-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, P04kSmBMMrysa74y13yYh7cvtn8b8EgsResMff+HEg9O/q3MYzLXx10d466PGvQm Ce6cpF4qp9OKOtiYt7AXTA== 0001140361-06-007326.txt : 20060515 0001140361-06-007326.hdr.sgml : 20060515 20060512193813 ACCESSION NUMBER: 0001140361-06-007326 CONFORMED SUBMISSION TYPE: 10QSB PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 20060331 FILED AS OF DATE: 20060515 DATE AS OF CHANGE: 20060512 FILER: COMPANY DATA: COMPANY CONFORMED NAME: PERFORMANCE CAPITAL MANAGEMENT LLC CENTRAL INDEX KEY: 0001221170 STANDARD INDUSTRIAL CLASSIFICATION: FINANCE SERVICES [6199] IRS NUMBER: 030375751 STATE OF INCORPORATION: CA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10QSB SEC ACT: 1934 Act SEC FILE NUMBER: 000-50235 FILM NUMBER: 06836719 MAIL ADDRESS: STREET 1: 222 SOUTH HARBOR BLVD SUITE 400 CITY: ANAHELM STATE: CA ZIP: 92805 10QSB 1 form10qsb.txt PERFORMANCE CAPITAL MANAGEMENT 10-QSB 3-31-2006 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-QSB [X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended March 31, 2006 ------------------ [ ] TRANSITION REPORT UNDER SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from__________ to __________ Commission file number: 0 - 50235 --------------- PERFORMANCE CAPITAL MANAGEMENT, LLC -------------------------------------------------------------------- (Exact name of small business issuer as specified in its charter) California 03-0375751 ------------------------------ --------------------------------- State or other jurisdiction of (IRS Employer Identification No.) incorporation or organization 222 South Harbor Blvd., Suite 400, Anaheim, California 92805 -------------------------------------------------------------------- (Address of principal executive offices) (714) 502-3780 --------------------------- (Issuer's telephone number) -------------------------------------------------------------------------- (Former name, former address and former fiscal year, if changed since last report.) Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter period that the issuer was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes [ ] No [X] Check whether the issuer has filed documents and reports required to be filed by Section 12, 13 or 15(d) of the Exchange Act after the distribution of securities under a plan confirmed by a court. Yes [X] No [ ] As of May 1, 2006, the issuer had 564,125 LLC Units issued and outstanding. Transitional Small Business Disclosure Format (Check one): Yes [ ] No [X]
PERFORMANCE CAPITAL MANAGEMENT, LLC INDEX TO QUARTERLY REPORT ON FORM 10-QSB FOR THE QUARTER ENDED MARCH 31, 2006 PART I - FINANCIAL INFORMATION PAGE Item 1 Consolidated Financial Statements Review Report of Independent Registered Public Accounting Firm. . . . . . . . . . . . . . . . . . 1 Consolidated Balance Sheets as of March 31, 2006 (unaudited) and December 31, 2005 (audited). . . 2 Consolidated Statements of Operations for the quarters ended March 31, 2006 and 2005 (unaudited). 3 Consolidated Statements of Members' Equity for the quarters ended March 31, 2006 and 2005 (unaudited) and the year ended December 31, 2005 (audited) . . . . . . . . . . . . . . . . . 4 Consolidated Statements of Cash Flows for the quarters ended March 31, 2006 and 2005 (unaudited). 5 Condensed Notes to the Consolidated Financial Statements (unaudited). . . . . . . . . . . . . . . 6 Item 2 Management's Discussion and Analysis of Financial Condition and Results of Operations . . . . . . 16 Item 3 Controls and Procedures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23 PART II - OTHER INFORMATION Item 2 Changes in Securities and Small Business Issuer Purchases of Equity Securities. . . . . . . . . . 24 Item 6 Exhibits. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24 SIGNATURES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
PART I - FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS [MOORE STEPHENS WURTH FRAZER AND TORBET, LLP LETTERHEAD] REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM - ------------------------------------------------------- To the Board of Directors Performance Capital Management, LLC Anaheim, California We have reviewed the accompanying consolidated balance sheet of Performance Capital Management, LLC as of March 31, 2006, and the related consolidated statements of operations, members' equity and cash flows for the quarters ended March 31, 2006 and 2005. All information included in these consolidated financial statements is the representation of the management of Performance Capital Management, LLC. We conducted our review in accordance with the standards of the Public Company Accounting Oversight Board (United States). A review of interim financial information consists principally of applying analytical procedures and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with the standards of the Public Company Accounting Oversight Board, the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion. Based on our reviews, we are not aware of any material modifications that should be made to the accompanying consolidated financial statements referred to above for them to be in conformity with U.S. generally accepted accounting principles. We have previously audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheet of Performance Capital Management, LLC as of December 31, 2005, and the related consolidated statements of operations, members' equity and cash flows for the year ended December 31, 2005 (not presented herein); and in our report dated March 20, 2006, we expressed an unqualified opinion on those consolidated financial statements. In our opinion, the information set forth in the accompanying consolidated balance sheet as of December 31, 2005, is fairly stated, in all material respects, in relation to the balance sheet from which it has been derived. /s/ Moore Stephens Wurth Frazer And Torbet, LLP May 5, 2006 Orange, California 1
PERFORMANCE CAPITAL MANAGEMENT, LLC AND SUBSIDIARY CONSOLIDATED BALANCE SHEETS AS OF MARCH 31, 2006 AND DECEMBER 31, 2005 March 31, December 31, 2006 2005 (unaudited) (audited) ------------ -------------- ASSETS ------ Cash and cash equivalents $ 1,444,743 $ 1,810,677 Restricted cash 678,844 380,352 Other receivables 51,867 25,678 Advance on loan portfolio purchase 145,971 - Purchased loan portfolios, net 5,943,269 8,446,724 Property and equipment, net 148,186 141,169 Deposits 57,746 57,746 Prepaid expenses and other assets 161,866 90,843 ------------ -------------- Total assets $ 8,632,492 $ 10,953,189 ============ ============== LIABILITIES AND MEMBERS' EQUITY ------------------------------- LIABILITIES: Accounts payable $ 112,677 $ 78,644 Accrued liabilities 477,196 346,554 Accrued interest 48,731 30,225 Notes payable 4,715,962 7,336,505 Income taxes payable 48,180 27,580 ------------ -------------- Total liabilities 5,402,746 7,819,508 COMMITMENTS AND CONTINGENCIES - - MEMBERS' EQUITY 3,229,746 3,133,681 ------------ -------------- Total liabilities and members' equity $ 8,632,492 $ 10,953,189 ============ ==============
The accompanying notes are an integral part of these consolidated financial statements. See Review Report of Independent Registered Public Accounting Firm. 2
PERFORMANCE CAPITAL MANAGEMENT, LLC AND SUBSIDIARY CONSOLIDATED STATEMENTS OF OPERATIONS For the Quarter For the Quarter Ended Ended March 31, March 31, 2006 2005 (unaudited) (unaudited) ----------------- ----------------- REVENUES: Portfolio collections $ 3,728,936 $ 3,188,207 Portfolio sales 1,532,610 - ----------------- ----------------- Total revenues 5,261,546 3,188,207 Less portfolio basis recovery 2,848,305 1,560,131 ----------------- ----------------- NET REVENUES 2,413,241 1,628,076 ----------------- ----------------- OPERATING COSTS AND EXPENSES: Salaries and benefits 1,168,750 1,117,716 General and administrative 732,589 761,087 Depreciation 25,041 42,833 ----------------- ----------------- Total operating costs and expenses 1,926,380 1,921,636 ----------------- ----------------- INCOME (LOSS) FROM OPERATIONS 486,861 (293,560) ----------------- ----------------- OTHER INCOME (EXPENSE): Interest expense and other financing costs (204,515) (56,457) Reorganization costs - (190) Interest income 2,652 3,395 Other income - 1,669 ----------------- ----------------- Total other expense, net (201,863) (51,583) ----------------- ----------------- INCOME (LOSS) BEFORE INCOME TAX PROVISION 284,998 (345,143) INCOME TAX PROVISION 20,600 17,600 ----------------- ----------------- NET INCOME (LOSS) $ 264,398 $ (362,743) ================= ================= NET INCOME (LOSS) PER UNIT BASIC AND DILUTED $ .47 $ (.64) ================= =================
The accompanying notes are an integral part of these consolidated financial statements. See Review Report of Independent Registered Public Accounting Firm. 3
PERFORMANCE CAPITAL MANAGEMENT, LLC AND SUBSIDIARY CONSOLIDATED STATEMENTS OF MEMBERS' EQUITY Total Member Unreturned Abandoned Accumulated Members' Units Capital Capital Deficit Equity ------- ------------ ----------- ------------- ----------- Balance, December 31, 2004 563,861 $24,633,642 $ 489,244 $(21,536,538) $3,586,348 Reinstatement of units to investor 65 3,503 (3,503) - Distributions to investors (164,629) (164,629) Net loss (362,743) (362,743) ------- ------------ ----------- ------------- ----------- Balance, March 31, 2005 563,926 24,472,516 485,741 (21,899,281) 3,058,976 Distributions to investors (493,474) (493,474) Net income 568,179 568,179 ------- ------------ ----------- ------------- ----------- Balance, December 31, 2005 563,926 23,979,042 485,741 (21,331,102) 3,133,681 Reinstatement of units to investor 199 11,938 (11,938) - Distributions to investors (168,333) (168,333) Net income 264,398 264,398 ------- ------------ ----------- ------------- ----------- Balance, March 31, 2006 564,125 $23,822,647 $ 473,803 $(21,066,704) $3,229,746 ======= ============ =========== ============= ===========
The accompanying notes are an integral part of these consolidated financial statements. See Review Report of Independent Registered Public Accounting Firm. 4
PERFORMANCE CAPITAL MANAGEMENT, LLC AND SUBSIDIARY CONSOLIDATED STATEMENTS OF CASH FLOWS For the Quarter For the Quarter Ended Ended March 31, 2006 March 31, 2005 (unaudited) (unaudited) ----------------- ----------------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income (loss) $ 264,398 $ (362,743) Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: Depreciation 25,041 42,833 (Increase) decrease in assets: Other receivables (26,189) (303,190) Prepaid expenses and other assets (71,023) (81,347) Advance on loan portfolio purchase (145,971) Loan portfolios 2,503,455 (890,096) Increase (decrease) in liabilities: Accounts payable 34,033 75,306 Accrued liabilities 130,642 2,515 Accrued interest 18,506 22,578 Income taxes payable 20,600 13,600 ----------------- ----------------- Net cash provided by (used in) operating activities 2,753,492 (1,480,544) ----------------- ----------------- CASH FLOWS FROM INVESTING ACTIVITIES: Additions to property and equipment (32,058) (2,996) ----------------- ----------------- CASH FLOWS FROM FINANCING ACTIVITIES: Loan proceeds from borrowing - 1,718,614 Repayment of loans (2,620,543) (337,321) Distributions to investors (168,333) (164,629) ----------------- ----------------- Net cash provided by (used in) financing activities (2,788,876) 1,216,664 ----------------- ----------------- NET CHANGE IN CASH AND CASH EQUIVALENTS (67,442) (266,876) CASH AND CASH EQUIVALENTS, beginning of period 2,191,029 2,042,360 ----------------- ----------------- CASH AND CASH EQUIVALENTS, end of period $ 2,123,587 $ 1,775,484 ================= ================= SUPPLEMENTAL DISCLOSURE FOR CASH FLOW INFORMATION: Income taxes paid $ - $ 4,000 ================= ================= Interest paid $ 163,178 $ 33,881 ================= =================
