002 571,550 $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 571,550 25,982,968 - (21,836,590) 4,146,378
-------- ------------ ----------- ------------- -----------
Distributions to investors - (338,065) - - (338,065)
Member units returned by investors (634) (31,926) 31,926 - -
Net loss - - - (490,555) (490,555)
-------- ------------ ----------- ------------- -----------
Balance, December 31, 2003 570,916 25,612,977 31,926 (22,327,145) 3,317,758
Distributions to investors - (327,001) - - (327,001)
Net income - - - 838,809 838,809
-------- ------------ ----------- ------------- -----------
Balance, June 30, 2004 570,916 $25,285,976 $ 31,926 $(21,488,336) $3,829,566
======== ============ =========== ============= ===========
The accompanying notes are an integral part of these financial statements.
See Report of Independent Registered Public Accounting Firm.
4
PERFORMANCE CAPITAL MANAGEMENT, LLC
STATEMENTS OF CASH FLOWS
For the six For the six
months ended months ended
June 30, 2004 June 30, 2003
(unaudited) (unaudited)
--------------- ---------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 838,809 $ (598,764)
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation 89,358 103,178
(Increase) decrease in assets:
Other receivables 8,162 13,734
Note receivables - (51,524)
Prepaid expenses and other assets 29,410 (16,685)
Loan portfolios 607,176 1,803,573
Increase (decrease) in liabilities:
Accounts payable 8,964 (40,787)
Pre-petition claims - (19,737)
Accrued liabilities 52,561 (161,094)
Income taxes payable - (10,695)
--------------- ---------------
Net cash provided by operating activities 1,634,440 1,021,199
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property and equipment (20,144) (3,674)
CASH FLOWS FROM FINANCING ACTIVITIES:
Distribution to investors (327,001) (133,912)
--------------- ---------------
NET CHANGE IN CASH AND CASH EQUIVALENTS 1,287,295 883,613
CASH AND CASH EQUIVALENTS, beginning of period 1,029,397 871,534
--------------- ---------------
CASH AND CASH EQUIVALENTS, end of period $ 2,316,692 $ 1,755,147
=============== ===============
SUPPLEMENTAL DISCLOSURE FOR CASH FLOW INFORMATION:
Income taxes paid $ 17,390 $ -
=============== ===============
Interest paid $ - $ -
=============== ===============
The accompanying notes are an integral part of these financial statements.
See Report of Independent Registered Public Accounting Firm.
5
PERFORMANCE CAPITAL MANAGEMENT,LLC
CONDENSED NOTES TO THE FINANCIAL STATMENTS
(Unaudited)
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. 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.
See Report of Independent Registered Public Accounting Firm.
6
PERFORMANCE CAPITAL MANAGEMENT,LLC
CONDENSED NOTES TO THE FINANCIAL STATMENTS
(Unaudited)
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:
Original
Fund's Number of Number of Percentage
Name Unit Holders PCM LLC Units Interest in PCM LLC
- ------ ------------ ------------- -------------------
PAM 370 52,050 9
PAMII 459 76,700 13
PAMIII 595 99,900 18
PAMIV 1553 285,950 50
PAMV 327 56,950 10
------------- -------------------
Totals 571,550 100
============= ===================
The following is a summary of the ownership interest of Performance Capital
Management, LLC as of June 30, 2004:
Original
Fund's Number of Percentage
Name PCM LLC Units Interest in PCM LLC
- -------- ------------- -------------------
PAM 52,000 9
PAMII 76,700 13
PAMIII 99,900 18
PAMIV 285,456 50
PAMV 56,860 10
------------- -------------------
Totals 570,916 100
============= ===================
See Report of Independent Registered Public Accounting Firm.
7
PERFORMANCE CAPITAL MANAGEMENT, LLC
CONDENSED NOTES TO THE FINANCIAL STATEMENTS
(Unaudited)
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 Distributions to Investors (472)
Net Loss For The Year
Ended December 31, 2003 (1,089)
---------
Members' Equity PCM, LLC
at December 31, 2003 3,318
2004 Distributions to Investors (327)
Net Income For The Period
Ended June 30, 2004 839
---------
Members' Equity PCM, LLC
at June 30, 2004 $ 3,830
=========
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 was
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.
See Report of Independent Registered Public Accounting Firm.
8
PERFORMANCE CAPITAL MANAGEMENT, LLC
CONDENSED NOTES TO THE FINANCIAL STATEMENTS
(Unaudited)
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 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 sheets.
See Report of Independent Registered Public Accounting Firm.
9
PERFORMANCE CAPITAL MANAGEMENT, LLC
CONDENSED NOTES TO THE FINANCIAL STATEMENTS
(Unaudited)
Note 3 - Summary of Significant Accounting Policies, (continued)
Purchased Loan Portfolios, (continued)
- --------------------------------------
The Company provides a valuation allowance for acquired loan portfolios when the
present value of expected future cash flows do not exceed the carrying values of
the portfolios.
Over the life of the portfolio, the Company's management continues to review the
carrying values of each loan for impairment. If the net present value of
estimated 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.
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 $2,511,000 as of June 30, 2004. 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.
