- --------------------------------------------------------------------------------
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended March 31, 2005
--------------------
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from to
---------- ----------
Commission file number: 0 - 50235
-----------------
PERFORMANCE CAPITAL MANAGEMENT, LLC
-----------------------------------
(Exact name of small business issuer as specified in its charter)
California 03-0375751
------------------------------ -------------------------------
State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization
222 South Harbor Blvd., Suite 400, Anaheim, California 92805
--------------------------------------------------------------------------
(Address of principal executive offices)
(714) 502-3780
---------------------------
(Issuer's telephone number)
--------------------------------------------------------------------------
(Former name, former address and former fiscal year, if changed since last
report.)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the issuer was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes [X] No [ ]
Check whether the issuer has filed 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 April 15, 2005, the issuer had
563,926 LLC Units issued and outstanding.
Transitional Small Business Disclosure Format (Check one): Yes [ ] No [X]
PERFORMANCE CAPITAL MANAGEMENT, LLC
INDEX TO
QUARTERLY REPORT ON FORM 10-QSB
FOR THE QUARTER ENDED MARCH 31, 2005
PART I - FINANCIAL INFORMATION PAGE
Item 1 Consolidated Financial Statements
Review Report of Independent Registered Public Accounting Firm . . . . . . . . . . . . . . . . . . 1
Consolidated Balance Sheets as of March 31, 2005 (unaudited) and December 31, 2004 (audited) . . . 2
Consolidated Statements of Operations for the quarters ended March 31, 2005 and 2004 (unaudited) . 3
Consolidated Statements of Members' Equity for the quarters ended March 31, 2005 and 2004
(unaudited) and the year ended December 31, 2004 (audited) . . . . . . . . . . . . . . . . . . . . 4
Consolidated Statements of Cash Flows for the quarters ended March 31, 2005 and 2004 (unaudited) . 5
Condensed Notes to the Consolidated Financial Statements (unaudited) . . . . . . . . . . . . . . . 6
Item 2 Management's Discussion and Analysis of Financial Condition and Results of Operations. . . . . . . 15
Item 3 Controls and Procedures. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
PART II - OTHER INFORMATION
Item 2 Changes in Securities and Small Business Issuer Purchases of Equity Securities . . . . . . . . . . 22
Item 6 Exhibits and Reports on Form 8-K . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
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 consolidated balance sheet of Performance
Capital Management, LLC as of March 31, 2005, and the related consolidated
statements of operations, members' equity and cash flows for the quarters ended
March 31, 2005 and 2004. All information included in these consolidated
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 consolidated financial statements referred to above
for them to be in conformity with U.S. generally accepted accounting principles.
We have previously audited, in accordance with the standards of the Public
Company Accounting Oversight Board (United States), the consolidated balance
sheet of Performance Capital Management, LLC as of December 31, 2004, and the
related consolidated statements of operations, members' equity and cash flows
for the year ended December 31, 2004 (not presented herein); and in our report
dated March 9, 2005, we expressed an unqualified opinion on those consolidated
financial statements. In our opinion, the information set forth in the
accompanying consolidated balance sheet as of December 31, 2004, is fairly
stated, in all material respects, in relation to the balance sheet from which it
has been derived.
/s/ Moore Stephens Wurth Frazer And Torbet, LLP
May 9, 2005
Orange, California
1
PERFORMANCE CAPITAL MANAGEMENT, LLC AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
AS OF MARCH 31, 2005 AND DECEMBER 31, 2004
March 31, December 31,
2005 2004
(unaudited) (audited)
------------ --------------
ASSETS
------
Cash and cash equivalents $ 1,369,052 $ 1,920,155
Restricted cash 406,432 122,205
Other receivables 334,684 31,494
Purchased loan portfolios, net 3,881,738 2,991,642
Property and equipment, net 214,971 254,808
Deposits 57,746 56,588
Prepaid expenses and other assets 166,252 86,063
------------ --------------
Total assets $ 6,430,875 $ 5,462,955
============ ==============
LIABILITIES AND MEMBERS' EQUITY
-------------------------------
LIABILITIES:
Accounts payable $ 134,581 $ 59,275
Accrued liabilities 376,439 373,924
Accrued interest 30,653 8,075
Notes payable 2,798,336 1,417,043
Income taxes payable 31,890 18,290
------------ --------------
Total liabilities 3,371,899 1,876,607
COMMITMENTS AND CONTINGENCIES - -
MEMBERS' EQUITY 3,058,976 3,586,348
------------ --------------
Total liabilities and members' equity $ 6,430,875 $ 5,462,955
============ ==============
The accompanying notes are an integral part of these consolidated financial statements.
See Review Report of Independent Registered Public Accounting Firm.
