Attached files
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EX-31.2 - EXHIBIT 31.2 - PERFORMANCE CAPITAL MANAGEMENT LLC | ex31_2.htm |
EX-31.1 - EXHIBIT 31.1 - PERFORMANCE CAPITAL MANAGEMENT LLC | ex31_1.htm |
EX-32.1 - EXHIBIT 32.1 - PERFORMANCE CAPITAL MANAGEMENT LLC | ex32_1.htm |
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-Q
T QUARTERLY REPORT PURSUANT TO SECTION 13
OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the
quarterly period ended September
30, 2009
OR
£ TRANSITION
REPORT PURSUANT TO 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 registrant as specified in its charter)
California
|
03-0375751
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|||
State
or other jurisdiction of incorporation or organization
|
(IRS
Employer Identification No.)
|
7001 Village Drive. Suite 255, Buena Park,
California 90621
(Address
of principal executive offices)
(714) 736-3790
(Registrant’s
telephone number)
(Former
name, former address and former fiscal year, if changed since last
report.)
Indicate
by check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days. Yes T No
£
Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (Section 232.405 of
this chapter) during the preceding 12 months (or for such shorter period that
the registrant was required to submit and post such files). Yes
£ No
£
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company. See
the definitions of “large accelerated filer,” “accelerated filer” and “smaller
reporting company” in Rule 12b-2 of the Exchange Act.
Large
accelerated filer £
|
Accelerated
filer £
|
Non-accelerated
filer £
|
Smaller
reporting company T
|
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act).
Yes £ No
T
As of
November 6, 2009, the registrant had 548,443 LLC Units issued and
outstanding.
PERFORMANCE CAPITAL MANAGEMENT, LLC
Index
to
Quarterly
Report on Form 10-Q
For
the Quarter Ended September 30, 2009
Page
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1
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PART
I – FINANCIAL INFORMATION
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Item
1
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2
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2
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3
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4
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5
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6
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Item
2
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19
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Item
4T
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29
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PART
II – OTHER INFORMATION
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Item
1
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29
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Item
2
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30
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Item
3
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30
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Item 5 | Other Information | 30 | |
Item
6
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30
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31
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EXPLANATORY
NOTE
Unless
otherwise indicated or the context otherwise requires, all references in this
Quarterly Report on Form 10-Q to “we,” “us,” “our,” and the “Company” are to
Performance Capital Management, LLC, a California limited liability company, and
our wholly-owned subsidiary, Matterhorn Financial Services, LLC
(“Matterhorn”).
CAUTIONARY NOTICE REGARDING FORWARD-LOOKING
STATEMENTS
We desire
to take advantage of the “safe harbor” provisions of the Private Securities
Litigation Reform Act of 1995. This Quarterly Report on Form 10-Q (Report)
contains a number of forward-looking statements that reflect management’s
current views and expectations with respect to our business, strategies, future
results and events, and financial performance. All statements made in this
Report other than statements of historical fact, including statements that
address operating performance, the economy, events or developments that
management expects or anticipates will or may occur in the future, including
statements related to revenues, profitability, adequacy of funds from
operations, cash flows and financing, and our ability to continue as a going
concern are forward-looking statements. In particular, the words such as
“believe,” “expect,” “intend,” “anticipate,” “estimate,” “may,” “will,” “can,”
“plan,” “predict,” “could,” “future,” variations of such words, and similar
expressions identify forward-looking statements, but are not the exclusive means
of identifying such statements and their absence does not mean that the
statement is not forward-looking.
Readers
should not place undue reliance on these forward-looking statements, which are
based on management’s current expectations and projections about future events,
are not guarantees of future performance, are subject to risks, uncertainties
and assumptions and apply only as of the date of this Report. Our actual
results, performance or achievements could differ materially from historical
results as well as the results expressed in, anticipated or implied by these
forward-looking statements.
For a
more detailed discussion of some of the factors that may affect our business,
results and prospects, see our Annual Report on Form 10-K for the year ended
December 31, 2008 filed with the Securities and Exchange Commission on April 7,
2009, as well as various disclosures made by us in this Report and in our other
reports we file with the Securities and Exchange Commission, including our
periodic reports on Form 10-Q and current reports on Form 8-K. Except as
required by law, we undertake no obligation to publicly update or revise any
forward-looking statements, whether as a result of new information, future
events or otherwise.
PART
I – FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
PERFORMANCE CAPITAL MANAGEMENT, LLC AND
SUBSIDIARY
CONSOLIDATED
BALANCE SHEETS
AS OF
SEPTEMBER 30, 2009 AND DECEMBER 31, 2008
September 30,
2009
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December 31,
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|||||||
(unaudited)
|
2008
|
|||||||
ASSETS
|
||||||||
Cash
and cash equivalents
|
$ | 93,915 | $ | 421,943 | ||||
Restricted
cash
|
281,543 | 335,890 | ||||||
Other
receivables
|
2,244 | 27,431 | ||||||
Purchased
loan portfolios, net
|
1,530,437 | 2,099,627 | ||||||
Property
and equipment, net
|
35,393 | 358,761 | ||||||
Deposits
|
35,822 | 35,822 | ||||||
Prepaid
expenses and other assets
|
52,035 | 84,710 | ||||||
Total
assets
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$ | 2,031,389 | $ | 3,364,184 | ||||
LIABILITIES AND MEMBERS'
EQUITY
|
||||||||
LIABILITIES:
|
||||||||
Accounts
payable
|
$ | 160,382 | $ | 66,222 | ||||
Accrued
liabilities
|
520,092 | 546,001 | ||||||
Accrued
interest
|
8,677 | 17,140 | ||||||
Notes
payable
|
867,586 | 2,235,649 | ||||||
Income
taxes payable
|
6,000 | 23,580 | ||||||
Total
liabilities
|
1,562,737 | 2,888,592 | ||||||
COMMITMENTS
AND CONTINGENCIES
|
- | - | ||||||
MEMBERS'
EQUITY
|
468,652 | 475,592 | ||||||
Total
liabilities and members' equity
|
$ | 2,031,389 | $ | 3,364,184 |
For
the three months ended
|
For
the three months ended
|
For
the nine months ended
|
For
the nine months ended
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|||||||||||||
September 30,
2009
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September 30,
2008
|
September 30,
2009
|
September 30,
2008
|
|||||||||||||
(unaudited)
|
(unaudited)
|
(unaudited)
|
(unaudited)
|
|||||||||||||
REVENUES:
|
||||||||||||||||
Portfolio
collections, net
|
$ | 1,254,846 | $ | 1,671,290 | $ | 4,162,764 | $ | 6,043,042 | ||||||||
Portfolio
sales, net
|
8,860 | 215,765 | 13,344 | 700,767 | ||||||||||||
TOTAL
NET REVENUES
|
1,263,706 | 1,887,055 | 4,176,108 | 6,743,809 | ||||||||||||
OPERATING
COSTS AND EXPENSES:
|
||||||||||||||||
Salaries
and benefits
|
566,384 | 824,729 | 1,866,761 | 2,791,919 | ||||||||||||
General
and administrative
|
678,781 | 681,385 | 1,922,330 | 2,235,856 | ||||||||||||
Provision
for (Recovery of) portfolio impairment
|
- | 408,000 | (150,000 | ) | 1,384,000 | |||||||||||
Loss
on impairment of property and equipment
|
255,000 | - | 255,000 | - | ||||||||||||
Depreciation
|
27,980 | 27,469 | 83,704 | 79,507 | ||||||||||||
Total
operating costs and expenses
|
1,528,145 | 1,941,583 | 3,977,795 | 6,491,282 | ||||||||||||
INCOME
(LOSS) FROM OPERATIONS
|
(264,439 | ) | (54,528 | ) | 198,313 | 252,527 | ||||||||||
OTHER
INCOME (EXPENSE):
|
||||||||||||||||
Interest
expense and other financing costs
|
(52,612 | ) | (116,259 | ) | (200,030 | ) | (334,535 | ) | ||||||||
Interest
income
|
25 | 483 | 100 | 1,338 | ||||||||||||
Other
income
|
2,330 | 548 | 2,330 | 557 | ||||||||||||
Total
other expense, net
|
50,257 | (115,228 | ) | (197,600 | ) | (332,640 | ) | |||||||||
INCOME
(LOSS) BEFORE INCOME TAX PROVISION
|
(314,696 | ) | (169,756 | ) | 713 | (80,113 | ) | |||||||||
INCOME
TAX PROVISION
|
- | 5,790 | 7,810 | 23,390 | ||||||||||||
NET
LOSS
|
$ | (314,696 | ) | $ | (175,546 | ) | $ | (7,097 | ) | $ | (103,503 | ) | ||||
NET
LOSS PER LLC UNIT – BASIC AND DILUTED
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$ | (0.57 | ) | $ | (0.32 | ) | $ | (0.01 | ) | $ | (0.19 | ) |
Member
Units
|
Unreturned Capital
|
Abandoned
Capital
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Accumulated
Deficit
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Total
Members' Equity
|
||||||||||||||||
Balance,
December 31, 2007
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549,911 | $ | 22, 257,470 | $ | 1,051,946 | $ | (22,867,335 | ) | $ | 442,081 | ||||||||||
Member
units returned by investors
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(672 | ) | (28,954 | ) | 28,954 | - | - | |||||||||||||
Distributions
to investors
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- | (102 | ) | - | - | (102 | ) | |||||||||||||
Net
loss
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- | - | - | (103,503 | ) | (103,503 | ) | |||||||||||||
Balance,
September 30, 2008 (unaudited)
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549,239 | $ | 22, 228,414 | $ | 1,080,900 | $ | (22,970,838 | ) | $ | 338,476 | ||||||||||
Net
income
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- | - | - | 137,116 | 137,116 | |||||||||||||||
Balance,
December 31, 2008
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549,239 | 22, 228,414 | 1,080,900 | (22,833,722 | ) | 475,592 | ||||||||||||||
Member
units returned by investors
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(746 | ) | (35,347 | ) | 35,347 | - | - | |||||||||||||
Distributions
to investors
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- | 157 | - | - | 157 | |||||||||||||||
Net
loss
|
- | - | - | (7,097 | ) | (7,097 | ) | |||||||||||||
Balance,
September 30, 2009 (unaudited)
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548,493 | $ | 22,193,224 | $ | 1,116,247 | $ | (22,840,819 | ) | $ | 468,652 |
For
the Nine Months Ended
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For
the Nine Months Ended
|
|||||||
September 30,
2009
|
September 30,
2008
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|||||||
(unaudited)
|
(unaudited)
|
|||||||
CASH
FLOWS FROM OPERATING ACTIVITIES:
|
||||||||
Net
loss
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$ | (7,097 | ) | $ | (103,503 | ) | ||
Adjustments
to reconcile net income to net cash provided by operating
activities:
|
||||||||
Depreciation
|
83,704 | 79,507 | ||||||
Provision
for (Recovery of) portfolio impairment
|
(150,000 | ) | 1,384,000 | |||||
Loss
on impairment of property and equipment
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255,000 | - | ||||||
Decrease
(increase) in assets:
|
||||||||
Other
receivables
|
25,187 | 6,708 | ||||||
Prepaid
expenses and other assets
|
32,675 | 43,761 | ||||||
Loan
portfolios
|
719,190 | (719,657 | ) | |||||
Increase
(decrease) in liabilities:
|
||||||||
Accounts
payable
|
94,161 | (10,407 | ) | |||||
Accrued
liabilities
|
(25,909 | ) | (84,676 | ) | ||||
Accrued
interest
|
(8,463 | ) | (15,721 | ) | ||||
Income
taxes payable
|
(17,580 | ) | (1,790 | ) | ||||
Net
cash provided by operating activities
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1,000,868 | 578,222 | ||||||
CASH
FLOWS FROM INVESTING ACTIVITIES:
|
||||||||
Additions
to property and equipment
|
(15,337 | ) | (100,816 | ) | ||||
CASH
FLOWS FROM FINANCING ACTIVITIES:
|
||||||||
Net
(increase) decrease in restricted cash
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54,347 | (17,073 | ) | |||||
Borrowings
on loans payable
|
116,689 | 2,575,060 | ||||||
Repayment
of loans
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(1,484,752 | ) | (3,314,351 | ) | ||||
Distributions
to investors
|
157 | (102 | ) | |||||
Net
cash used in financing activities
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(1,313,559 | ) | (756,466 | ) | ||||
NET
DECREASE IN CASH AND CASH EQUIVALENTS
|
(328,028 | ) | (279,060 | ) | ||||
CASH
AND CASH EQUIVALENTS, beginning of period
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421,943 | 693,227 | ||||||
CASH
AND CASH EQUIVALENTS, end of period
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$ | 93,915 | $ | 414,167 | ||||
SUPPLEMENTAL
DISCLOSURE FOR CASH FLOW INFORMATION:
|
||||||||
Income
taxes paid
|
$ | 25,390 | $ | 25,180 | ||||
Interest
paid
|
$ | 145,366 | $ | 314,282 |
PERFORMANCE CAPITAL MANAGEMENT, LLC AND SUBSIDIARY
CONDENSED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
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 (“Reorganization
Plan”) and operating agreement. The Reorganization 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 the
Reorganization Plan on February 4, 2002. Assets were transferred at historical
carrying values and liabilities were assumed as required by the bankruptcy
confirmation plan. The entities that were consolidated under the Reorganization
Plan are as follows:
• Performance
Capital Management, Inc., a California corporation;
• Performance
Asset Management Fund, Ltd., a California limited partnership;
• Performance
Asset Management Fund II, Ltd., a California limited partnership;
• Performance
Asset Management Fund III, Ltd., a California limited partnership;
• Performance
Asset Management Fund IV, Ltd., a California limited partnership;
and
• Performance
Asset Management Fund V, Ltd., a California limited partnership.
