Fairway Financial Solutions Fin Memo April 2009

FINANCING MEMORANDUM

April 2009

400 East Royal LaneSuite #290

Irving, TX. 75039Phone: 972.869.7659

Fax: 972.869.7656www.fairwayfinancial.net

PRELUDEThis confidential memorandum (“Memorandum”) has been prepared for discussion purposes only and recipients are not to construe the contents of this memorandum as investment, legal or tax advice. This memorandum is being submitted on a confidential basis for use by a limited number of parties solely in connection with a possible transaction (the “transaction”) involving “the company”, and Fairway Financial Solutions, LLC. By accepting this memorandum, the recipient agrees to continue to be bound by the terms of the confidentiality agreement and to further keep confidential the information contained or referenced herein or made available, in connection with any further investigation of the company. In addition, the recipient agrees not to reproduce this memorandum in whole or in part, and if the recipient ceases investigating the company, the recipient will return this memorandum to Fairway Financial Solutions, LLC., as soon as practicable, together with any other materials relating to the company that may have been received from the company.

Fairway Financial Solutions, LLC. Has relied without independent verification, on the accuracy and completeness of all information furnished by the company and other third parties contained in this memorandum. The memorandum uses phrases like “the company expects,” “the company believes,” “the company anticipates,” and similar phrases. These phrases do not constitute representations warranties or guarantees of any kind, expressed or implied, but merely represent the subjective forward-looking statements and expectations of the company based upon the best information available, and is subject to change without notice. Such forward-looking statements and expectations are subject to risks, uncertainties and assumptions. All such cautionary language used in this memorandum is expressly intended to provide warnings of risks, uncertainties, and events that may cause the company’s results and position to be different from the expectations outlined in this memorandum. Further, Fairway Financial Solutions and the company expressly disclaim any and all liability for any written or oral communication transmitted or made available to an interested party. A party who expresses interest in pursuing a transaction and is deemed appropriately qualified by the company, in its sole and absolute discretion, may be given the opportunity to conduct a due diligence investigation and ultimately enter into an agreement containing such representations and warranties concerning the transaction and the company as agreed to by the parties. Fairway Financial Solutions, LLC. And the company reserves the right to negotiate with one or more parties at any time and to enter into a definitive agreement with respect to a transaction with the company, or to determine not to proceed with a transaction involving the company without prior notice to you or any other party. The company reserves the right to terminate at any time, further participation and proposed transaction process by any party, and to modify procedures without assigning any reason therefore. The company shall have no legal commitment or obligation to any party reviewing this memorandum, unless a written agreement regarding the proposed transaction has been fully executed, delivered and approved by the company, and any conditions the company’s obligations hereunder have been satisfied or waived. All communications or inquiries relating to the company or this memorandum should be directed to one of the representatives of Fairway Financial Solutions listed below:

Fairway Financial Solutions Financing MemorandumThis information is proprietary and is not for duplication, use or distribution beyond intended recipient.

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Ken Hannold Fred C. WhiteExecutive Director Managing Partner

Email: [email protected] Email: [email protected]

Phone: 972.869.7659 Phone: 972.869.76XXFax: 972.869.7656 Fax: 972.869.7660

Accepted by: _____________________________ Date: ____________


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mailto:[email protected]

mailto:[email protected]

Table of ContentsTABLE OF CONTENTS 4

EXECUTIVE OVERVIEW 5

COMPANY OVERVIEW 5FINANCIAL MODEL METHODOLOGY 6FIGURE 1: SAMPLE FINANCIAL MODEL 8

INVESTMENT MERITS 8

ATTRACTIVE MARKET TIMING 8EXPERIENCED INDUSTRY VETERANS WITH EXCELLENT TRACK RECORD 8INFRASTRUCTURE IN PLACE AND TESTED 8VARIABLE COST BUSINESS MODEL 9ACCESS TO PROPRIETARY DEAL FLOW 9DATA DRIVEN PURCHASING STRATEGY 10COMPLIANCE WITH PROFESSIONAL STANDARDS 10