2
PERFORMANCE CAPITAL MANAGEMENT, LLC AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Quarter For the Quarter
Ended Ended
March 31, March 31,
2005 2004
(unaudited) (unaudited)
----------------- -----------------
REVENUES:
Portfolio collections $ 3,188,207 $ 2,451,370
Portfolio sales - 1,782,064
----------------- -----------------
Total revenues 3,188,207 4,233,434
Less portfolio basis recovery 1,560,131 1,826,227
----------------- -----------------
NET REVENUES 1,628,076 2,407,207
----------------- -----------------
OPERATING COSTS AND EXPENSES:
Salaries and benefits 1,117,716 1,114,460
General and administrative 761,087 577,370
Depreciation 42,833 45,173
----------------- -----------------
Total operating costs and expenses 1,921,636 1,737,003
----------------- -----------------
INCOME (LOSS) FROM OPERATIONS (293,560) 670,204
----------------- -----------------
OTHER INCOME (EXPENSE):
Interest Expense (56,457) -
Reorganization costs (190) (8,837)
Interest income 3,395 2,391
Other income 1,669 7,017
----------------- -----------------
Total other income (expense), net (51,583) 571
----------------- -----------------
INCOME (LOSS) BEFORE INCOME TAX PROVISION (345,143) 670,775
INCOME TAX PROVISION 17,600 11,600
----------------- -----------------
NET INCOME (LOSS) $ (362,743) $ 659,175
================= =================
NET INCOME (LOSS) PER UNIT
BASIC AND DILUTED $ (.64) $ 1.15
================= =================
The accompanying notes are an integral part of these consolidated financial statements.
See Review Report of Independent Registered Public Accounting Firm.
3
PERFORMANCE CAPITAL MANAGEMENT, LLC AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF MEMBERS' EQUITY
Total
Member Unreturned Abandoned Accumulated Members'
Units Capital Capital Deficit Equity
-------- ------------ ----------- ------------- -----------
Balance, December 31, 2003 570,916 $25,612,977 $ 31,926 $(22,327,145) $3,317,758
Distributions to investors (164,503) (164,503)
Net income 659,175 659,175
-------- ------------ ----------- ------------- -----------
Balance, March 31, 2004 570,916 25,448,474 31,926 (21,667,970) 3,812,430
Distributions to investors (509,069) (509,069)
Distributions forfeited 151,555 151,555
Cancellation of investors units (7,055) (457,318) 457,318
Net income 131,432 131,432
-------- ------------ ----------- ------------- -----------
Balance, December 31, 2004 563,861 24,633,642 489,244 (21,536,538) 3,586,348
Reinstatement of Units to Investor 65 3,503 (3,503)
Distributions to investors (164,629) (164,629)
Net loss (362,743) (362,743)
-------- ------------ ----------- ------------- -----------
Balance, March 31, 2005 563,926 $24,472,516 $ 485,741 $(21,899,281) $3,058,976
======== ============ =========== ============= ===========
The accompanying notes are an integral part of these consolidated financial statements.
See Review Report of Independent Registered Public Accounting Firm.
4
PERFORMANCE CAPITAL MANAGEMENT, LLC AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Quarter For the Quarter
Ended Ended
March 31, 2005 March 31, 2004
(unaudited) (unaudited)
----------------- -----------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ (362,743) $ 659,175
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation 42,833 45,173
(Increase) decrease in assets:
Other receivables (303,190) (4,006)
Prepaid expenses and other assets (81,347) (59,539)
Loan portfolios (890,096) 506,231
Increase (decrease) in liabilities:
Accounts payable 75,306 (792)
Accrued liabilities 2,515 94,726
Accrued interest 22,578 -
Income taxes payable 13,600 11,600
----------------- -----------------
Net cash provided by (used in) operating activities (1,480,544) 1,252,568
----------------- -----------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property and equipment (2,996) (5,682)
----------------- -----------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Loan proceeds from borrowing 1,718,614 -
Repayment of loans (337,321) -
Distributions to investors (164,629) (164,503)
----------------- -----------------
Net cash provided by (used in) financing activities 1,216,664 (164,503)
----------------- -----------------
NET CHANGE IN CASH AND CASH EQUIVALENTS (266,876) 1,082,383
CASH AND CASH EQUIVALENTS, beginning of period 2,042,360 1,029,397
----------------- -----------------
CASH AND CASH EQUIVALENTS, end of period $ 1,775,484 $ 2,111,780
================= =================
SUPPLEMENTAL DISCLOSURE FOR CASH FLOW INFORMATION:
Income taxes paid $ 4,000 $ 800
================= =================
Interest paid $ 33,881 $ -
================= =================
The accompanying notes are an integral part of these consolidated financial statements.
See Review Report of Independent Registered Public Accounting Firm.
5
PERFORMANCE CAPITAL MANAGEMENT, LLC AND SUBSIDIARY
CONDENSED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - ORGANIZATION AND DESCRIPTION OF BUSINESS
Performance Capital Management, LLC ("PCM LLC") and its wholly-owned subsidiary,
Matterhorn Financial Services, LLC ("Matterhorn") (collectively the "Company",
unless stated otherwise) are 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. In late December 1998, these
six entities voluntarily filed bankruptcy petitions, which were later
consolidated into one case. 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 Review Report of Independent Registered Public Accounting Firm.
