Form 10-KSB
[X] ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934 For the Fiscal Year ended December 31, 1997
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT OF 1934
For the transition period from _______ to ______
Commission file number 0-28764
Performance Asset Management Fund III, Ltd., A California Limited
Partnership
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(Exact name of small business issuer as specified in its charter)
California 33-0526128
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(State or other jurisdiction (IRS Employer Identification
of incorporation or organization) No.)
4100 Newport Place, Suite 400, Newport Beach, California 92660
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(Address of principal executive offices)
(714) 566-3400
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(Issuer's telephone number)
Securities to be registered under Section 12 (b) of the Act:
Name of Each Exchange
Title of each class on which each class is to be
to be so registered: registered:
None None
Securities to be registered under Section 12 (g) of the Act:
(Title of Class)
Limited Partnership Interests ("Units")
<PAGE>
PERFORMANCE ASSET MANAGEMENT FUND III, LTD,
A CALIFORNIA LIMITED PARTNERSHIP
INDEX TO FORM 10-KSB
PART I
Item 1. Description of Business
Item 2. Description of Property
Item 3. Legal Proceedings
Item 4. Submission of Matters to a Vote of Security Holders
PART II
Item 5. Market for Units and Related Matters for Holders in
Interest
Item 6. Management's Discussion and Analysis of Financial Condition
and Results of Operations
Item 7. Financial Statements
Item 8. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure
PART III
Item 9. Directors, Executive Officers, Promoters and Control
Persons
Item 10. Executive Compensation
Item 11. Security Ownership of Certain Beneficial Owners and
Management
Item 12. Certain Relationships and Related Transactions.
Item 13. Exhibits
Signatures
<PAGE>
PERFORMANCE ASSET MANAGEMENT FUND III, LTD.,
A CALIFORNIA LIMITED PARTNERSHIP
PART I
ITEM 1. Description of Business.
The General Partner.
Performance Development, Inc., a California corporation and the
General Partner of the partnership ("General Partner"), was formed in
June 1990 to engage in various aspects of the investment banking
industry. The General Partner is also the General Partner for various
other California limited partnerships.
Formation of Partnership.
Performance Asset Management III, Ltd. A California Limited
Partnership, was formed on October 13, 1992, as a limited partnership
in California pursuant to the provisions of the Revised Limited
Partnership Act of the State of California ("Partnership") by the filing
of the Certificate of Limited Partnership on Form LP-1 with the State of
California Secretary of State. The Partnership offered and sold 1,998 limited
partnership interests ("Units"), at a purchase price of $5,000.00 per
Unit. The offer and sale of the Units were exempt from the registration
requirements of Section 5 of the Securities Act of 1933 ("Securities Act")
because the Units were offered and sold pursuant to an exemption specified
by the provisions of Section 4(2) of the Securities Act and Regulation D
promulgated pursuant thereto. The total amount contributed to the capital
of the Partnership from purchasers of Units ("Limited Partners") was
$9,990,000. As of March 1, 1998, the Partnership had 596 Limited
Partners. The executive offices of the Partnership are located at
4100 Newport Place, Suite 400, Newport Beach, California 92660. The
Partnership's telephone number is (714) 566-3400.
Business of the Partnership.
The Partnership is engaged in the business of acquiring 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 managing, operating, collecting, servicing, or selling
those assets. Typically, these assets consist of charged off credit
card contracts, secured and unsecured commercial and consumer loans,
personal property, notes receivable, and other forms of indebtedness.
These assets, typically, are purchased and sold as portfolios
("Portfolios").
The General Partner, on behalf of the Partnership, has entered
into joint venture agreements with Performance Capital Management, Inc.
("PCM"), a California corporation and an Affiliate* of the General
Partner, pursuant to the provisions of which PCM provides acquisition,
collection and servicing activities for the Partnership. Presently,
the General Partner intends for the Partnership to continue its joint
venture relationship with PCM. The joint venture agreements generally
provide that all distributions are shared by the venturers in
proportion to their respective percentage interests, generally 55% to
65% for the Partnership and 35% to 45% for PCM. The General Partner
<PAGE>
has concentrated on purchasing Portfolios for the Partnership, which
have the potential to generate cash flow to the Partnership with
effective servicing and collection efforts. The objective of the
Partnership is to maximize gain or income from the Portfolios purchased
with the least amount of expenditure for servicing and collection
efforts. The Partnership acquires the Portfolios from PCM. The
Portfolios, acquired from third-parties, are sold to the Partnership by
PCM for amounts determined by the General Partner to be reasonable,
customary, and competitive in light of the size, type and character of
the acquired Portfolios and consistent with the Partnership's Agreement
of Limited Partnership ("Partnership Agreement"). The Partnership
utilizes the services of PCM to manage, service, and collect on the
Portfolios. Additionally, the Partnership sells Portfolios and
portions of Portfolios in those circumstances in which the General
Partner determines that such sales are in the best interests of the
Partnership.
* The term Affiliate means (i) any person who directly or
indirectly controls or is controlled by or under a common control with
another person or entity; (ii) a person owning or controlling 10% or
more of the outstanding voting securities of such other person or
entity; (iii) any officer or director of such other person or entity;
or (iv) any person who is an officer, director, general partner,
trustee, or holder of 10% or more of the voting securities or
beneficial interests of any of the foregoing.
Bulk Portfolios.
Typically, loan accounts are sold by the originating lenders in
bulk Portfolios that range in size from tens of thousands to multi-
hundred million dollars in outstanding principal balances. These
Portfolio sales usually consist of a large quantity of charged off
credit card contracts, automobile deficiencies, secured and unsecured
consumer installment loans, commercial loans, and other forms of
indebtedness. Although typically only a relatively small percent of
the total outstanding principal balances of most Portfolios purchased
by the Partnership can be collected, most of those Portfolios have been
purchased at discounts sufficient enough that, when coupled with
effective servicing and collection efforts, profits can be realized and
the Partnership's objectives can be fulfilled. The Partnership has
sold certain acquired Portfolios, or portions thereof, to various third
parties. Profits from such sales have been used to acquire additional
assets for the Partnership and to distribute cash to the Limited
Partners.
Acquisition of Portfolios.
Because of the experience of PCM in Portfolio acquisition
transactions, PCM is recognized by the institutions selling charged off
commercial and consumer indebtedness as one of the larger purchasers of
distressed consumer indebtedness. PCM general relies on its own
contacts and relationships for acquisitions of Portfolios.
Upon contacting or being contacted by a potential seller of
Portfolios, PCM will normally request that certain data be submitted
for due diligence purposes. By reviewing that data, PCM and the
General Partner analyze the respective Portfolios by checking an array
of information, including data integrity, deciphering statutes of
limitations by state and incorporating other methods to check the
<PAGE>
individual debtors status. By completing the due diligence process and
considering the pertinent information regarding a potential Portfolio's
acquisition, PCM and the General Partner can approximate the value of
that Portfolio and extend an offer to purchase that Portfolio on terms
which should enable the Partnership to collect, service and manage that
Portfolio to a profit.
The General Partner anticipates that the Partnership will
continue to purchase Portfolios. In past years, the Partnership has
acquired certain Portfolios which have accounts that have been
rewritten with terms and conditions different from the original
obligations. The General Partner anticipates that the Partnership will
not acquire such Portfolios in the future unless such an opportunity
arises and the General Partner believes that this opportunity will
achieve the objectives of the Partnership.
Investments in Portfolios are carried at the lower of cost or
estimated net realizable value. Amounts collected on the Portfolios
acquired by the Partnership are treated as a reduction to the carrying
basis of the related investment on an individual Portfolio basis.
Accordingly, income is not recognized by the Partnership until recovery
of 100% of the original cost of the investment by the Partnership on a
Portfolio by Portfolio basis occurs. Estimated net realizable value
represents the estimate of the General Partner, based upon the General
Partner's present plans and intentions, of the present value of future
collections. As a result of the distressed nature of the loans
comprising the Portfolios, there is no assurance that the unpaid
principal balances of those loans will be collected. Any adjustments
to the carrying value of the individual Portfolios are recorded in
results of operations.
As of December 31, 1997, and 1996, the Partnership had
investments in Portfolios with remaining values of $1,663,174 and
$2,566,546, respectively. Collections and sales proceeds obtained by the
Partnership on investments in these Portfolios totaled $908,816 and $4,725,191
during the years ended December 31, 1997 and 1996, respectively.
The Partnership acquired one Portfolio and three Portfolios
totaling $25,477 and $2,764,469 during the years December 31, 1997 and
1996, respectively.
Servicing and Collection of Portfolios.
Once a Portfolio is purchased, generating cash flow involves a
rigorous campaign to locate and contact the maximum number of
individual debtors. The General Partner and its Affiliates
continuously utilize shared data and technology, as well as various
third party databases, in an attempt to locate individual debtors.