STRATEGY 11

PRODUCT FOCUS 11PRODUCT CHARACTERISTICS 11SOURCING STRATEGY 11BROKERS 12ALLIANCES 12VALUATION METHODOLOGY 12COLLECTION STRATEGY 13FIGURE 2: COLLECTION STRATEGY 15

PRINCIPALS 16

KEN HANNOLD 16FRED WHITE 17

TONY WARDEN 18GEORGE MULLER 18GLENN GOLDBERG 19

PARTNERS 20

CFO/CONTROLLER – VCFO- KEVIN HANKS 20SHEFFIELD AND ASSOCIATES – NICK ROSE AND SARA DAVIES 20CONTRAX SYSTEMS – DAWN HORST 21

INFRASTRUCTURE 22

INDUSTRY OVERVIEW 23

FINANCIAL MODEL 28

FIGURE 3: ESTIMATED NET CASH FLOW 29

BALANCE SHEET 30

EXECUTIVE OVERVIEW


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Company OverviewFairway Financial Solutions, (“Fairway”) based in Dallas, Texas was founded in October 2006 by Ken Hannold and Fred White. Fairway is an Accounts Receivable Management Company (ARM) that acquires, collects and manages portfolios of non-performing consumer debt. Fairway’s founders are financial services and accounts receivable industry veterans with a combined experience of 50+ years. Since inception, Fairway has been engaged as an advisory services provider to various credit grantor institutions. Specific engagements are outlined below:

Fairway was engaged by Washington Mutual’s Retail Operations Group to provide management and oversight of the entire collections process, including day-to-day oversight of collection vendors on pre and post charge-off accounts and asset sales.

Fairway has provided advisory services to Cerberus Capital Partners on their due diligence of Option One Mortgage and on servicing improvements at Aegis and GMAC Mortgage companies.

Fairway has engaged in a long-term assignment with Clayton’s Special Servicing division, Quantum Servicing Corporation to enhance and expand the servicing platform located in Tampa, Florida.

Fairway’s founders have personally invested over $750,000 in the company thus far and have spent the last year developing the infrastructure and defining critical operating tasks which include:

WinDebtXL, (Fairway’s system of record) Analytical tools Valuation models Vendor relationships Licensing requirements Testing strategies to effectively liquidate purchased portfolios

Fairway’s objective is to raise $20 million dollars in order to purchase portfolios of consumer debt over the course of twelve months. The following financial


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model outlined herein illustrates the projected returns on the 1st tranche of portfolios we plan on acquiring in June utilizing $2 million in invested capital.

Fairway acquired one small consumer portfolio in October 2007 for testing purposes. To date, this portfolio is performing to expect liquidation rates and our policies, procedures and systems have surpassed expectations. Due to market conditions and our projections for continued increases in supply and reduction in pricing, Fair way is projecting its next round of acquisitions in late Q309 or Q409. We will continue to monitor the market and opportunistically begin acquisitions when prices bottom out.

Financial Model Methodology

Fairway is planning to raise approximately $2,000,000 from a group of investors by June 15, 2009. Invested capital will be used to acquire credit card receivables from one or more financial institutions by June 30, 2009. The face value of the acquired credit card receivables is estimated at $40 million (or a rate of $.05 per dollar). Based on the timing, amounts to be collected, associated management fees and costs of collection, the anticipated internal rate of return to investors is projected to be 27%. Based on industry information and estimates by Company management, Fairway projects:

Gross collection dollars of $4,500,000 will be recovered over 37 months on the $2,000,000 cost of acquired receivables (referred to as a 2.25 multiple on invested dollars).

Collection costs paid to 3rd party collection agencies will be paid on a contingency fee rate of 35% of gross dollars collected.

Portfolio Management fees of 5% will be paid monthly to Fairway until 1.15 cash on cash return is attained, for sourcing, evaluating/underwriting, selection and management of credit card receivable portfolios.

Fairway will manage all third party vendors, develop liquidation/recovery strategies and direct the eventual sale of the residual value of purchased portfolios. It is anticipated that the company will make quarterly distributions to investors as collections are made. The company is incentivized to maximize total return to investors and will participate in returns after 1.15 *cash on cash return is paid to investors at approximately 19 months , at which time Fairway will share residuals with the investors at a ratio of 25% to FFS / 75% to Investors.