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) with a term ending in June 2010.
Matterhorn was consolidated in the financial statements as a wholly-owned
subsidiary starting in the third quarter of 2004.
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 portion of any residual
collections on the portfolios acquired with a loan, after repayment of the
purchase price (plus interest) to Varde and the Company and payment of servicing
fees. 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.
PERFORMANCE
CAPITAL MANAGEMENT, LLC AND SUBSIDIARY
CONDENSED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
Note
2 - Basis of Presentation
The
unaudited consolidated financial statements have been prepared by the Company,
pursuant to the rules and regulations of the Securities and Exchange Commission.
The information furnished herein reflects all adjustments (consisting of normal
recurring accruals and adjustments) which are, in the opinion of management,
necessary to fairly present the operating results for the respective periods.
Certain information and footnote disclosures normally present in annual
consolidated financial statements prepared in accordance with accounting
principles generally accepted in the United States of America have been omitted
pursuant to such rules and regulations. These consolidated financial
statements
should be read in conjunction with the audited financial statements and
footnotes for the year ended December 31, 2008, included in the Company's
Current Report on Form 10-K filed with the Securities and Exchange Commission on
April 7, 2009. The results for the nine months ended September 30, 2009 are not
necessarily indicative of the results to be expected for the full year ending
December 31, 2009.
The Company's management has
evaluated subsequent events through November 20, 2009, which is the date that
the consolidated financial statements were issued.
Going
Concern
On
November 9, 2009, the PCM LLC Board of Directors determined that it is in the
best interests of the Company and its members to wind down business operations.
As a result, the Board of Directors is reviewing the options available to the
Company and has directed management to prepare a plan of dissolution and
liquidation of the Company for the Board's consideration. In the meantime, the
Company is exploring opportunities to sell some Matterhorn and PCM LLC
portfolios to raise capital to pay outstanding obligations and fund ongoing
expenses. Even if a plan of dissolution and liquidation is approved by the Board
of Directors, the plan could not be implemented without the approval of members
holding a majority of the outstanding member units of PCM LLC. As a result, the
Company has presented its financial statements on a going concern
basis.
Should a
plan of dissolution and liquidation of the Company be approved by the Board of
Directors and subsequently approved by the required vote of PCM LLC members, the
Company would then change its basis of accounting from the going concern basis
to the liquidation basis.
While the
basis of presentation remains that of a going concern, based upon current cash
and cash equivalent balances and planned spending rates for the remainder of
2009, management believes that the Company does not have adequate cash and cash
equivalents on hand to support ongoing operations over the next twelve months.
The Company has experienced recurring losses from operations, and as of
September 30, 2009, the Company had available cash and cash equivalents of
approximately $94,000. These factors raise substantial doubt about the Company’s
ability to continue as a going concern.
The
accompanying unaudited condensed consolidated financial statements have been
prepared assuming that the Company will continue as a going concern. This basis
of accounting contemplates the recovery of the Company’s assets and the
satisfaction of liabilities in the normal course of business and this does not
include any adjustments to reflect the possible future effects on the
recoverability and classification of assets or the amounts and classification of
liabilities that might be necessary should the Company be unable to continue as
a going concern or should a formal plan of dissolution be approved by the
Company’s Board of Directors and its members.
Note
3 - Summary of Significant Accounting Policies
The
consolidated financial statements do not include any adjustments relating to the
recoverability and classification of recorded asset amounts and the amount and
classification of liabilities that might be necessary should the Company be
unable to continue as a going concern. These adjustments could be
material.
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.
PERFORMANCE
CAPITAL MANAGEMENT, LLC AND SUBSIDIARY
CONDENSED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
Note
3 - Summary of Significant Accounting Policies (continued)
Significant
estimates have been made by management with respect to the timing and amount of
collection of future cash flows from purchased 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.
Recently Issued Accounting
Pronouncements
In June
2009, the Financial Accounting Standards Board ("FASB") issued the Accounting
Standards Codification (the "Codification"). Effective July 1, 2009, the
Codification is the single source of authoritative accounting principles
recognized by the FASB to be applied by non-governmental entities in the
preparation of financial statements in conformity with GAAP. The Company adopted
the Codification during the third quarter of 2009 and the adoption did not
materially impact the Company’s financial statements, however the Company’s
references to accounting literature within the Company’s notes to the condensed
consolidated financial statements have been revised to conform to the
Codification classification.
In June
2009, the FASB issued Statement of Financial Accounting Standards ("FAS") 166,
"Accounting for Transfers of Financial Assets, an Amendment of FASB Statement
No. 140" ("FAS 166"), which is not yet included in the Codification. FAS 166
modifies the financial components approach, removes the concept of a qualifying
special purpose entity, and clarifies and amends the derecognition criteria for
determining whether a transfer of a financial asset or portion of a financial
asset qualifies for sale accounting. FAS 166 also requires expanded disclosures
regarding transferred assets and how they affect the reporting entity. FAS 166
is effective for the Company beginning January 1, 2010. The Company does not
expect the adoption of FAS 166 to have a material effect on its consolidated
financial statements.
In June
2009, the FASB issued FAS 167, "Amendments to FASB Interpretation No. 46R" ("FAS
167"), which is not yet included in the Codification. FAS 167 changes the
consolidation analysis for VIEs and requires a qualitative analysis to determine
the primary beneficiary of the VIE. The determination of the primary beneficiary
of a VIE is based on whether the entity has the power to direct matters which
most significantly impact the activities of the VIE and has the obligation to
absorb losses, or the right to receive benefits, of the VIE which could
potentially be significant to the VIE. FAS 167 requires an ongoing
reconsideration of the primary beneficiary and also amends the events triggering
a reassessment of whether an entity is a VIE. FAS 167 requires additional
disclosures for VIEs, including disclosures about a reporting entity's
involvement with VIEs, how a reporting entity's involvement with a VIE affects
the reporting entity's financial statements, and significant judgments and
assumptions made by the reporting entity to determine whether it must
consolidate the VIE. FAS 167 is effective for the Company beginning January 1,
2010. The Company does not expect the adoption of FAS 167 to have a material
effect on its consolidated financial statements.
In August
2009, the FASB issued Accounting Standards Update ("ASU") 2009-05, which
provides alternatives to measuring the fair value of liabilities when a quoted
price for an identical liability traded in an active market does not exist. The
alternatives include using the quoted price for the identical liability when
traded as an asset or the quoted price of a similar liability or of a similar
liability when traded as an asset, in addition to valuation techniques based on
the amount an entity would pay to transfer the identical liability (or receive
to enter into an identical liability). The amended guidance is effective for the
Company beginning October 1, 2009. The Company does not expect the
adoption of ASU 2009-05 to have a material effect on its consolidated financial
statements.
In
October 2009, the FASB issued Accounting Standards Update No. 2009-13, “Revenue
Recognition (Topic 605): Multiple-Deliverable Revenue Arrangements—a consensus
of the FASB Emerging Issues Task Force,” which establishes a selling price
hierarchy for determining the selling price of a deliverable, and eliminates the
residual method of allocation. This update requires the arrangement
consideration be allocated at the inception of the
PERFORMANCE
CAPITAL MANAGEMENT, LLC AND SUBSIDIARY
CONDENSED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
Note
3 - Summary of Significant Accounting Policies (continued)
arrangement
to all deliverables using the relative selling price method. This update is
effective prospectively for revenue arrangements entered into or materially
modified in fiscal years beginning on or after June 15, 2010. The Company is
currently analyzing the impact of this update, if any, to its consolidated
financial statements.
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 had no
cash balances that exceeded federally insured limits as of September 30, 2009.
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 is 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. Restricted cash is not considered to be a
cash equivalent.
Property and
Equipment
Property
and equipment are carried at cost and depreciation is computed over the
estimated useful lives of the assets ranging from 3 to 7 years. The Company uses
the straight-line method of depreciation. Property and equipment transferred
under the Reorganization Plan were transferred at net book value. Depreciation
is computed on the remaining useful life at the time of transfer.
The
related cost and accumulated depreciation of assets retired or otherwise
disposed of are removed from the accounts and the resultant gain or loss is
reflected in earnings. Maintenance and repairs are expensed currently while
major betterments are capitalized.