Once a debtor is contacted, the collection representative begins
negotiating various payment and settlement options. These options can
include payments in full for all outstanding obligations, discounted
settlements and short-term payment plans. Normally, because the cost
basis is extremely low for each account, collection representatives can
offer more attractive settlement and payment options to individual
debtors than those debtors have been offered by the originating lender
or contingent collection firms.
<PAGE>
The Partnership utilizes the services of PCM exclusively for
managing, servicing, and collecting the Partnership's Portfolios.
Therefore, the Partnership is dependent upon PCM for those management,
servicing, and collection services. The compensation paid by the
Partnership to PCM for those services is no less favorable to the
Partnership than that compensation which would be paid by the
Partnership to equally qualified but unaffiliated persons.
The Partnership is completely dependent on PCM for
managing, servicing and collecting the Partnership's Portfolios. The
General Partner is confident that in the event, for whatever reason,
PCM would be unable to collect, manage and service those Portfolios,
the General Partner will be able to retain for the benefit of the
Partnership, another competently qualified entity to service, manage
and collect those Portfolios for the Partnership, with minimum
disruption to the business of the Partnership.
Settlement with West Capital Financial Services Corp.
Prior to March 1996, the Partnership also utilized the collection
services of West Capital Financial Services Corp., a California
corporation ("WCFSC"), pursuant to a servicing agreement entered into
in 1992. In 1994, the General Partner desired to utilize a portion of
the Partnership's revenues and cash flow for the purpose of causing the
Partnership to acquire an ownership interest in WCFSC. In order to
effectuate that acquisition, on April 8, 1994 the General Partner, on
behalf of the Partnership and the four other similar California
partnerships ("PAM Funds"), entered into a Stock Acquisition Agreement
("Stock Agreement") with WCFSC. The purpose of the Stock Agreement was
to acquire, for the Partnership and the PAM Funds, 1,000 shares of no
par common stock of WCFSC, which 1,000 shares would represent 50% of
the then issued and outstanding no par common shares of WCFSC. The
Stock Agreement provided that the PAM Funds and the Partnership would
receive credits for approximately $1,881,950 due to the PAM Funds and
the Partnership from WCFSC, and the Partnership and the PAM Funds would
then remit cash to WCFSC in the amount of $1,970,000 to WCFSC that was
received from collections on certain Portfolios during the 5 month period
subsequent to the date on which the Stock Agreement was signed.
Certain differences of opinion developed between the General
Partner and WCFSC regarding the terms and conditions of the Stock
Agreement. As a result, the General Partner, for the benefit of the
Partnership and its Affiliates, including the PAM Funds, commenced
litigation against WCFSC and certain of its Affiliates ("WCFSC Dispute").
On February 8, 1996, the parties to the WCFSC Dispute entered
into a Settlement Agreement and mutual general release ("Settlement
Agreement") for the purpose of settling and resolving any and all
disputes existing between the various parties to the WCFSC Dispute. The
Settlement Agreement resulted in the dismissal of the WCFSC Dispute;
release by all parties of all claims against other involved parties,
including those claims relating to the Stock Agreement; and assignment
and transfer by the Partnership and its Affiliates to WCFSC of certain
distressed loan Portfolios.
<PAGE>
The Settlement Agreement required that WCFSC pay to the
Partnership and its Affiliates $16,194,850 in exchange for the general
release, by the Partnership and its Affiliates, of WCFSC and its
Affiliates from the claims asserted in the WCFSC Dispute. The
Settlement Agreement also required the sale to WCFSC by the Partnership
and its Affiliates of certain interests of the Partnership and its
Affiliates in certain Portfolios, and the transfer by the Partnership
and its Affiliates to WCFSC of various other assets and rights. In
addition, the Settlement Agreement required the establishment of a
defense fund of $250,000 that is available to pay legal costs and fees
incurred by WCFSC to defend any and all actions which may be brought by
limited partners in the PAM Funds or the Partnership. To date no such
actions have been brought. The defense fund terminates in July of 1999.
Any remaining funds and earned interest will be distributed to the
Partnership and the PAM Funds.
The proceeds from the Settlement Agreement were allocated to the
Partnership and its Affiliates, including the PAM Funds, by the General
Partner in accordance with the respective interests of the Partnership
and its Affiliates. Accordingly, the Partnership was allocated
$5,727,315 of the total settlement proceeds.
The Settlement Agreement was approved by 87.63% of the Limited
Partners; 0.02% of the Limited Partners disapproved the Settlement
Agreement; and 12.35% of the Limited Partners provided no response
regarding the approval of the Settlement Agreement.
Additionally, 91.12% of all the limited partners in the PAM Funds
and the Partnership, in the aggregate, executed a general release in
favor of WCFSC.
Reorganization of Partnership.
The General Partner is considering the merger, combination,
reorganization, and rollup ("Rollup") of the PAM Funds and the
Partnership into Performance Asset Management Company, a Delaware
corporation ("PAMCO"). The General Partner is aware of the various
federal and state rules and regulations regarding the Rollup, and the
General Partner intends that it and the Partnership will comply with
those rules and regulations. In an effort to assure compliance with
those rules and regulations, the General Partner engaged in
conversations with representatives from the State of California
Department of Corporations ("Department") regarding the Rollup. The
General Partner and representatives of the Department determined that
to accommodate the purposes of the General Partner and to expedite, as
much as possible, the Rollup, the Performance Asset Management Fund
Trust be established ("Trust"). Accordingly, on or about December 8,
1995, the Trust was established. As of December 31, 1997, the total
amounts on deposit in the Trust totaled $7,628,216, including
$2,141,594 which is for the direct benefit of the Partnership.
Employees.
The Partnership does not have any employees. The General Partner
does not have any employees. The human resources requirements of the
Partnership for 1997 were furnished by Vision Capital Services, Corp. a
California corporation ("Vision") and an Affiliate of the General
Partner. Vision was formed in January 1997 to provide human resources
("employees") to PCM, the General Partner, the Partnership and their
Affiliates. All employees, while directly employed by Vision, work for
the benefit of PCM, the General Partner, and the Partnership and their
Affiliates. The Partnership reimburses Vision for any expenditures
paid by Vision on the Partnership's behalf. Fees and expenses paid by
<PAGE>
the Partnership to Vision are not less favorable to the Partnership
than those that would be paid by the Partnership to equally qualified
but unaffiliated persons. In 1996 the services furnished by Vision were
furnished by Spectrum Capital Management, Inc., a California
corporation and an Affiliate of the General Partner ("SCM"), under a
similar reimbursement arrangement.
The Units and Distributions of Cash.
The Units constitute equity interests entitling each Limited
Partner to a pro rata share of cash distributions made to the Limited
Partners. The Partnership Agreement specifies how the cash available for
distribution, whether occurring from operations or sales or
refinancing, is to be shared among the Limited Partners and the General
Partner. The distributions payable to the Limited Partners are not
fixed in amount and depend upon the operating results and net sale or
refinancing proceeds available from the disposition of the Partnership's
assets.
Environmental Compliance.
Due to the nature of the Partnership and General Partner's
business, the Partnership is not subject to any significant costs of
regulatory compliance with respect to federal, state and local
environmental laws and rulings, and does not anticipate any significant
expenses associated with such laws or rulings in the future.
Item 2. Description of Property
Investment Policies.
The Partnership's plan of business provides for the acquisition
of various types of income producing assets from various sources for
the purpose of generating revenue and cash available for distribution
to the Partners and can not be amended without a vote of the
Limited Partners. The present intentions of the General Partner are to
continue to acquire Portfolios. The General Partner has no current
intention of acquiring investments in real estate or interests in real
estate. The Partnership is not subject to any restrictions or
limitations on the percentage of assets that may be invested in any one
type of investment.
Property held by the Partnership.
The Partnership held the following investment property as of
December 31 for the years specified:
<TABLE>
<CAPTION>
Property 1997 1996
------------------------- --------------- --------------
<S> <C> <C>
Cash Held in Trust $2,141,594 $2,656,338
Net Investments in Portfolios 1,663,174 2,566,546
</TABLE>
<PAGE>
The PAM Funds and the Partnership have interests in cash and
equivalents totaling $7,628,216 which was distributed by WCFSC to the
Trust and used for the benefit of, among other parties, the
Partnership. The Partnership's portion of such amounts is included as
Cash Held in Trust at December 31, 1997.
Portfolios are carried at the lower of cost or estimated net
realizable value. Amounts collected on the loans acquired by the
Partnership are treated as a reduction to the carrying basis of the
related Portfolio. Accordingly, income is not recognized by the
Partnership until recovery of 100% of the cost to the Partnership of
the respective Portfolio. Estimated net realizable value represents
the General Partner's estimate, based on its present plans and
intentions, of the present value of future collections. As a result of
the distressed nature of the loans comprising the Portfolios, no
interest is earned on outstanding balances, and there is no assurance
that the unpaid principal balances of those loans will be collected.
Any adjustments to the carrying value of the individual Portfolios are
recorded in results of operations.
Executive Office.