*because cash will be distributed to investors as collections are made, the balance of investment dollars will decline over the life of a purchased accounts receivable portfolio. Accordingly, the internal rate of return to the investor will


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be computed based upon the distributions made, the timing of distributions and the average outstanding investment balances over the life of the portfolio.

Year 1 Year 2 Year 3

Investment 2,000,000Gross Collections____________

2,320,839 3,713,925 4,500,000

Third Party Collection Costs 35%____________

812,294 1,299,874 1,575,000

Gross Investment Return____________

1,508,545 2,414,051 2,925,000

Management Fee 5%____________

116,890

Performance Fee25%____________

160,554 354,292

Cumulative Cash to Investor 1.23x____________

1,391,655 2,136,607 2,453,817

Cumulative IRR27%

CUMULATIVE RESULTS


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INVESTMENT MERITSAttractive Market TimingWhile there has been a significant price escalation on the purchase price of distressed debt portfolios over the last five (5) years, pricing trends seem to be reversing in a recent “pricing rationalization.” Macroeconomic conditions are likely to lead to more supply thus putting further pressure on already reducing prices. For these reasons, companies with “dry powder” available during 2009 should be able to opportunistically purchase favorably priced portfolios across various asset classes. The pricing rationalization can be seen on Page 23.

Experienced Industry Veterans with Excellent Track RecordFairway’s principals have extensive experience and a proven track record in financial services and the account receivable industry, with expertise in debt markets, collection agency management, collection strategies, analysis and valuation of account receivable portfolios, and leadership of large collection organizations. The principals have held senior leadership roles with industry leading financial services organizations; including:

Bank of America HSBC JP Morgan Chase and Washington Mutual

While managing Chase’s/Bank One’s recovery operations, the principals managed over $8 billion in credit card receivables utilizing in-house staff, agency placements and sales. In 2002, a benchmark study indicated that Chase/Bank One Recovery operations were the low-cost provider in the card receivables industry. The principals developed and implemented a series of recovery strategies and initiatives resulting in a coincident recovery rate improvement of 50%. More recently, while acting as outsourced management for Washington Mutual’s collections process, Fairway was able to produce total benefits of approximately $14 million through collection enhancement techniques, cost savings measures, and more stringent auditing procedures.

Infrastructure in Place and TestedDuring 2007, Fairway purchased and implemented WinDebtXL as their system of record. Additionally, Fairway implemented three independent valuation tools to price portfolios and an account-scoring tool to direct the collections effort on an account-level basis. Fairway has also established relationships with leading collection agencies in anticipation of increased purchasing activities. These tools and relationships are designed to allow Fairway to effectively price portfolios, properly direct the collections effort, and maximize returns on purchased


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portfolios. This system has been tested with Fairway’s initial portfolio purchase in October 2007.

Variable Cost Business ModelFairway will utilize an entirely outsourced business model to most efficiently collect upon the purchased accounts. The business model will also allow Fairway to scale quickly into growth or to pull back if deals do not fit its stringent investment parameters. A variable cost model allows the purchaser to pursue an opportunistic purchase strategy while not forcing a buyer to overpay merely to “feed the machine”, which can lead to poor financial investment decisions.

Access to Proprietary Deal FlowFairway’s founders maintain close working relationships with several credit grantors that will allow proprietary access to deal flow. Fairway has a particularly close relationship with several credit grantors and brokers. Additionally, Fairway will opportunistically supplement the proprietary deals with open market deals where the firm’s stringent investment parameters are met.


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Data Driven Purchasing StrategyFairway acquires portfolios at deep discounts from their face value utilizing advanced valuation and underwriting processes in order to forecast the recoverability of a portfolio. The three-tiered modeling structure allows Fairway to triangulate proper pricing on portfolios. Once the portfolio is acquired, Fairway utilizes multiple scoring tools measuring propensity to pay and best collection strategy. Accounts are segmented for specialized treatments. With Fairway’s expertise, experience and proven results, coupled with advanced analytical modeling, the company expects to collect a 2.25x to 2.5x multiple on purchase prices over an eighteen to thirty-six month period. The targeted multiple range is in line with market expectations.