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 the 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 either do not meet
PCM LLC's targeted collection characteristics, are located in geographic areas
where PCM LLC is not licensed to collect or are sold for strategic reasons. Loan
portfolios sold are valued at the lower of cost or market.
Proceeds from strategic sales of purchased loan portfolios in excess of their
cost basis are recorded as net revenue when received.
Members' Equity
- ---------------
Members' equity includes voting LLC units held by members and non-voting LLC
units held by one economic interest owner. As of June 30, 2004, and December 31,
2003, PCM LLC had 547,194 voting LLC units and 23,722 non-voting LLC units.
Abandoned capital represents LLC units that are either voluntarily returned to
the Company by a member or LLC units that are redeemed and cancelled following a
procedure authorized by PCM LLC's plan of reorganization to eliminate the
interests of members the Company has not been able to locate.
See Report of Independent Registered Public Accounting Firm.
10
PERFORMANCE CAPITAL MANAGEMENT, LLC
CONDENSED NOTES TO THE FINANCIAL STATEMENTS
(Unaudited)
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, 2004 and
December 31, 2003 are as follows. The carrying amount of cash and cash
equivalents, restricted cash and liabilities approximate their fair values. 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, 2004 and December 31, 2003 was 20%. The
estimated fair value of loan portfolios was $15,300,000 at June 30, 2004 and
December 31, 2003.
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, 2004 and December 31, 2003 totaled
approximately $583 million 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 net present value of estimated
future cash flows 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
June 30, 2004 December 31, 2003
---------------------------- ----------------------------
Unrecovered cost balance,
beginning of period $ 7,619,515 $ 9,517,146
Valuation allowance,
beginning of period (5,538,019) (5,472,952)
---------------------------- ----------------------------
Net balance, beginning of period 2,081,496 4,044,194
Net portfolio activity (607,176) (1,962,698)
---------------------------- ----------------------------
Net balance, end of period $ 1,474,320 $ 2,081,496
============================ ============================
The activity in the loan portfolios in the accompanying financial statements is
as follows:
Three months Three months Six months Six months
ended ended ended ended
June 30, 2004 June 30, 2003 June 30, 2004 June 30, 2003
---------------------- ---------------------- ---------------------- ---------------------
Purchased loan portfolios $ 1,301,455 $ 549,890 $ 2,621,452 $ 899,841
Collections on loan portfolios (2,273,717) (2,367,483) (4,725,087) (5,007,101)
Sales of loan portfolios (975,393) (159,763) (2,757,457) (505,724)
Revenue recognized on collections 1,640,905 1,392,762 3,300,525 2,744,271
Revenue recognized on sales 205,804 10,036 953,391 65,140
---------------------- ---------------------- ---------------------- ---------------------
Net portfolio activity $ (100,946) $ (574,558) $ (607,176) $ (1,803,573)
====================== ====================== ====================== =====================
The valuation allowance related to the loan portfolios had a balance of
$5,538,019 at June 30, 2004 and December 31, 2003.
See Report of Independent Registered Public Accounting Firm.
11
PERFORMANCE CAPITAL MANAGEMENT, LLC
CONDENSED NOTES TO THE FINANCIAL STATEMENTS
(Unaudited)
Note 6 - Other Receivables
Other receivables consist of collections on portfolios received by a third party
collection agency.
Note 7 - Property and Equipment
Property and equipment is as follows:
As of As of
June 30, 2004 Dec. 31, 2003
---------------------- ----------------------
Office furniture and equipment $ 282,485 $ 273,835
Computer equipment 494,223 482,729
Leasehold improvements 36,982 36,982
---------------------- ----------------------
Totals 813,690 793,546
Less accumulated depreciation 484,980 395,622
---------------------- ----------------------
Property and equipment, net $ 328,710 $ 397,924
====================== ======================
Depreciation expense for the three months ended June 30, 2004 and 2003 amounted
to $44,185 and $51,677, respectively. Depreciation expense for the six months
ended June 30, 2004 and 2003 amounted to $89,358 and $103,178, respectively.
Note 8 - 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, 2004 are as follows:
Year ending
June 30,
------------
2005 $309,000
2006 318,000
2007 139,000
Thereafter -
Rental expense for the three months ended June 30, 2004 and 2003 amounted to
$79,210 and $77,450, respectively. Rental expense for the six months ended June
30, 2004 and 2003 amounted to approximately $158,870 and $155,029, respectively.
Note 9 - Earnings Per Member Unit
Basic and diluted earnings per member unit are calculated based on the weighted
average number of member units issued and outstanding, 570,916 for the six
months ended June 30, 2004 and 571,550 for the six months ended June 30, 2003.
Note 10 - Employee benefit plans
The Company has a defined contribution plan covering all eligible full-time
employees of Performance Capital Management (the Plan Sponsor) who are currently
employed by the Company and have completed six months of service from the time
of enrollment. The Plan was established by the Plan Sponsor to provide
retirement income for its employees and is subject to the provisions of the
Employee Retirement Income Security Act of 1974 as amended (ERISA).
See Report of Independent Registered Public Accounting Firm.