Long-term
assets of the Company are reviewed annually as to whether their carrying value
has become impaired. Management considers assets to be impaired if
the carrying value exceeds the future projected cash flows from related
operations. Management also re-evaluates the periods of amortization to
determine whether subsequent events and circumstances warrant revised estimates
of useful lives. As of September 30, 2009, management expects these assets, net
of an impairment write down of $255,000, to be fully recoverable as of September
30, 2009.
Leases and Leasehold
Improvements
PCM LLC
accounts for its leases under the provisions of Financial Accounting Standards
Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 840, “Leases”,
which require that leases be evaluated and classified as operating leases or
capital leases for financial reporting purposes. The Company’s office lease is
accounted for as an operating lease. The office lease contains certain
provisions for incentive payments, future rent increases, and periods in which
rent payments are reduced. The total amount of rental payments due over the
lease term is being charged to rent expense on a straight-line method over the
term of the lease. The difference between the rent expense recorded and the
amount paid is credited or charged to “Deferred rent obligation,” which is
included in “Accrued liabilities” in the accompanying Consolidated Balance
Sheets. In addition, leasehold improvements associated with this operating lease
are amortized over the lease term.
PERFORMANCE
CAPITAL MANAGEMENT, LLC AND SUBSIDIARY
CONDENSED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
Note
3 - Summary of Significant Accounting Policies (continued)
Revenue
Recognition
The
Company accounts for its investment in purchased loan portfolios utilizing
either the interest method or the cost recovery method with the provisions of
FASB ASC Topic 310, “Receivables”. Purchased loan portfolios consisted primarily
of non-performing credit card accounts. The interest method is being used by the
Company for the majority of portfolios purchased after December 31, 2006.
However, if future cash flows cannot be reasonably estimated for a particular
portfolio, the Company will use the cost recovery method. 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 consolidated balance sheets.
Accretable
yield represents the amount of income the Company expects to generate over the
remaining life of its existing investment in loan portfolios based on estimated
future cash flows. Total accretable yield is the difference between future
estimated collections and the current carrying value of a portfolio. All
estimated cash flows on portfolios where the cost basis has been fully recovered
are classified as zero basis cash flows.
Commencing
with portfolios acquired on or after January 1, 2007, in accordance with FASB
ASC Topic 310, discrete loan portfolio purchases during a quarter, with the
exception of those portfolios where the Company uses the cost recovery method,
are aggregated into pools based on common risk characteristics. The Company
accounts for each static pool as a unit for the economic life of the pool
(similar to one loan) for purposes of recognizing revenue from loan portfolios,
applying collections to the cost basis of loan portfolios, and providing for
loss or impairment.
Once a
static pool is established, the portfolios are permanently assigned to the pool.
The discount (i.e., the difference between the cost of each static pool and the
related aggregate contractual loan balance) is not recorded because the Company
expects to collect a relatively small percentage of each static pool’s
contractual loan balance. As a result, loan portfolios are recorded at cost at
the time of acquisition. The use of the interest method was reflected for the
first time in the Company’s report on Form 10-QSB for the period ended September
30, 2007.
The
interest method applies an effective interest rate, or internal rate of return
(“IRR”), to the cost basis of the pool, which is to remain unchanged throughout
the life of the pool unless there is an increase in subsequent expected cash
flows and is used for almost all loan portfolios purchased after December 31,
2006. The Company purchases loan portfolios usually in the late stages of the
post charged off collection cycle. The Company can therefore, based on common
characteristics, aggregate most purchases in a quarter into a common pool. Each
static pool retains its own identity. Revenue from purchased loan portfolios is
accrued based on a pool’s effective interest rate applied to the pool’s adjusted
cost basis. The cost basis of each pool is increased by revenue earned and
decreased by gross collections and impairments.
Collections
on each static pool are allocated to revenue and principal reduction based on
the estimated IRR, which is the rate of return that each static pool requires to
amortize the cost or carrying value of the pool to zero over its estimated life.
Each pool’s IRR is determined by estimating future cash flows, which are based
on historical collection data for pools with similar characteristics. Based on
historical cash collections, each pool is given an expected life of 60 months.
The actual life of each pool may vary, but will generally amortize in
approximately 60 months, with some pools amortizing sooner and some amortizing
later. Monthly cash flows greater than the recognized revenue will
reduce the carrying value of each static pool and monthly cash flows lower than
the recognized revenue will increase the carrying value of the static pool. Each
pool is reviewed at least quarterly and compared to historical trends to
determine whether each static pool is performing as expected. This comparison is
used to determine future estimated cash flows. Subsequent increases in cash
flows expected to be collected are generally recognized prospectively through an
upward adjustment of the pool’s effective IRR over its remaining life.
Subsequent decreases in expected cash flows do not change the effective IRR, but
are recognized as an impairment of the cost basis of the pool, and are reflected
in the
consolidated statements of operations as an impairment expense with a
corresponding valuation allowance
PERFORMANCE
CAPITAL MANAGEMENT, LLC AND SUBSIDIARY
CONDENSED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
Note
3 - Summary of Significant Accounting Policies (continued)
offsetting
the investment in purchased loan portfolios in the consolidated financial
statements. If the cash flow estimates increase subsequent to recording an
impairment, recovery of the previously recognized impairment is made prior to
any increases to the IRR.
The cost
recovery method prescribed by FASB ASC Topic 310 is used when collections on a
particular portfolio cannot be reasonably predicted. Under the cost recovery
method, no revenue is recognized until the Company has fully collected the cost
of the portfolio.
Prior to
January 1, 2007, revenue from all portfolios was accounted for using the cost
recovery method of accounting in accordance with FASB ASC Topic 310 and prior to
January 1, 2005, the Company accounted for its investment in purchased loan
portfolios using the cost recovery method. For the Company’s portfolios acquired
prior to January 1, 2007, the cost recovery method of accounting was and
continues to be used. Under the cost recovery method, 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 the purchased loan portfolios are then recognized as net
revenue.
The
Company provides a valuation allowance for an acquired loan portfolio when the
present value of expected future cash flows does not exceed the carrying value
of the portfolio. Over the life of the portfolio, the Company’s management will
continue to review the carrying values of each loan for impairment. If net
present value of expected future cash flows falls below the carrying value of
the related portfolio, the valuation allowance is adjusted
accordingly.
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. The Company continues collection
efforts for certain accounts in these portfolios right up until the point of
sale. Proceeds from sales of purchased loan portfolios are recorded as revenue
when received.
Under the
cost recovery method, when the Company sells all or a portion of a portfolio, to
the extent of remaining cost basis for the portfolio, it reduces the cost basis
of the portfolio by a pro rata percentage of the original portfolio cost. This
method of accounting also applies to portfolios purchased and then immediately
sold prior to being aggregated into a pool. Under the interest method, however,
when the Company sells all or a portion of a portfolio in a pool, it reduces the
cost basis of the pool by a pro rata percentage of the average portfolio cost in
the pool. The Company’s policy does not take into account whether the portion of
the portfolio being sold may be more or less valuable than the remaining
accounts that comprise the portfolio.
Income
Taxes
PCM LLC
is treated as a partnership for Federal income tax purposes and does not incur
Federal income taxes. Instead, its earnings and losses are included in the
personal returns of its members.
PCM LLC
is also treated as a partnership for state income tax purposes. The State of
California imposes an annual corporation filing fee and an annual limited
liability company fee.
The
operations of a limited liability company are generally not subject to income
taxes at the entity level, because its net income or net loss is distributed
directly to and reflected on the tax returns of its members. The net tax basis
of PCM LLC’s assets and liabilities is more than the reported amounts on the
financial statements by approximately $420,000 for the 2008 tax year, due
primarily to the timing differences of purchased loan portfolio loss reserves
and impairments.
PERFORMANCE
CAPITAL MANAGEMENT, LLC AND SUBSIDIARY
CONDENSED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
Note
3 - Summary of Significant Accounting Policies (continued)
Members’
Equity
Members’
equity includes voting LLC units held by members and non-voting LLC units held
by one economic interest owner. As of September 30, 2009, PCM LLC had 524,820
voting LLC units and 23,673 non-voting LLC units. Retired or 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 PCM
LLC members that PCM LLC has not been able to locate. In July 2009, three
individuals and one trust voluntarily surrendered a total of 746 LLC units to
the Company. In October 2009, one individual voluntarily surrendered
a total of 50 member units to the Company. The forfeited LLC units represented
each member’s entire respective investment interest in the Company.
Note
4 – Fair Value of Financial Instruments
The
Company adopted FASB ASC Topic 820, “Fair Value Measurements and Disclosures”,
as of January 1, 2008 as it applies to financial assets and liabilities, and as
of January 1, 2009 as it relates to non-financial assets and liabilities,
including goodwill and other indefinite-lived assets. The adoption of FASB ASC
Topic 820 did not have a material impact on the Company’s consolidated
statements of financial position, operations or cash flows.
The fair
values of the Company’s financial instruments reflect the amounts that would be
received to sell an asset or paid to transfer a liability in an orderly
transaction between market participants at the measurement date (i.e. the “exit
price”). The statement utilizes a fair value hierarchy that prioritizes the
inputs to valuation techniques used to measure fair value into three broad
levels. The following is a brief description of those three levels:
|
§
|
Level
1: Observable inputs such as quoted prices (unadjusted)
in active markets for identical assets or
liabilities.
|
|
§
|
Level
2: Inputs other than quoted prices that are observable
for the asset or liability, either directly or indirectly. These include
quoted prices for similar assets or liabilities in active markets and
quoted prices for identical or similar assets or liabilities in markets
that are not active.
|
|
§
|
Level
3: Unobservable inputs that reflect the reporting
entity’s own assumptions.
|
The
Company’s financial instruments consist of the following:
Financial Instruments With
Carrying Value Equal to Fair Value
|
§
|
Cash
and cash equivalents
|
|
§
|
Other
receivables
|
The fair
value of cash and cash equivalents and other receivables approximates their
respective carrying value.
Financial Instruments Not
Required to Be Carried at Fair Value
|
§
|
Investment
in loan portfolios, net
|
|
§
|
Long
term debt
|
The
Company has elected not to adopt the provisions of FASB ASC Topic 825,
“Financial Instruments”. Therefore, the above instruments are not required to be
recorded at their fair value. However, for disclosure purposes, the Company is
required to estimate the fair value of financial instruments when it is
practical to do so. Borrowings under the Company’s credit facility are carried
at historical cost, adjusted for additional borrowings less principal
repayments, which approximates fair value.
Historically,
the Company has measured the fair value of its loan portfolios based on the
discounted present value of the actual amount of money that the Company believed
a loan portfolio would ultimately produce utilizing entity-specific
measurements. Under FASB ASC Topic 820, the Company would have to attempt to
determine the fair market value of hundreds of loan portfolios on a recurring
basis. There is no active market for loan portfolios or
observable
PERFORMANCE
CAPITAL MANAGEMENT, LLC AND SUBSIDIARY
CONDENSED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
Note
4 – Fair Value of Financial Instruments (continued)
inputs
for the fair value estimation. Therefore, there is potential for a significant
variance in the actual fair value of a loan portfolio and the Company’s
estimate. Given this inherent uncertainty associated with measuring the fair
value of its loan portfolios under FASB ASC Topic 820 and the excessive costs
that would be incurred, the Company considers it not practical to measure the
fair value of its loan portfolios.