The General Partner's and Partnership's executive offices are
located in Newport Beach, California in a facility of approximately
15,000 square feet, which is shared among a number of affiliated
companies. Neither the General Partner nor the Partnership is party to
the lease for these offices.
Item 3. Legal Proceedings.
Legal Proceedings.
The legal action specified in this section is the only legal
action pending against the Partnership and no additional legal actions
against the Partnership are contemplated. Additionally, the legal
actions in which the General Partner and certain of its Affiliates are
involved are specified below.
On or about October 31, 1997, SunAmerica, Inc., a Maryland
corporation; SunAmerica Life Insurance Company, an Arizona corporation;
WCFSC; and WCFSC Special Purpose Corporation, a California corporation,
as Plaintiffs, filed a Complaint in United States District Court for
the Central District of California alleging (i) violations of Section
10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 promulgated
pursuant thereto; (ii) fraud and deceit; and (iii) gross negligence.
Specified in the Complaint as Defendants are Vincent E. Galewick,
President of the General Partner; the Partnership and the PAM Funds;
and the General Partner ("Performance Defendants"). None of the
Performance Defendants have been served with the Complaint, and the
Performance Defendants became aware of the allegations in the Complaint
on or about November 7, 1997.
The Complaint, in essence, alleges that Michael A. Joplin, the
then President of WCFSC, engaged in wrongful, deceptive and fraudulent
conduct in connection with the purchase and sale of certain securities.
Additionally, that Complaint alleges that the Performance Defendants
participated in that conduct.
<PAGE>
None of the Performance Defendants participated, either directly
or indirectly, in any wrongful, deceptive and fraudulent conduct in
connection with the purchase and sale of those securities.
As part of their settlement of various disputes with WCFSC, the
Performance Defendants entered into the Settlement Agreement which
includes a thorough and comprehensive mutual general release ("Release").
Pursuant to the provisions of the Release, WCFSC, for itself and
its shareholders, officers, directors, affiliates, agents, successors,
and assigns, forever and unequivocally released, acquitted and
discharged the Performance Defendants and their officers, directors,
employees, shareholders, partnerships, affiliates, agents, successors,
and assigns. Therefore, it is the opinion of counsel for the
Performance Defendants that the Performance Defendants have been
completely and unconditionally released from any liability arising from
their relationships and transactions with WCFSC.
The Performance Defendants deny each and every allegation in that
litigation matter and shall defend that litigation matter vigorously.
Moreover, Plaintiffs in that lawsuit have represented to the court that
they are amending their complaint. On or about March 10, 1998,
Plaintiffs attorney filed a declaration under penalty of perjury with
the court which stated that, Based on Plaintiffs investigations to
date, defendants Vincent Galewick, Performance Development, Inc. and
Performance Asset Management Funds, Ltd. are not expected to be named
as defendants in the amended complaint. It is the opinion of counsel
for the Performance Defendants that all the Performance Defendants may
be dismissed from that lawsuit. Moreover, it is the opinion of counsel
for the Performance Defendants that any resolution of that litigation
matter other than dismissal should be resolved favorably for the
Performance Defendants and, therefore, the resolution of that
litigation matter should not (i) affect the ability of the General
Partner to function as the General Partner and manage operations of the
Partnerships, or (ii) materially and adversely affect the General
Partner or the Partnerships.
Accordingly, the General Partner is informed and, therefore,
believes that a subsequent, amended complaint may be filed in this
matter and that none of the Performance Defendants will be specified as
defendants in that subsequent amended complaint. No assurance can be
given that any such subsequent amended complaint will, in fact, be
filed or, if filed, that any of the Performance Defendants will not be
specified as defendants. If the Partnership or the General Partner
remain as defendants in that litigation action, there can be no
assurance or guaranty that the resolution of such litigation action
will not have a material adverse effect on the business or financial
resources of the General Partner or the Partnership.
The General Partner; Income Network Company, a California
corporation and an Affiliate of the General Partner; and Vincent E.
Galewick are named as Defendants in a pending litigation matter
entitled Margarita K. Kanne and Louis H. Knoop v. Sundance Resources;
Prospect Fund, 1991 II et al. In that action the Plaintiffs allege
violations of certain provisions of the California Corporations Code
and the Securities Act and common law fraud. The General Partner,
Income Network Company, and Mr. Galewick deny each and every such
allegation in that litigation matter and are defending that litigation
matter vigorously. The causes of action alleged in that litigation
matter against the defendants regarding those violations of the
<PAGE>
California Corporations Code and the Securities Act were dismissed by
summary adjudication entered in favor of those defendants. It is the
opinion of counsel for the General Partner that any resolution of that
litigation matter should not (i) affect the ability of the General
Partner to function as the General Partner and manage operations of the
Partnerships or (ii) materially and adversely affect the General
Partner or the Partnerships.
Indemnification of General Partner
A provision has been made in the Partnership Agreement to provide
that the General Partner shall have no liability to the Partnership for
any loss occurring because of any act or omission by the General
Partner; provided however, that the General Partner's conduct was in
the best interest of the Partnership; provided, further, however, that
the General Partner's conduct did not constitute fraud, bad faith,
gross misconduct or gross negligence. As a result, Limited Partners
may have a more limited right of action in certain circumstances than
they would in the absence of such a provision in the Partnership
Agreement.
The Partnership Agreement also provides that, to the extent
permitted by law, the Partnership shall indemnify the General Partner
against liability and related expenses (including attorney's fees)
incurred in dealings with third parties; provided, however, the conduct
of the General Partner is consistent with the standards described in
the preceding paragraph. The General Partner is not indemnified
against liabilities occurring pursuant to the provisions of the
Securities Act. The Partnership shall not pay for any insurance
insuring the liability of the General Partner or any other persons for
actions or omissions for which indemnification is not permitted by the
Partnership Agreement; provided, however, the General Partner may be an
additional insured party on policies obtained for the benefit of the
Partnership to the extent there is no additional cost to the
Partnership or decrease in the insurance proceeds payable to the
Partnership.
DISCLOSURE OF COMMISSION'S POSITION ON
INDEMNIFICATION FOR SECURITIES ACT LIABILITIES
INSOFAR AS INDEMNIFICATION FOR LIABILITIES ARISING UNDER THE ACT
MAY BE PERMITTED TO DIRECTORS, OFFICERS OR PERSONS CONTROLLING THE
COMPANY PURSUANT TO THE FOREGOING PROVISIONS, THE COMPANY HAS BEEN
INFORMED THAT IN THE OPINION OF THE COMMISSION SUCH INDEMNIFICATION IS
AGAINST PUBLIC POLICY AS EXPRESSED IN THE ACT AND IS, THEREFORE,
UNENFORCEABLE.
Bankruptcy Proceedings
The Partnership has not been a party, directly or indirectly, to
any bankruptcy, receivership, or similar proceedings.
Reorganization
The Partnership is not now a party to any material
reclassification, merger, consolidation, or purchase or sale of a
significant amount of assets not in the ordinary course of business;
provided, however, it is contemplated that the Partnership shall be
reorganized, merged, consolidated, and rolled up with and into PAMCO.
<PAGE>
Item 4. Submission of Matters to a Vote of Security Holders.
In January 1996, the General Partner submitted to the Limited
Partners for vote the acceptance of the Settlement Agreement. The
Settlement Agreement was approved by 87.63% of the Limited Partners;
less than 1% of the Limited Partners disapproved of the Settlement
Agreement; and 12.35% of the Limited Partners provided no responses
regarding the approval of the Settlement Agreement.
PART II.
Item 5. Market for Units and Related Matters for Holders in Interest.
The Units are not publicly traded or transferable to other
purchasers. Accordingly, no market information is provided.
As of March 1, 1998, the Partnership had 596 Limited Partners.
The Partnership provided cash distributions of $800,400 and
$295,925 to Limited Partners during the years ended December 31, 1997
and 1996, respectively. The Partnership recorded distributions of
$88,800 and $35,775 to the General Partner during the years ended
December 31, 1997 and 1996, respectively. Distributions have been
suspended in anticipation of the reorganization and merger of the
Partnership and the PAM Funds into PAMCO.
Item 6. Management's Discussion and Analysis of Financial Condition and
Results of Operations.
Results of Operations
Comparison of the year ended December 31, 1997 to the year ended
December 31, 1996.
Collections from the Partnership's Portfolios decreased
approximately 81% to $908,816 for the year ended December 31, 1997,
from $4,725,191 for the comparable period in 1996. This decrease in
collections was primarily attributable to proceeds received in 1996
from the settlement and sale of the Partnership's Portfolios to WCFSC.
Subsequent to April 1996, PCM provided all servicing and collection
services for the Partnership and will continue to do so. The
Partnership, in conjunction with PCM and other affiliated Partnerships
also sold portions of previously acquired Portfolios to independent
third-party purchasers. Proceeds recorded from such sales totaled
$54,711 for the period ended December 31, 1997.