12
PERFORMANCE CAPITAL MANAGEMENT, LLC
CONDENSED NOTES TO THE FINANCIAL STATEMENTS
(Unaudited)
Note 10 - Employee benefit plans (continued)
The Plan is a contributory plan whereby participants may contribute a percentage
of pre-tax annual compensation as outlined in the Plan agreement and as limited
by Federal statute. Participants may also contribute amounts representing
distributions from other qualified defined benefit or contribution plans. The
Plan Sponsor does not make matching contributions.
Note 11 - Subsequent events
On August 2, 2004, an order of the United States Bankruptcy Court was entered
closing the Chapter 11 case. In late December 1998, six entities (See note 1)
voluntarily filed bankruptcy petitions, which were later consolidated into one
case. Performance Capital Management, LLC is the entity that was formed for the
purpose of reorganizing the six entities. The order acts as a discharge and
termination of any and all liabilities and debts of, and claims against, the six
entities that arose at any time before the confirmation order became effective
on February 4, 2002.
In July, 2004 the Company completed a credit facility (effective June 10, 2004)
with Varde Investment Partners, L.P. (Varde), a participant in the debt
collection industry to augment portfolio purchasing capacity using capital
provided by Varde. Under the agreement, the Company has created a wholly-owned
subsidiary, Matterhorn Financial Services, LLC (Matterhorn). The facility
provides for up to $25 million of capital (counting each dollar loaned on a
cumulative basis) over a five-year term. Varde is not under any obligation to
make a loan to Matterhorn, and Varde must agree on the terms for each specific
advance as set forth in the loan facility. Under the terms of the facility,
Varde will receive both interest and a contingent interest in any profits on the
portfolios acquired with a loan. Portfolios purchased using the facility will
be owned by the Company's subsidiary, Matterhorn Financial Services LLC, a
California limited liability company, in which Varde has a first priority
security interest securing repayment of its loans. As of June 30, 2004, no loans
had been completed and no activity occurred at Matterhorn.
See Report of Independent Registered Public Accounting Firm.
13
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 14, 2004.
OVERVIEW
We acquire assets originated by federal and state banking and savings
institutions, loan agencies, and other sources, for the purpose of generating
income and cash flow from collecting or selling those assets. Typically, these
assets consist of charged-off credit card contracts. These assets are typically
purchased and sold as portfolios.
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 believe that deteriorating market conditions have made
it more difficult to purchase portfolios at prices that will permit us to
accomplish these objectives. We record our portfolios at cost based on the
purchase price. We reduce the cost bases of our portfolios 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, in many instances
to retain those accounts that best fit our collection profile and to reduce our
purchase commitment by reselling the others. We then collect those accounts we
retain as a distinct portfolio. We do not generally purchase loan portfolios
solely with a view to their resale, and for this reason we generally do not show
portfolios on our balance sheet as "held for investment". From time to time we
sell some of our portfolios either to capitalize on market conditions, to
dispose of a portfolio that is not performing or to dispose of a portfolio whose
collection life, from our perspective, has run its course. When we engage in
these sales, we continue collecting the portfolio right up until the closing of
the sale.
We earn revenues from collecting our portfolios and from selling our portfolios
or portions of our portfolios. We recognize gross revenue when we collect an
account and when we sell a portfolio or a portion of it. On our income statement
we reduce our gross revenues by the cost basis recovery of our portfolios to
arrive at net revenue. For collections, we reduce the cost basis of the
portfolio dollar-for-dollar until we have completely recovered the cost basis of
the portfolio. When we sell a portfolio or a portion of it, to the extent of
remaining cost basis for the portfolio, we reduce the cost basis of the
portfolio by a percentage of the original portfolio cost.
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.
14
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.
In general, we expect increases in the cost basis of our portfolios presented on
our balance sheet to accompany increases in portfolio fair value. 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 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.
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 February 4, 2002, 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.
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.
15
When we collect an account in a portfolio, we reduce the cost basis of the
portfolio dollar-for-dollar until we have completely recovered the cost basis of
the portfolio. We believe this method of accounting for the amortization of the
purchase price of our portfolios is conservative and minimizes the effect of
estimation on our results of operations. This policy has the effect of
"front-loading" expenses, however, and may result in a portfolio initially
showing no net revenue for a period of time and then showing only net revenue
once we have recovered its entire cost basis. Although this accounting policy
may be criticized for not matching portfolio cost basis to revenue on a
proportionate basis over the life of the portfolio, we believe a policy grounded
in conservatism is preferable to a policy of attempting to estimate the
appropriate matching percentages, due to the distressed nature of the portfolio
assets and the lack of assurance that projected collections will actually occur.
When we sell a portfolio or a portion of it, to the extent of remaining cost
basis for the 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, 2004, and 2003
The following discussion compares our results for the quarter ended June 30,
2004, to the quarter ended June 30, 2003. We generated net income of
approximately $180,000 for the quarter ended June 30, 2004, compared to a net
loss of approximately $274,000 for the quarter ended June 30, 2003.