Note
5 - Purchased Loan Portfolios
The
Company acquires loan portfolios from federal and state banks and other sources.
These loans are acquired at a substantial discount from the actual outstanding
balance. The aggregate outstanding contractual loan balances at September 30,
2009 and December 31, 2008 totaled approximately $718 million and $739 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.
The
carrying amount of purchased loan portfolios included in the accompanying
consolidated balance sheets is as follows:
As
of
|
As
of
|
|||||||
Sept. 30,
2009
|
Dec. 31,
2008
|
|||||||
Unrecovered
cost balance, beginning of period
|
$ | 3,881,968 | $ | 3,582,983 | ||||
Valuation
allowance, beginning of period
|
(1,782,341 | ) | (360,341 | ) | ||||
Net
balance, beginning of period
|
2,099,627 | 3,222,642 | ||||||
Net
portfolio activity
|
(719,190 | ) | 298,985 | |||||
Subtotal
|
1,380,437 | 3,521,627 | ||||||
Recovery
(Provision) for portfolio impairment
|
150,000 | (1,422,000 | ) | |||||
Net
balance, end of period
|
$ | 1,530,437 | $ | 2,099,627 |
Purchases by
Quarter
The
following table summarizes portfolio purchases the Company made during the year
ended December 31, 2008 and each of the first, second and third
quarters of 2009, that were accounted for using the interest method, and the
respective purchase prices (in
thousands):
For
the year
ended
|
For
the three
months
ended
|
For
the three
months
ended
|
For
the three
months
ended
|
||||
December 31, 2008
|
March 31, 2009
|
June 30, 2009
|
Sept. 30,
2009
|
||||
Fair
Value Date of Purchase
|
$1.8
million
|
$0.1
million
|
$0.0
million
|
$0.0
million
|
|||
Forward
Flow Allocation (Accretable Yield )
|
$2.4
million
|
$0.1
million
|
$0.0
million
|
$0.0
million
|
PERFORMANCE
CAPITAL MANAGEMENT, LLC AND SUBSIDIARY
CONDENSED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
Note
5 - Purchased Loan Portfolios – (continued)
During
the nine months ended September 30, 2009, the Company purchased $59,500 of loan
portfolios. During the twelve months ended December 31, 2008, the Company
purchased $3.3 million of loan portfolios, $1.4 million of which was immediately
sold after being purchased.
Changes in Investment in
Purchased Loan Portfolios
As of
September 30, 2009, the portfolios accounted for using the cost recovery method
consisted of $172,000 in net book value of investment in loan
portfolios.
The
activity in the loan portfolios in the accompanying consolidated financial
statements is as follows:
Three
Months
Ended
|
Three
Months
Ended
|
Nine
Months
Ended
|
Nine
Months
Ended
|
|||||||||||||
Sept. 30,
2009
|
Sept. 30,
2008
|
Sept. 30,
2009
|
Sept. 30,
2008
|
|||||||||||||
Balance,
beginning of period
|
$ | 1,673,988 | $ | 3,063,357 | $ | 2,099,627 | $ | 3,222,642 | ||||||||
Purchased
loan portfolios
|
- | 371,541 | 59,500 | 3,257,610 | ||||||||||||
Collections
on loan portfolios
|
(1,262,929 | ) | (1,830,549 | ) | (4,288,206 | ) | (6,657,637 | ) | ||||||||
Sales
of loan portfolios
|
(28,920 | ) | (281,646 | ) | (38,281 | ) | (2,092,275 | ) | ||||||||
Revenue
recognized on collections
|
1,254,846 | 1,671,290 | 4,162,764 | 6,043,042 | ||||||||||||
Revenue
recognized on sales
|
8,860 | 215,765 | 13,344 | 700,767 | ||||||||||||
Cash
collection applied to principal
|
(115,408 | ) | (243,459 | ) | (628,311 | ) | (531,850 | ) | ||||||||
Provision
for portfolio impairment
|
- | (408,000 | ) | 150,000 | (1,384,000 | ) | ||||||||||
Balance,
end of period
|
$ | 1,530,437 | $ | 2,558,299 | $ | 1,530,437 | $ | 2,558,299 |
Projected Amortization of
Portfolios
As of
September 30, 2009, the Company had approximately $1.5 million in investment in
purchased loan portfolios, of which approximately $1.4 million is accounted for
using the interest method. This balance will be amortized based upon current
projections of cash collections in excess of revenue applied to the principal
balance. The estimated amortization of the investment in purchased loan
portfolios under the interest method is as follows:
For
the Years Ended
|
||||
September 30,
|
Amortization
|
|||
2010
|
$ | 641,000 | ||
2011
|
$ | 421,000 | ||
2012
|
$ | 237,000 | ||
2013
|
$ | 57,000 | ||
2014
|
$ | 2,000 | ||
$ | 1,358,000 |
PERFORMANCE
CAPITAL MANAGEMENT, LLC AND SUBSIDIARY
CONDENSED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
Note
5 - Purchased Loan Portfolios – (continued)
Accretable
Yield
Accretable
yield represents the amount of income recognized on purchased loan portfolios
under the interest method that the Company can expect to generate over the
remaining life of its existing pools of portfolios based on estimated future
cash flows as of September 30, 2009. Changes in accretable yield for the nine
months ended September 30, 2009 and the year ended December 31, 2008, were as
follows:
Nine
months Ended
|
Year
ended
|
|||||||
Sept. 30,
2009
|
Dec. 31,
2008
|
|||||||
Balance
at the be beginning of the period
|
$ | 2,369,000 | $ | 2,523,000 | ||||
Additions,
net
|
80,000 | 2,321,000 | ||||||
Income
recognized on portfolios, net
|
(1,162,000 | ) | (1,269,000 | ) | ||||
Recovery
of (Provision for) portfolio impairment and other
adjustments
|
913,000 | (1,206,000 | ) | |||||
Balance
at the end of the period
|
$ | 2,200,000 | $ | 2,369,000 |
The
valuation allowances related to the loan portfolios for the nine months ended
September 30, 2009 and the year ended December 31, 2008 are as
follows:
Nine
months ended
|
Year
ended
|
|||||||
Sept. 30,
2009
|
Dec. 31,
2008
|
|||||||
Valuation
allowance, beginning of period
|
$ | 1,782,341 | $ | 360,341 | ||||
(Decrease)
increase in valuation allowance due to portfolio
Impairment
|
(150,000 | ) | 1,422,000 | |||||
Valuation
allowance, end of period
|
$ | 1,632,341 | $ | 1,782,341 |
Note
6 - Property and Equipment
Property
and equipment is as follows:
As
of
|
As
of
|
|||||||
Sept. 30,
2009
|
Dec. 31,
2008
|
|||||||
Office
furniture and equipment
|
$ | 364,361 | $ | 432,139 | ||||
Computer
equipment
|
658,996 | 761,736 | ||||||
Leasehold
improvements
|
44,357 | 113,502 | ||||||
Totals
|
1,067,714 | 1,307,377 | ||||||
Less
accumulated depreciation
|
(1,032,321 | ) | (948,616 | ) | ||||
Property
and equipment, net
|
$ | 35,393 | $ | 358,761 |
Depreciation
expense for the quarters ended September 30, 2009 and 2008 amounted to
approximately $28,000 and $27,000, respectively. Depreciation for the nine
months ended September 30, 2009 and September 30, 2008 amounted to approximately
$84,000 and $80,000, respectively.
PERFORMANCE
CAPITAL MANAGEMENT, LLC AND SUBSIDIARY
CONDENSED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
Note
7 - Other Receivables
Other
receivables consist primarily of collections on portfolios received by
third-party collection agencies.
Note
8 – Notes Payable
In 2004,
the Company 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 June 2009. The agreement with
Varde was amended in June 2009 to extend the term of the agreement to June 2010.
All of the other terms and conditions in the agreement remained the
same.
PCM LLC’s
wholly-owned subsidiary Matterhorn owed approximately $0.9 and $2.2 million at
September 30, 2009 and December 31, 2008, respectively, under the facility in
connection with its purchase of certain charged-off loan portfolios. The total
amount borrowed under the facility was approximately $16.8 million at September
30, 2009 and December 31, 2008, respectively.
In June
2007, the Company entered into an amendment to the agreement with Varde that
extends the maturity date for principal and any other accrued but unpaid amounts
on each loan from up to two years to up to three years for portfolio purchases
using the credit facility made on or after the effective date of the amendment.
Each loan has minimum payment threshold points, a term of up to three years and
bears interest at the rate of 12% per annum. These obligations are
scheduled to be paid in full on dates ranging through September 2011, with the
approximate following principal payments due:
Twelve
Months Ending
|
|
September 30,
|
|
2010
|
$0.7
million
|
2011
|
$0.2
million
|
Once all
funds (including funds invested by the Company) invested in a portfolio financed
by Varde have been repaid (with interest) and all servicing fees 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, the parent operating company, has
guaranteed certain of Matterhorn's operational obligations under the loan
documents. The amount of remaining available credit under the facility was
approximately $8.2 million at September 30, 2009 and December 31, 2008,
respectively. The assets of Matterhorn that provide security for Varde's loans
were carried at a cost of approximately $1.2 million at September 30,
2009.
The
Company has failed to timely meet principal threshold points and payment
deadlines on several of its loan agreements with Varde, which constitutes a
default under the Master Loan Agreement. Varde has not, however, served the
Company with any notice of default and, thereby, has not initiated the default
procedures under the Master Loan Agreement. The following Varde loans have been
impacted by delayed collections:
|
•
|
A
Varde loan that was made in December 2005 was due to be paid in full in
December 2008. The original loan was for approximately $4.6 million. The
principal balance at October 31, 2009 was approximately $40,000. Varde has
informally agreed to extend the portfolio’s payment terms based on current
collection rates that are anticipated to pay off interest and principal
owed to Varde over the next several
months.
|
PERFORMANCE
CAPITAL MANAGEMENT, LLC AND SUBSIDIARY
CONDENSED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
Note
8 – Notes Payable (continued)
|
•
|
In
May 2009, Varde loaned $71,000 to the Company to pay for legal collections
costs for a portfolio. This loan was subsequently determined by
Varde to be due and the Company repaid the loan in the third quarter of
2009.
|
If Varde
were to exercise its rights under the default provisions of the Master Loan
Agreement, it could demand the immediate payment of all amounts due and recall
servicing of the portfolios from PCM LLC, which would have a material impact on
the financial condition of the Company.
Note
9 - Commitments and Contingencies
Lease
Commitments
On July
17, 2006, PCM LLC entered into an Office Lease Agreement to lease office space
in Buena Park, California. PCM LLC is using the leased premises as
its principal executive offices and operating facility.
The term
of the lease is 87 months and commenced on December 1, 2006, and will expire on
February 28, 2014. PCM LLC has an option to renew the lease for one additional
five-year term at the then prevailing "fair market rental rate" at the end of
the term.