6
PERFORMANCE CAPITAL MANAGEMENT, LLC AND SUBSIDIARY
CONDENSED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
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 PCM LLC pursuant to the
terms of the Reorganization Plan:
Original Number of Number of Percentage
Fund's 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 March 31, 2005:
Original Number of Percentage
Fund's Name PCM LLC Units Interest In PCM LLC
- ----------- ------------- -------------------
PAM 51,565 9
PAMII 76,101 14
PAMIII 97,759 17
PAMIV 281,980 50
PAMV 56,521 10
------------- -------------------
Totals 563,926 100
============= ===================
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.
See Review Report of Independent Registered Public Accounting Firm.
7
PERFORMANCE CAPITAL MANAGEMENT, LLC AND SUBSIDIARY
CONDENSED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - ORGANIZATION AND DESCRIPTION OF BUSINESS (CONTINUED)
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 Distribution to Investors (165)
Net Income For The Period
Ended March 31, 2004 659
---------
Members' Equity PCM, LLC
at March 31, 2004 3,812
2004 Distributions to Investors (509)
Distributions forfeited 152
Net Income For The Period
Ended December 31, 2004 131
---------
Members' Equity PCM, LLC 3,586
at December 31, 2004
2005 Distribution to Investors (165)
Net Loss For The Period
Ended March 31, 2005 (362)
Members' Equity PCM, LLC ---------
at March 31, 2005 $ 3,059
=========
See Review Report of Independent Registered Public Accounting Firm.
8
PERFORMANCE CAPITAL MANAGEMENT, LLC AND SUBSIDIARY
CONDENSED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - ORGANIZATION AND DESCRIPTION OF BUSINESS (CONTINUED)
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.
On August 2, 2004, an order of the United States Bankruptcy Court was entered
closing the Chapter 11 case. The order acts as a discharge and termination of
any and all liabilities and debts of, and claims against, PCM INC, PAM, PAM II,
PAM III, PAM IV and PAM V that arose at any time before the confirmation order
became effective on February 4, 2002.
Wholly-owned Subsidiary
- ------------------------
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. To implement the agreement, PCM LLC created a wholly-owned
subsidiary, 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 under the loan facility. Under the terms of
the facility, Varde will receive both interest and a residual amount of any
profits on the portfolios acquired with a loan. Portfolios purchased using the
facility will be owned by PCM LLC's subsidiary, Matterhorn. Varde has a first
priority security interest in Matterhorn's assets securing repayment of its
loans.
NOTE 2 - BASIS OF PRESENTATION
Interim Condensed Financial Statements
- --------------------------------------
These interim condensed consolidated financial statements have been prepared
using generally accepted accounting principles in the United States. The interim
consolidated 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 consolidated
financial statements have been prepared consistent with the accounting policies
described in the Company's annual audited consolidated financial statements.
Reference should be made to those statements included with the Company's annual
report filed on Form 10-KSB.
Reporting Entity
- ----------------
PCM LLC 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. Matterhorn was consolidated in the financial statements as a
wholly-owned subsidiary starting in the third quarter of 2004.
Transfer of Assets to Successor Company
- ---------------------------------------
Assets were transferred at historical carrying values and liabilities were
assumed as required by the bankruptcy confirmation plan.
See Review Report of Independent Registered Public Accounting Firm.
9
PERFORMANCE CAPITAL MANAGEMENT, LLC AND SUBSIDIARY
CONDENSED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
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.
The Company provides a valuation allowance for acquired loan portfolios when the
present value of a portfolio's expected future cash flows does not exceed the
carrying value of the portfolio.
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.
Cash and Cash Equivalents
- -------------------------
The Company defines cash equivalents as cash, money market investments, and
overnight deposits with original maturities of less than three months. Cash
equivalents are valued at cost, which approximates market. The Company maintains
cash balances, which exceeded federally insured limits by approximately $1.6
million as of March 31, 2005. 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.
Restricted cash consists principally of cash held in a segregated account
pursuant to the Company's credit facility with Varde. The Company and Varde
settle the status of these funds on a monthly basis pursuant to the credit
facility. The proportion of the restricted cash ultimately disbursed by
Matterhorn to Varde and PCM LLC depends upon a variety of factors, including the
portfolios from which the cash was collected, the size of servicing fees on the
portfolios that generated the cash, and the priority of payments due on the
portfolios that generated the cash.
See Review Report of Independent Registered Public Accounting Firm.
10
PERFORMANCE CAPITAL MANAGEMENT, LLC AND SUBSIDIARY
CONDENSED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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 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. Portions of portfolios sold typically do not
meet the Company's targeted collection characteristics. Loan portfolios sold are
valued at the lower of cost or market.