Compliance with Professional StandardsFairway is licensed to operate as a debt buyer and collection agency in all 50 states. Fairway is also a member of the following associations:

International Debt Buyers Association (DBA) The Association of Credit and Collection Professionals Debt Buyer Division

(ACA) The Dallas and North East Texas Better Business Bureau (BBB) Registered with Dunn & Bradstreet – D&B #79-056-0192


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STRATEGYFairway’s strategy is to purchase defaulted consumer accounts in various asset classes, with a focus on Deposit Account overdraft and credit card accounts. Fairway’s acquisition strategy is detailed below:

Product FocusFairway’s product interest is focused on consumer non-performing debt instruments including:

Credit Card Consumer Finance DDA Private Label/Retail

Product Characteristics Average pricing $0.06 per $1.00 of face value Aging - 0-12 months post charge off Balance range product - dependent but generally $500 – $4,500 Average

balance size Placements generally one post charge off agency placements Composition- national distribution Chain of title - no more than 1 buyer Title must be free and clear of any liens No adverse selection process or scored and segmented portfolios

Sourcing Strategy

Direct From Creditors:

Fairway will concentrate its efforts on direct creditors who offer credit cards, DDA, private label products, installment loans, and lines of credit. Financial institutions vary in their approach to the debt sales market and Fairway will engage those who are active in the market with consumer debt instruments and have an early exit strategy for their portfolios. This means looking for those who sell their portfolios immediately after charge off or following the placement with one collection agency (primary recall).


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Fairway will source portfolios from the top ten US banks such as HSBC, Chase, Bank of America, Wells Fargo and others, where the company has developed personal relationships with key management personnel.

BrokersFairway has expanded relationships with the major brokers in the market space. These relationships provide updates on current market conditions, pricing, seller activity, and othercritical industry information. Fairway’s focus is specific to the consumer based products andgenerally fresh and primary recall paper. Current broker relationships include, Credit Max, NLEX, World Wide Debt Exchange, and Garnet Capital.

AlliancesFairway has created alliances with other debt buyers and agencies from which it can source and share deals. These partners have the same product focus and bring unique relationships with certain creditors that broaden Fairway’s potential reach in the market.

Valuation MethodologyFairway employs three distinct methods for valuing portfolios to ensure proper pricing prior to purchase. This approach will triangulate pricing based upon multiple data sets. The system is comprised of:

WinDebtXL, Fairway’s system of record, is equipped with a valuation model. Lonestar Turn-Key Systems developed the proprietary WinDebtXL model. Lonestar has over 10 years of experience in debt buying and contingency placements. Lonestar and Fairway have also entered into an arrangement allowing Fairway access to Lonestar’s large database

Fairway has entered into a relationship with DHC, an ARM consulting company. DHC is an expert in valuing portfolios and possesses an extensive database of liquidation rates for multiple product types

Fairway has additionally created an internal model based on previous experience and utilizing its internal analytical resources. This model will use a blend of data including credit score, credit bureau data and contact information


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Fairway will conduct quantitative and qualitative analysis of the portfolios to determine whether a portfolio will meet its collection targets and financial goals. Fairway’s models will forecast recoverability of a portfolio utilizing the three models, supplemented by debt owner provided data. The models will:

Assess the portfolio at the macro level using demographics and macro economic analysis

Drill down to the individual account level utilizing multiple account characteristic variables in a regression analysis

Assess the likelihood of contact, rendering a contact ability score

These three approaches, in combination with current and projected economic conditions plus information provided on the sellers’ survey and anecdotal information, will result in a projected liquidation of the portfolio. Fairway will then apply its financial model that accounts for cost to collect, management fees, expected return rate, and cost of funds. The results are a specific price range in which Fairway will bid, thus helping to ensure Fairway meets its designated multiple and return rate.