The accompanying notes are an integral part of these consolidated financial statements. See Review Report of Independent Registered Public Accounting Firm. 5 PERFORMANCE CAPITAL MANAGEMENT, LLC AND SUBSIDIARY CONDENSED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS NOTE 1 - ORGANIZATION AND DESCRIPTION OF BUSINESS Performance Capital Management, LLC ("PCM LLC") and its wholly-owned subsidiary, Matterhorn Financial Services, LLC ("Matterhorn") (collectively the "Company", unless stated otherwise) are engaged in the business of acquiring assets originated by federal and state banks and other sources, for the purpose of generating income and cash flow from managing, collecting, or selling those assets. These assets consist primarily of non-performing credit card loan portfolios and are purchased and sold as portfolios ("portfolios"). Additionally, some of the loan portfolios are assigned to third party agencies for collection. Reorganization under bankruptcy - ------------------------------- PCM LLC was formed under a Chapter 11 Bankruptcy Reorganization Plan and operating agreement. The plan called for the consolidation of five California limited partnerships and a California corporation into the new California limited liability company. The five California limited partnerships were formed for the purpose of acquiring investments in or direct ownership of non-performing credit card loan portfolios from financial institutions and other sources. The assets of the five limited partnerships consisted primarily of non-performing credit card loans, as well as cash. In late December 1998, these six entities voluntarily filed bankruptcy petitions, which were later consolidated into one case. PCM LLC was formed on January 14, 2002 and commenced operations upon the confirmation of its Bankruptcy Reorganization Plan ("Reorganization Plan") on February 4, 2002. The entities that were consolidated under the Reorganization Plan are as follows: Performance Asset Management Fund, Ltd., - (PAM), a California limited partnership, formed in 1991. Units in PAM were sold in a private placement offering. PAM raised $5,205,000 in gross proceeds from the sale of its partnership units. PAM was not subject to the reporting requirements of the Securities and Exchange Commission. Performance Asset Management Fund II, Ltd., - (PAMII), a California limited partnership, formed in 1992. Units in PAMII were sold in a private placement offering. PAMII raised $7,670,000 in gross proceeds from the sale of its partnership units. PAMII was not subject to the reporting requirements of the Securities and Exchange Commission. Performance Asset Management Fund III, Ltd., - (PAMIII), a California limited partnership, formed in 1992. Units in PAMIII were sold in a private placement offering. PAMIII raised $9,990,000 in gross proceeds from the sale of its partnership units. PAMIII was a public limited partnership that was subject to the reporting requirements of the Securities and Exchange Commission. Performance Asset Management Fund IV, Ltd., - (PAMIV), a California limited partnership, formed in 1992. Units in PAMIV were sold in an intrastate offering to residents of California. PAMIV raised $28,595,000 in gross proceeds from the sale of its partnership units. PAMIV was a public limited partnership that was subject to the reporting requirements of the Securities and Exchange Commission. Performance Asset Management Fund V, Ltd., - (PAMV), a California limited partnership, formed in 1994. Units in PAMV were sold in a private placement offering. PAMV raised $5,965,000 in gross proceeds from the sale of its partnership units. PAMV was not subject to the reporting requirements of the Securities and Exchange Commission. Performance Capital Management, Inc. - (PCM INC), a California corporation incorporated in January 1993. PCM INC identified potential portfolio acquisitions, performed due diligence in conjunction with potential portfolio acquisitions, acquired portfolios, and through joint ventures with the limited partnerships (PAM, PAMII, PAMIII, PAMIV, and PAMV) collected and sold acquired portfolios. The limited partnerships (PAM, PAMII, PAMIII, PAMIV, and PAMV) collectively obtained 98.5% of the outstanding shares of PCM INC. The minority interest of 1.5% was effectively eliminated in the bankruptcy plan. See Review Report of Independent Registered Public Accounting Firm. 6 PERFORMANCE CAPITAL MANAGEMENT, LLC AND SUBSIDIARY CONDENSED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS NOTE 1 - ORGANIZATION AND DESCRIPTION OF BUSINESS (CONTINUED) Pre-petition operations - ----------------------- A total of approximately $57,450,000 was raised over the period 1991 to 1994 by selling limited partnership interests in PAM, PAMII, PAMIII, PAMIV, and PAMV. Approximately $8.7 million was deducted for brokerage and organizational expenses. Approximately $49 million was used to purchase non-performing credit card loan portfolios. These portfolios were typically purchased by the limited partnerships from PCM INC. PCM INC also collected the portfolios under joint venture agreements between itself and the limited partnerships. In the normal course of business, loan portfolios would be purchased, collections would be made and in some cases the portfolios were sold. PCM INC was in the business of managing these loan portfolios. PCM INC generally charged a "mark-up" to the limited partnerships for portfolios purchased for the limited partnerships. This markup averaged 35% above the price PCM INC paid for the portfolios on the open market. PCM INC was also contractually entitled to receive 45% of all monies collected on the portfolios. Reorganization plan - ------------------- The following is a summary of the ownership interest of PCM LLC pursuant to the terms of the Reorganization Plan:
Original Number of Number of Percentage Fund's Name Unit Holders PCM LLC Units Interest in PCM LLC - ------------ ------------ ------------- ------------------- PAM 370 52,050 9 PAMII 459 76,700 13 PAMIII 595 99,900 18 PAMIV 1553 285,950 50 PAMV 327 56,950 10 ------------- ------------------- Totals 571,550 100 ============= ===================
The following is a summary of the ownership interest of Performance Capital Management, LLC as of March 31, 2006:
Fund's Number of Percentage Name PCM LLC Units Interest in PCM LLC - ------------ ------------- ------------------- PAM 51,565 9 PAMII 76,101 14 PAMIII 97,759 17 PAMIV 282,179 50 PAMV 56,521 10 ------------- ------------------- Totals 564,125 100 ============= ===================
The Reorganization Plan calls for distributions to be made first to the LLC Members to the extent of and in proportion to their unreturned Capital Contributions; and thereafter to the LLC Members in proportion to their respective percentage ownership interest. The combination of the Partnerships and PCM INC is summarized as follows (in thousands): See Review Report of Independent Registered Public Accounting Firm. 7 PERFORMANCE CAPITAL MANAGEMENT, LLC AND SUBSIDIARY CONDENSED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS NOTE 1 - ORGANIZATION AND DESCRIPTION OF BUSINESS (CONTINUED)
PAM PAMII PAMIII PAMIV PAMV PCM INC Total ---------------------------------------------------------------------- Sale of Limited Partnership Units $ 5,205 $ 7,670 $ 9,990 $28,595 $ 5,965 $ - $ 57,425 Distributions to Investors (3,704) (4,137) (3,719) (6,920) (829) - (19,309) ---------------------------------------------------------------------- Unreturned Capital 1,501 3,533 6,271 21,675 5,136 - 38,116 Accumulated Deficit (288) (1,333) (2,424) (9,330) (2,561) (2,302) (18,238) ---------------------------------------------------------------------- Cash and Net Assets Transferred to PCM LLC $ 1,213 $ 2,200 $ 3,847 $12,345 $ 2,575 $ (2,302) 19,878 =========================================================== Cumulative Distributions For The Period February 4, 2002 Through December 31, 2004 (13,146) Cumulative Net Loss For The Period February 4, 2002 Through December 31, 2004 (3,298) Distributions Forfeited 152 Members' Equity PCM, LLC --------- at December 31, 2004 3,586 2005 Distributions to Investors (165) Net Loss For The Quarter Ended March 31, 2005 (362) Members' Equity PCM, LLC --------- at March 31, 2005 3,059 2005 Distributions to Investors (493) Net Income For The Nine Months Ended December 31, 2005 567 Members' Equity PCM, LLC --------- at December 31, 2005 3,133 2006 Distributions to Investors (168) Net Income For The Quarter Ended March 31, 2006 264 Members' Equity PCM, LLC --------- at March 31, 2006 $ 3,229 =========
See Review Report of Independent Registered Public Accounting Firm. 8 PERFORMANCE CAPITAL MANAGEMENT, LLC AND SUBSIDIARY CONDENSED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS NOTE 1 - ORGANIZATION AND DESCRIPTION OF BUSINESS (CONTINUED) PAM III and PAM IV were reporting entities under the Securities Exchange Act of 1934. PAM, PAMII, PAMV, and PCM INC were not reporting entities. It was determined that PCM LLC is a "successor company" under rule 12g-3 of the Securities Exchange Act of 1934, and therefore is subject to the reporting requirements of the Securities Exchange Act of 1934. PCM LLC's LLC units are not publicly traded securities. The Reorganization Plan placed certain restrictions on the transfer of members' interests. On August 2, 2004, an order of the United States Bankruptcy Court was entered closing the Chapter 11 case. The order acts as a discharge and termination of any and all liabilities and debts of, and claims against, PCM INC, PAM, PAM II, PAM III, PAM IV and PAM V that arose at any time before the confirmation order became effective on February 4, 2002. Wholly-owned Subsidiary - ----------------------- In July, 2004, the Company completed a credit facility (effective June 10, 2004) with Varde Investment Partners, L.P. ("Varde"), a participant in the debt collection industry, to augment portfolio purchasing capacity using capital provided by Varde. To implement the agreement, PCM LLC created a wholly-owned subsidiary, Matterhorn. The facility provides for up to $25 million of capital (counting each dollar loaned on a cumulative basis) over a five-year term. Varde is not under any obligation to make a loan to Matterhorn and Varde must agree on the terms for each specific advance under the loan facility. Under the terms of the facility, Varde will receive both interest and a 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. NOTE 2 - BASIS