<PAGE>
The Partnership is completely dependent on PCM for managing, servicing
and collecting the Partnership's Portfolios. The General Partner is confident
that in the event, for whatever reason, PCM would be unable to collect, manage
and service those Portfolios, the General Partner will be able to retain for
the benefit of the Partnership, another competently qualified entity to service,
manage and collect those Portfolios for the Partnership, with minimum
disruption to the business of the Partnership.
Net investment income decreased approximately 43% to zero from
$884,915 in 1996 due to the proceeds recived from the WCFSC Settlement Agree-
ment in 1996. Durng the year ended December 31, 1996, the Partnership held
twelve Portfolios in which 100% of the original cost was recovered and net
investment income was recorded for these Portfolios. This is attributed
entirely to the settlement and sale of the Portfolios related to the Settlement
Agreement with WCFSC.
The Partnership received proceeds from three Portfolio sales to third
parties of $54,711, of which 100% were characterized as recoveries of invest-
ment and reflected as Portfolio collections for the year ended December 31,
1997. For the comparable period ended December 31, 1996, three
Portfolio sales to third parties totaled $112,820, of which 100% were
characterized as recoveries of investment and characterized as Portfolio
collections. The General Partner believes that proceeds from both collections
and Portfolio account sales will increase in subsequent periods.
Total operating expenses decreased approximately 18% to $320,836
for the year ended December 31, 1997, which compares to $392,357 for
the comparable period in 1996. Collection expenses decreased
approximately 38% for the year ended December 31, 1997, to $45,241 from
$73,542 for the comparable period in 1996. The decrease in collection
expenses is attributed primarily to the fact that less Portfolios were
maintained by the Partnership due to the settlement and sale of the
Partnership's Portfolios to WCFSC pursuant to the Settlement Agreement
with WCFSC. The decrease in professional fees of approximately 23% to
$195,199 for the year ended December 31, 1997 from $254,453 in 1996 is
also attributed to the Settlement Agreement with WCFSC.
The General Partner continuously evaluates the collectibility of
distressed loan balances, and reduces the carrying value of the
investments based on such evaluations. The Partnership has recorded an
allowance for possible Portfolio losses on investments in specific
distressed loan Portfolios of $20,033 as of December 31, 1997.
Financial Condition.
The Partnership's total assets decreased approximately 18% to
$5,035,056 as of December 31, 1997, from $6,120,078 at December 31,
1996. This decrease is primarily attributed to Portfolio collection
proceeds of $908,816 of which 100% was recorded as a reduction of
<PAGE>
investment Portfolio assets. The following table is a summary of the
activity of investments in Portfolio assets for the year ended December
31, 1997.
Carrying Value of Portfolios, January 1, 1997 $2,566,546
Carrying Value of Portfolio Accounts Sold (54,711)
Collections of Portfolio Basis (Carrying Value) (854,105)
Provision for Portfolio Losses (20,033)
Cost of Investment Portfolio Acquired 25,477
----------
Carrying Value of Portfolios, December 31, 1997 $1,663,174
==========
Liquidity and Resources.
The Partnership relies on proceeds from Portfolio collections and
sales to fund additional acquisitions of Portfolios and Partnership
working capital requirements. Portfolio collections are principally
dependent on the resources and performance of PCM. The Partnership is
completely dependent on PCM for managing, servicing and collecting the
Partnership's Portfolios. The General Partner is confident that in the
event, for whatever reason, PCM would be unable to collect, manage and
service those Portfolios, the General Partner will be able to retain
for the benefit of the Partnership, another competently qualified
entity to service, manage and collect those Portfolios for the
Partnership, with minimum disruption to the business of the
Partnership.
At December 31, 1997, the Partnership had cash and equivalents
available for operations of $1,109,587 compared to $775,755 at December
31, 1996. The General Partner anticipates that cash and equivalent
balances at December 31, 1997 will be sufficient to finance current and
forecasted operations.
The Partnership acquired one new distressed loan Portfolio
totaling $25,477 in the fiscal year ended December 31, 1997, and
anticipates that the Partnership will acquire additional Portfolios in
the near future. Future acquisitions will depend on the asset market,
which continues to grow in size and diversity. The General Partner
believes that the Partnership will continue to acquire low-priced
distressed Portfolios; however, the General Partner will continue to
evaluate assets with different pricing and debtor account structure to
determine whether such Portfolios can generate significant immediate
cash flows and provide additional liquidity to the Partnership.
The Partnership has made no future commitments with credit card
originators and other financial institutions to acquire Portfolios.
The General Partner and PCM plan to use their present contacts and
relationships to identify and acquire additional assets for the Partnership
at optimal prices, and believe that they will have no difficulties in
identifying and acquiring such assets. Distributions were suspended to
Limited Partners in the third quarter of 1997 in anticipation of the
contemplated reorganization of the Partnership and the PAM Funds into PAMCO.
<PAGE>
Impact of Additional Partnership Acquisitions on Operations.
The General Partner anticipates that additional Portfolio
acquisitions and continued expansion will improve the Partnership's
liquidity, profitability and financial condition, as a result of
increased Portfolio collections and sales. The General Partner
anticipates that in order to supplement such growth, PCM must continue
to increase its total number of collection representatives and human
resources. The General Partner anticipates that existing management
will be able to supervise the additional Portfolio growth of the
Partnership, as well as facilitate any increase of the Partnership's
Portfolio sales activities. The General Partner, in conjunction with
PCM and other Affiliates, is seeking to lease office space in which PCM
and the Partnership plan to move their facilities. The General Partner
believes that this move will provide the Partnership with adequate
operating facilities for the future growth of the Partnership.
Trends in the Distressed Debt Industry
According to a recent report in a 1997 supplement to Collections
and Credit Risk magazine, PCM is one of the top five purchasers of bad
debt in the United States. Most of the top fifty purchasers of bad debt
maintain well-established collections operations and service and
collect on the bad debt which they purchase. A secondary layer of
competition for distressed asset portfolios are companies that buy debt
in bulk and break it up into smaller portfolios that are then resold
to collection agencies, private investors and attorneys. Traditional
collection agencies and attorneys purchase bad debt to diversify their
operations and add debt they own to contingency collection work for
others. Moreover, industry sources estimate that about a quarter of the
buyers of bad debt in 1997 were outside investors with no experience in
the collections industry who thereafter arranged for collection agencies
to collect the debt, either through joint ventures or contingency placement.
While accurate figures are elusive, it is estimated that the volume of bad
debt purchased in the United States in 1997 ranged from $12 billion to
$18 billion.
The amount of debt available for sale in the industry continues to
increase. Financial institutions previously had forwarded all their
accounts after charge-off to collection agencies for further collection
activity as standard operating procedure. After being at an agency for
six to twelve months, accounts would be returned to the lender and then
forwarded to additional agencies, sometimes as many as five times. In order
to streamline operations and control costs, many institutions are now
looking towards the sale of some or all of these accounts as a means to get
immediate revenue for these accounts. Additionally, not only does the
total amount of debt continue to rise year after year, but the
percentage of those debts that becomes charged-off also continues to
grow. These factors continue to create market opportunities for the
buyers of distressed financial instruments as more institutions
discover the advantages of selling their debts. The General Partner
believes that the Partnership is well positioned to take advantage of these
trends in the distressed debt industry in its next fiscal year.
<PAGE>
Year 2000 Disclosure
The General Partner recognizes that the arrival of the Year 2000
poses a unique challenge to the ability of the computer systems of PCM,
used to service, manage and collect the Portfolios in which the
Partnership has an interest, to recognize properly and process date
sensitive information related to the date change from December 31, 1999
to January 1, 2000. As the century date change occurs, date-sensitive
systems may recognize the Year 2000 as 1900, or not at all. This
inability to recognize or treat properly the Year 2000 may cause PCM's
computer systems to process financial and operational information
incorrectly, which could have a material adverse effect on the
Partnership's results of operations. PCM has assessed and begun
remedial work relating to PCM's computer software programs and business
processes to provide for PCM's ability to continue to function
effectively.
In 1997, PCM began the process of identifying, evaluating and
implementing changes to PCM's computer programs necessary to address
the Year 2000 issue. The General Partner is currently addressing the
Partnership's internal Year 2000 issue by coordinating with PCM in
connection with PCM's modification of existing programs and conversions
to new programs. The General Partner is also in communication with
financial institutions and other entities with which PCM and the
Partnership conduct business to help them identify and resolve the year
2000 issue as it relates to the Partnership's business operations. An
assessment of the readiness of those third party institutions and
entities with which the Partnership does business is ongoing. While
PCM and the General Partner are confident that PCM will complete
assessment and remediation of PCM's computer software, there can be no
assurance that the necessary modifications and conversions by those
third party institutions and entities with which PCM and the
Partnership conduct business will be completed in a timely manner,
which could have a material adverse effect on the Partnership's results
of operations. The total cost to the Partnership associated with the
required modifications and conversions is not expected to be material
to the Partnership's results of operations and financial position and
is being expensed as incurred.