Collection StrategyFairway will rely upon its more than 50 years combined experience in the collection business to drive the collections process. Fairway’s management has extensive prior experience developing collections strategies that are differentiated by portfolio type, age of delinquency and changes in the economic environment. Fairway’s founders also have extensive process management experience, as both have been trained in and have reengineered processes utilizing Six Sigma, Lean and operational excellence tools. Previously, these strategies have proved successful, and have resulted in superior recovery and delinquency rates at First USA/Bank One, WAMU and HSBC. Fairway has developed a low cost business model that will deliver industry-best efficiency ratios. Fairway’s approach is to utilize a combination of outsourcing and variable expenses that will enable Fairway to operate at 43% efficiency ratio. Fairway will utilize a combination of domestic and offshore agencies during the first 18 months of each portfolio’s life. This strategy will enable Fairway to drive down contingency rates over time while ensuring target collection rates are met.


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Fairway will utilize indifference price analysis and mark-to-market review to determine whether to sell or hold a portfolio for the duration. Fairway’s focus will be on purchasing accounts between zero and twelve months from charge-off to be collected by 3rd

party outsourced collection agencies. Fairway will utilize three valuation methods to triangulate the appropriate pricing on purchased portfolios. Once portfolios are purchased, the following methodologies will be used to maximize liquidation/recovery rates:

Placement at third party collection agencies stateside and offshore utilizing state of the art vendor management processes and procedures. Initial providers include ERSolutions, National Recovery Service, DRS Bonded and URS

TSYS Debt Management will act as bankruptcy and deceased outsource provider.

Specialized locator/skip trace vendors Partnership with Money Management International, a consumer credit

counseling service Utilization of a Legal Network - Track America, where legal strategy is

deemed appropriate Resale of non-performing accounts

All financial models are built assuming Fairway will hold the accounts for at least three years. Sales will only be undertaken when the net present value models indicate that the potential purchase price will exceed the expected future collections left in the portfolio.Please refer to Figure 2 on the following page for a representative process of Fairway’s collection strategy.


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FIGURE 2: COLLECTION STRATEGY


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PRINCIPALSProvided below are the respective biographies of the senior management team of Fairway:

Ken Hannold During his 26 years in the industry, Mr. Hannold has worked for Household International (Now HSBC), Bank One (now Chase) and Washington Mutual. He has held senior leadership positions with all of these companies with core competencies in Accounts Receivable Management, portfolio sales, servicing, agency management and collection strategies. Mr. Hannold also served on the Board of Directors for Consumer Credit Counseling of Washington D.C.

While at Washington Mutual, Ken provided senior leadership oversight for operations in commercial servicing and credit card collection operations. His leadership led the commercial servicing and appraisal group to achieve industry leading efficiency ratios, reducing “cost of servicing” over a two year period by 40%, (from 2004 to 2006). He established a management philosophy and culture that led the division to achieve best in class employee retention rate of 88% and a 40% improvement in employee satisfaction. During his tenure at Bank One Card Services, Ken managed the Recovery and Fulfillment operations, controlling a budget of over $92 Million that generated over $400 Million net revenue per year in recoveries. His scope of responsibility spanned multiple collection call centers and recovery operations as Regional manager with over 700 employees at three sites. His efforts led to production and efficiency gains that resulted in a 25% reduction in staffing. Other key accomplishments include:

Executed the largest bad debt sale in March 1999 by selling over $2 Billion in charged off receivables that garnered over $175 Million in recoveries

Planned and administered the Austin Site Start up for collections and recovery

Instituted employee relation’s initiatives in collaboration with Customer Service, Human Resources and Customer Retention resulting in a 20% improvement in site attrition rate

Designed and implemented a series of recovery strategy initiatives resulting in a coincident recovery rate improvement of 50%

Launched collection strategy initiatives that resulted in a $47 Million improvement in Net Credit Loss

Devised and implemented collection strategy adjustments that resulted in a $42 Million improvement in Net Credit Loss


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Fred White Spent over 25 years managing credit card receivables with two leading credit card issuers, Bank One/Chase and Bank of America (formerly InterFirst). Mr. White spent three years managing Washington Mutual’s commercial loan fulfillment and servicing operation. While there, he was accountable for servicing its $40 Billion commercial loan portfolio, which included all aspects of loan closing, portfolio management and risk assessment, customer service, and escrow management. His oversight included a staff of 283 FTE with a budget in excess of $32 Million. Accolades included leading the operation to achieve upgrades in its ratings from Fitch and S&P to above average Master Servicer as well as developing a complete set of dashboard metrics to monitor all operations effectively.