The base
rent will increase on a yearly basis throughout the term. Future minimum lease
commitments under the Buena Park lease for the twelve months ended September 30,
will be:
Year
ending
|
Approximate
Annual
|
|||
Sept. 30, 2009
|
Lease Commitments
|
|||
2010
|
$ | 355,000 | ||
2011
|
$ | 355,000 | ||
2012
|
$ | 360,000 | ||
2013
|
$ | 364,000 | ||
2014
|
$ | 152,000 |
In addition to the base
rent, PCM LLC must pay its pro rata share of the increase in operating expenses,
property taxes and property insurance for the building above the total dollar
amount of operating expenses, property taxes and property insurance for the
2006 base calendar year.
The
building lease contains provisions for incentive payments, future rent
increases, or periods in which rent payments are reduced. As the Company
recognizes rent expense on a straight-line basis, the difference between the
amount paid and the amount charged to rent expense is recorded as a liability.
The amount of deferred rent liability at September 30, 2009 and December 31,
2008 was $175,000 and $196,000, respectively. Rental expense for the
three months ended September 30, 2009 and 2008 amounted to approximately
$80,000, respectively. Rental expense for the nine months ended
September 30, 2009 and 2008 amounted to approximately $241,000, respectively.
PCM LLC is obligated under a five-year equipment lease expiring in 2011 with
minimum payments of $3,900 per year.
Legal
Proceedings
On June
3, 2009, a class action lawsuit was filed against Performance Capital
Management, LLC, et. al., in Orange County Superior Court in Santa Ana,
California. Plaintiffs claim to be persons who were members of the
certified class in the Worley v. Storage USA case, Orange County Superior Court,
which was settled in 2008. The Company acquired the debt owed by the plaintiffs
to Storage USA in the latter half of 2004 and the first half of 2005 Plaintiffs
make broad, general assertions that the Company has violated the Consumer Credit
Reporting Agencies Act with respect to information about the plaintiffs that the
Company furnished to consumer reporting agencies. Plaintiffs seek injunctive
relief, actual and punitive damages to be determined by the court, attorney’s
fees and court costs. This lawsuit has been referred to legal counsel. The
merits of the case have not yet been
PERFORMANCE
CAPITAL MANAGEMENT, LLC AND SUBSIDIARY
CONDENSED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
Note
9 - Commitments and Contingencies (continued)
determined.
The Company expects to prevail in this lawsuit; however, as litigation is
inherently unpredictable, there can be no assurance in this regard, and,
therefore, an accrual has been made to provide for the Company’s potential
liability in this case. If the plaintiffs do prevail, the results could have a
material effect on the Company’s financial position.
On July
9, 2009, a class action lawsuit was filed against Performance Capital
Management, LLC in the United States District Court for the Eastern District of
New York. Plaintiff, on behalf of herself and a proposed class, makes
broad, general assertions that the Company violated the Fair Debt Collection
Practices Act, 15 U.S.C. Section 1692 et seq. with respect to its debt
collection practices. The plaintiffs seek statutory and punitive damages as well
as attorney’s fees and court costs. This lawsuit has been referred to legal
counsel. The merits of the case have not yet been determined. The Company
expects to prevail in this lawsuit; however, as litigation is inherently
unpredictable, there can be no assurance in this regard, and, therefore, an
accrual has been made to provide for the potential liability in this case. If
the plaintiffs do prevail, the results could have a material effect on the
Company’s financial position.
Note
10 - Earnings Per LLC Unit
Basic and
diluted earnings per LLC unit are calculated based on the weighted average
number of LLC units issued and outstanding, 548,990 and 549,571 for the nine
months ended September 30, 2009 and September 30, 2008,
respectively.
Note
11 - Employee Benefit Plans
The
Company has a defined contribution plan (the “Plan”) covering all eligible
full-time employees of PCM LLC (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
Forfeiture of Member
Units
In
October 2009, one individual voluntarily surrendered a total of 50 member units
to the Company. The forfeited member units represented the member’s entire
respective investment interest in the Company.
Dissolution of the
Company
On
November 9, 2009, the PCM LLC Board of Directors determined that it is in the
best interests of the Company and its members to wind down business operations.
As a result, the Board of Directors is reviewing the options available to the
Company and has directed management to prepare a plan of dissolution and
liquidation of the Company for the Board's consideration. In the meantime, the
Company is exploring opportunities to sell some Matterhorn and PCM LLC
portfolios to raise capital to pay outstanding obligations and fund ongoing
expenses. Even if a plan of dissolution and liquidation is approved by the Board
of Directors, the plan could not be implemented without the approval of members
holding a majority of the outstanding member units of PCM LLC. If a plan of
dissolution and liquidation is approved by the Board of Directors, it will be
described in detail in a proxy statement to be filed with the Securities and
Exchange Commission and sent to the PCM LLC members.
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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, financing and operating costs and still have a profit. We record our
portfolios at cost based on the purchase price. We reduce the cost bases of our
portfolios or pools: (i) based on collections under the cost recovery revenue
recognition method; and (ii) by amortizing over the life expectancy of the pool
under the interest revenue recognition method, which we are using for the
majority of our loan portfolios. The cost basis of a portfolio or pool is also
reduced by sales of all or a portion of a portfolio and by impairment of the net
realizable value of a portfolio.
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. At times we
also sell portions of portfolios, when reasonable, to provide cash for operating
expenses and to pay amounts owed to third parties. When we engage in sales of
portfolios, we continue collecting the accounts right up until the closing of
the sale.
Historically,
we have measured the fair value of our loan portfolios based on the discounted
present value of the actual amount of money that we believed a loan portfolio
would ultimately produce utilizing entity-specific measurements. The Financial
Accounting Standards Board (FASB), however, recently issued Financial Accounting
Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 820,
“Fair Value Measurements and Disclosures”, which provides guidance for measuring
fair value and requires certain disclosures. It does not require any new fair
value measurements, but rather applies to all other accounting pronouncements
that require or permit fair value measurements. FASB ASC Topic 820 emphasizes
that fair value is a market-based measurement, not an entity-specific
measurement. Therefore, a fair value measurement would need to be determined
based on the assumptions that market participants would use in pricing the asset
or liability.
Under
FASB ASC Topic 820, we would have to attempt to determine the fair market value
of hundreds of loan portfolios on a recurring basis. There is no active market
for loan portfolios or observable inputs for the fair value estimation.
Therefore, there is potential for a significant variance in the actual fair
value of a loan portfolio and our estimate. Given this inherent uncertainty
associated with measuring the fair value of our loan portfolios under FASB ASC
Topic 820 and the excessive costs that would be incurred, we consider it not
practical to measure the fair value of our loan portfolios.
We earn
revenues from collecting our portfolios and from selling our portfolios or
portions of our portfolios. Under the cost recovery method, we recognize gross
revenue when we collect an account and when we sell a portfolio or a portion of
it. Under the interest method of accounting, portfolio collection revenue is
accrued based on each pool’s effective interest rate applied to the pool’s
adjusted cost basis. The cost basis of each pool is increased by revenue earned
and decreased by gross collections and impairments.
On our
statement of operations, when using the cost recovery method, we reduce our
total revenues by the cost basis recovery of our portfolios to arrive at net
revenue. For collections revenue, we reduce the cost basis of the portfolio
dollar-for-dollar until we have completely recovered the cost basis of the
portfolio. Alternatively, the interest method applies an effective interest
rate, or internal rate of return (“IRR”), to the adjusted cost basis of the
pool, which remains unchanged throughout the life of the pool unless there is an
increase in subsequent expected cash flows. We use the interest method of
accounting for most of our loan portfolios purchased after December 31, 2006.
However, a portion of our portfolios are fully recovered and accounted for under
the cost recovery method. This is due to a steady decline in the number of
portfolio purchases since 2007.
Under the
cost recovery method, when we sell all or a portion of a portfolio, to the
extent of remaining cost basis for the portfolio, we reduce the cost basis of
the portfolio by a pro rata percentage of the original portfolio cost. This method
of accounting also applies to portfolios purchased and then immediately sold
prior to being aggregated into a pool. Under the interest method, however, when
we sell all or a portion of a portfolio in a pool, it reduces the cost basis of
the pool by a pro rata percentage of the average portfolio cost in the pool. 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.
For those
portfolios where we are using the cost recovery method of accounting, 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
generally collect our portfolios over periods of time ranging from three to
seven years, with the bulk of a portfolio's yield forecasted to come in the
first three years we collect it. Due to a lack of debtor liquidity,
however, we are experiencing movement of the timing of our portfolio collections
towards the far end of this range. If we succeed in collecting our
portfolios, we expect to recover the cost we paid for them, repay the loans used
to purchase them, pay our collection, financing and operating costs, and still
have excess cash.
Historically,
our statement of operations generally reported proportionately low net revenues
in periods that had substantial collections of recently purchased portfolios,
due to the “front-loaded” cost basis recovery associated with portfolios where
we used the cost basis recovery method. As a result, during times of rapid
growth in our portfolio purchases (and probably for several quarters
thereafter), our statement of operations showed a net loss. The use of the
interest method of accounting as of January 1, 2007, eliminates this
front-loading effect by amortizing the portfolio loan costs over the expected
life of the loan portfolio. Collections from older portfolios whose cost bases
have been completely recovered, along with the use of the interest method of
accounting, may contribute to our statement of operations reporting a lower net
loss or possibly net income, assuming our portfolios perform over time as
anticipated and we collect them in an efficient manner.
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, legal collections
costs and telephone, rent and professional expenses. These expenses also include
expenses associated with being a publicly reporting entity. 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. Interest and financing costs tend to decrease
as the amount we borrow decreases.
BASIS
OF PRESENTATION
We
present our financial statements based on February 4, 2002, the date we emerged
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 the six entities agreed to receive
ownership interests in the Company in exchange for their ownership interests in
the predecessor entities. Our consolidated financial statements include the
accounts of the Company, and its wholly-owned special purpose subsidiary
Matterhorn. All significant intercompany balances and transactions have been
eliminated.
The
Company’s consolidated financial statements have been prepared by management in
accordance with accounting principles generally accepted in the United States on
a “going concern” basis, which presumes that the Company will be able to realize
its assets and discharge its liabilities in the normal course of business for
the foreseeable future. We have experienced a steady decline in our revenues and
have now reached a point where we may not have sufficient capital resources to
cover our operating expenses over the next twelve months. These conditions raise
substantial doubt about the Company’s ability to continue as a going concern.
The consolidated financial statements do not include any adjustments relating to
the recoverability and classification of recorded asset amounts and the amount
and classification of liabilities that might be necessary should the Company be
unable to continue as a going concern. These adjustments could be material. See
the section entitled “Going Concern” in Note 2 to the Condensed Notes to the
Consolidated Financial Statements.