<PAGE>
Performance Asset Management Fund III, Ltd.,
A California Limited Partnership
Index to Financial Statements
For the Years Ended December 31, 1997 and 1996
Report of Independent Auditors F-1
Financial Statements of Performance Asset Management Fund III, Ltd.,
A California Limited Partnership:
Balance Sheets as of December 31, 1997 and 1996 F-2
Statements of Operations for the years ended
December 31, 1997 and 1996 F-3
Statements of Partners' Capital (Deficit) for the
years ended December 31, 1997 and 1996 F-4
Statements of Cash Flows for the years ended
December 31, 1997 and 1996 F-5
Notes to Financial Statements F-6
<PAGE>
REPORT OF INDEPENDENT AUDITORS
To the Partners of
Performance Asset Management Fund III, Ltd.
A California Limited Partnership
We have audited the accompanying balance sheets of Performance Asset Management
Fund III, Ltd., A California Limited Partnership ("Partnership"), as of December
31, 1997 and 1996, and the related statements of operations, partners' capital
(deficit) and cash flows for the years then ended. These financial statements
are the responsibility of the Partnership's management. Our responsibility is
to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Performance Asset Management
Fund III, Ltd., A California Limited Partnership, as of December 31, 1997 and
1996, and the results of its operations and its cash flows for the years then
ended, in conformity with generally accepted accounting principles.
/S/ KELLY & COMPANY
Kelly & Company
Newport Beach, California
March 6, 1998
F - 1
<PAGE>
<TABLE>
Performance Asset Management III, Ltd.,
A California Limited Partnership
Balance Sheets
December 31, 1997 and 1996
ASSETS
<CAPTION>
1997 1996
---------- ----------
<S> <C> <C>
Cash and equivalents $1,109,587 $775,755
Cash held in trust 2,141,594 2,656,338
Investments in distressed loan portfolios, net 1,663,174 2,566,546
Due from affiliate 56,221 56,039
Other assets 64,480 64,477
Organization costs, net - 923
---------- ----------
Total assets $5,035,056 $6,120,078
========== ==========
LIABILITIES AND PARTNERS' CAPITAL
Accounts payable $5,219 $715
Due to affiliates, net 464,128 492,800
---------- ----------
Total liabilities 469,347 493,515
---------- ----------
General partner's deficit (no units outstanding) (395,923) (289,959)
Limited partners' capital (2,000 units authorized;
1,998 units issued and outstanding at
December 31, 1997 and 1996) 4,961,632 5,916,522
---------- ----------
Total partners' capital 4,565,709 5,626,563
---------- ----------
Total liabilities and partners' capital $5,035,056 $6,120,078
========== ==========
<FN>
The accompanying notes are an integral part of the financial statements.
F - 2
</TABLE>
<PAGE>
<TABLE>
Performance Asset Management III, Ltd.,
A California Limited Partnership
Statements of Operations
For the Years Ended December 31, 1997 and 1996
<CAPTION>
1997 1996
---------- ----------
<S> <C> <C>
Portfolio collections $908,816 $4,725,191
Less: portfolio basis recovery 908,816 3,840,276
---------- ----------
Net investment income 0 884,915
---------- ----------
Cost of operations:
Collection expense 45,241 73,542
Management fee expense 51,757 51,425
Provision for Portfolio Losses 20,033 -
Professional fees 195,199 254,453
Amortization 923 1,155
General and administrative expense 7,683 11,782
---------- ----------
Total operating expenses 320,836 392,357
---------- ----------
Income (loss) from operations (320,836) 492,558
Other income:
Interest 149,098 190,605
Other income 84 -
---------- ----------
Net income (loss) ($171,654) $683,163
========== ==========
Net income (loss) allocable to general partner ($17,164) $68,315
========== ==========
Net income (loss) allocable to limited partners ($154,490) $614,848
========== ==========
Net income (loss) per limited partnership unit ($77.32) $307.73
========== ==========
<FN>
The accompanying notes are an integral part of the financial statements.
F - 3
</TABLE>
<PAGE>
<TABLE>
Performance Asset Management III, Ltd.,
A California Limited Partnership
Statements of Partners' Capital (Deficit)
For the Years Ended December 31, 1997 and 1996
<CAPTION>
General Limited
Partner Partners Total
--------- ---------- ----------
<S> <C> <C> <C>
Balance, December 31, 1995 ($322,499) $5,597,599 $5,275,100
Distributions (35,775) (295,925) (331,700)
Net income 68,315 614,848 683,163
--------- ---------- ---------
Balance, December 31, 1996 (289,959) 5,916,522 5,626,563
Distributions (88,800) (800,400) (889,200)
Net income (17,164) (154,490) (171,654)
--------- ---------- ---------
Balance, December 31, 1997 ($395,923) $4,961,632 $4,565,709
========= ========== =========
<FN>
The accompanying notes are an integral part of the financial statements.
F - 4
</TABLE>
<PAGE>
<TABLE>
Performance Asset Management III, Ltd.,
A California Limited Partnership
Statements of Cash Flows
For the Years Ended December 31, 1997 and 1996
<CAPTION>
1997 1996
---------- ----------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) ($171,654) $683,163
Adjustments to reconcile net income (loss) to net
cash provided by operating activities:
Amortization 923 1,155
Decrease (increase) in assets:
Other assets (3) 101,338
Due from affiliates (182) (56,039)
Provision for portfolio losses 20,033
Increase (decrease) in liabilities:
Accounts payable 4,504 (1,808)
Due to affiliates (28,672) 59,858
---------- ----------
Net cash (used in) operating activities (175,051) 787,667
---------- ----------
Cash flows provided by (used in) investing activities:
Recovery of portfolio basis 908,816 3,840,276
Receivable from West Capital - 927,540
Cash held in trust 514,744 (1,893,699)
Purchase of investments in distressed loan portfolios (25,477) (2,764,469)
---------- ----------
Net cash provided by investing activities 1,398,083 109,648
---------- ----------
Cash flows (used in) financing activities:
Distributions to partners (889,200) (331,700)
---------- ----------
Net cash used in financing activities (889,200) (331,700)
---------- ----------
Net increase in cash 333,832 565,615
Cash at beginning of period 775,755 210,140
---------- ----------
Cash at end of period $1,109,587 $775,755
========== ==========
Supplemental Disclosure of Cash Flow Information
Cash paid during the year for:
Franchise taxes $800 $800
<FN>
The accompanying notes are an integral part of the financial statements.
F - 5
</TABLE>
<PAGE>
Performance Asset Management Fund III, Ltd.
A California Limited Partnership
Notes to Financial Statements
1. Organization and Summary of Significant Accounting Policies
Organization and Description of Business
Performance Asset Management Fund III, Ltd., A California Limited Partner-
ship (the "Partnership"), was formed in September 1992, for the purpose of
acquiring investments in or direct ownership of distressed loan portfolios
from financial institutions and other sources. Interests in the Partnership
were sold in a private placement offering pursuant to Regulation D promul-
gated by the Securities and Exchange Commission on a "best efforts" basis;
however, the Partnership did not begin its primary operations until October
1992. The general partner is Performance Development, Inc., a California
corporation ("PDI")(the "General Partner").
The Partnership terminates at December 31, 2005. At that time, the Partner-
ship will distribute any remaining cash after payment of Partnership obliga-
tions following the sale or collection of all assets.
Profits, losses, and cash distributions are allocated 90% to the limited
partners and 10% to the General Partner until such time as the limited
partners have received cash equal to 100% of their contributions to the
Partnership. Thereafter, Partnership profits, losses, and cash distribu-
tions are allocated 70% to the limited partners and 30% to the General
Partner.
Cash and Equivalents
The Partnership defines cash equivalents as all highly liquid investments
with an original maturity of three months or less. The Partnership main-
tains cash balances at one bank in accounts which exceeded federally
insured limits by approximately $1,009,000 and $675,000 at December 31,
1997 and 1996, respectively. The Partnership uses a cash management system
whereby idle cash balances are transferred daily into a master account and
invested in high quality, short-term securities that do not enjoy the bene-
fit of the federal insurance. The Partnership's management believes that
these cash balances are not subject to any significant credit risk due to
the nature of the investments and the strength of the bank and has not
experienced any past losses with cash and equivalent investments.
The Partnership received interest income from these investments of $149,098
and $190,605 in 1997 and 1996, respectively.
Cash Held in Trust
The General Partner anticipates that the Partnership and PAM, PAM II, IV,
and V, may, in the future, be reorganized and merged into one corporation
(Potential Merger Participant PAM Funds). In an effort to accomplish that
reorganization and merger, the General Partner, on behalf of the
Partnership and the other Potential Merger Participant PAM Funds, entered
into an agreement on December 12, 1995 with the State of California
Department of Corporations, pursuant to the provisions of which the
Performance Asset Management Fund Trust ("Trust") was created. These funds
F - 6
<PAGE>
Performance Asset Management Fund III, Ltd.