Revenue
- -------
Our net revenues increased to approximately $1.8 million for the quarter ended
June 30, 2004, from approximately $1.4 million for the quarter ended June 30,
2003. The following table presents a comparison of the components of our
revenues for the quarter ended June 30, 2004, to the quarter ended June 30,
2003, as well as presenting net revenue as a percentage of the corresponding
total revenue (approximate amounts due to rounding):
Total Collections Sales
------------------- ------------------ ------------------
Quarter Ended Quarter Ended Quarter Ended
6/30/04 6/30/03 6/30/04 6/30/03 6/30/04 6/30/03
------- ---------- ------ ---------- ------ ----------
($in millions) ($in millions) ($in millions)
Total revenues $ 3.2 $ 2.5 $ 2.2 $ 2.4 $ 1.0 $ 0.2
Less basis recovery (1.4) (1.1) (0.6) (1.0) (0.8) (0.2)
------- ---------- ------ ---------- ------ ----------
Net revenues $ 1.8 $ 1.4 $ 1.6 $ 1.4 $ 0.2 $
======= ========== ====== ========== ====== ==========
Net revenue percentage 56.8% 55.5% 72.2% 58.8% 21.1% 6.3%
Portfolio collections continue to provide most of our total revenues. Our total
revenues from portfolio collections declined slightly, while our net revenues
from portfolio collections increased slightly. 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 portfolios purchased during the second half of 2002. We have
completely recovered the cost basis of most of these portfolios purchased in
2002, resulting in collections of these portfolios generating net revenue. We
expect our 2002 portfolios to continue generating net revenues. During the six
months ended June 30, 2004, we acquired approximately $1.6 million of new
portfolios (net of portions of portfolios we promptly resold). In future
quarters, the cost basis recovery associated with collecting these 2004
portfolios, combined with others that we acquired in 2003, could offset the
increase in net revenue percentage we would otherwise expect our 2002 portfolios
to generate.
16
Our total revenues from portfolio sales increased dramatically. As part of our
program to emphasize efforts to continue to collect some of our older
portfolios, we identified a substantial number of older portfolios whose
collection lives, from our perspective, have run their course. We identified
these portfolios as candidates for sale and were able to sell a number of them
in the first six months of 2004 on terms we considered acceptable. We may engage
in further sales if we believe market conditions are acceptable. We continue
collection efforts for certain accounts in these portfolios right up until the
point of sale. We also 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.
Our net income of approximately $180,000 for the quarter ended June 30, 2004, is
essentially due to the approximately $206,000 of net revenues we derived from
portfolio sales. Without these sales, our collection activities would have
essentially produced a break-even quarter. Although we still have some older
portfolios identified for sale, we do not expect future portfolio sales to be of
the same magnitude that we experienced in the first six months of 2004.
Operating Expenses
- ------------------
Our total operating costs and expenses remained relatively stable at
approximately $1.6 million for each of the quarters ended June 30, 2004, and
2003. Our ratio of operating costs and expenses to total revenues decreased to
51.1% for quarter ended June 30, 2004, from approximately 65.0% for quarter
ended June 30, 2003. The improvement in 2004 from 2003 was due principally to
substantially higher revenues from portfolio sales in 2004. Because these
portfolio sales result in substantial revenues without any corresponding
collection effort, they have the effect of artificially lowering the 2004 ratio
of operating costs and expenses to total revenues. Our ratio of operating costs
and expenses to total revenues from collections (i.e., excluding the effect of
portfolio sales), a measure of collection efficiency, increased to 73.0% for the
quarter ended June 30, 2004, from 69.4% for the quarter ended June 30, 2003.
The increase in this ratio results principally from the decrease in total
revenues from collections to approximately $2.2 million for the quarter ended
June 30, 2004, from approximately $2.4 million for the quarter ended June 30,
2003. We believe our existing infrastructure can collect a greater dollar
volume of accounts, and we plan to lower this ratio by increasing total revenues
from collections without incurring a proportionate increase in operating costs
and expenses. To accomplish this objective, we will continue our efforts to
improve the balance between our new and old portfolios. The deteriorating
market conditions that have led to increased portfolio prices present a
significant obstacle to achieving increases in total revenues from collections,
because of the difficulty in replenishing and then increasing our portfolios.
As discussed in greater detail below, we believe that our agreement with Varde
Investment Partners, L.P. ("Varde") will assist our efforts to acquire the
volume of new portfolios it will take to produce substantial increases in total
revenues from collections.
Our general and administrative expenses increased to approximately $641,000 for
the quarter ended June 30, 2004, from approximately $530,000 for the quarter
ended June 30, 2003, due principally to legal expenses associated with entering
into the Varde credit facility and increased expenses for our independent
auditors and insurance. Our salaries and benefits expenses decreased to
approximately $1.0 million for the quarter ended June 30, 2004, from
approximately $1.1 million for the quarter ended June 30, 2003, due principally
to reduced headcount. Our operating expenses may increase somewhat if we succeed
in increasing the volume of accounts we collect, but we expect increases in
total revenues to outpace any material increases in variable costs associated
with our collection efforts.
Comparison of Results for the Six Months Ended June 30, 2004, and 2003
The following discussion compares our results from the six months ended June 30,
2004, to the six months ended June 30, 2003.
We generated net income of approximately $839,000 for the six months ended June
30, 2004, compared to a net loss of approximately $599,000 for the six months
ended June 30, 2003. Our operating activities provided cash of approximately
$1.6 million for the six months ended June 30, 2004, as compared to providing
cash of approximately $1.0 million for the same period in 2003.