CRITICAL
ACCOUNTING POLICIES
Investments in
Portfolios
We
account for our investment in loan portfolios in accordance with the provisions
of FASB ASC Topic 310, using either the interest method or the cost recovery
method. FASB ASC Topic 310 addresses accounting for differences between initial
estimated cash flows expected to be collected from purchased loans, or “pools,”
and subsequent changes to those estimated cash flows. For portfolios purchased
on or before December 31, 2006, and for portfolios purchased after that date
where the amount and timing of future cash collections on a pool of loans are
not reasonably estimable, we account for such portfolios using the cost recovery
method. If the accounts in these portfolios have different risk characteristics
than those included in other portfolios acquired during the same quarter, or the
necessary information is not available to estimate future cash flows, then they
are not aggregated with other portfolios and they are accounted for under the
cost recovery method.
We
present investments in portfolios on our consolidated balance sheet at the lower
of cost, market, or estimated net realizable value. We reduce the cost basis of
a portfolio or a pool on a proportionate basis when we sell a portion of the
portfolio, and we treat amounts collected on a portfolio or pool as a reduction
to the carrying basis of the portfolio (i) on an individual portfolio basis
using the cost recovery method and (ii) over the life of the pool using the
interest method. When we present financial statements, we assess the estimated
net realizable value of our portfolios or pools each quarter on a
portfolio-by-portfolio basis under the cost recovery method or on a pooling
basis under the interest method, and we reduce the value of any portfolio or
pool 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. Our
calculation of net realizable value does not take into account the cost to
collect the future cash streams. Using the cost recovery method, once we write
down a particular portfolio we do not increase it in subsequent periods if our
plans and intentions or our assumptions change. Using the interest method, if
the cash flow estimates increase subsequent to recording an impairment, recovery
of the previously recognized impairment is made prior to any increases to the
IRR.
Under the
cost recovery method, 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. This method has the effect of “front-loading”
expenses, which 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.
For the
majority of portfolios purchased after December 31, 2006, we use the interest
method. The interest method applies an effective interest rate, or internal rate
of return (“IRR”) to the cost basis of the pool, which is to remain level, or
unchanged throughout the life of the pool unless there is an increase in
subsequent expected cash flows. Subsequent increases in cash flows expected to
be collected generally are recognized prospectively through an upward adjustment
of the pool’s effective interest rate over its remaining life. Subsequent
decreases in expected cash flows do not change the effective interest rate, but
are recognized as an impairment of the cost basis of the pool, and are reflected
in the consolidated statements of operations as a reduction in revenue with a
corresponding valuation allowance offsetting the investment in loan portfolios
in the consolidated statements of financial condition. If the cash flow
estimates increase subsequent to recording an impairment, recovery of the
previously recognized impairment is made prior to any increases to the IRR. Any
change to our estimates could be material to our financial
statements.
We
account for each static pool as a unit for the economic life of the pool
(similar to one loan) for recognition of revenue from loan portfolios, for
collections applied to the cost basis of loan portfolios and for provision for
loss or impairment. Revenue from loan portfolios is accrued based on each pool’s
effective interest rate applied to each pool’s adjusted cost basis. The cost
basis of each pool is increased by revenue earned and decreased by gross
collections and impairments.
Under the
cost recovery method, when we sell all or a portion of a portfolio, to the
extent of remaining cost basis for the portfolio, we reduce the cost basis of
the portfolio by a pro rata percentage of the original portfolio cost. This
method of accounting also applies to portfolios that are purchased and then
immediately sold prior to being aggregated into a pool. Under the interest
method, however, when we sell all or a portion of a portfolio in a pool, it
reduces the cost basis of the pool by a pro rata percentage of the average
portfolio cost in the pool. 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.
Credit
Facility
As
discussed in greater detail in the Liquidity and Capital Resources section of
this Report below, our credit facility with Varde Investment Partners, L.P.
(“Varde”) provides for up to $25 million of capital (counting each dollar loaned
on a cumulative basis) with a term ending in June 2010. The facility provides
for Varde to receive a residual interest in portfolio collections after all
funds invested in a portfolio have been repaid (with interest) and all servicing
fees for that portfolio have been paid. We do not record a liability for
contingent future payments of residual interests due to the distressed nature of
the portfolio assets and the lack of assurance that collections sufficient to
result in a liability will actually occur. When such payments actually occur, we
reflect them in our statement of operations as other financing
costs.
OPERATING
RESULTS
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.
Comparison
of Results for the Quarters Ended September 30, 2009 and 2008
The
following compares our results for the three months ended September 30, 2009, to
the three months ended September 30, 2008. We had a net loss of $315,000 in the
three months ended September 30, 2009, as compared to a net loss of $176,000 in
the three months ended September 30, 2008.
Revenue
The
following table summarizes the total cash proceeds we generated from operations
and the net revenues we recognized for the three months ended September 30, 2009
and 2008, respectively (see consolidated Statements of Operations and Note 5 to
the Condensed Notes to the Consolidated Financial Statements).
Cash
Received Three months ended September 30,
|
Net
Revenue Three months ended September 30,
|
||||||
2009
|
2008
|
2009
|
2008
|
||||
Collections
on Loan Portfolios*
|
$1.3
million
|
$1.8
million
|
$1.3
million
|
$1.7
million
|
|||
Sales
of Loan Portfolios
|
$0.0
million
|
$0.3
million
|
$0.0
million
|
$0.2
million
|
|||
Total
|
$1.3
million
|
$2.1
million
|
$1.3
million
|
$1.9
million
|
*
Excluding gross collections applied to principal (see Note 5 to the Condensed
Notes to the Consolidated Financial Statements).
The slow
down in the economy and our lack of capital to purchase new portfolios has
resulted in our total cash proceeds declining to a level that has forced us to
significantly contract our business operations and explore our options for
unwinding the Company. Our total cash proceeds from collections decreased by
$0.6 million and our total cash proceeds from sales of portfolios decreased by
$253,000 for the three months ended September 30, 2009, as compared to the three
months ended September 30, 2008.
Our total
net revenues decreased by $0.6 million to $1.3 million in the three months ended
September 30, 2009, as compared to $1.9 million in the three months ended
September 30, 2008. Portfolio collections provided 99.3% and 88.6% of our total
net revenues in the three months ended September 30, 2009 and 2008,
respectively. We generated $9,000 in revenues from portfolio sales in the three
months ended September 30, 2009, as compared to $216,000 in the three months
ended September 30, 2008. More significant was the $416,000 decrease
in net portfolio collections, which was $1.3 million and $1.7 million in the
three months ended September 30, 2009 and 2008, respectively. These significant
decreases in total cash proceeds and net revenues are the result of fewer
portfolio purchases, fewer portfolio sales and lower than projected performance
of our portfolios, as discussed in more detail in the Liquidity and Capital
Resources section of this Report below.
Our net
portfolio purchases of $0.4 million for the three months ended September 30,
2008 were substantially higher than during the three months ended September 30,
2009, where no portfolio purchases were made. We purchased $60,000 of
portfolios during the nine months ended September 30, 2009, but do not have any
plans to purchase additional portfolios in 2009. Instead, we used a
portion of our limited cash flows from operating activities, $252,000 in the
three months ended September 30 2009, to pay down principal and interest owed to
Varde. We have also applied funds otherwise due to us from Matterhorn towards
principal and interest payments to Varde, which has further depleted our cash
reserves.
In an
effort to offset declining portfolio purchases beginning in 2006 and to continue
to maximize use of our collection infrastructure, we began implementing other
collection strategies in 2007, such as serving as a third-party collection
agency, expanding use of the judicial process to collect specific accounts
determined to be suitable for such an approach, and improving the accuracy of
debtor contact information contained in our databases, but have not realized
significant gains from these strategies. Due to a lack of sufficient volume to
justify the costs associated with the third party collections program, in
September 2008 we decided to eliminate the program and focus our resources on
collecting our own and Matterhorn’s portfolios.
We have
scaled back our legal collections program in 2009 as compared to 2008 and expect
to continue to reduce our use of legal collections going forward. We utilize our
network of third party law firms on a commission basis in cases where we
determine that it is financially or strategically prudent to use legal
collections to collect an account. Legal collections tend to have longer time
horizons but are expected to contribute to an increase in returns over two to
five years. The method used to select accounts for legal collections is a
critical component of a successful legal collections program. If accounts that
have a higher likelihood of being collected using legal process are accurately
selected, overall collection efficiency should increase. We do not have a set
policy regarding when to initiate legal process. Given the varying nature of
each case, we exercise our business judgment following an analysis of accounts
using computer-based guidance to determine when we believe using legal process
is appropriate (i.e., where a debtor has sufficient assets to repay the
indebtedness and has, to date, been unwilling to pay). Once a judgment is
obtained, the primary methods for collecting on the judgment are liens on
property and garnishment, both of which have a long time horizon for
collection.
With all
of our collections efforts, we are keenly aware that claims based on the Fair
Debt Collection Practices Act (“FDCPA”), the Consumer Credit Reporting Agencies
Act and comparable state statutes may result in lawsuits, including class action
lawsuits, which could be material to the Company due to the remedies available
under these statutes. Two such lawsuits have been filed against the Company and
are discussed in more detail in Note 9 to the Condensed Notes to the
Consolidated Financial Statements.
We had a
net loss in the third quarter of 2009 of $315,000 as compared to a net loss of
$176,000 in the third quarter of 2008. The period-to-period difference in net
loss reflected on our consolidated Statements of Operations was due to $1.3
million total net revenues in the third quarter of 2009 as compared to $1.9
million in the third quarter of 2008, no portfolio impairment charge in the
third quarter of 2009, as compared to an impairment charge of $408,000 in the
third quarter of 2008, and an impairment loss of $255,000 to write
down property and equipment to their fair value at September 30,
2009.
Members’
equity decreased by $315,000 in the third quarter of 2009 from $783,000 at June
30, 2009. The decrease in members’ equity is attributed to the net loss of
$315,000 that we incurred in the third quarter of 2009.
Operating
Expenses
Our total
operating costs and expenses decreased to $1.5 million in the three months ended
September 30, 2009 from $1.9 million in three months ended September 30, 2009, a
$0.4 million decrease. This decrease was due to: a $258,000 decrease
in salaries and benefits from significantly reducing staff and implementing a
reduced pay structure for remaining collectors and administrative personnel, as
well as reducing officer and director compensation; a general reduction in the
scope of our business activities, offset by an impairment charge to fixed assets
of $255,000; and a $408,000 decrease in the provision for portfolio impairment
charge in the third quarter of 2009 as compared to the third quarter of 2008. We
expect our operating expenses to decrease as we continue to scale down our
business operations.
Impairments
arise when actual portfolio collections are generated at a slower rate than
forecasted using the interest method. If actual portfolio collections are
generated at a faster rate than originally forecasted, a reduction in our net
impairment provision occurs. The current economic conditions have made it
challenging to estimate when a portfolio will generate collections revenue and,
therefore, we anticipate that we may periodically record impairment charges. Due
to such fluctuations in the economy, the degree to which such impairments impact
our financial statements will continue to vary from
quarter-to-quarter.
We view
our material fixed costs as: payroll for administrative staff; rent; computer
maintenance; professional services; and insurance.