A California Limited Partnership
Notes to Financial Statements
1. Organization and Summary of Significant Accounting Policies, Continued
Cash Held in Trust, Continued
held in trust are subject to the terms of the Trust Agreement. The Trust
was the recipient of a portion of the funds resulting from the settlement
of certain then pending litigation between the Partnership and its
affiliates and West Capital Financial Services Corp. ("WCFSC") and its
affiliates. The trust fund balance until Trust termination must exceed
$5,000,000 among all Potential Merger Participant PAM Funds. The Trust
will terminate and the trustee will distribute all of the remaining funds
held by the trustee on August 18, 1998 if reorganization and merger is not
completed by such date. The Partnership's share of the Trust's funds at
December 31, 1997 and 1996 was $2,141,594 and $2,656,338.
Investment in Distressed Loan Portfolios and Revenue Recognition
Investments in distressed loan portfolios are carried at the lower of cost
or estimated net realizable value. Amounts collected are treated as a
reduction to the carrying basis of the related investment on an individual
portfolio basis and are reported in the Statement of Operations as portfolio
collections. Under the cost recovery method of revenue recognition used
by the Partnership, net investment income is not recognized until 100%
recovery of the carrying value of the investment in each portfolio occurs.
Estimated net realizable value represents management's estimates, based on
its present plans and intentions, of the present value of future collec-
tions. Due to the distressed nature of these investments, no interest is
earned on outstanding balances, and there is no assurance that the unpaid
balances of these investments will ultimately be collected. Any adjustments
reducing the carrying value of the individual portfolios are recorded in the
results of operations.
Organization Costs, Net
Organization costs include legal and other professional fees incurred
related to the initial organization of the Partnership. These costs have
been capitalized and amortized using the straight-line method over five
years ending in 1997. Accumulated amortization at December 31, 1997 and
1996, totaled $5,786 and $4,863, respectively.
Professional Expenses
Professional expenses are incurred in relation to ongoing accounting and
legal assistance.
F - 7
<PAGE>
Performance Asset Management Fund III, Ltd.
A California Limited Partnership
Notes to Financial Statements
1. Organization and Summary of Significant Accounting Policies, Continued
Income Taxes
No provision for income taxes has been provided for in the financial
statements, except for the Partnership's minimum state franchise tax
liability of $800. All partners report individually on their share of
Partnership operating results.
Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the finan-
cial statements and the reported amounts of revenue and expenses during
the reported period. Actual results could differ from the estimates.
Financial Statement Classification
Certain amounts within the 1996 financial statements have been reclassified
in order to conform with the 1997 financial statement presentation.
2. Investments in Distressed Loan Portfolios, Net
Investments in distressed loan portfolios consist primarily of charged-off
credit card accounts and consumer loan balances, such as auto and personal
lines of credit, originated by independent third-party financial institu-
tions located throughout the United States. In addition, the Partnership
acquired portfolios of defaulted consumer debts which were rewritten under
terms different from the original obligation. The fair value of these
investments was determined by discounting the estimated future cash collec-
tions on such investments during the estimated portfolio holding period
using a discount rate commensurate with the risks involved.
The discount rate converts the individual portfolio's expected future cash
flows to a calculated present value. The Partnership utilized an industry
specific discount rate from Ibbotsen's Cost of Capital Yearbook 1998 which
considered information for the 1997 year. The Partnership utilized the cost
of capital rate experienced in 1997 by personal finance companies. The
personal finance companies' data was selected as it most closely reflected
comparable economic risk levels and the type of business operations
encountered. The weighted average cost of capital for personal fiance
companies was between 8.08 and 10.95 for 1997 and 7.31 and 9.4 for 1996.
The Partnership used rates within these ranges.
At December 31, 1997 and 1996, investments in distressed loan portfolios
consisted of the following:
F - 8
<PAGE>
Performance Asset Management Fund III, Ltd.
A California Limited Partnership
Notes to Financial Statements
2. Investments in Distressed Loan Portfolios, Net, Continued
1997
--------------------------
Carrying Fair
Amount Value
---------- ----------
Credit card accounts $1,662,543 $2,924,343
Consumer loans 631 631
---------- ----------
$1,663,174 $2,924,974
========== ==========
1996
--------------------------
Carrying Fair
Amount Value
---------- ----------
Credit card accounts $2,566,058 $4,254,288
Consumer loans 488 1,236
---------- ----------
$2,566,546 $4,255,524
========== ==========
At December 31, 1997, the allowance for possible losses on investments
(the "allowance") in specific destressed loan portfolios consisted of
the following:
1997
-----------------------------------------
Investment Allowance for Carrying
Balance Portfolio Losses Amount
---------- ---------------- ----------
Credit card accounts $1,683,207 $20,033 $1,663,174
---------- ---------------- ----------
$1,683,207 $20,033 $1,663,174
========== ================ ==========
The Partnership continuously evaluates the collectibility of distressed
loan balances by reviewing the cash flows from the individual portfolios
as well as their respective market values. The Partnership adjusts the
allowance of those portfolios for which the cash flows or market values of
the portfolios are less than the current net book value. The Partnership
has recorded an allowance for possible losses on investments in specific
distressed loan portfolios of $20,033 at December 31, 1997. No allowance
was required at December 31, 1996.
3. Related Party Transactions
The Partnership has entered into several fee and cost reimbursement
arrangements with affiliated corporations most of which are provided for
and documented in the limited partnership agreement and the offering
prospectus. With the exception of PCM, all of the entities are controlled
by the General Partner and/or its sole shareholder. In the case of PCM,
there is one minority shareholder who holds one and one-half per cent of
the outstanding stock. The affiliated corporations and other affiliated
entities are identified below:
F - 9
<PAGE>
Performance Asset Management Fund III, Ltd.
A California Limited Partnership
Notes to Financial Statements
3. Related Party Transactions, Continued
Affiliated Corporations:
Performance Development, Inc. ("PDI")
Performance Capital Management ("PCM")
Vision Capital Service Corp.("Vision")
Spectrum Capital Management, Inc. ("Spectrum")
Other Affiliated Entities
Performance Asset Management Fund, Ltd. and
Performance Asset Management Funds II, IV, V and VI, Ltd. ("PAM Funds")
PDI was formed as a California corporation in June 1990 to engage in various
aspects of the investment banking industry. PDI is also the General Partner
for the PAM Funds and various other California limited partnerships. PDI,
in accordance with the limited partnership agreement and offering
prospectus, is reimbursed for legal, accounting, and other costs relating
to the limited partnership. In addition, the Partnership pays PDI an annual
management fee of 2.0% of the net asset value of the Partnership portfolio
assets during the operating phase of the Partnership in accordance with the
provisions of the limited partnership agreement. As the General Partner in
the Partnership, PDI is also entitled to a portion of periodic distributions
to partners, in accordance with the provisions of the limited partnership
agreement.
PDI's management fees incurred and recorded by the Partnership totaled
$51,757 and $51,425 for the years ended December 31, 1997 and 1996, respec-
tively. The Partnership also made general partner capital distributions to
PDI of $88,800 and $35,775 for the years ended December 31, 1997 and 1996,
respectively. At December 31, 1997 and 1996, the Partnership had amounts
owed to PDI recorded as amounts due to affiliates of $382,162 and $492,364,
respectively.
PCM was formed as a California corporation in February 1993, and since its
formation has performed services for the Partnership and the PAM Funds
relative to locating, evaluating, negotiating, acquiring, servicing, and
collecting investments in distressed loan portfolios. PCM acquires
distressed loan portfolios from third-parties and sells the portfolios
to the Partnership for amounts determined by the General Partner to be
reasonable, customary, and competitive in light of the size, type and
character of the acquired portfolios and consistent with the limited
partnership agreement. The Partnership also enters into agreements with
PCM to collect and service the acquired portfolios. The agreements
generally provide that all proceeds generated from the collection of
portfolio assets will be shared by the parties in proportion to their
respective distribution interests, generally 55% to 65% for the Partnership
and 35% to 45% for PCM. The Partnership also reimburses PCM for certain
costs incurred in the collection of portfolio assets.
For the years ended December 31, 1997 and 1996, the Partnership was charged
$45,241 and $73,542, respectively, by PCM for collection expenses which
F - 10
<PAGE>
Performance Asset Management Fund III, Ltd.
A California Limited Partnership
Notes to Financial Statements
3. Related Party Transactions, Continued
included but were not limited to collection letters that were sent out to
the debtors, debtor tracers utilized in an attempt to locate portfolio
debtors, and administration costs incurred when setting up each debtor
profile in the PCM information database.
For the years ended December 31, 1997 and 1996, PCM sold to the Partner-
ship one portfolio and three portfolios, respectively, and recorded
acquisition fees for these portfolios of $6,744 and $686,459, respectively.
These acquisition fees have been included in the carrying value of the
related Partnership investments.
The Partnership had three portfolio sales for $54,711 in the year ended
December 31, 1997, and three portfolio sales for $112,820 in the year
ended December 31, 1996. PCM effects the sale of the portfolios for the
Partnership to non-related third parties and retains 15% of the proceeds as
a commission.