Revenue
- -------
Our net revenues increased to approximately $4.3 million for the six months
ended June 30, 2004, from approximately $2.8 million for the six months ended
June 30, 2003. The following table presents a comparison of the components of
our revenues for the six months ended June 30, 2004, and 2003, as well as
presenting net revenue as a percentage of the corresponding total revenue
(approximate amounts due to rounding):
17
Total Collections Sales
--------------------- -------------------- ----------------------
Six Months Ended Six Months Ended Six Months Ended
6/30/04 6/30/03 6/30/04 6/30/03 6/30/04 6/30/03
------- ---------- --------- ---------- ---------- ---------
($in millions) ($in millions) ($in millions)
Total revenues $ 7.5 $ 5.5 $ 4.7 $ 5.0 $ 2.8 $ 0.5
Less basis recovery (3.2) (2.7) (1.4) (2.3) (1.8) (0.4)
--------- ---------- --------- --------- ---------- ----------
Net revenues $ 4.3 $ 2.8 $ 3.3 $ 2.7 $ 1.0 $ 0.1
========= ========== ========= ========= ========== ==========
Net revenue percentage 56.9% 51.0% 69.9% 54.8% 34.6% 12.9%
Portfolio collections continue to provide most of our total revenues. Our total
revenues from portfolio collections declined slightly, while our net revenues
from portfolio collections increased. 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 portfolios purchased during the second half of 2002. We have
completely recovered the cost basis of most of these portfolios purchased in
2002, resulting in collections of these portfolios generating net revenue. We
expect our 2002 portfolios to continue generating net revenues. During the six
months ended June 30, 2004, we acquired approximately $1.6 million of new
portfolios (net of portions of portfolios we promptly resold). In future
periods, the cost basis recovery associated with collecting these 2004
portfolios, combined with others that we acquired in 2003, could offset the
increase in net revenue percentage we would otherwise expect our 2002 portfolios
to generate.
Both our total and net revenues from portfolio sales showed dramatic increases.
As part of our program to emphasize efforts to continue to collect some of our
older portfolios, we identified a substantial number of older portfolios whose
collection lives, from our perspective, have run their course. We identified
these portfolios as candidates for sale and were able to sell a number of them
in the first six months of 2004 on terms we considered acceptable. We may engage
in further sales if we believe market conditions are acceptable. We continue
collection efforts for certain accounts in these portfolios right up until the
point of sale. We also 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. During the six months ended June 30, 2004, the
prompt resale of portions of portfolios we purchased provided approximately $1.1
million of our $2.8 million of total revenues from portfolio sales.
Our net income of approximately $839,000 for the six months ended June 30, 2004,
is essentially due to the approximately $953,000 of net revenues we derived from
portfolio sales. Without this large volume of sales, we would have essentially
broken even for the six months ended June 30, 2004. Although we still have some
older portfolios identified for sale, we do not expect future portfolio sales to
be of the same magnitude that we experienced in the first six months of 2004.
Operating Expenses
- ------------------
Our total operating costs and expenses remained relatively stable at
approximately $3.4 million for each of the six-month periods ended June 30,
2004, and 2003. Our ratio of operating costs and expenses to total revenues
decreased to 45.4% for the six months ended June 30, 2004, from approximately
60.9% for the six months ended June 30, 2003. The improvement in 2004 from 2003
was due principally to the dramatic increase in revenues from portfolio sales in
2004. Because these portfolio sales result in substantial revenues without any
corresponding collection effort, they have the effect of artificially lowering
the 2004 ratio of operating costs and expenses to total revenues. Our ratio of
operating costs and expenses to total revenues from collections (i.e., excluding
the effect of portfolio sales), a measure of collection efficiency, increased to
71.9% for the six months ended June 30, 2004, from 67.1% for the six months
ended June 30, 2003. The increase in this ratio results principally from the
decrease in total revenues from collections to approximately $4.7 million for
the six months ended June 30, 2004, from approximately $5.0 million for the six
months ended June 30, 2003. As discussed above in the quarter-to-quarter
analysis, we plan to reduce this ratio by increasing total revenues from
collections without incurring a proportionate increase in operating costs and
expenses.
18
Our general and administrative expenses increased to approximately $1.2 million
for the six months ended June 30, 2004, from approximately $1.1 million for the
six months ended June 30, 2003, due principally to legal expenses associated
with entering into the Varde credit facility and increased expenses for our
independent auditors and insurance. Our salaries and benefits expenses decreased
to approximately $2.1 million for the six months ended June 30, 2004, from
approximately $2.2 million for the six months ended June 30, 2003, due
principally to reduced headcount. Our operating expenses may increase somewhat
if we succeed in increasing the volume of accounts we collect, but we expect
increases in total revenues to outpace any material increases in variable costs
associated with our collection efforts.
LIQUIDITY AND CAPITAL RESOURCES
Our cash and cash equivalents increased approximately $1.3 million in the first
six months of 2004 to a balance of approximately $2.3 million at June 30, 2004.
During the six months ended June 30, 2004, our portfolio collections and sales
generated approximately $6.4 million of cash (net of proceeds from portions of
portfolios we promptly resold), and we used approximately $3.2 million for
operating and other activities, approximately $1.6 million to purchase new
portfolios (net of portions of portfolios we promptly resold) and approximately
$327,000 for distributions to unit holders. The results from our collection
activities, net of the approximately $327,000 of distributions we paid,
essentially provided the approximately $1.3 million increase in our cash
balance.