Proceeds from strategic sales of purchased loan portfolios 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 March 31, 2005, PCM LLC had
540,204 voting LLC units (540,139 LLC units as of December 31, 2004) and 23,722
non-voting LLC units (23,722 LLC units as of December 31, 2004). 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. At December 31, 2004, the
Company cancelled 7,055 member units and took back approximately $152,000 of
related unclaimed distributions under the procedure authorized in the
reorganization plan. The $152,000 of unclaimed distributions was treated as an
addition to Members' Equity. The total amount of abandoned unreturned capital
relating to the 7,055 member units was $457,318. During the first quarter of
2005, a member with 65 units was reinstated. These 65 units had been considered
returned voluntarily with the 634 member units surrendered in 2003. It was
determined that this was done in error.
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 March 31, 2005 and
December 31, 2004 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 March 31, 2005 and December 31, 2004 was 20%. The
estimated fair value of loan portfolios was $21.6 million and $19.2 million at
March 31, 2005 and December 31, 2004, 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 March 31, 2005 and December 31, 2004 totaled
approximately $699 million and $641 million, 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.
See Review Report of Independent Registered Public Accounting Firm.
11
PERFORMANCE CAPITAL MANAGEMENT, LLC AND SUBSIDIARY
CONDENSED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
NOTE 5 - PURCHASED LOAN PORTFOLIOS (CONTINUED)
The carrying amount of loans included in the accompanying balance sheets are as
follows:
As of As of
Mar. 31, 2005 Dec. 31, 2004
--------------- ---------------
Unrecovered cost balance,
beginning of period $ 3,003,642 $ 7,619,515
Valuation allowance,
beginning of period (12,000) (5,538,019)
--------------- ---------------
Net balance, beginning of period 2,991,642 2,081,496
Net portfolio activity 890,096 910,146
--------------- ---------------
Net balance, end of period $ 3,881,738 $ 2,991,642
=============== ===============
The activity in the loan portfolios in the accompanying financial statements is
as follows:
For the Quarter For the Quarter
Ended Ended
Mar. 31, 2005 Mar. 31, 2004
----------------- -----------------
Purchased loan portfolios, net $ 2,450,227 $ 1,319,996
Collections on loan portfolios (3,188,207) (2,451,370)
Sales of loan portfolios - (1,782,064)
Revenue recognized on collections 1,628,076 1,659,620
Revenue recognized on sales - 747,587
----------------- -----------------
Net portfolio activity $ 890,096 $ (506,231)
================= =================
The valuation allowance related to the loan portfolios had a balance of $12,000
at March 31, 2005 and December 31, 2004.
NOTE 6 - OTHER RECEIVABLES
Other receivables consist of collections on portfolios received by third party
collection agencies and funds due from a portfolio seller for the return of
certain contractually ineligible accounts improperly included by the seller in a
portfolio purchased by Matterhorn.
NOTE 7 - PROPERTY AND EQUIPMENT
Property and equipment is as follows:
As of As of
Mar. 31, 2005 Dec. 31, 2004
-------------- --------------
Office furniture and equipment $ 284,171 $ 284,171
Computer equipment 497,219 494,223
Leasehold improvements 36,982 36,982
-------------- --------------
Totals 818,372 815,376
Less accumulated depreciation 603,401 560,568
-------------- --------------
Property and equipment, net $ 214,971 $ 254,808
============== ==============
Depreciation expense for the quarters ended March 31, 2005 and 2004 amounted to
$42,833 and $45,173, respectively.
See Review Report of Independent Registered Public Accounting Firm.
12
PERFORMANCE CAPITAL MANAGEMENT, LLC AND SUBSIDIARY
CONDENSED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
NOTE 8 - NOTES PAYABLE
The Company has entered into an agreement for a credit facility with Varde that
provides for up to $25 million of capital (counting each dollar loaned on a
cumulative basis) over a five-year term ending in July 2009. At March 31, 2005,
PCM LLC's wholly-owned subsidiary Matterhorn owed approximately $2.8 million
under the facility in connection with its purchase of certain charged-off loan
portfolios. The total amount borrowed through March 31, 2005 is approximately
$3.4 million. Each advance has minimum payment threshold points. Each advance
has a term of two years and bears interest at the rate of 12% per annum. These
obligations are scheduled to be paid in full on dates ranging from August 2006
to February 2007, with principal payments of approximately $606,000 due in 2005,
$1.5 million due in 2006, and $739,000 due in 2007. Once all funds (including
those invested by the Company) invested in a portfolio financed by Varde have
been repaid (with interest) and all servicing costs have been paid, Varde will
begin to receive a residual interest in collections of that portfolio. Depending
on the performance of the portfolio, these residual interests may never be paid,
they may begin being paid a significant time later than Varde's loan is repaid
(i.e., after the funds invested by the Company are repaid with interest), or, in
circumstances where the portfolio performs extremely well, the loan could be
repaid early and Varde could conceivably begin to receive its residual interest
on or before the date that the loan obligation was originally scheduled to be
paid in full. Varde has a first priority security interest in all the assets of
Matterhorn, securing repayment of its loans and payment of its residual
interest. PCM LLC, our parent operating company, has guarantied certain of
Matterhorn's operational obligations under the loan documents. The amount of
remaining available credit under the facility at March 31, 2005 was
approximately $21.6 million. The assets of Matterhorn that provide security for
Varde's loan were carried at a cost of approximately $3.2 million at March 31,
2005.