At December 31, 1997, the Partnership had a net amount of 24,713 owed to
PCM included in amounts due to affiliates. At December 31, 1996, the
Partnership had a net amount of $56,039 due from PCM included in amounts
due from affiliates.
Vision was formed in January 1997 to serve as an employment service bureau
to PCM, PDI and the PAM Funds. All employees, while directly employed by
Vision, work for the benefit of PCM, PDI and the PAM Funds. The Partner-
ship pays PDI a fee equal to the actual wages paid to Vision. In 1996 the
services performed by Vision were performed by Spectrum under a similar
reimbursement arrangement. At December 31, 1997 and 1996, employee
service fees were $13,019 and $56,184, respectively.
4. Settlement with West Capital Financial Services Corp.
On April 8, 1994, the General Partner, on behalf of the Partnership and the
other Potential Merger Participant PAM Funds, entered into a Stock Acquisi-
tion Agreement ("Stock Agreement") with WCFSC, for the purpose of acquiring
50% of the then issued and outstanding no par common shares of WCFSC. The
Stock Agreement provided that the Partnership and the other Potential Merger
Participant PAM Funds would receive credits for approximately $1,881,950 due
them from WCFSC. The Partnership and the other Potential Merger Participant
PAM Funds would then remit cash in the amount of $1,970,000 that was payable
during the five month period subsequent to the agreement date of the
transaction.
Certain differences of opinion developed between the General Partner and
WCFSC regarding the terms and conditions of the Stock Agreement. As a
result, the General Partner, for the benefit of the Partnership and the
other Potential Merger Participant PAM Funds, commenced litigation against
WCFSC and certain of its affiliates ("WCFSC Dispute").
On February 8, 1996, the parties to the WCFSC Dispute entered into a
Settlement Agreement and Mutual General Release ("Settlement Agreement")
for the purpose of settling and resolving any and all disputes existing
between the various parties to the WCSFC Dispute. The Settlement Agreement
resulted in the dismissal of the WCFSC Dispute, release by all parties of
all claims against other involved parties, including those claims relating
F - 11
<PAGE>
Performance Asset Management Fund III, Ltd.
A California Limited Partnership
Notes to Financial Statements
4. Settlement with West Capital Financial Services Corp., Continued
to the Stock Agreement, and the assignment and transfer by the Partnership
and the other Potential Merger Participant Pam Funds to WCFSC of certain
distressed loan portfolios.
The Settlement Agreement required that WCFSC pay to the Partnership and its
affiliates $16,194,850 in exchange for the general release as well as the
transfer to WCFSC by the Partnership and the other Potential Merger Parti-
cipant PAM Funds of certain interests in certain distressed loan portfolios,
and the transfer of various other assets and rights. In addition, the
Settlement Agreement required the establishment of a defense fund of
$250,000 from the proceeds which has been available to pay legal fees and
costs incurred by WCFSC to defend any and all actions which may be brought
by limited partners of the Partnership and the PAM Funds. To date no such
actions have been brought and no funds have been expended. The defense fund
terminates in July 1999. Any remaining funds and earned interest will be
distributed to the Partnership and the other Potential Merger Participant
PAM Funds. The Partnership's portion of the defense fund is included in
other assets.
The proceeds from the Settlement Agreement were allocated to the Partner-
ship and its affiliates, including the other Potentia Merger Participant
PAM Funds, by the General Partner in accordance with the respective
interests of the Partnership and those affiliates. Accordingly, the
Partnership was allocated $5,727,315 of the total settlement proceeds
(see Note 1 - Cash Held in Trust).
The Settlement Agreement was approved by 87.63% of the limited partners of
the Partnership; only 0.02% of the limited partners of the Partnership
disapproved; and 12.35% of the limited partners of the Partnership provided
no responses. A general release in favor of WCFSC was executed by 91.12%
of all the limited partners in the Partnership and the other Potential
Merger Participant Pam Funds.
5. Partners' Capital
In July 1997 the distributions to partners were suspended in anticipation
of the reorganization (See Note 1 - Cash Held in Trust). For the years
ended December 31, 1997 and 1996, the Partnership had 1,998 partnership
units outstanding of the 2,000 partnership units authorized.
The net income or loss per partnership unit was calculated by dividing the
total limited partner net income/(loss) by the number of limited
partnership units issued and outstanding as of December 31, 1997 and 1996.
The General Partner did not own any partnership units as of December 31,
1997 and 1996.
6. Disclosures about Fair Value of Financial Instruments
The carrying amounts reported on the Balance Sheet for cash and cash
equivalents approximate fair value due to the short-maturity of these
instruments.
The carrying values of due to affiliates and due from affiliates approx-
imate fair value.
The fair value of investment in distressed loan portfolios is addressed in
Note 2 - Investments in Distressed Loan Portfolios.
F - 12
<PAGE>
Performance Asset Management Fund III, Ltd.
A California Limited Partnership
Notes to Financial Statements
7. Year 2000 Disclosure
In 1997, PCM began the process of identifying, evaluating and implementing
changes to PCM's computer programs necessary to address the Year 2000 issue.
The General Partner is currently addressing the Partnership's internal Year
2000 issue by coordinating with PCM in connection with PCM's modification
of existing programs and conversions to new programs. The General Partner
is also in communication with financial institutions and other entities with
which the Partnership conducts business to help them identify and resolve
the Year 2000 issue as it relates to the Partnership's business operations.
An assessment of the readiness of those third party institutions and
entities with which the Partnership does business is ongoing. While PCM
and the General Partner are confident that PCM will complete the assessment
and remediation of PCM's computer software, there can be no assurance that
the necessary modifications and conversions by those third party insti-
tutions and entities with which the Partnership conducts business will be
completed in a timely manner, which could have a material adverse effect on
the Partnership's results of operations. The total cost to the Partnership
associated with the required modifications and conversions is not expected
to be material to the Partnership's results of operations and financial
position and is being expensed as incurred.
8. New Pronouncements
Management has reviewed the following new pronouncements issued in 1997 by
the Financial Accounting Standards Board ("FASB"): SFAS 128, Earnings Per
Share; SFAS 129, Disclosure of Information about Capital Structure; SFAS
130, Reporting on Comprehensive Income; SFAS 131, Disclosures about Segments
of an Enterprise and Related Information; and the Accounting Standards
Executive Committee's release SOP 96-1, Environmental Redemption
Liabilities. Management believes these pronouncements do not apply or
will not have a material impact to the Partnership.
9. Net Investment Income
The following schedule summarizes portfolio sales and collections of debt
on portfolios held by the Partnership. Related portfolio basis recoveries
and net investment income are also presented (see Note 1 for revenue
recognition policy).
1997
------------------------------------------
Sales to Collection
WCFSC Third Parties of debt Total
------- ------------- ---------- -------
Portfolio Collections - $54,711 $854,105 $908,816
Portfolio Basis Recovery - 54,711 854,105 908,816
------- ------------- ---------- -------
Net investment income - - - -
======= ============= ========== =======
<PAGE>
Performance Asset Management Fund III, Ltd.
A California Limited Partnership
Notes to Financial Statements
9. Net Investment Income, Continued
1996
------------------------------------------
Sales to Collection
WCFSC Third Parties of debt Total
--------- ------------- ---------- -------
Portfolio Collections $4,391,375 $112,820 $220,996 $4,725,191
Portfolio Basis Recovery 3,511,087 112,820 216,369 3,840,276
-------- ------------- ---------- ---------
Net investment income $880,288 - $4,627 $884,915
======== ============= ========== ========
F - 14
<PAGE>
Item 8. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.
None.
PART III.
Item 9. Directors, Executive Officers, Promoters and Control Persons.
The directors and principal executive officers of the General
Partner is as specified on the following table:
Name Age Position
Vincent E. Galewick 38 President, Secretary, and
Sole Director
Michael A. Cushing 38 Chief Financial Officer
Vincent E. Galewick is the President, Secretary, sole director
and sole shareholder of the General Partner. Mr. Galewick has been the
sole director of the General Partner since the formation of the
Partnership. Mr. Galewick has acted in this capacity for the General
Partner since the formation of the General Partner in 1990.
As the President and original shareholder of the General Partner,
Mr. Galewick has been instrumental in the selection, negotiation, and
acquisition of approximately 150 Portfolios with original obligations
exceeding $2.1 billion. Those Portfolios are owned and managed by the
Partnership and the PAM Funds.
In January 1989, Mr. Galewick became affiliated with Income
Network Company, working as a Registered Principal. Income Network
Company is a member Broker/Dealer of the National Association of
Securities Dealers, Inc. and has been such a member since March 14,
1988. In March of 1992, Mr. Galewick purchased all of the common stock
of Income Network Company. Income Network Company is an Affiliate of
the General Partner and specializes in direct participation programs.