OF PRESENTATION Reporting entity - ---------------- PCM LLC is a successor entity of six companies emerging from bankruptcy (see Note 1). The accompanying balance sheets, statements of operations, members' equity, and cash flows include balances and transactions since the emergence from bankruptcy. Matterhorn was consolidated in the financial statements as a wholly-owned subsidiary starting in the third quarter of 2004. Fresh start accounting - ---------------------- Statement of Position 90-7 issued by the American Institute of Certified Public Accountants ("SOP 90-7") addresses accounting for companies in reorganization under the bankruptcy code. For certain entities, SOP 90-7 requires "fresh start accounting" which records a revaluation of assets to fair values and an adjustment of liabilities to present values. SOP 90-7 also requires the following procedures for entities that adopt fresh start accounting: 1. The reorganization value of the entity should be allocated to the entity's assets following FAS 141; 2. Liabilities other than deferred taxes should be stated at present values of amounts to be paid using current interest rates; 3. Deferred taxes should be presented in conformity with generally accepted accounting principles. Benefits realized from preconfirmation net operating loss carryforwards should reduce reorganization value in excess of amounts allocable to identifiable assets and other intangibles until exhausted and be reported as a direct addition to paid-in capital thereafter; See Review Report of Independent Registered Public Accounting Firm. 9 PERFORMANCE CAPITAL MANAGEMENT, LLC AND SUBSIDIARY CONDENSED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS NOTE 2 - BASIS OF PRESENTATION (CONTINUED) 4. Changes in accounting principles that will be required for the emerging entity within the twelve months following the adoption of fresh start accounting should be adopted at the same time fresh start accounting is adopted. SOP 90-7 also requires the following disclosure in the initial financial statements after fresh start accounting has been adopted: 1. Adjustments to the historical amounts of individual assets and liabilities; 2. The amount of debt forgiveness; 3. The amount of prior retained earnings or deficit eliminated; and 4. Other important matters in determining reorganization value. Management reviewed these requirements and determined that fresh start accounting was not applicable because assets exceeded liabilities prior to confirmation of the plan and existing limited partners retained a majority interest in the successor entity. For entities that do not meet the requirements for fresh start accounting, SOP 90-7 requires that liabilities compromised by a confirmed bankruptcy plan be stated at present value of amounts to be paid, using current interest rates. Debt forgiveness, if any, should be reported as an extraordinary item. As part of the Reorganization Plan, no debt forgiveness existed and all liabilities subject to compromise were presented on the face of the balance sheet as pre-petition claims with disclosures required by SOP 90-7 presented in Note 10. These claims have been paid or settled by December 31, 2003. Transfer of assets to successor company - --------------------------------------- Assets were transferred at historical carrying values and liabilities were assumed as required by the bankruptcy confirmation plan. NOTE 3 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Use of estimates - ---------------- In preparing financial statements in conformity with accounting principles generally accepted in the United States of America, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Significant estimates have been made by management with respect to the timing and amount of collection of future cash flows from non-performing credit card loan portfolios. Among other things, the estimated future cash flows of the portfolios are used to recognize impairment in the purchased loan portfolios. Management reviews the estimate of future collections, and it is reasonably possible that these estimates may change based on actual results and other factors. A change could be material to the financial statements. Purchased loan portfolios - ------------------------- Purchased loan portfolios consisted primarily of non-performing credit card accounts. For substantially all the Company's acquired portfolios, future cash flows cannot be reasonably estimated in order to record an accretable yield consistently. Therefore, the Company utilizes the cost recovery method as required by AICPA Practice Bulletin 6. Application of the cost recovery method requires that any amounts received be applied first against the recorded amount of the portfolios; when that amount has been reduced to zero, any additional amounts received are recognized as net revenue. Acquired portfolios are initially recorded at their respective costs, and no accretable yield is recorded on the accompanying balance sheets. See Review Report of Independent Registered Public Accounting Firm. 10 PERFORMANCE CAPITAL MANAGEMENT, LLC AND SUBSIDIARY CONDENSED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS NOTE 3 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) 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 continues 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. Cash and cash equivalents - ------------------------- The Company defines cash equivalents as cash, money market investments, and overnight deposits with original maturities of less than three months. Cash equivalents are valued at cost, which approximates market. The Company maintains cash balances, which exceeded federally insured limits by approximately $1.9 million as of March 31, 2006. 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. 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 March 31, 2006, management expects these assets to be fully recoverable. Revenue recognition - ------------------- Revenue is accounted for using the cost recovery method of accounting in accordance with Practice Bulletin No. 6, "Amortization of Discounts on Certain Acquired Loans". Under the cost recovery method of accounting, all cash receipts relating to individual loan portfolios are applied first to recover the cost of the portfolios, prior to recognizing any revenue. Cash receipts in excess of cost of purchased loan portfolios are then recognized as net revenue. Loan portfolio sales occur after the initial portfolio analysis is performed and the loan portfolio is acquired. Portions of portfolios sold typically do not meet the Company's targeted collection characteristics. Loan portfolios sold are valued at the lower of cost or market. Proceeds from strategic sales of purchased loan portfolios are recorded as revenue when received. See Review Report of Independent Registered Public Accounting Firm. 11 PERFORMANCE CAPITAL MANAGEMENT, LLC AND SUBSIDIARY CONDENSED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS NOTE 3 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) 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. Members' Equity - --------------- Members' equity includes voting LLC units held by members and non-voting LLC units held by one economic interest owner. As of March 31, 2006, PCM LLC had 540,403 voting LLC units (540,204 LLC units as of December 31, 2005) and 23,722 non-voting LLC units (23,722 LLC units as of December 31, 2005). Abandoned capital represents LLC units that are either voluntarily returned to the Company by a member or LLC units that are redeemed and cancelled following a procedure authorized by PCM LLC's plan of reorganization to eliminate the interests of members the Company has not been able to locate. In the first quarter of 2006, 199 units of previously cancelled units were reinstated due to a beneficiary heir establishing ownership. NOTE 4 - FAIR VALUE OF FINANCIAL INSTRUMENTS The estimated fair value and the methods and assumptions used to estimate the fair values of the financial instruments of the Company as of March 31, 2006 and December 31, 2005 are as follows. The carrying amount of cash and cash equivalents, restricted cash and liabilities approximate their fair values. The total and retained fair values of purchased loan portfolios were determined based on both market pricing and discounted expected cash flows. The total fair value of the Company's portfolios includes fair value attributable to the residual interests of third parties in collections once all funds (including funds invested by the Company) invested in a portfolio have been repaid (with interest) and all servicing fees have been paid. The retained fair value of the Company's portfolios excludes fair value attributable to these residual interests. The discount rate is based on an acceptable rate of return adjusted for the risk inherent in the loan portfolios. The discount rate utilized at March 31, 2006 and December 31, 2005 was 20%. The estimated total fair value of loan portfolios was $24.2 million and $28.0 million at March 31, 2006, and December 31, 2005, respectively, and the estimated retained fair value of loan portfolios was $23.5 million and $27.5 million at March 31, 2006, and December 31, 2005, respectively. NOTE 5 - PURCHASED LOAN PORTFOLIOS The Company acquires portfolios of non-performing credit card loans from federal and state banks and other sources. These loans are acquired at a substantial discount from the actual outstanding balance. The aggregate outstanding contractual loan balances at March 31, 2006 and December 31, 2005 totaled approximately $720 million and $749 million, respectively. The Company initially records acquired loans at cost. To the extent that the cost of a particular loan portfolio exceeds the net present value of estimated future cash flows expected to be collected, a valuation allowance is recognized in the amount of such impairment. See Review Report of Independent Registered Public Accounting Firm. 12 PERFORMANCE CAPITAL MANAGEMENT, LLC AND SUBSIDIARY CONDENSED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS NOTE 5 - PURCHASED LOAN PORTFOLIOS (CONTINUED) The carrying amount of loans included in the accompanying balance sheets are as follows:
As of As of Mar. 31, 2006 Dec. 31, 2005 --------------- --------------- Unrecovered cost balance, beginning of period $ 8,505,065 $ 3,003,642 Valuation allowance, beginning of period (58,341) (12,000) --------------- --------------- Net balance, beginning of period 8,446,724 2,991,642 Net portfolio activity (2,503,455) 5,455,082 --------------- --------------- Net balance, end of period $ 5,943,269 $ 8,446,724 =============== ===============
The activity in the loan portfolios in the accompanying financial statements is as follows:
For the Quarter For the Quarter Ended Ended Mar. 31, 2006 Mar. 31, 2005 ----------------- ----------------- Purchased loan portfolios, net $ 344,850 $ 2,450,227 Collections on loan portfolios (3,728,936) (3,188,207) Sales of loan portfolios (1,532,610) - Revenue recognized on collections 1,881,514 1,628,076 Revenue recognized on sales 531,727 - ----------------- ----------------- Net portfolio activity $ (2,503,455) $ 890,096 ================= =================