During the six months ended June 30, 2004, 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. Excluding the results from the large volume of portfolio sales in
the first six months of 2004, our cost basis recovery of approximately $1.4
million plus our operating and other expenses of approximately $3.4 million
exceeded our total revenues from collections of approximately $4.7 million by
approximately $97,000.
During the fourth quarter of 2003, we used some of the cash reserves we
accumulated during the first three quarters of 2003 to acquire approximately
$1.1 million of new portfolios. We believe that market conditions for acquiring
new portfolios improved during the fourth quarter of 2003 but then deteriorated
during the first half of 2004. As a result, our portfolio purchases (net of
portions of portfolios we promptly resold) during the first half of 2004 slowed
to approximately $1.6 million, which was essentially equal to the approximately
$1.6 million in cash we received during the first half of 2004 from sales of
portfolios (net of proceeds from portions of portfolios we promptly resold).
The higher prices for portfolios associated with deteriorating market conditions
make it difficult for us to replenish or increase our portfolios, which in turn
undermines our ability to implement our strategy to leverage our infrastructure
by increasing total revenues from collections. We have responded to these
pricing pressures by augmenting our purchases from originating creditors with
purchases on the secondary market. Whether we can continue to acquire
portfolios at the pace of the past six months, or accelerate that pace, will
continue to depend on our assessment of market conditions, as well as the amount
of liquid cash and other financial resources available to us.
We believe we continue 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, continue to show results. By monitoring the results of calls
originated through our dialer, we have identified portfolios that require more
cost to collect than others. Particularly where we have worked to collect these
portfolios over an extended period of time, we have identified these portfolios
as candidates for sale if we are able to sell them at reasonable prices. We sold
a number of these portfolios in the first six months of 2004. We believe this
process of constantly evaluating portfolio returns against costs of collection
should continue to improve the balance between our new and old portfolios.
Our portfolios provide our principal long-term 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 was approximately $15.3 million at
both June 30, 2004, and December 31, 2003. At the same time, the cost basis of
our portfolios decreased to approximately $1.5 million at June 30, 2004, from
approximately $2.1 million at December 31, 2003. Our portfolio sales of
approximately $2.8 million (with a cost basis of approximately $1.8 million)
played a significant role in the overall decrease in the cost basis of our
portfolios. Fair value remained constant in part because we purchased $1.6
million of new portfolios (net of portions of portfolios we promptly resold),
which have an estimated fair value substantially higher than their purchase
price. We believe the estimated fair value of our portfolios will increase in
the near term as we continue to acquire new portfolios and our sales of older
portfolios diminish. Our
19
plan to leverage our infrastructure also contemplates portfolio purchases
leading to an increase in portfolio cost basis, based on reinvesting cash
proceeds generated by our collection activities, reinvesting proceeds from sales
of older portfolios and accessing the Varde credit facility to borrow funds to
acquire new portfolios. Whether we are able to achieve this growth in portfolio
cost basis - and the timing on which such growth may occur - will depend on
whether market conditions permit us to purchase portfolios at reasonable prices
and on our financial resources. While we intend to continue to aggressively seek
new portfolios that we believe we can acquire on favorable terms, we do not
intend to acquire portfolios just to leverage our infrastructure if we believe
the portfolio profiles do not justify their prices.
We used a discount rate of 20% to determine the estimates of fair value of our
portfolios at June 30, 2004, and December 31, 2003. 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, 2004 December 31, 2003
-------------- -----------------
Higher collection risk (25% discount rate) $ 14.3 million $ 14.3 million
Assumed collection risk (20% discount rate) $ 15.3 million $ 15.3 million
Lower collection risk (15% discount rate) $ 16.6 million $ 16.6 million
Our estimates of fair value also would change if we revised our projections of
the magnitude and timing of future collections. Because of the inherent
uncertainty associated with predicting future events, our determinations of fair
value at any particular point in time are only estimates, and actual fair value
could ultimately vary significantly from our estimate.
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. Beginning in April 2003, we
began making quarterly distributions. During 2003, we made three distributions
totaling approximately $472,000. We made distributions totaling approximately
$327,000 in January and April of 2004. We also made a distribution of
approximately $162,000 in July 2004 relating to the second quarter of 2004.
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, large sales of older portfolios and the timing of
distributions to our members, we may not achieve increases in fair value each
quarter.
We have a credit facility with Varde that we intend to use to enhance our
ability to purchase portfolios. The facility provides for up to $25 million of
capital (counting each dollar loaned on a cumulative basis) over a five-year
term. Varde is not under any obligation to make a loan to us if Varde does not
approve of the portfolio(s) we propose to acquire, the terms of the acquisition
and the terms for the specific advance under the loan facility. We must agree
with Varde on the terms for each specific advance under the loan facility,
including such material terms as:
- the relative sizes of our participation and Varde's in supplying the
purchase price;
- the amount of servicing fees we will receive for collecting the
portfolio;
- the rates of return on the funds advanced by Varde and us; and
- the split of any excess profits after repayment of the purchase price
(plus interest) to Varde and us and payment of collection expenses.