NOTE 9 - COMMITMENTS AND CONTINGENCIES
Lease Commitments
- ------------------
The Company currently leases office space in Anaheim, California under a
non-cancelable five year operating lease. Under the lease agreement, PCM LLC
must pay a basic monthly rental charge plus a portion of the building's common
area expenses.
Future minimum lease commitments as of March 31, 2005 are as follows:
Year ending
March 31,
- -----------
2006 316,000
2007 214,000
Thereafter -
Rental expense for the quarter ended March 31, 2005 and 2004 amounted to
approximately $81,597 and $79,659, respectively. The Company is obligated under
a five year equipment lease, expiring in 2009, for minimum payments of $4,800
per year.
NOTE 10 - 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, 563,926 for the quarter
ended March 31, 2005 and 570,916 for the quarter ended March 31, 2004.
See Review Report of Independent Registered Public Accounting Firm.
13
PERFORMANCE CAPITAL MANAGEMENT, LLC AND SUBSIDIARY
CONDENSED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
NOTE 11 - 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).
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 12 - SUBSEQUENT EVENTS
On April 28, 2005, Matterhorn borrowed approximately $2.3 million under the
Varde credit facility in connection with our purchase of a charged-off loan
portfolio. This obligation has a two year term expiring in April 2007 and bears
interest at a rate of 12% per annum.
See Review Report of Independent Registered Public Accounting Firm.
14
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 due to their inherent uncertainty. 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 March 31, 2005.
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. We purchase portfolios using our own cash
resources and funds borrowed from a third party.
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 portfolios, repay funds borrowed to purchase portfolios, pay
our collection and operating costs and still have a profit. We believe that
market conditions currently make it difficult, although not impossible, 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 statement of
operations we reduce our total 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.
15
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.
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, repay the loans used to
purchase them, pay our collection and operating costs, and still have excess
cash.
Our statement of operations generally will report proportionately low net
revenues in periods that have substantial collections of recently purchased
portfolios, due to the "front-loaded" cost basis recovery associated with new
portfolios. As a result, during times of rapid growth in our portfolio purchases
(and probably for several quarters thereafter), our statement of operations will
likely show a net loss. As purchases slow and more collections come from older
portfolios whose cost bases have been completely recovered, our statement of
operations will begin to report net income, assuming our portfolios perform over
time as anticipated and we collect them in an efficient manner. For the
foreseeable future, we intend to continue seeking new large dollar-volume
portfolio purchases using our loan facility with Varde Investment Partners, L.P.
("Varde").
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. Our consolidated
financial statements include the accounts of our parent operating company,
Performance Capital Management, LLC, and its wholly-owned special purpose
subsidiary Matterhorn Financial Services LLC, a California limited liability
company ("Matterhorn"). All significant intercompany balances and transactions
have been eliminated.
16
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. We believe a policy grounded in
conservatism is preferable to a policy of attempting to match portfolio cost
basis to revenue on a proportionate basis over the life of the portfolio, 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.
As discussed in greater detail below, our credit facility with Varde provides
for up to $25 million of capital (counting each dollar loaned on a cumulative
basis) over a five-year term ending in July 2009. The facility provides for
Varde to receive a residual interest in portfolio collections after all funds
invested in the portfolio have been repaid (with interest) and all servicing
costs have been paid. We do not record a liability for this residual interest
due to the distressed nature of the portfolio assets and the lack of assurance
that collections sufficient to result in a liability to Varde will actually
occur.
For ease of presentation in the following discussions of "Operating Results" and
"Liquidity and Capital Resources", we round amounts less than one million
dollars to the nearest thousand dollars and amounts greater than one million
dollars to the nearest hundred thousand dollars.
OPERATING RESULTS
COMPARISON OF RESULTS FOR THE QUARTERS ENDED MARCH 31, 2005 AND 2004
The following discussion compares our results for the quarter ended March 31,
2005, to the quarter ended March 31, 2004. We had a net loss of approximately
$363,000 for the quarter ended March 31, 2005, as compared to net income of
approximately $659,000 for the quarter ended March 31, 2004. Our operating
activities used cash of $1.5 million in the quarter ended March 31, 2005, as
compared to providing cash of $1.3 million in the quarter ended March 31, 2004.