The valuation allowance related to the loan portfolios had a balance of $58,341 at March 31, 2006 and December 31, 2005. NOTE 6 - OTHER RECEIVABLES Other receivables consist of collections on portfolios received by third party collection agencies and funds due from a portfolio seller for the return of certain contractually ineligible accounts improperly included by the seller in a portfolio purchased by Matterhorn. NOTE 7 - PROPERTY AND EQUIPMENT Property and equipment is as follows:
As of As of Mar. 31, 2006 Dec. 31, 2005 -------------- -------------- Office furniture and equipment $ 287,142 $ 286,822 Computer equipment 557,165 525,427 Leasehold improvements 36,982 36,982 -------------- -------------- Totals 881,289 849,231 Less accumulated depreciation 733,103 708,062 -------------- -------------- Property and equipment, net $ 148,186 $ 141,169 ============== ==============
Depreciation expense for the quarters ended March 31, 2006 and 2005 amounted to $25,041 and $42,833 respectively. See Review Report of Independent Registered Public Accounting Firm. 13 PERFORMANCE CAPITAL MANAGEMENT, LLC AND SUBSIDIARY CONDENSED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS NOTE 8 - NOTES PAYABLE The Company has entered into an agreement for a credit facility with Varde that provides for up to $25 million of capital (counting each dollar loaned on a cumulative basis) over a five-year term ending in July 2009. PCM LLC's wholly-owned subsidiary Matterhorn owed approximately $4.7 million and $7.3 million at March 31, 2006, and December 31, 2005, respectively, under the facility in connection with its purchase of certain charged-off loan portfolios. The total amount borrowed was approximately $10.2 million at March 31, 2006 and December 31, 2005. Each advance has minimum payment threshold points. Each advance has a term of two years and bears interest at the rate of 12% per annum. These obligations are scheduled to be paid in full on dates ranging from April 2007 to December 2007, with the approximate following principal payments due:
Year ending March 31, ----------- 2007 $945,000 2008 $3,771,000
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, our parent operating company, has guarantied certain of Matterhorn's operational obligations under the loan documents. The amount of remaining available credit under the facility was approximately $14.8 million at March 31, 2006 and December 31, 2005. The assets of Matterhorn that provide security for Varde's loan were carried at a cost of approximately $5.0 million at March 31, 2006. NOTE 9 - COMMITMENTS AND CONTINGENCIES Lease Commitments - ----------------- The Company currently leases office space in Anaheim, California under a non-cancelable five year operating lease. Under the lease agreement, PCM LLC must pay a basic monthly rental charge plus a portion of the building's common area expenses. Future minimum lease commitments as of March 31, 2006 are as follows:
Year ending March 31, ----------- 2007 $214,000 Thereafter -
Rental expense for the quarter ended March 31, 2006 and 2005 amounted to approximately $83,975 and $81,597, respectively. The Company timely exercised its option to renew the lease on its existing office space, but the contractual provisions in the lease do not guarantee that a renewal will occur. the Company's landlord will propose new economic terms to the Company as part of the option exercise process, which the Company then may accept or reject. In the meantime, the Company continues to explore other alternatives for office space. The Company is obligated under a five year equipment lease, expiring in 2009, for minimum payments of $4,800 per year. See Review Report of Independent Registered Public Accounting Firm. 14 PERFORMANCE CAPITAL MANAGEMENT, LLC AND SUBSIDIARY CONDENSED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS NOTE 10 - EARNINGS PER MEMBER UNIT Basic and diluted earnings per member unit are calculated based on the weighted average number of member units issued and outstanding, 564,125 for the quarter ended March 31, 2006 and 563,926 for the quarter ended March 31, 2005. NOTE 11 - EMPLOYEE BENEFIT PLANS The Company has a defined contribution plan covering all eligible full-time employees of Performance Capital Management (the Plan Sponsor) who are currently employed by the Company and have completed six months of service from the time of enrollment. The Plan was established by the Plan Sponsor to provide retirement income for its employees and is subject to the provisions of the Employee Retirement Income Security Act of 1974, as amended (ERISA). The Plan is a contributory plan whereby participants may contribute a percentage of pre-tax annual compensation as outlined in the Plan agreement and as limited by Federal statute. Participants may also contribute amounts representing distributions from other qualified defined benefit or contribution plans. The Plan Sponsor does not make matching contributions. NOTE 12 - SUBSEQUENT EVENTS In two separate transactions closed on April 3 and 4, 2006, Matterhorn borrowed approximately $1.4 million under the Varde loan facility in connection with the purchase of certain charged-off loan portfolios. Each of these obligations has a two-year term expiring in April 2008 and bears interest at a rate of 12% per annum. The timing of payments of principal and interest depends on the collection performance of the portfolios Matterhorn purchased using these borrowed funds. Following these borrowings, the remaining availability under the credit facility is approximately $13.4 million. See Review Report of Independent Registered Public Accounting Firm. 15 PERFORMANCE CAPITAL MANAGEMENT, LLC AND SUBSIDIARY CONDENSED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Except for the historical information presented in this document, the matters discussed in this Form 10-QSB, and specifically in "Management's Discussion and Analysis of Financial Condition and Results of Operations," or otherwise incorporated by reference into this document contain "forward-looking statements" (as such term is defined in the Private Securities Litigation Reform Act of 1995). These statements can be identified by the use of forward-looking terminology such as "believes," "plans," "expects," "may," "will," "intends," "should," "plan," or "anticipates" or the negative thereof or other variations thereon or comparable terminology, or by discussions of strategy that involve risks and uncertainties. The safe harbor provisions of Section 21E of the Securities Exchange Act of 1934, as amended, and Section 27A of the Securities Act of 1933, as amended, apply to forward-looking statements made by Performance Capital Management, LLC. You should not place undue reliance on forward-looking statements due to their inherent uncertainty. Forward-looking statements involve risks and uncertainties. The actual results that we achieve may differ materially from any forward-looking statements due to such risks and uncertainties. These forward-looking statements are based on current expectations, and we assume no obligation to update this information. Readers are urged to carefully review and consider the various disclosures made by us in this report on Form 10-QSB and in our other reports filed with the Securities and Exchange Commission that attempt to advise interested parties of the risks and factors that may affect our business. The following discussion and analysis of our financial condition and results of operations should be read in conjunction with the unaudited financial statements and accompanying notes and the other financial information appearing elsewhere in this report and with the financial information contained in our Form 10-KSB filed with the Securities and Exchange Commission on March 31, 2006. OVERVIEW We acquire assets originated by federal and state banking and savings institutions, loan agencies, and other sources, for the purpose of generating income and cash flow from collecting or selling those assets. Typically, these assets consist of charged-off credit card contracts. These assets are typically purchased and sold as portfolios. We purchase portfolios using our own cash resources and funds borrowed from a third party. Before purchasing a portfolio, we conduct due diligence to assess the value of the portfolio. We try to purchase portfolios at a substantial discount to the actual amount of money that they will ultimately produce, so that we can recover the cost we pay for portfolios, repay funds borrowed to purchase portfolios, pay our collection and operating costs and still have a profit. We believe that market conditions currently make it difficult, although not impossible, to purchase portfolios at prices that will permit us to accomplish these objectives. We record our portfolios at cost based on the purchase price. We reduce the cost bases of our portfolios on a portfolio-by-portfolio basis based on collections, sales of some or all of the portfolio and impairment of net realizable value. We frequently sell certain portions of portfolios we purchase, in many instances to retain those accounts that best fit our collection profile and to reduce our purchase commitment by reselling the others. We then collect those accounts we retain as a distinct portfolio. We do not generally purchase loan portfolios solely with a view to their resale, and for this reason we generally do not show portfolios on our balance sheet as "held for investment". From time to time we sell some of our portfolios either to capitalize on market conditions, to dispose of a portfolio that is not performing or to dispose of a portfolio whose collection life, from our perspective, has run its course. When we engage in these sales, we continue collecting the portfolio right up until the closing of the sale. We earn revenues from collecting our portfolios and from selling our portfolios or portions of our portfolios. We recognize gross revenue when we collect an account and when we sell a portfolio or a portion of it. On our statement of operations we reduce our total revenues by the cost basis recovery of our portfolios to arrive at net revenue. For collections, we reduce the cost basis of the portfolio dollar-for-dollar until we have completely recovered the cost basis of the portfolio. When we sell a portfolio or a portion of it, to the extent of remaining cost basis for the portfolio, we reduce the cost basis of the portfolio by a percentage of the original portfolio cost. 16 Our net revenues from portfolio collections may vary from quarter to quarter because the number and magnitude of portfolios where we are still recovering costs may vary, and because the return rates of portfolios whose costs we have already recovered in full may vary. Similarly, our net revenues from portfolio sales may vary from quarter to quarter depending on the number and magnitude of portfolios (or portions) we decide to sell and the market values of the sold portfolios (or portions) relative to their cost bases. We refer to the discounted present value of the actual amount of money that we believe a portfolio will ultimately produce as the "fair