20
It is unlikely that we will ever have outstanding indebtedness of the full $25
million at any one time, due to the cumulative nature of the facility.
Portfolios purchased using the facility will be owned by our subsidiary,
Matterhorn Financial Services LLC, a California limited liability company, in
which Varde has a first priority security interest securing repayment of its
loans.
When we identify a portfolio we would like to acquire using the loan facility,
Matterhorn will make a proposal to Varde, specifying, among other things:
- Total cost of the portfolio(s), including closing costs and amortized
expenses;
- Proportions of the total cost to be funded by Varde (not to exceed
75%) and us;
- Percentage of collections to be paid to Performance Capital
Management, LLC as a servicing fee;
- Rates of return on the funds advanced by Varde and us; and
- Proportions of excess profits to Varde and Matterhorn after payment of
the preceding four items.
When we make a proposal to Varde, Varde has the opportunity to conduct its own
due diligence concerning the portfolio(s). Varde may accept our proposal, with
or without modifications, in a commitment that will specify the number of days
the commitment remains open. Varde has no obligation to accept a proposal and
may reject a proposal for any reason or for no reason.
Our agreement with Varde is the most important initiative we have undertaken to
leverage our infrastructure resources. We believe that, by accessing the Varde
facility to acquire more portfolios than we could acquire using only our own
financial resources, our current collection infrastructure will handle a greater
volume of accounts. We also believe that the Varde facility will leverage our
portfolio acquisition strategy by permitting us to acquire larger denomination
portfolios. We believe that some of these larger denomination portfolios have
pricing and quality characteristics that are difficult to find in the smaller
denomination portfolios we have acquired thus far. Even with the additional
financial resources available through the facility, the deteriorating market
conditions that have led to increased portfolio prices could frustrate our
strategy to achieve increases in portfolio cost basis. As discussed above, we
do not intend to acquire portfolios just to leverage our infrastructure if we
believe the portfolio profiles do not justify their prices. Please see our Form
8-K filed with the Securities and Exchange Commission on July 29, 2004, for more
information about the Varde agreement.
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 intend to use the Varde credit
facility to increase the volume of accounts we service other than through new
portfolio acquisitions using only our cash resources.
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
In accordance with the Exchange Act, we carried out an evaluation, under the
supervision and with the participation of management, including our Chief
Operations Officer and Accounting Manager, of the effectiveness of our
disclosure controls and procedures as of the end of the period covered by this
report. Based on this evaluation, our Chief Operations Officer and our
Accounting Manager concluded that our disclosure controls and procedures were
effective as of June 30, 2004, to provide reasonable assurance that information
required to be disclosed in our reports filed or submitted under the Exchange
Act is recorded, processed, summarized and reported within the time periods
specified in the Securities and Exchange Commission's rules and forms.
There has been no change in our internal controls over financial reporting that
occurred during the three months ended June 30, 2004, that has materially
affected, or is reasonably likely to materially affect, our internal controls
over financial reporting.
21
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On August 2, 2004, an order of the United States Bankruptcy Court for the
Central District of California Santa Ana Division was entered closing the
Chapter 11 case involving Performance Capital Management, LLC and its
predecessors. In late December 1998, six entities voluntarily filed bankruptcy
petitions, which were later consolidated into one case. Performance Capital
Management, LLC is an entity that was formed by a U.S. Chapter 11 Trustee and
the Official Committee of Equity Security Holders in January 2002 for the
purpose of reorganizing the six entities. The order acts as a discharge and
termination of any and all liabilities and debts of, and claims against, the six
entities that arose at any time before the confirmation order became effective
on February 4, 2002. For more information about the bankruptcy, please see our
report on Form 8-K dated February 4, 2002 and filed with the SEC on April 2,
2003.
ITEM 2. CHANGES IN SECURITIES AND SMALL BUSINESS ISSUER PURCHASES OF EQUITY
SECURITIES
We have not purchased any LLC Units from our members since February 4, 2002, our
inception. We commenced a procedure authorized by our plan of reorganization to
eliminate the interests of members we have not been able to locate. Through
delivery to last known addresses and public advertising in certain newspapers,
we have attempted to notify approximately 42 people or entities listed as
investors in the PAM Funds that they will no longer be members if we do not hear
from them in six months. At this time we believe these investors represent
ownership of approximately 7,154 LLC Units, approximately $307,000 of unreturned
capital and approximately $152,000 of uncashed distribution checks.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On June 14, 2004, we held our annual meeting of members in Anaheim, California.
At the meeting, our members were asked to vote on the election of Class I
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 218,357 6,568
Rodney Woodworth 218,606 6,195
Donald W. Rutherford 218,258 6,667
The following Class II directors continued to serve as directors following the
annual meeting: Lester Bishop, Larry Smith, David Barnhizer and Sanford Lakoff.
In addition to the election of directors, the following matters were voted upon
at the annual meeting:
- 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, 2004. The votes were cast as follows: 220,519 in favor of
ratification; 1,592 against ratification; and 2,814 abstaining.
No other matters were submitted to our members at the annual meeting.