17
Revenue
- -------
Our net revenues decreased to $1.6 million for the quarter ended March 31, 2005,
from $2.4 million for the quarter ended March 31, 2004. The following table
presents a comparison of the components of our revenues for the quarter ended
March 31, 2005, to the quarter ended March 31, 2004, as well as presenting net
revenue as a percentage of the corresponding total revenue (approximate amounts
due to rounding):
Total Collections Sales
------------------------ ------------------------ -----------------------
For the Quarter For the Quarter For the Quarter
Ended March 31, Ended March 31, Ended March 31,
2005 2004 2005 2004 2005 2004
----------- ----------- ----------- ----------- ---------- -----------
($in millions) ($in millions) ($in millions)
Total revenues $ 3.2 $ 4.2 $ 3.2 $ 2.4 $ --- $ 1.8
Less basis recovery (1.6) (1.8) (1.6) (0.8) --- (1.0)
----------- ----------- ----------- ----------- ---------- -----------
Net revenues $ 1.6 $ 2.4 $ 1.6 $ 1.6 $ --- $ 0.8
=========== =========== =========== =========== ========== ===========
Net revenue percentage 51.1% 56.9% 51.1% 67.7 N/A 42.0%
Portfolio collections provided all of our revenues in the quarter ended March
31, 2005 and most of our total revenues in the quarter ended March 31, 2004. Our
total revenues from portfolio collections increased substantially 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 stayed about the same, but the percentage of
net revenues to total revenues declined significantly. These results reflect the
fact that recently purchased portfolios (which provide no net revenues because
of front-loaded cost basis recovery) provided a substantial portion of our
increased total collection revenues. During 2004, we acquired $5.3 million of
new portfolios (net of portions of portfolios we promptly resold). In the first
quarter of 2005 we acquired $2.5 million of new portfolios, net of returns of
contractually ineligible accounts improperly included in previous portfolio
acquisitions. We have seen our total revenue from collections increase as we
begin to exploit the large purchases we made in 2004 and continue making in
2005. We expect to continue to have strong total collection revenue as we
collect these recent portfolio purchases. The cost basis recovery associated
with collecting these 2004 portfolios, combined with the portfolios that we have
already acquired in 2005 and additional portfolios we plan to acquire in 2005,
could continue to offset the increase in net revenue percentage we would
otherwise expect our 2002 and 2003 portfolios (whose cost bases we have
completely recovered) to generate and actually result in a further decline in
our net revenue percentage.
Both our total and net revenues from portfolio sales showed dramatic decreases.
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 quarter of 2004 on terms we considered acceptable. No similar sales
were made in the first quarter of 2005. 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 loss of $363,000 for the first quarter 2005 is primarily attributable to
the large increase in portfolio cost basis recovery resulting from the
collection of recently purchased portfolios and to the lack of older portfolio
sales during the quarter. Our net income of $659,000 for the quarter ended March
31, 2004, was essentially due to the $748,000 of net revenues we derived from
older portfolio sales. Without this large volume of sales, we would have
essentially had a break-even quarter in the first quarter 2004.
Operating Expenses
- -------------------
Our total operating costs and expenses increased to $1.9 million for the quarter
ended March 31, 2005, from $1.7 million for the quarter ended March 31, 2004.
Our ratio of operating costs and expenses to total revenues from collections
(i.e., excluding the
18
effect of portfolio sales), a measure of collection efficiency, decreased to
60.3% for the quarter ended March 31, 2005, from 70.9% for the quarter ended
March 31, 2004. We accomplished this efficiency improvement by increasing total
collection revenues while leveraging the fixed costs of our existing
infrastructure and by decreasing the variable costs required to collect each
dollar of revenue. We plan to continue improving this efficiency measure, both
by continuing to increase total revenues (while holding infrastructure costs
down) and by continuing to reduce variable costs required to collect each dollar
of revenue. We intend to continue monitoring the magnitude of the change in the
margin by which our total collection revenues exceed our operating costs and
expenses relative to the principal and interest we pay to Varde under the credit
facility to ensure that the Varde facility provides additional liquidity to us
and does not become the source of a cash crunch.
Our general and administration expenses increased to $761,000 for the quarter
ended March 31, 2005, from $577,000 for the quarter ended March 31, 2004. This
increase was due primarily to an increase in utilization of third party
collection agencies, an increase in other collection expenses related to the
increased volume of collections made possible by the increase in new portfolio
purchases, and an increase in legal and accounting expenses. Our salaries and
benefits expenses remained relatively stable at $1.1 million for the quarters
ended March 31, 2005 and 2004. Our headcount has remained relatively stable,
although we still experience significant employee turnover among our collectors.
We expect our operating expenses to increase somewhat in 2005 as we increase the
volume of accounts we collect, but we expect increases in total revenues to
outpace any material increases in costs associated with our collection efforts.
LIQUIDITY AND CAPITAL RESOURCES
Our cash and cash equivalents decreased $267,000 in the first quarter of 2005 to
a balance of $1.8 million at March 31, 2005. During the quarter ended March 31,
2005, our portfolio collections generated $3.2 million of cash, we borrowed $1.7
million, and we used $1.9 million for operating and other activities, $2.5
million to purchase new portfolios (net of returns), $165,000 for distributions
to unit holders and $337,000 to repay loans payable.