value" of the portfolio. If we conduct our business successfully, the aggregate fair value of our portfolios should be substantially greater than the aggregate cost basis of our portfolios presented on our balance sheet. We must make assumptions to determine fair value, the most significant of which are the magnitude and timing of future collections and the discount rate used to determine present value. Because of the inherent uncertainty associated with predicting future events, our determinations of fair value at any particular point in time are only estimates, and actual fair value could ultimately vary significantly from our estimate. In general, we expect increases in the cost basis of our portfolios presented on our balance sheet to accompany increases in portfolio fair value. The magnitude and timing of our collections could cause cost basis to decline in some quarters when fair value actually increases, however, because we "front-load" our cost basis recovery instead of matching portfolio cost basis recovery to revenue on a proportionate basis over the life of the portfolio. Our purchasing patterns could reinforce this divergence. A decrease in the magnitude of new portfolio acquisitions (i.e., failing to reinvest all of cash collections representing cost basis recovery) may still result in a fair value increase because new portfolios generally have a fair value that exceeds their purchase price. We plan to realize the difference between fair value and cost basis over time as we collect our portfolios. We generally collect our portfolios over periods of time ranging from three to seven years, with the bulk of a portfolio's yield coming in the first three years we collect it. If we succeed in collecting our portfolios and realize the difference between fair value and cost basis of our portfolios, we will recover the cost we paid for them, repay the loans used to purchase them, pay our collection and operating costs, and still have excess cash. Our statement of operations generally will report proportionately low net revenues in periods that have substantial collections of recently purchased portfolios, due to the "front-loaded" cost basis recovery associated with new portfolios. As a result, during times of rapid growth in our portfolio purchases (and probably for several quarters thereafter), our statement of operations will likely show a net loss. As purchases slow and more collections come from older portfolios whose cost bases have been completely recovered, our statement of operations will begin to report net income, assuming our portfolios perform over time as anticipated and we collect them in an efficient manner. For the foreseeable future, we intend to continue seeking new large dollar-volume portfolio purchases using our loan facility with Varde Investment Partners, L.P. ("Varde"). Our operating costs and expenses consist principally of salaries and benefits and general and administrative expenses. Fluctuations in our salaries and benefits correspond roughly to fluctuations in our headcount. Our general and administrative expenses include non-salaried collection costs, telephone, rent and professional expenses. Fluctuations in telephone and collection costs generally correspond to the volume of accounts we are attempting to collect. Professional expenses tend to vary based on specific issues we must resolve. BASIS OF PRESENTATION We present our financial statements based on our February 4, 2002, emergence from bankruptcy being treated as the inception of our business. In our emergence from bankruptcy, we succeeded to the assets and liabilities of six entities that were in bankruptcy. The equity owners of these entities approved a reorganization plan under which the owners of these six entities agreed to receive ownership interests in Performance Capital Management, LLC, in exchange for their ownership interests in the predecessor entities. Our consolidated financial statements include the accounts of our parent operating company, Performance Capital Management, LLC, and its wholly-owned special purpose subsidiary Matterhorn Financial Services LLC, a California limited liability company ("Matterhorn"). All significant intercompany balances and transactions have been eliminated. 17 CRITICAL ACCOUNTING ESTIMATES We present investments in portfolios on our balance sheet at the lower of cost, market, or estimated net realizable value. As discussed above, we reduce the cost basis of a portfolio on a proportionate basis when we sell a portion of the portfolio, and we treat amounts collected on a portfolio as a reduction to the carrying basis of the portfolio on an individual portfolio basis. When we present financial statements we assess the estimated net realizable value of our portfolios on a portfolio-by-portfolio basis, and we reduce the value of any portfolio that has suffered impairment because its cost basis exceeds its estimated net realizable value. Estimated net realizable value represents management's estimates, based upon present plans and intentions, of the discounted present value of future collections. We must make assumptions to determine estimated net realizable value, the most significant of which are the magnitude and timing of future collections and the discount rate used to determine present value. Once we write down a particular portfolio, we do not increase it in subsequent periods if our plans and intentions or our assumptions change. We present the fair value of our portfolios only in the notes to our financial statements, not in the basic financial statements themselves. In order to understand our financial statements the reader must understand the concepts involved in estimation of the fair value of our portfolios, as discussed in the section above entitled "Overview". Because of the inherent uncertainty associated with predicting future events, our determinations of fair value at any particular point in time are only estimates, and actual fair value could ultimately vary significantly from our estimate. When we collect an account in a portfolio, we reduce the cost basis of the portfolio dollar-for-dollar until we have completely recovered the cost basis of the portfolio. We believe this method of accounting for the amortization of the purchase price of our portfolios is conservative and minimizes the effect of estimation on our results of operations. This policy has the effect of "front-loading" expenses, however, and may result in a portfolio initially showing no net revenue for a period of time and then showing only net revenue once we have recovered its entire cost basis. We believe a policy grounded in conservatism is preferable to a policy of attempting to match portfolio cost basis to revenue on a proportionate basis over the life of the portfolio, due to the distressed nature of the portfolio assets and the lack of assurance that projected collections will actually occur. When we sell a portfolio or a portion of it, to the extent of remaining cost basis for the portfolio, we reduce the cost basis of the portfolio by a percentage of the original portfolio cost. Our policy does not take into account whether the portion of the portfolio we are selling may be more or less valuable than the remaining accounts that comprise the portfolio. We believe our policy, which is grounded in this objective measure for cost basis recovery, is preferable to a policy that would attempt to estimate whether a portion of a portfolio being sold is more or less valuable than the remaining accounts that comprise the portfolio, because our policy minimizes the effect of estimation on our results of operations. As discussed in greater detail below, our credit facility with Varde provides for up to $25 million of capital (counting each dollar loaned on a cumulative basis) over a five-year term ending in July 2009. The facility provides for Varde to receive a residual interest in portfolio collections after all funds invested in the portfolio have been repaid (with interest) and all servicing fees 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. 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. 18 OPERATING RESULTS COMPARISON OF RESULTS FOR THE QUARTERS ENDED MARCH 31, 2006 AND 2005 The following discussion compares our results for the quarter ended March 31, 2006, to the quarter ended March 31, 2005. We had net income of $264,000 for the quarter ended March 31, 2006, as compared to a net loss of $363,000 for the quarter ended March 31, 2005. Revenue - ------- Our net revenues increased to $2.4 million for the quarter ended March 31, 2006, from $1.6 million for the quarter ended March 31, 2005. The following table presents a comparison of the components of our revenues for the quarter ended March 31, 2006, to the quarter ended March 31, 2005, as well as presenting net revenue as a percentage of the corresponding total revenue (approximate amounts due to rounding):
Total Collections Sales ------------------- ------------------- ---------------- For the Quarter For the Quarter For the Quarter Ended March 31 Ended March 31 Ended March 31 2006 2005 2006 2005 2006 2005 ------- ---------- ------- ---------- ------- ------- ($ in millions) ($ in millions) ($ in millions) Total revenues $ 5.2 $ 3.2 $ 3.7 $ 3.2 $ 1.5 $ --- Less basis recovery (2.8) (1.6) (1.8) (1.6) (1.0) --- ------- ---------- ------- ---------- ------- ------- Net revenues $ 2.4 $ 1.6 $ 1.9 $ 1.6 $ 0.5 $ --- ======= ========== ======= ========== ======= ======= Net revenue percentage 45.9% 51.1% 50.5% 51.1% 34.7% N/A