22
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit
Number Description
- ------- ---------------------------------------------------------------------------------------------------
2.1 Joint Chapter 11 Plan of Reorganization Proposed by Chapter 11 Trustee and the Official Committee
of Equity Security Holders effective February 4, 2002 (1)
2.2 First Amended Disclosure Statement Describing Joint Chapter 11 Plan Proposed by Chapter 11
Trustee and the Official Committee of Equity Security Holders approved on October 12, 2001 (1)
3.1 Performance Capital Management, LLC Articles of Organization (1)
3.2 Operating Agreement for Performance Capital Management, LLC (1)
3.3 First Amendment to Operating Agreement for Performance Capital Management, LLC (1)
3.4 Second Amendment to Operating Agreement for Performance Capital Management, LLC (2)
4.1 Specimen Performance Capital Management, LLC Unit Certificate (1)
4.2 Specimen Performance Capital Management, LLC Economic Interest Unit Certificate (1)
4.3 Provisions in the Operating Agreement for Performance Capital Management, LLC pertaining to the
rights of LLC Unit holders (see Exhibits 3.2 and 3.3) (1)
10.1 Master Loan Agreement by and among Performance Capital Management, LLC, Varde Investment
Partners, L.P. and Matterhorn Financial Services, LLC, dated June 10, 2004 (3)
31.1 Certification of Chief Executive Officer Pursuant to Rule 13a-14(a)
31.2 Certification of Principal Financial Officer Pursuant to Rule 13a-14(a)
32.1 Certification of Principal Executive Officer and Principal Financial Officer Pursuant to 18 U.S.C.
Sec. 1350 *
<FN>
* The certifications filed under Exhibit 32.1 are not deemed "filed" for purposes of Section 18 of the
SecuritiesExchange Act of 1934 and are not to be incorporated by reference into any filing of Performance
Capital Management, LLC under the Securities Exchange Act of 1933, as amended, or the Securities Exchange Act
Of 1934, as amended, whether made before or after the date hereof irrespective of any general incorporation
by reference language contained in any such filing, except to the extent that Performance Capital Management,
LLC specifically incorporates it by reference.
(1) Filed on April 2, 2003 as an exhibit to our report on Form 8-K dated February 4, 2002 and incorporated
herein by reference.
(2) Filed on November 14, 2003 as an exhibit to our report on Form 10-QSB for the period ended September 30,
2003 and incorporated herein by reference.
(3) Filed on July 29, 2004 as an exhibit to our report on Form 8-K dated July 13, 2004 and incorporated
herein by reference.
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the three months ended June 30, 2004.
23
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 16, 2004 By: /s/ David J. Caldwell
- ----------------------- ------------------------
(Date) Name: David J. Caldwell
Its: Chief Operations Officer
24
EXHIBIT INDEX
Exhibit
Number Description
- ------- ---------------------------------------------------------------------------------------------------
2.1 Joint Chapter 11 Plan of Reorganization Proposed by Chapter 11 Trustee and the Official Committee
of Equity Security Holders effective February 4, 2002 (1)
2.2 First Amended Disclosure Statement Describing Joint Chapter 11 Plan Proposed by Chapter 11
Trustee and the Official Committee of Equity Security Holders approved on October 12, 2001 (1)
3.1 Performance Capital Management, LLC Articles of Organization (1)
3.2 Operating Agreement for Performance Capital Management, LLC (1)
3.3 First Amendment to Operating Agreement for Performance Capital Management, LLC (1)
3.4 Second Amendment to Operating Agreement for Performance Capital Management, LLC (2)
4.1 Specimen Performance Capital Management, LLC Unit Certificate (1)
4.2 Specimen Performance Capital Management, LLC Economic Interest Unit Certificate (1)
4.3 Provisions in the Operating Agreement for Performance Capital Management, LLC pertaining to the
rights of LLC Unit holders (see Exhibits 3.2 and 3.3) (1)
10.1 Master Loan Agreement by and among Performance Capital Management, LLC, Varde Investment
Partners, L.P. and Matterhorn Financial Services, LLC, dated June 10, 2004 (3)
31.1 Certification of Chief Executive Officer Pursuant to Rule 13a-14(a)
31.2 Certification of Principal Financial Officer Pursuant to Rule 13a-14(a)
32.1 Certification of Principal Executive Officer and Principal Financial Officer Pursuant to 18 U.S.C.
Sec. 1350 *
<FN>
* The certifications filed under Exhibit 32.1 are not deemed "filed" for purposes of Section 18 of the
Securities Exchange Act of 1934 and are not to be incorporated by reference into any filing of Performance
Capital Management, LLC under the Securities Exchange Act of 1933, as amended, or the Securities Exchange
Act of 1934, as amended, whether made before or after the date hereof irrespective of any general incorporation
by reference language contained in any such filing, except to the extent that Performance Capital Management,
LLC specifically incorporates it by reference.
(1) Filed on April 2, 2003 as an exhibit to our report on Form 8-K dated February 4, 2002 and incorporated
herein by reference.
(2) Filed on November 14, 2003 as an exhibit to our report on Form 10-QSB for the period ended September 30,
2003 and incorporated herein by reference.
(3) Filed on July 29, 2004 as an exhibit to our report on Form 8-K dated July 13, 2004 and incorporated
herein by reference.