The large cost basis recovery associated with the recent rapid growth in our
portfolios has made it difficult to achieve results consistent with our business
plan: to recover the cost we pay for our portfolios, repay funds borrowed to
purchase portfolios, pay our collecting and operating costs and still have a
profit. Our cost basis recovery of $1.6 million plus our operating and other
expenses of $1.9 million exceeded our total revenues from collections of $3.2
million by $274,000. We used some of the revenue and borrowed $1.7 million to
purchase approximately $2.5 million of new portfolios (net of returns) during
the quarter. On a cash basis, our $267,000 decrease in cash was due to the sum
of our cash expenses of $1.9 million, total portfolio purchases of $2.7 million,
loan repayments of $337,000 and distributions of $165,000 exceeding the sum of
our cash collections of $3.2 million and borrowings of $1.7 million.
During 2004 and the beginning of 2005, we believe we have continued to improve
the balance between our new and old portfolios. In addition, we believe that our
procedures to ensure that our collectors continue to focus collection efforts on
older portfolios that still have returns to yield, rather than focusing just on
the most recently acquired portfolios, continue to show results. We have used
our dialer to ensure that our collectors continue to focus on portfolios other
than those we have most recently acquired. By monitoring the results of calls
originated through our dialer, we identified portfolios that required more cost
to collect than others. Particularly where we had worked to collect these
portfolios over an extended period of time, we determined that some of our
portfolios' collection lives had run their course from our perspective. We sold
a number of older portfolios identified by this process in 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.
Current plans for 2005 do not call for the sale of a large number of older
portfolios, but we may engage in further sales if we believe market conditions
are acceptable.
During 2004, we simultaneously addressed two objectives: (1) to increase the
volume of portfolios available for collection in order to capitalize on
infrastructure capacity and (2) to improve cash liquidity. Of the $7.4 million
of portfolios we purchased in 2004, we retained $5.3 million to collect (we
promptly resold the other $2.1 million). During the first quarter of 2005, we
purchased $2.5 million of portfolios (net of returns). These purchases enabled
us to reverse a trend in 2003 of steadily declining portfolio cost basis, which
had resulted from our difficulty in finding portfolios available for purchase at
prices we considered reasonable. Because of the improvement in the volume of
portfolios available for collection, we expect to add collection personnel to
capitalize on our infrastructure capacity,
19
with increased total revenues from collections outpacing increased costs
associated with added headcount and increased collection activity. We purchased
approximately $3.0 million of additional portfolios during April 2005. Whether
we continue to acquire portfolios at the pace of the first four months of 2005
will depend on our assessment of market conditions, as well as the amount of
liquid cash and other financial resources available to us.
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 at March 31, 2005, increased $2.4
million to $21.6 million from $19.2 million at December 31, 2004. At the same
time, the cost basis of our portfolios increased to $3.9 million at March 31,
2005, from $3.0 million at December 31, 2004.
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.
Our estimate of fair value and our portfolio cost basis increased due in part to
the large portfolio purchases we made in 2004 and 2005, and fair value also
increased because we believe recently purchased portfolios will provide better
collection ratios than some of the older portfolios we inherited from our PAM
Fund predecessors, because newly acquired portfolios generally provide an
increase in fair value substantially greater than the increase in cost basis
recorded on our balance sheet and because improved collection procedures have
extended the collection lives of some of our older portfolios. We believe the
fair value of our portfolios will continue to increase in the near term as we
acquire new portfolios. We believe our portfolio cost basis will also increase
in the near term because we can use the Varde credit facility as well as
reinvest some cash proceeds from collections into the purchase of new
portfolios. Long-term growth in portfolio cost basis will depend on whether
market conditions continue to permit us to purchase portfolios at reasonable
prices and on our financial resources.
We used a discount rate of 20% to determine the fair values of our portfolios at
March 31, 2005, and December 31, 2004. The following table sets forth
alternative estimates of fair value if we assessed collection risk as higher
(using a discount rate of 25%) or lower (using a discount rate of 15%).
March 31, 2005 December 31, 2004
--------------- ------------------
Higher collection risk (25% discount rate) $ 20.1 million $ 17.9 million
Assumed collection risk (20% discount rate) $ 21.6 million $ 19.2 million
Lower collection risk (15% discount rate) $ 23.4 million $ 20.8 million
Our estimates of fair values also would change if we revised our projections of
the magnitude and timing of future collections. Because of the inherent
uncertainty associated with predicting future events, our determinations of fair
value at any particular point in time are only estimates, and actual fair value
could ultimately vary significantly from our estimate.
In the near term, we plan to reinvest some of our cash collections representing
cost basis recovery to acquire additional portfolios and use the Varde facility
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.
20
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, the timing of loan repayments and residual
interest payments to Varde, and the timing of distributions to our members, we
may not achieve increases in fair value each quarter.
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 2004, we made distributions
totaling $674,000. We made distributions of $165,000 in each of January 2005 and
April 2005 relating to quarters ended December 31, 2004 and March 31, 2005,
respectively.