Portfolio collections provided 70.9% of our total revenues in the quarter ended March 31, 2006 and all of our total revenues in the quarter ended March 31, 2005. Our total revenues from portfolio collections increased substantially due to collections from recently purchased portfolios and increased efficiency in collection procedures for both recently purchased and older portfolios. Our net revenues from portfolio collections increased by $253,000, but the percentage of net revenues to total revenues stayed about the same. These results reflect the fact that recently purchased portfolios (which provide no net revenues because of front-loaded cost basis recovery) continue to provide a substantial portion of our increased total collection revenues. During 2005, we acquired $11.5 million of new portfolios (net of returns; $11.0 million after adjusting for a January 2006 sale of a $461,000 portion of a portfolio purchased in December 2005). In the first quarter of 2006 we acquired $345,000 of new portfolios (net of returns), and in April 2006, we acquired another $1.6 million of portfolios. We have seen our total revenue from collections increase as we begin to exploit the large purchases we made in 2005 and expect to continue making in 2006. We expect to continue to have strong total collection revenue as we collect these recent portfolio purchases. The cost basis recovery associated with collecting these 2005 portfolios, combined with the portfolios that we have already acquired in 2006 and additional portfolios we plan to acquire in 2006, could continue to offset the increase in net revenue percentage we would otherwise expect our 2003 and 2004 portfolios (whose cost bases we have completely recovered) to generate and actually result in a further decline in our net revenue percentage. Both our total and net revenues from portfolio sales showed increases. As part of our program to emphasize efforts to continue to collect and realize a reasonable return on our portfolios, we identified one larger portfolio that was not performing to our expectations. We sold this portfolio for $1.1 million with Varde's consent in the first quarter of 2006 on terms we considered acceptable. We also sold a $462,000 portion of a portfolio purchased in December 2005. No similar sales were made in the first quarter of 2005. We may engage in further sales if we believe market conditions are acceptable. We continue collection efforts for certain accounts in these portfolios right up until the point of sale. We also anticipate continuing to sell portions of newly acquired portfolios from time to time, but we do not expect to generate substantial net revenues from these sales. If we exclude the effect of portfolio sales for the quarter ended March 31, 2006, our net income for the quarter decreased to a net loss of $267,000 as compared to a net loss of $363,000 for the quarter ended March 31, 2005. The quarter ended March 31, 2005 did not have portfolio sales. As long as we succeed at using the Varde facility to increase portfolio purchases on a year-to-year basis, we do not expect our collection activity to show net income, due to 19 front-loaded cost basis recovery. If our purchasing patterns slow, we believe that our collection activity will begin to show net income. Our overall net income of $264,000 in the quarter ended March 31, 2006 is essentially due to the net revenues we derived from portfolio sales. Operating Expenses - ------------------ Our total operating costs and expenses remained at $1.9 million for each of the quarters ended March 31, 2006 and 2005. Our ratio of operating costs and expenses to total revenues from collections (i.e., excluding the effect of portfolio sales), a measure of collection efficiency, decreased to 51.7% for the quarter ended March 31, 2006, from 60.3% for the quarter ended March 31, 2005. This efficiency improvement results from the ongoing implementation of our three-part strategy to improve collection performance: (1) increasing total collection revenues by capitalizing on the increased volume of accounts we have available to collect; (2) using our existing infrastructure to collect a greater dollar volume of accounts; and (3) continuing to reduce variable costs required to collect each dollar of revenue. We believe that our agreement with Varde, discussed in greater detail below, has played a significant role in enabling us to increase the volume of accounts we have available to collect. The increased revenues that result from collecting a greater volume of accounts have outpaced increased variable and other collection costs. We plan to continue following our strategy of increasing total revenues (while holding infrastructure costs down) and reducing variable costs required to collect each dollar of revenue, but we believe we may be nearing the point where it may not be possible to achieve further material decreases in the ratio of operating costs and expenses to total revenues from collections. We intend to continue monitoring the magnitude of the change in the margin by which our total collection revenues exceed our operating costs and expenses relative to the principal and interest we pay to Varde under the credit facility to ensure that the Varde facility provides additional liquidity to us and does not result in loan payments that will deplete our cash balances. In order to maintain the working capital necessary to run our operations, we anticipate maintaining a careful balance between portfolios we purchase using our own cash (where collection revenues are immediately available to us in full) and portfolios we purchase using the Varde credit facility (where we must immediately apply a substantial portion of collections to debt service). Our general and administration expenses decreased by $28,000 to $733,000 for the quarter ended March 31, 2006, from $761,000 for the quarter ended March 31, 2005. Our salaries and benefits expenses remained relatively stable at $1.2 million for the quarter ended March 31, 2006, as compared to $1.1 million for the quarter ended March 31, 2005. Our headcount has remained relatively stable, although we still experience significant employee turnover among our collectors. Our operating expenses may continue to increase in 2006 as we increase the volume of accounts we collect, but we expect increases in total revenues to continue to outpace any material increases in costs associated with our collection efforts. Our ability to sustain revenue increases that outpace cost increases depends on our ability to continue to identify and make large dollar-volume purchases of portfolios at prices we believe are reasonable. LIQUIDITY AND CAPITAL RESOURCES Our cash and cash equivalents decreased $67,000 in the first quarter of 2006 to a balance of $2.1 million at March 31, 2006. During the quarter ended March 31, 2006, our portfolio collections and sales generated $5.3 million of cash, and we used $2.2 million for operating and other activities, $345,000 to purchase new portfolios (net of returns), $2.6 million to repay loans and $168,000 for distributions to unit holders. The large cost basis recovery associated with the recent rapid growth in our portfolios has made it difficult to generate the profit called for in our business plan: to recover the cost we pay for our portfolios, repay funds borrowed to purchase portfolios, pay our collecting and operating costs and still have a profit. Excluding the results from portfolio sales in the quarter ended March 31, 2006, our cost basis recovery of $1.8 million plus our operating, interest and other expenses of $2.1 million slightly exceeded our total revenues from collections of $3.7 million. We generated sufficient cash to repay the portion of borrowed funds that came due in the first quarter of 2006. We believe these results reflect the steady progress we have made to focus on collecting the right portfolios in an efficient manner. We believe our future results will continue to reflect this progress, although the "front-loading" of cost basis recovery from our recent large portfolio purchases could continue to cause our statement of operations to show a net loss. During 2005 we believe we continued to improve the balance between our new and old portfolios by purchasing the largest dollar amount of portfolios in one year since inception ($11.5 million in 2005; $11.0 million after adjusting for the January 2006 sale described above). We may not match that level of activity in 2006, but we plan to continue 20 adding new portfolios if we can purchase them at reasonable prices. Including the purchases we made in April, we have added $2.0 million of portfolios thus far in 2006. Because of the improvement in the volume of portfolios available for collection, we expect to add collection personnel to capitalize on our infrastructure capacity, with increased total revenues from collections outpacing increased costs associated with added headcount. Whether we continue to acquire portfolios at the same pace as in 2005 will continue to depend on our assessment of market conditions, as well as the amount of liquid cash and other financial resources available to us. We believe that our procedures to ensure that our collectors continue to focus collection efforts on older portfolios that still have returns to yield, rather than focusing just on the most recently acquired portfolios, continue to show results. We have used our dialer to ensure that our collectors continue to focus on portfolios other than those we have most recently acquired. By monitoring the results of calls originated through our dialer, we identify portfolios that require more cost to collect than others. As a result of these procedures, we identified a larger portfolio that was not performing as well as we wanted, and we sold it during the first quarter of 2006. We believe this process of constantly evaluating portfolio returns against costs of collection should continue to improve the balance between our new and old portfolios. Current plans for 2006 do not call for the sale of a large number of older portfolios, but we may engage in further sales if we believe market conditions are acceptable. Our portfolios provide our principal long-term source of liquidity. Over time, we expect to convert our portfolios to cash in an amount that equals or exceeds the cost basis of our portfolios. In addition, some portfolios whose cost bases we have completely recovered will continue to return collections to us. The total fair value of our portfolios includes fair value attributable to the residual interests of third parties in collections once all funds (including funds invested by us) invested in a portfolio have been repaid (with interest) and all servicing fees have been paid. The retained fair value of our portfolios excludes fair value attributable to these residual interests. Our estimate of the total fair value of our portfolios at March 31, 2006, decreased $3.8 million to $24.2 million from $28.0 million at December 31, 2005. At the same time, the cost basis of our portfolios decreased to $5.9 million at March 31, 2006, from $8.4 million at December 31, 2005. Our estimate of the retained fair value of our portfolios at March 31, 2006, decreased $4.0 million to $23.5 million from $27.5 million at December 31, 2005. Our estimates of fair value and our portfolio cost basis decreased due to several factors: (1) after acquiring $11.5 million of portfolios in 2005, we acquired only $345,000 of new portfolios during the first quarter of 2006; (2) we had total collections of $3.7 million during the first quarter (with a related cost basis recovery of $1.8 million); and (3) we sold portfolios in the amount of $1.5 million (with a related cost basis recovery of $1.0 million). Whether the fair value and cost basis of our portfolios will resume the growth established in 2005 will depend on our ability to find portfolios at a reasonable price in a very competitive market. If we can find reasonably priced portfolios, we believe our portfolio fair value and cost basis will increase in the near term because we can use the Varde credit facility as well as reinvest some cash proceeds from collections to purchase new portfolios. Long-term growth in portfolio fair value and cost basis will depend on whether market conditions continue to permit us to purchase portfolios at reasonable prices and on our financial resources. We used a discount rate of 20% to determine the fair values of our portfolios at March 31, 2006 and December 31, 2005. The following table sets forth alternative estimates of total fair value, retained fair value, and the portion of fair value attributable to residual interests of third parties in collections, if we assessed collection risk as higher (using a discount rate of 25%) or lower (using a discount rate of 15%).