Mr. Galewick continues as a Registered Principal of Income Network
Company and hold Series 6, 22, 24, 39, and 63 securities licenses. In
addition, Mr. Galewick is currently the President, Secretary, and sole
director of PCM.
Michael Cushing is the Chief Financial Officer of the General
Partner and PCM. Mr. Cushing graduated from the University of
California at Santa Barbara with a Bachelor of Arts in Business
Economics. Mr. Cushing became licensed as a Certified Public
Accountant in the State of California while employed by the accounting
firm of Coopers and Lybrand.
Mr. Cushing has served in various capacities with the General
Partner and its Affiliates, including acquisition consultant, director
of operations and Chief Financial Officer for the General Partner and
certain of its Affiliates since March 1992.
From January of 1989 to November of 1991, Mr. Cushing served as
Vice President of Real Estate and corporate Secretary for the general
partner of Bay Plaza Partnership, a master developer of a planned 1.4
million square foot, $240 million downtown redevelopment project for
the city of St. Petersburg, Florida.
Item 10. Executive Compensation.
Specified below, in tabular form, is the aggregate annual
remuneration of each of the 3 highest paid persons who are officers or
directors of the General Partner as a group during the Partnership's
most recent fiscal year.
Name of individual or Capacities in which
Identity of Group Remuneration was Received Remuneration
None** None None
**The officers and directors of the General Partner receive no
direct compensation from the Partnership. The officers and directors
of the General Partner are part of the human resources provided to the
General Partner by Vision. As a result, the officers and directors of
the General Partner receive their remuneration from Vision and from its
predecessor, SCM. In fiscal 1997, Vincent E. Galewick and Michael A. Cushing
received a total of $7,086 from Vision and its predecessor which was charged
to the Partnership.
Item 11. Security Ownership of Certain Beneficial Owners and
Management.
No person or groups are beneficial owners of 5% or more of the
total Units.
Security Ownership of Management.
The directors and principal executive officers of the General
Partner do not hold any Units. Vincent E. Galewick is the President,
Secretary, sole director and sole shareholder of the General Partner.
As specified above, Mr. Galewick is also the President, Secretary,
Chief Financial Officer, sole director, and sole shareholder of Income
Network Company, an Affiliate of the General Partner which served as
the Placement Manager for the offer and sale of the Units. Mr.
Galewick is also the President, Secretary, sole director of PCM, which,
as specified above, is an Affiliate of the General Partner and provides
certain due diligence, Portfolio servicing and acquisition services for
the Partnership. Mr. Galewick is also the President, Secretary, sole
director, and sole shareholder of Vision, which, as specified above, is
an Affiliate of the General Partner which provides human resources to
the General Partner and its Affiliates, including PCM.
Changes in Control.
The General Partner is not aware of any arrangements which may
result in changes in control as that term is defined by the
provisions of Item 403(c) of Regulation S-B, other than a proposal,
currently under consideration by the General Partner, pursuant to which
the PAM Funds and the Partnership would merge with and into PAMCO. The
result of the proposed merger would be that a series of interrelated
changes to the current organizational form of PAMCO would be
implemented, including (a) merging the Partnership and the PAM Funds
with and into PAMCO, as a result of which PAMCO would be the sole
surviving entity; (b) terminating the PAM Funds and the Partnership and
(c) converting the Limited Partners interests in the Partnership into
common shares issued by PAMCO.
The merger proposal has been approved by the Board of Directors
of the General Partner; provided, however, the merger proposal has not
been submitted to the shareholders of the General Partner for approval.
The merger proposal but may not be approved by the Limited Partners of
the PAM Funds or the Partnership.
Item 12. Certain Relationships and Related Transactions.
Compensation to the General Partner and Affiliates.
Other than as specified herein, no compensation is paid to the
General Partner, although the General Partner and certain of its
Affiliates are reimbursed for certain expenses that the General Partner
and those Affiliates have advanced on behalf of the Partnership. These
compensation arrangements have been established by the General Partner
and are not the result of arm's length negotiations.
Management Fee to General Partner.
The General Partner receives an annual and ongoing fee for the
management of the affairs of the Partnership equal to 2-1/2% of the net
asset value of the Partnership's assets, which is defined as the total
of the (i) lower of the (a) market value, as determined by the General
Partner on an annual basis, or (b) cost to the Partnership of non-
performing assets and (ii) principal balances of performing assets.
The management fee is earned by the General Partner on an annual basis
and is paid to the General Partner pro rata on a monthly basis. During
the years ended December 31, 1997 and 1996, the Partnership incurred
fees owed to the General Partner of $51,757 and $51,425, respectively.
Reimbursement of Expenses.
The General Partner has been reimbursed for reasonable and
necessary expenses paid or incurred by the General Partner regarding
the operation of the Partnership, including legal and accounting fees
and costs and fees of consultants, collection agencies, and other
related services.
General Partner's Interest in Partnership Items.
The General Partner has and shall continue to have a present and
continuing 10% interest in all partnership allocations of net income
and loss, credits, deductions, and distributions until the Limited
Partners have received cash distributions from the Partnership in an
amount equal to 100% of their contributions to the capital of the
Partnership ("Capital Contributions"). Then the General Partner shall
receive 30% of all allocations. If the Limited Partners have received
cash distributions from the partnership in an amount equal to 100% of
their Capital Contributions by the time the partnership is liquidated,
the General Partner shall receive 30% of any distributions upon
liquidation. Otherwise, the General Partner shall receive 10% of such
distributions until the Limited Partners have received cash equal to
100% of their Capital Contributions. During the years ended December
31, 1997 and 1996, the Partnership recorded distributions to the
General Partner of $88,800 and $35,775, respectively.
Compensation to Performance Capital Management, Inc.
PCM was formed in February of 1993 to perform services related to
locating, evaluating, negotiating, acquiring, servicing, and collecting
Portfolios. PCM acquires Portfolios from third-party financial
institutions and sells the Portfolios to the Partnership and the PAM
Funds at cost plus an acquisition fee of approximately 20% to 37% as
provided in the related purchase agreements. The Partnership also
enters into joint venture agreements with PCM to collect and service
the Portfolios. The joint venture agreements generally provide that
the venturers share all proceeds generated from the collection of the
Portfolios in proportion to their respective percentage interests,
generally 55% to 65% for the Partnership and 35% to 45% for PCM. The
Partnership also reimburses PCM for certain costs associated with the
collection of the Portfolios.
The Partnership had three Portfolio sales for $54,711 in the year
ended December 31, 1997 and three Portfolio sales for $112,820 in the
year ended December 31, 1996. PCM effects the sale of the Portfolios
for the Partnership to non-related third parties and retains 15% of the
proceeds as a commission.
For the years ended December 31, 1997 and 1996, the Partnership
purchased one Portfolio and three Portfolios from PCM, respectively,
and recorded acquisition fees for these portfolios of $6,744 and
$686,459, respectively. Also, for the years ended December 31, 1997
and 1996, the Partnership recorded collection costs payable to PCM of
$45,241 and $73,542 respectively.
Item 13. Exhibits.
Exhibit Number Exhibit
1 Certificate of Limited Partnership Form LP-1 (Charter
Document)*
2 Agreement of Limited Partnership**
(Instrument defining the rights of Security Holders)
27 Financial Data Schedule
* Reference is made to the Partnership's Form 10-KSB, dated
March 31, 1997, in which that Certificate of Limited Partnership was
included as an exhibit. The Partnership, by this reference, makes that
Certificate of Limited Partnership a part of this Form 10-KSB.
** Reference is made to the Partnership's Form 10-KSB, dated
March 31, 1997, in which that Agreement of Limited Partnership was
included as an exhibit. The Partnership, by this reference, makes that
Agreement of Limited Partnership a part of this Form 10-KSB.
<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the
Partnership caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
Dated: March 31, 1998 Performance Asset Management Fund III, Ltd.,
A California Limited Partnership (Registrant)
By: /S/Performance Development, Inc.,
a California corporation
-------------------------------
Its: General Partner
By: /S/Vincent E. Galewick
-------------------------------
Its: President
In accordance with the Exchange Act, this report has been signed by the
following persons on behalf of the registrant and in the capacities and
on the dates indicated.
Dated: March 31, 1998 Performance Asset Management Fund III, Ltd.,
A California Limited Partnership (Registrant)
By: /S/Performance Development, Inc.,
a California corporation
-------------------------------
Its: General Partner
By: /S/Vincent E. Galewick
-------------------------------
Its: Sole Director
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION FROM THE FORM
10-KSB FOR THE YEAR ENDED DECEMBER 31, 1997 AND IS QUALIFIED
IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> DEC-31-1997
<CASH> 1110
<SECURITIES> 0
<RECEIVABLES> 56
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
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<TOTAL-ASSETS> 5305
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0
0
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 5305
<SALES> 908
<TOTAL-REVENUES> 908
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<OTHER-EXPENSES> 321
<LOSS-PROVISION> 0
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<INCOME-PRETAX> (172)
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</TABLE>