Our agreement with Varde provides us with a source of capital to purchase new
portfolios. The agreement provides up to $25 million of capital (counting each
dollar loaned on a cumulative basis) over a five-year term. It is unlikely that
we will ever have outstanding indebtedness approaching the full $25 million at
any one time, due to the cumulative nature of the facility. At March 31, 2005,
Matterhorn owed $2.8 million under the facility in connection with purchases of
certain charged-off loan portfolios. Under the credit facility, Varde has a
first priority security interest in Matterhorn's assets. The assets of
Matterhorn that provide security for Varde's loan were carried at a cost of $3.2
million at March 31, 2005. The loan advances have minimum payment threshold
points with terms of two years and bear interest at the rate of 12% per annum.
These obligations are scheduled to be paid in full on dates ranging from August
2006 to February 2007. Once all funds (including those invested by us) invested
in a portfolio financed by Varde have been repaid (with interest) and all
servicing costs have been paid, Varde will begin to receive a residual interest
in collections of that portfolio. Depending on the performance of the portfolio,
these residual interests may never be paid, they may begin being paid a
significant time later than Varde's loan is repaid (i.e., after the funds
invested by us are repaid with interest), or, in circumstances where the
portfolio performs extremely well, the loan could be repaid early and Varde
could conceivably begin to receive its residual interest on or before the date
that the loan obligation was originally scheduled to be paid in full.
The amount of remaining available credit under the facility at March 31, 2005
was $21.6 million. Matterhorn has borrowed a total of $3.4 million, with $2.8
million outstanding at March 31, 2005. Matterhorn borrowed an additional $2.3
million on April 28, 2005. There can be no assurance that Varde will advance any
new money under the facility, because in each instance Varde must approve of the
portfolio(s) we propose to acquire and the terms of the acquisition. We do not
have any plans to raise equity capital. Based on our cash position and current
financial resources, and assuming our operating results continue to increase at
projected levels, we believe we have adequate capital resources to continue our
business as presently conducted for the foreseeable future. We plan to continue
to use the Varde credit facility to maximize the return on our infrastructure
and to continue to reduce variable costs required to collect each dollar of
revenue. We will continue to consider other alternatives to increase the volume
of accounts we service other than through new portfolio acquisitions using only
our cash resources, however, if the economic returns to us seem reasonable.
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 our Accounting Manager, of the effectiveness of our
disclosure controls and procedures as of the end of the period covered by this
report. In designing and evaluating disclosure controls and procedures,
management recognized that any controls and procedures, no matter how well
designed and operated, can provide only reasonable assurance of achieving the
desired control objectives. Further, the
21
design of a control system must reflect the fact that there are resource
constraints. Because of the inherent limitations in all control systems, no
evaluation of controls can provide absolute assurance that all control issues
and instances of fraud, if any, may be detected. Based on this evaluation, our
Chief Operations Officer and our Accounting Manager concluded that our
disclosure controls and procedures were effective as of March 31, 2005, 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. As noted below, however, we previously
identified a weakness in our disclosure controls and procedures that existed
during the period ended September 30, 2004.
During the process of evaluating and testing the effectiveness of our disclosure
controls and procedures for the period ended September 30, 2004, management
identified a potential deficiency involving the Company's failure to timely
disclose an event that was reportable under new Form 8-K Item 2.03. Disclosure
of this event was included in our Form 10-QSB for the quarter ended September
30, 2004, under Part II, Item 5. Since identifying this potential deficiency,
management has begun to monitor this potential deficiency in order to determine
whether any further mitigating controls are necessary. We filed a current report
on Form 8-K Item 2.03 one day late during the fourth quarter, on December 29,
2004, for a closing under the Varde credit facility that occurred on December
21, 2004. Our most recent closings under the Varde credit facility occurred on
February 25, 2005 and April 28, 2005, and we timely filed current reports on
Form 8-K Item 2.03 on March 2, 2005 and April 29, 2005, respectively. We intend
to continue monitoring the reporting of closings under the Varde credit facility
to ensure that related filings are made on a timely basis.
There has been no change in our internal controls over financial reporting that
occurred during the first quarter of 2005 that has materially affected, or is
reasonably likely to materially affect, our internal controls over financial
reporting.
PART II - OTHER INFORMATION
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 concluded a procedure authorized by our plan of reorganization to
eliminate the interests of members we have not been able to locate. At December
31, 2004, the Company cancelled 7,055 LLC Units and took back approximately
$152,000 of related unclaimed distributions under the procedure authorized in
the reorganization plan. The $152,000 of unclaimed distributions was treated as
an addition to Members' Equity. The total amount of abandoned unreturned capital
relating to the 7,055 LLC Units was $457,318. During the first quarter of 2005 a
member with 65 LLC Units was reinstated. These 65 LLC Units had been considered
returned voluntarily with the 634 LLC Units surrendered in 2003. It was
determined that this was done in error.
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)
22
EXHIBIT
NUMBER DESCRIPTION
- ------------------------------------------------------------------------------------------------------------
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)
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.
(b) REPORTS ON FORM 8-K
On March 2, 2005, we filed a report on Form 8-K dated February 25, 2005,
containing disclosure under Item 2.03 pertaining to a material borrowing under
our credit facility with Varde.
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
May 13, 2005 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)
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.