Total Retained Fair Value of Fair Value Fair Value Residual Interests ------------------ ------------------ ------------------ Mar 31 Dec 31 Mar 31 Dec 31 Mar 31 Dec 31 2006 2005 2006 2005 2006 2005 -------- -------- -------- -------- -------- -------- ($ in millions) ($ in millions) ($ in millions) Higher collection risk (25% discount rate) $ 22.5 $ 26.2 $ 21.8 $ 25.7 $ 0.7 $ 0.5 Assumed collection risk (20% discount rate) $ 24.2 $ 28.0 $ 23.5 $ 27.5 $ 0.7 $ 0.5 Lower collection risk (15% discount rate) $ 26.2 $ 30.3 $ 25.3 $ 29.7 $ 0.9 $ 0.6
21 Our estimates of fair values also would change if we revised our projections of the magnitude and timing of future collections. Because of the inherent uncertainty associated with predicting future events, our determinations of fair value at any particular point in time are only estimates, and actual fair value could ultimately vary significantly from our estimate. We do not present the portion of fair value attributable to residual interests of third parties in collections as a liability in our financial statements, although it does represent a contingent obligation to make payments to a third party. Because we will receive a servicing fee and our share of residual collections, we believe collections of the specified portfolios will generate funds sufficient to pay these residual interests to third parties as they come due and cover our operating costs, with the potential for some profit on our part. If our collection efficiency declines significantly, however, we might have to use some of our own capital to cover operating costs. In the near term, we plan to reinvest some of our cash collections representing cost basis recovery to acquire additional portfolios and use the Varde facility to acquire additional portfolios to continue growing the fair value of our portfolios on a quarter to quarter basis. Ultimately we plan to reinvest all of the cash representing cost basis recovery, plus a portion of excess cash, to acquire additional portfolios. Our Board of Directors has described this strategy as having two parts: - Provide an annuity without impairing the value of the business; and - Grow the business to increase the annuity. Due to factors such as the availability of new portfolios, market pricing conditions for new portfolios, the timing of loan repayments and residual interest payments to Varde, and the timing of distributions to our members, we may not achieve increases in fair value each quarter. In the near term we plan to use some of our cash collections representing cost basis recovery to make distributions to our members and interest holders. Ultimately we plan to generate cash in excess of our collection and operating costs and our cost basis recovery and to use some of the excess cash to make distributions to our members and interest holders. Beginning in April 2003, we began making quarterly distributions. During 2005, we made distributions totaling $658,000. We made distributions of $165,000 in each of January 2006 and April 2006 relating to quarters ended December 31, 2005 and March 31, 2006, respectively. Our agreement with Varde provides us with a source of capital to purchase new portfolios. The agreement provides up to $25 million of capital (counting each dollar loaned on a cumulative basis) over a five-year term. We will never have outstanding indebtedness approaching the full $25 million at any one time, due to the cumulative nature of the facility. At March 31, 2006, Matterhorn owed $4.7 million under the facility in connection with purchases of certain charged-off loan portfolios. Under the credit facility, Varde has a first priority security interest in Matterhorn's assets. The assets of Matterhorn that provide security for Varde's loan were carried at a cost of $5.0 million at March 31, 2006. The loan advances have minimum payment threshold points with terms of two years and bear interest at the rate of 12% per annum. These obligations are scheduled to be repaid in full on dates ranging from April 2007 to December 2007. 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 March 31, 2006 was $14.8 million. Matterhorn has borrowed a total of $10.2 million, with $4.7 million outstanding at March 31, 2006. In two separate transactions closed on April 3 and 4, 2006, Matterhorn borrowed approximately $1.4 million under the Varde loan facility in connection with our purchase of certain charged-off loan portfolios. Each of these obligations has a two-year term expiring in April 2008 and bears interest at a rate of 12% per annum. The timing of payments of principal and interest depends on the collection performance of the portfolios Matterhorn purchased using these borrowed funds. Following these borrowings, the remaining availability under the credit facility is approximately $13.4 million. 22 There can be no assurance that Varde will advance any new money under the facility, because in each instance Varde must approve of the portfolio(s) we propose to acquire and the terms of the acquisition. We do not have any plans to raise equity capital. Based on our cash position and current financial resources, and assuming our operating results continue to increase at projected levels, we believe we have adequate capital resources to continue our business as presently conducted for the foreseeable future. We plan to continue to use the Varde credit facility to maximize the return on our infrastructure and to continue to reduce variable costs required to collect each dollar of revenue. We will continue to consider other alternatives to increase the volume of accounts we service other than through new portfolio acquisitions using only our cash resources, however, if the economic returns to us seem reasonable. We do not have any contractual commitments to make capital expenditures, and we have not budgeted any capital expenditures for the coming year. We may from time to time acquire capital assets on an as needed basis. Our most significant capital assets are our dialer and our telephone switch, which we do not anticipate having to replace within the next year. We timely exercised our option to renew the lease on our existing office space, but the contractual provisions in our lease do not guarantee that a renewal will occur. Our landlord will propose new economic terms to us as part of the option exercise process, which we then may accept or reject. In the meantime, we continue to explore other alternatives for office space. ITEM 3. CONTROLS AND PROCEDURES In accordance with the Exchange Act, we carried out an evaluation, under the supervision and with the participation of management, including our Chief Operations Officer and our Accounting Manager, of the effectiveness of our disclosure controls and procedures as of the end of the period covered by this report. In designing and evaluating disclosure controls and procedures, management recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives. Further, the design of a control system must reflect the fact that there are resource constraints. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, may be detected. Based on this evaluation, our Chief Operations Officer and our Accounting Manager concluded that our disclosure controls and procedures were effective as of March 31, 2006, to provide reasonable assurance that information required to be disclosed in our reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission's rules and forms. As noted below, however, we previously identified a weakness in our disclosure controls and procedures that existed during the period ended September 30, 2004. During the process of evaluating and testing the effectiveness of our disclosure controls and procedures for the period ended September 30, 2004, management identified a potential deficiency involving the Company's failure to timely disclose an event that was reportable under new Form 8-K Item 2.03. Disclosure of this event was included in our Form 10-QSB for the quarter ended September 30, 2004, under Part II, Item 5. Since identifying this potential deficiency, management monitored this potential deficiency to determine whether any further mitigating controls are necessary. On December 30, 2005, we had a closing under the Varde credit facility, which we disclosed in a Form 8-K under Item 2.03 dated December 30, 2005 and filed on February 1, 2006. The Form 8-K was filed 28 days late. We closed this transaction on a tight time line to accommodate the seller's desire to consummate the transaction in 2005, and we then rebalanced this purchase in January 2006, with Varde's consent, by transferring approximately $750,000 of the portfolio to Performance Capital Management and by selling approximately $461,000 of the portfolio to a third party. During the several weeks over which we rebalanced this purchase, we overlooked our obligation to file the required Form 8-K. We intend to formalize a checklist process to be used in connection with future Varde closings to better control all aspects of such transactions, including monitoring the reporting of closings on Form 8-K on a timely basis. Two closings under the Varde credit facility occurred on April 3 and April 4, 2006, and we timely filed a current report on Form 8-K under Item 2.03 dated April 3, 2006 and filed on April 5, 2006. There has been no change in our internal controls over financial reporting that occurred during the first quarter of 2006 that has materially affected, or is reasonably likely to materially affect, our internal controls over financial reporting. 23 PART II - OTHER INFORMATION ITEM 2. CHANGES IN SECURITIES AND SMALL BUSINESS ISSUER PURCHASES OF EQUITY SECURITIES We did not purchase any LLC Units from our members during the quarter ended March 31, 2006. However, we completed a procedure at the end of the fourth quarter 2004 authorized by our plan of reorganization to cancel the interests of members we have not been able to locate. In January 2005, a total of 65 LLC Units of the previously cancelled LLC Units were reinstated. In January 2006, 199 of the previously cancelled LLC Units were reinstated due to an heir establishing ownership. ITEM 6. EXHIBITS (a) EXHIBITS
EXHIBIT NUMBER DESCRIPTION - ------- -------------------------------------------------------------------------------------------------- 2.1 Joint Chapter 11 Plan of Reorganization Proposed by Chapter 11 Trustee and the Official Committee of Equity Security Holders effective February 4, 2002 (1) 2.2 First Amended Disclosure Statement Describing Joint Chapter 11 Plan Proposed by Chapter 11 Trustee and the Official Committee of Equity Security Holders approved on October 12, 2001 (1) 3.1 Performance Capital Management, LLC Articles of Organization (1) 3.2 Operating Agreement for Performance Capital Management, LLC (1) 3.3 First Amendment to Operating Agreement for Performance Capital Management, LLC (1) 3.4 Second Amendment to Operating Agreement for Performance Capital Management, LLC (2) 4.1 Specimen Performance Capital Management, LLC Unit Certificate (1) 4.2 Specimen Performance Capital Management, LLC Economic Interest Unit Certificate (1) 4.3 Provisions in the Operating Agreement for Performance Capital Management, LLC pertaining to the rights of LLC Unit holders (see Exhibits 3.2 and 3.3) (1) 10.1 Indemnification Agreement dated August 8, 2005 between Performance Capital Management, LLC and Edward Rucker 31.1 Certification of Chief Executive Officer Pursuant to Rule 13a-14(a) 31.2 Certification of Principal Financial Officer Pursuant to Rule 13a-14(a) 32.1 Certification of Principal Executive Officer and Principal Financial Officer Pursuant to 18 U.S.C. Sec. 1350 *