Late in
the third quarter of 2009 we made further substantial cuts to our collection and
administrative staff. As of March 1, 2009, we had a total of 53
full-time employees and 4 part-time employees, and as of November 1, 2009, we
had a total of 30 full-time employees and 4 part-time employees. The results of
the latest cuts will be recognized in the fourth quarter of 2009. In
the event we do not have the infrastructure to manage the collections of
accounts in-house, we will outsource collections to third party collection
agencies. Our purchases of portfolios in 2009 have only been $60,000 due to a
lack of capital and we do not anticipate making any further purchases in 2009
for the same reason.
Our
interest expense and other financing costs were $53,000 and $116,000 in the
three months ended September 30, 2009 and 2008, respectively, a $63,000
decrease. The decrease was due primarily to paying down most of the debt owed to
Varde. The Varde debt decreased to $868,000 at September 30, 2009, as compared
to $2.9 million at September 30, 2008. We have no current plans to use the Varde
facility to purchase portfolios in the remainder of 2009 due to our limited cash
reserves.
Comparison
of Results for the Nine Months Ended September 30, 2009 and 2008
The
following compares our results for the nine months ended September 30, 2009, to
the nine months ended September 30, 2008. We had a net loss of $7,000 in the
nine months ended September 30, 2009, as compared to a net loss of $104,000 in
the nine months ended September 30, 2008.
Revenue
The
following table summarizes the total cash proceeds we generated from operations
and the net revenues we recognized for the nine months ended September 30, 2009
and 2008, respectively (see consolidated Statements of Operations and Note 5 to
the Condensed Notes to the Consolidated Financial Statements).
Cash
Received
Nine
months ended Sept. 30,
|
Net
Revenue
Nine
months ended Sept. 30,
|
||||||
2009
|
2008
|
2009
|
2008
|
||||
Collections
on Loan Portfolios*
|
$4.3
million
|
$6.7
million
|
$4.2
million
|
$6.0
million
|
|||
Sales
of Loan Portfolios
|
$0.0
million
|
$2.1
million
|
$0.0
million
|
$0.7
million
|
|||
Total
|
$4.3
million
|
$8.8
million
|
$4.2
million
|
$6.7
million
|
*
Excluding gross collections applied to principal (see Note 5 to the Condensed
Notes to the Consolidated Financial Statements).
For the
nine months ended September 30, 2009, as compared to the nine months ended
September 30, 2008, our total cash proceeds from collections decreased by $2.4
million and our total cash proceeds from sales of portfolios decreased by $2.1
million. As discussed above in the quarter-to-quarter comparison, our cash
collections from portfolios are decreasing significantly as we experience the
effects of fewer portfolio purchases and lower than projected performance of our
portfolios due in large part to a significant slowdown in the economy. If a
portfolio’s cash collections come in at slower rate than the loan repayments due
to Varde, the cash is immediately used to pay Varde instead of being reinvested
in new portfolio purchases, further reducing the Company’s cash reserves. As a
result, we are exploring options to unwind the Company’s business operations
(discussed in more detail below in the section of this Report entitled Liquidity
and Capital Resources).
Our total
net revenues decreased by $2.6 million to $4.2 million in the nine months ended
September 30, 2009, as compared to $6.7 million in the nine months ended
September 30, 2008. The decrease in total net revenues was due to significant
sales of portfolios in the first nine months of 2008 as compared to the first
nine months of 2009 and collections revenue decreasing due to a continuing
decline in portfolio purchases and a lower level of debtor liquidity. Portfolio
collections provided 99.7% and 89.6% of our total net revenues in the nine
months ended September 30, 2009 and 2008, respectively. We had net revenues of
$13,000 from portfolio sales in the nine months ended September 30, 2009, as
compared to $701,000 in the nine months ended September 30, 2008, a $687,000
decrease. Net revenues from portfolio collections decreased by $1.9 million,
with $6.0 million recognized in the nine months ended September 30, 2008 as
compared to $4.2 million recognized in the nine months ended September 30,
2009.
Our net
portfolio purchases of $60,000 in the first nine months of 2009 were
substantially lower than our net portfolio purchases of $3.3 million (net of the
$1.4 million portion that was immediately sold) in the first nine months of
2008. No further purchases are anticipated for the remainder of
2009.
We had a
net loss in the first nine months of 2009 of $7,000, as compared to a net loss
of $104,000 in the nine months ended September 30, 2008, a $97,000 increase in
net income. The lower period-to-period net loss in the first nine months of 2009
as compared to the same period in 2008 was due to:
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·
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a
$150,000 recovery of portfolio impairment, as compared to an impairment
charge of $1.4 million in the first nine months of 2008, resulting
from collections being generated at a faster rate than forecasted at the
time the original impairment provisions were
charged;
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·
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a
significant decrease in our operating costs and expenses as we continue to
scale down our business operations;
and
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·
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lower
interest and other financing costs in the first nine months of 2009 as
compared to the first nine months of 2008 due to no portfolio purchases
using the Varde facility and paying off amounts due to Varde in the first
nine months of 2009.
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In
addition, a greater number of older loan portfolios, accounted for using the
cost recovery method, had a zero cost basis in the first three quarters of 2009
as compared to the first three quarters of 2008, with all collections from these
portfolios being recorded as income.
During
the first nine months of 2009, we generated positive cash flow from operating
activities of $1.0 million, enabling us to pay amounts due to Varde. Members’
equity, however, decreased by $7,000 in first nine months of 2009 from $476,000
at December 31, 2008. This decrease in members’ equity is attributed to a net
loss of $7,000 that we incurred in the first nine months of
2009.
Operating
Expenses
Our total
operating costs and expenses decreased to $4.0 million in the nine months ended
September 30, 2009 from $6.5 million in nine months ended September 30, 2008, a
$2.5 million decrease, due to: a $925,000 decrease in salaries and
benefits resulting from a significant reduction in staff and implementation of a
reduced pay structure for remaining collectors and administrative personnel, as
well as a reduction in officer and director compensation; a $314,000 decrease in
general and administrative expenses, primarily resulting from a decreased
emphasis on legal collections and a general reduction in our business
operations, offset by an impairment charge to fixed assets of $255,000; and a
$1.5 million decrease in the provision for portfolio impairment due to a
$150,000 recovery of impairment charge in the first three quarters of 2009, as
compared to a portfolio impairment charge of $1.4 million in the first
three quarters of 2008. We expect our operating expenses to decrease as we
continue to scale down our business operations.
Our
interest expense and other financing costs were $200,000 and $335,000 in the
nine months ended September 30, 2009 and 2008, respectively, a $135,000
decrease. The decrease was due primarily to paying down debt owed to
Varde. The Varde debt decreased to $868,000 at September 30, 2009 as
compared to $2.9 million at September 30, 2008.
LIQUIDITY
AND CAPITAL RESOURCES
Cash and
cash equivalents, including restricted cash, decreased by approximately 50% to
$375,000 at September 30, 2009, from $758,000 at December 31, 2008, a $382,000
decrease. Our primary sources of cash are cash flows from operations and
borrowings. Recently, cash has been used for repayments of borrowings, purchases
of property and equipment, legal collections, public reporting company expenses
and general working capital. During the nine months ended September 30, 2009,
our portfolio collections and sales generated $4.3 million of cash, we borrowed
$117,000, and we used $3.7 million for operating and other activities, $60,000
for purchases of new portfolios, and $1.5 million to repay loans, thus spending
more cash than we generated.
Our
portfolios provide our principal long-term source of liquidity. Our purchase of
portfolios is limited by the amount of cash reserves and borrowed funds we have
available and the availability of reasonably priced portfolios. Cash generated
from operations depends upon our ability to efficiently collect on the loan
portfolios. Over the life of a portfolio, our goal is to convert the portfolio
to cash in an amount that equals or exceeds the cost basis of the portfolio.
After the cost basis has been recovered, each dollar collected, if any, is
recorded as income. Historically, we have collected two to two and a half times
a portfolio’s purchase price over three to seven years. Due to a lack of debtor
liquidity, however, we are experiencing movement of the timing of our portfolio
collections towards the far end of this range, which has in a few cases impacted
our ability to timely repay amounts owed to Varde. Many factors, including the
state of the economy, paying too much for a portfolio, the liquidity of debtors,
and our ability to retain qualified collectors, may impact our ability to
collect an amount of cash necessary to timely recover the cost we pay for a
portfolio, repay funds borrowed to purchase the portfolio, pay our collection,
financing and operating costs and still have a profit. Fluctuations in these
factors have caused a negative impact on our business and materially impacted
our expected future cash flows.
While
prices of loan portfolios have fallen recently, our low cash reserves have
prevented us from capitalizing on the availability of lower cost portfolios. The
drop in prices has also made it more difficult for us to sell portfolios at
reasonable prices. In addition, the downturn in the economy appears to have
resulted in a decrease in debtor liquidity, which generally has the effect of
reducing the number of collectable accounts and increasing the time and
resources it takes to collect amounts owed. With loan terms of three years,
longer collection timelines have forced us to use our limited cash proceeds to
pay amounts owed to Varde instead of using it to acquire new portfolios. In
addition, Varde is applying amounts owed to us from Matterhorn towards repayment
of its loans. The result is that we are expending cash much faster than we are
generating income.
Based
upon current cash and cash equivalent balances and planned spending rates for
the remainder of 2009, we believe that we do not have adequate cash and cash
equivalents on hand to support our business operations over the next twelve
months. These conditions raise substantial doubt about the Company’s ability to
continue as a going concern as discussed below under the section entitled “Going
Concern.”
Our
limited cash reserves are being used to repay Varde, pay operating expenses and
collect our existing portfolios as efficiently as possible. No
portfolio purchases are anticipated for the rest of 2009. We will
continue our efforts to reduce variable costs associated with collections in
addition to selling portfolios to generate additional income to pay operating
expenses and amounts owing to third parties.
In the
nine months ending September 30, 2009, our total net revenues of $4.2 million
were about level with our total operating, interest and other expenses of $4.2
million, resulting in a net loss of $7,000. Without the $150,000 recovery of
portfolio impairment charge, however, our operating and other expenses would be
$4.3 million and our net loss would increase commensurately.
Beginning
in 2007, we began instituting cost-cutting and capital preservation measures in
an effort to address our lower revenues, including foregoing payment of regular
distributions to our unit holders, purchasing portfolios with borrowed funds,
increasing portfolio sales, reducing our legal collections, and cutting salaries
and benefits through a reduction in administrative and collection personnel. Our
goal in 2009 has been to achieve at least break-even results.
In 2008,
we reduced our collection and administrative staff in an effort to align our
operating expenses to our lower collections revenues. As of November 1, 2009, we
had a total of 30 full-time employees and 4 part-time employees. As of March 1,
2009, we had a total of 53 full-time employees and 4 part-time employees. Our
reduction in collections staff, however, must take into consideration the
significant upfront investment in recruiting and training collection personnel
and the need to retain enough collectors to effectively service our portfolios.
We may increase our use of third-party collection agencies to service portions
of our loan portfolios as we reduce our collection staff. We will continue to
sell portfolios or portions of portfolios, if possible, if we believe portfolio
performance is not up to our expectations and/or we require additional capital
to fund our operations.