* The certifications filed under Exhibit 32.1 are not deemed "filed" for purposes of Section 18 of the Securities Exchange Act of 1934 and are not to be incorporated by reference into any filing of Performance Capital Management, LLC under the Securities Exchange Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended, whether made before or after the date hereof irrespective of any general incorporation by reference language contained 24 in any such filing, except to the extent that Performance Capital Management, LLC specifically incorporates it by reference. (1) Filed on April 2, 2003 as an exhibit to our report on Form 8-K dated February 4, 2002 and incorporated herein by reference. (2) Filed on November 14, 2003 as an exhibit to our report on Form 10-QSB for the period ended September 30, 2003 and incorporated herein by reference. 25 SIGNATURES In accordance with the requirements of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. PERFORMANCE CAPITAL MANAGEMENT, LLC May 12, 2006 By: /s/ David J. Caldwell - --------------------- --------------------------------------- (Date) Name: David J. Caldwell Its: Chief Operations Officer 26
EXHIBIT INDEX EXHIBIT NUMBER DESCRIPTION - ------- -------------------------------------------------------------------------------------------------- 2.1 Joint Chapter 11 Plan of Reorganization Proposed by Chapter 11 Trustee and the Official Committee of Equity Security Holders effective February 4, 2002 (1) 2.2 First Amended Disclosure Statement Describing Joint Chapter 11 Plan Proposed by Chapter 11 Trustee and the Official Committee of Equity Security Holders approved on October 12, 2001 (1) 3.1 Performance Capital Management, LLC Articles of Organization (1) 3.2 Operating Agreement for Performance Capital Management, LLC (1) 3.3 First Amendment to Operating Agreement for Performance Capital Management, LLC (1) 3.4 Second Amendment to Operating Agreement for Performance Capital Management, LLC (2) 4.1 Specimen Performance Capital Management, LLC Unit Certificate (1) 4.2 Specimen Performance Capital Management, LLC Economic Interest Unit Certificate (1) 4.3 Provisions in the Operating Agreement for Performance Capital Management, LLC pertaining to the rights of LLC Unit holders (see Exhibits 3.2 and 3.3) (1) 10.1 Indemnification Agreement dated August 8, 2005 between Performance Capital Management, LLC and Edward Rucker 31.1 Certification of Chief Executive Officer Pursuant to Rule 13a-14(a) 31.2 Certification of Principal Financial Officer Pursuant to Rule 13a-14(a) 32.1 Certification of Principal Executive Officer and Principal Financial Officer Pursuant to 18 U.S.C. Sec. 1350 *
* The certifications filed under Exhibit 32.1 are not deemed "filed" for purposes of Section 18 of the Securities Exchange Act of 1934 and are not to be incorporated by reference into any filing of Performance Capital Management, LLC under the Securities Exchange Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended, whether made before or after the date hereof irrespective of any general incorporation by reference language contained in any such filing, except to the extent that Performance Capital Management, LLC specifically incorporates it by reference. (1) Filed on April 2, 2003 as an exhibit to our report on Form 8-K dated February 4, 2002 and incorporated herein by reference. (2) Filed on November 14, 2003 as an exhibit to our report on Form 10-QSB for the period ended September 30, 2003 and incorporated herein by reference. EX-10.1 2 ex10_1.txt EXHIBIT 10.1 EXHIBIT 10.1 INDEMNIFICATION AGREEMENT THIS AGREEMENT OF EMPLOYMENT ("Agreement") is made and entered into in duplicate this 8th day of August , 2005 , by and between PERFORMANCE CAPITAL ----- -------- --- MANAGEMENT, L.L.C., a Limited Liability Company ("Employer"), and Edward Rucker ("Rucker") RECITALS A. Employer is a Limited Liability Company duly organized and validly existing pursuant to the laws of the State of California. B. Employer is in the business of acquiring, processing, servicing and collecting commercial and consumer indebtedness. C. Rucker is employed as Employer's Accounting Manager. D. Employer as additional consideration for RUCKER'S employment is entering into this Indemnification agreement per the following terms and conditions: 1. Employer shall indemnify RUCKER, if RUCKER is made a party to or threatened to be made a party to, or otherwise involved in, any proceeding commenced during the employment term, or after the employment term, because RUCKER is or was an employee or agent of Employer. The indemnification contemplated by the provisions of this agreement shall include any and all expenses, judgments, fines, penalties, settlements, and other amounts, actually and reasonably incurred by RUCKER in connection with the defense or settlement of any such proceeding; provided, however, RUCKER shall have acted in good faith and in a manner that RUCKER reasonably believed to be in the best interests of Employer and, in a criminal proceeding, Executive had no reasonable cause to believe that RUCKER'S conduct was unlawful. 2. Any an all expenses, including, but not limited to, filing fees, costs of investigation, attorney' fees, messenger and delivery expenses, postage, court reporters' fees and similar fees and expenses incurred by RUCKER in any proceeding shall be advanced by Employer prior to the final disposition of such proceeding at the written request of RUCKER, but only if RUCKER shall undertake to repay such advances, unless and to the extent that it is ultimately determined that Executive is entitled to indemnification. 3. The indemnification contemplated by the provisions of this Agreement shall not be deemed exclusive of any other rights to which RUCKER may be entitled pursuant to the provisions of the Articles of Incorporation or Bylaws of Employer, or any agreement, vote of shareholders, or disinterested directors, the General Corporation Law of the State of California, or otherwise, both as to action in his official capacities as an employee or agent of Employer and as to action in any other capacity while serving as an employee or agent of Employer. The indemnification contemplated by the provisions of this Agreement shall continue as to RUCKER although he may have ceased to be an employee or agent of Employer and shall inure to the benefit of the heirs and personal representatives of RUCKER, including the estate of RUCKER'S. 1 IN WITNESS WHEREOF the parties have executed this Agreement of Employment in duplicate, each of which shall have the force and effect of an original, on the date specified in the preamble of this Agreement. "EMPLOYER" PERFORMANCE CAPITAL MANAGEMENT, L.L.C. A California Limited Liability Company Edward Rucker By David J. Caldwell Edward Rucker ---------------------------- ------------------------- Its: CHIEF OPERATIONS OFFICER 2 EX-31.1 3 ex31_1.txt EXHIBIT 31.1 EXHIBIT 31.1 CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002 I, David J. Caldwell, certify that: 1. I have reviewed this quarterly report on Form 10-QSB of Performance Capital Management, LLC; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the small business issuer as of, and for, the periods presented in this report; 4. The small business issuer's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the small business issuer and have: (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the small business issuer, including its consolidated subsidiary, is made known to us by others within those entities, particularly during the period in which this report is being prepared; (b) [intentionally omitted during extended compliance period]; (c) Evaluated the effectiveness of the small business issuer's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and (d) Disclosed in this report any change in the small business issuer's internal control over financial reporting that occurred during the small business issuer's most recent fiscal quarter (the small business issuer's fourth quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the small business issuer's internal control over financial reporting; and 5. The small business issuer's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the small business issuer's auditors and the audit committee of the small business issuer's board of directors (or persons performing the equivalent functions): (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the small business issuer's ability to record, process, summarize and report financial information; and (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the small business issuer's internal control over financial reporting. Date: May 12, 2006 /s/ David J. Caldwell ------------------ ------------------------------------- David J. Caldwell Chief Operations Officer EX-31.2 4 ex31_2.txt EXHIBIT 31.2 EXHIBIT 31.2 CERTIFICATION OF PRINCIPAL FINANCIAL OFFICER PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002 I, Edward M. Rucker, certify that: 1. I have reviewed this quarterly report on Form 10-QSB of Performance Capital Management, LLC; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the small business issuer as of, and for, the periods presented in this report; 4. The small business issuer's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the small business issuer and have: (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the small business issuer, including its consolidated subsidiary, is made known to us by others within those entities, particularly during the period in which this report is being prepared; (b) [intentionally omitted during extended compliance period]; (c) Evaluated the effectiveness of the small business issuer's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and (d) Disclosed in this report any change in the small business issuer's internal control over financial reporting that occurred during the small business issuer's most recent fiscal quarter (the small business issuer's fourth quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the small business issuer's internal control over financial reporting; and 5. The small business issuer's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the small business issuer's auditors and the audit committee of the small business issuer's board of directors (or persons performing the equivalent functions): (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the small business issuer's ability to record, process, summarize and report financial information; and (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the small business issuer's internal control over financial reporting. Date: May 12, 2006 /s/ Edward M. Rucker ------------------- ------------------------------------- Edward M. Rucker Accounting Manager EX-32.1 5 ex32_1.txt EXHIBIT 32.1 EXHIBIT 32.1 PERFORMANCE CAPITAL MANAGEMENT, LLC CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER AND PRINCIPAL FINANCIAL OFFICER PURSUANT TO 18 U.S.C. Sec. 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Quarterly Report on Form 10-QSB of Performance Capital Management, LLC (the "Company") for the quarterly period ended March 31, 2006, as filed with the Securities and Exchange Commission on the date hereof (the "Report"), David J. Caldwell, as Chief Operations Officer of the Company, and Edward M. Rucker, as Accounting Manager of the Company, each hereby certifies, pursuant to 18 U.S.C. Sec. 1350, as adopted pursuant to Sec. 906 of the Sarbanes-Oxley Act of 2002, that, to the best of his knowledge: (1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. /s/ David J. Caldwell - ------------------------------------ David J. Caldwell Chief Operations Officer May 12, 2006 /s/ Edward M. Rucker - ------------------------------------ Edward M. Rucker Accounting Manager May 12, 2006 The material contained in this exhibit is not deemed "filed" with the Commission and is not to be incorporated by reference into any filing of the Company under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended, whether made before or after the date hereof and irrespective of any general incorporation language contained in such filing, except to the extent that the Company specifically incorporates it by reference. -----END PRIVACY-ENHANCED MESSAGE-----