We have
not been able to use the Varde credit facility in 2009 due to an inability to
contribute our percentage of the loan amount towards the acquisition of a
portfolio. During 2008, we purchased $1.9 million of portfolios (net of the $1.4
portion that was immediately sold) using the Varde credit facility. In the first
quarter of 2009, we purchased $60,000 of new portfolios using our own funds. Our
assessment of market conditions, as well as our ability to find suitable
financing, will continue to dictate whether and when we purchase portfolios. We
do not anticipate making portfolio purchases, either financed or on our own, in
the remainder of 2009 due to a lack of capital.
Varde Credit
Facility
On July
13, 2004, effective June 10, 2004, we entered into a definitive Master Loan
Agreement with Varde, a well-known participant in the debt collection industry,
to augment our portfolio purchasing capacity using capital provided by Varde.
The agreement provides for up to $25 million of capital (counting each dollar
loaned on a cumulative basis) over a five-year term ending in June 2009. The
agreement was amended in June 2009 to extend the term of the agreement through
June 2010. All of the other terms and conditions in the agreement remained the
same.
Varde is
not under any obligation to make a loan to us if it does not approve of the
portfolio(s) we propose to acquire and the terms of the acquisition, but it has
the right to participate in any acquisition of a portfolio that we decide to
purchase that is in excess of $500,000, pursuant to a right of first
refusal.
We must
agree with Varde on the terms for each specific advance under the credit
facility, including such material terms as: (a) the relative sizes of our
participation and Varde's in supplying the purchase price; (b) the amount of
servicing fees we will receive for collecting the portfolio; (c) the rates of
return on the funds advanced by Varde and us; and (d) the split of any residual
collections after repayment of the purchase price (plus interest) to Varde
and us and payment of servicing fees.
We will
never have outstanding indebtedness of the full $25 million at any one time due
to the cumulative nature of the credit facility. We have created Matterhorn, a
wholly-owned subsidiary, to serve as the entity that will purchase portfolios
under the loan agreement with Varde. Varde has a first priority security
interest in all the assets of Matterhorn securing repayment of its loans and
payment of its interest in residual collections. Performance Capital Management,
LLC has entered into a Servicing Agreement with Matterhorn as part of the
agreement with Varde, and Varde has a security interest in Matterhorn's rights
to proceeds under the Servicing Agreement. Under the Servicing Agreement,
Performance Capital Management collects the portfolios purchased by Matterhorn
in exchange for a fee that is agreed upon prior to the funding of each
individual financing by Varde. Performance Capital Management, LLC also
guarantees certain of Matterhorn's operational obligations under the loan
documents.
Varde may
exercise its rights under its various security interests and the guaranty if an
event of default occurs. These rights include demanding the immediate payment of
all amounts due to Varde, as well as liquidating the collateral. A failure to
make payments when due, if not cured within five days, is an event of default.
Other events of default include:
• Material
breaches of representations and warranties;
• Uncured
breaches of agreements having a material adverse effect;
• Bankruptcy
or insolvency of Performance Capital Management, LLC or Matterhorn;
• Fraudulent
conveyances;
• Defaults
in other debt or debt-related agreements;
• Failure
to pay judgments when due;
• Material
loss or damage to, or unauthorized transfer of, the collateral;
• Change
in control of Performance Capital Management;
• Termination
of Performance Capital Management as the Servicer under the Servicing Agreement;
and
• Breach
of Varde's right of first refusal to finance portfolio
acquisitions.
At
September 30, 2009, Matterhorn owed $0.9 million under the facility in
connection with purchases of certain charged-off loan portfolios. The assets of
Matterhorn that provide security for Varde's loans were carried at a cost of
$1.2 million at September 30, 2009. The loans have minimum payment threshold
points with terms of up to three years and bear interest at the rate of 12% per
annum. These obligations are scheduled to be repaid in full on dates ranging
through September 2011. Once all funds (including those invested by us) invested
in a portfolio financed by Varde have been repaid (with interest) and all
servicing fees 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 September 30, 2009 was $8.2
million. Matterhorn has borrowed a total of $16.8 million, with $0.9 million
outstanding at September 30, 2009.
Due
principally to the state of the economy, we are finding that the time it takes
us to collect the Matterhorn portfolios is extending beyond three years,
resulting in lower collections performance than required by the Varde loan
agreements. As a result, the Company has failed to timely meet principal
threshold points and payment deadlines on several of its loan agreements with
Varde, which constitutes a default under the Master Loan Agreement. Varde has
not, however, served the Company with any notice of default and, thereby, has
not initiated the default procedures under the Master Loan Agreement. The
following Varde loans have been impacted by delayed collections:
The
Company has failed to timely meet principal threshold points and payment
deadlines on several of its loan agreements with Varde, which constitutes a
default under the Master Loan Agreement. Varde has not, however, served the
Company with any notice of default and, thereby, has not initiated the default
procedures under the Master Loan Agreement. The following Varde loans have been
impacted by delayed collections:
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•
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A
Varde loan that was made in December 2005 was due to be paid in full in
December 2008. The original loan was for approximately $4.6 million. The
principal balance at October 31, 2009 was approximately $40,000. Varde has
informally agreed to extend the portfolio’s payment terms based on current
collection rates that are anticipated to pay off interest and principal
owed to Varde over the next several
months.
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•
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In
May 2009, Varde loaned $71,000 to the Company to pay for legal collections
costs for a portfolio. This loan was subsequently determined by
Varde to be due and the Company has repaid the loan in the third quarter
of 2009.
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If Varde
were to exercise its rights under the default provisions of the Master Loan
Agreement, it could demand the immediate payment of all amounts due and recall
servicing of the portfolios from Performance Capital Management, LLC, which
would have a material impact on our financial condition and ability to continue
operating.
Going
Concern
On
November 9, 2009, our Board of Directors determined that it is in the best
interests of the Company and its members to wind down business operations. As a
result, the Board is reviewing the options available to the Company and has
directed management to prepare a plan of dissolution and liquidation of the
Company for the Board's consideration. In the meantime, the Company is exploring
opportunities to sell some portfolios to raise capital to pay outstanding
obligations and fund ongoing expenses. Even if a plan of dissolution and
liquidation is approved by the Board, the plan could not be implemented without
the approval of members holding a majority of the outstanding member units of
the Company. As a result, the Company has presented its financial statements on
a going concern basis.
Should a
plan of dissolution and liquidation of the Company be approved by the Board and
subsequently approved by the required vote of members, the Company would then
change its basis of accounting from the going concern basis to the liquidation
basis. See Note 2 to the Condensed Notes to the Consolidated Financial
Statements, incorporated herein by reference, for further information on the
basis of presentation.
Capital
Expenditures
Our most
significant capital assets are our dialer and our telephone switch. We have paid
for our new dialer in full and have no significant capital asset expenditures
planned at the time of this filing.
RECENTLY
ISSUED ACCOUNTING PRONOUNCEMENTS
See Note
3 to the Condensed Notes to the Consolidated Financial Statements in this
Report.
ITEM 4T. CONTROLS AND PROCEDURES
As of the
end of the period covered by this report, we carried out an evaluation, under
the supervision and with the participation of management, including our Chief
Operations Officer (Principal Executive Officer) and our Accounting Manager
(Principal Financial Officer), of the effectiveness of our disclosure controls
and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under
the Securities Exchange Act of 1934 (the “Exchange Act”)). In designing and
evaluating disclosure controls and procedures, our management recognizes 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 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 September 30,
2009, to provide reasonable assurance that material information required to be
disclosed in our periodic reports filed with the SEC is recorded, processed,
summarized and reported within the time periods specified in the SEC’s rules and
forms.
There has
been no change in our internal controls over financial reporting (as defined in
Rules 13a-15(f) and 15d-15(f) of the Exchange Act) that occurred during the
quarter ended September 30, 2009 that has materially affected, or is reasonably
likely to materially affect, our internal controls over financial
reporting.
PART
II – OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
See Note
9 to the Condensed Notes to the Consolidated Financial Statements, incorporated
herein by reference, for information related to the following legal
matters.
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Lesley
Jennings and Edward Ordonez, Jr. v. Performance Capital Management, Inc.,
et. al.; and
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Victoria
Desimone v. Performance Capital Management,
LLC.
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ITEM 2. MEMBER FORFEITURES OF
SECURITIES
In July
2009, three individuals and one trust voluntarily surrendered a total of
746 member units to the Company. In October 2009, one member
voluntarily surrendered a total of 50 member units to the
Company. The forfeited member units represented each member’s entire
respective investment interest in the Company.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
The
Company has failed to timely meet principal threshold points and payment
deadlines on several of its loan agreements with Varde, which constitutes a
default under the Master Loan Agreement. Varde has not, however, served the
Company with any notice of default and, thereby, has not initiated the default
procedures under the Master Loan Agreement. See Note 8 to the Condensed Notes to
the Consolidated Financial Statements for additional information, which is
incorporated herein by reference.
ITEM 5. OTHER INFORMATION
On
November 9, 2009, our Board of Directors determined that it is in the best
interests of the Company and its members to wind down business operations. As a
result, the Board is reviewing the options available to the Company and has
directed management to prepare a plan of dissolution and liquidation of the
Company for the Board's consideration. In the meantime, the Company is exploring
opportunities to sell some Matterhorn and the Company's portfolios to raise
capital to pay outstanding obligations and fund ongoing expenses. Even if a plan
of dissolution and liquidation is approved by the Board, the plan could not be
implemented without the approval of members holding a majority of the
outstanding member units of the Company. If a plan of dissolution and
liquidation is approved by the Board, it will be described in detail in a proxy
statement to be filed with the Securities and Exchange Commission and sent to
the Company's members.
ITEM 6. EXHIBITS
An
Exhibit Index precedes the exhibits following the signature page and is
incorporated herein by reference.
SIGNATURES
Pursuant
to the requirements of the Securities Exchange Act of 1934, the registrant has
duly caused this report to be signed on its behalf by the undersigned thereunto
duly authorized.
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PERFORMANCE
CAPITAL MANAGEMENT, LLC
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November 20, 2009
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By:
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/s/ David J. Caldwell
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(Date)
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Name:
David J. Caldwell
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Its:
Chief Operations Officer
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EXHIBIT INDEX
Exhibit Number
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Description
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3.1
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Performance
Capital Management, LLC Articles of Organization (1)
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3.2
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Operating
Agreement for Performance Capital Management, LLC (1)
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3.3
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First
Amendment to Operating Agreement for Performance Capital Management, LLC
(1)
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3.4
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Second
Amendment to Operating Agreement for Performance Capital Management, LLC
(2)
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3.5
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Third
Amendment to Operating Agreement for Performance Capital Management, LLC
(3)
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Certification
of Principal Executive Officer pursuant to Rule 13a–14(a) of the
Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002
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Certification
of Principal Financial Officer pursuant to Rule 13a–14(a) of the
Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002
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Certifications
of Principal Executive Officer and Principal Financial Officer pursuant to
18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
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(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 August 14, 2006 as an exhibit to our report on Form 10-QSB for the period
ended June 30, 2006, and incorporated herein by reference.
32