Prior to Washington Mutual, Fred spent more than 15 years at Chase/Bank One Card Services where he managed several collection operations across the country, imbedding ”Skill Based Management Systems” to manage operations and drive results effectively. He was a key member of the card groups’ collections design team for developing a proprietary collections system, spending eight months designing and developing an industry leading system that is still considered to be a competitive advantage today. In addition, he was responsible for its $9 Billion charge off portfolio with an annual budget of $97 Million which included agency fees. During his tenure there, the operation was running as an industry best, low-cost provider, based on industry benchmark data provided through Visa’s monthly IRKI report (Industry Risk & Key Indicators). Major responsibilities and accomplishments while at Chase include:

Managed the placement and sales operations of more than $9 Billion in charged off credit card debt, evaluating opportunities and devising strategies to generate the highest net revenues.

Negotiated and closed in excess of 40 debt portfolio sales transactions, totaling more than $7 Billion.

Served on the advisory board of Narex during the development of their debt auction software.

Participated as panelist in several industry forums. Renegotiated SLA’s with 27 vendors, lowering fee rates and

introducing penalty pricing. Responsible for servicing in excess of 50,000 inbound calls per month,

maintaining ISF 85%-88% with an abandon rate less than 1.37% and ASA of less than 10 seconds


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Tony Warden

Possesses unique qualifications and experience in the financial services industry, during his 23 years he has worked for Discover Card, GE Capital, Bank One (now Chase), Metris (now HSBC) and Washington Mutual (now Chase). He has held senior leadership positions with all these companies with core competencies in Asset Management for Prime/Sub-prime, Retail, Private Label and Business consumer cards, Commercial and Residential Real Estate Servicing, Loss Mitigation, Default and Collections. Mr. Warden has background in Six Sigma (GE Black Belt Certified) and Lean Process Reengineering.

Conceiving, developing and executing the strategies and initiatives that drive, bottom line results, continuous operational improvement, employee and customer satisfaction and retention is what he does best. Throughout his career, in senior leadership positions with diverse industry leaders, he has earned a track-record of success in managing complex business initiatives, turnarounds and startups, and achieving exceptional results – business initiatives and results like: Effectively led the transformation of poorest performing collection operation

for $10B sub-prime issuer, elevating every key performance indicator from 5th

place to 1st or 2nd , while driving down annualized employee attrition from 79% to 19%; span of control 500 FTE, two locations

Set strategic direction, developed and executed objectives for collections operations resulting in record reduction in credit losses for major oil company client while achieving outstanding employee satisfaction results (85%)

Led the startup of a collections call center operation for a premier credit card issuer successfully beating delinquency, loss and expense plans for a $1.9B portfolio

Reduced operating expense $2.2M year one of being promoted to site leader for a major card issuer

While at Washington Mutual, Tony provided leadership for operations in consumer real estate servicing, loss mitigation, foreclosure, bankruptcy, REO, commercial servicing and credit card collection operations. He initiated appropriate strategies and implemented skills based performance management framework which resulted in entirely mitigating a 3 year loss trend, for the real estate portfolio, in a mere 7 months

Championed initiatives to reduce cycle times for closing commercial loans resulting in the Closing Departments standards per agent jumping exponentially from 8 to 48 per month, while greatly reducing rework and non-compliance, and improving employee and customer satisfaction

GEORGE MULLER

FORMER PRESIDENT and COO of Subaru of America, Inc., where he managed all day-to-day operations for this multi-billion dollar company. Prior to his role as the top executive of the company, Mr. Muller also held the positions of CFO, President of Subaru Financial Services and President of Subaru Foundation. Mr.


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Muller’s organizational leadership and guidance is a tremendous asset to Fairway Financial Solutions.

Glenn Goldberg

Was Chief Marketing Officer for Freedom Mortgage, one of the country’s largest independent originating & servicing platforms. He was in charge of a multi-billion dollar portfolio retention program and helped design workflow procedures which positively impacted retail, wholesale and branch operations. More recently, Mr. Goldberg designed and implemented a streamlined loan origination process using online loan pricing & eligibility determination software to quickly and cost-effectively grow the business. Prior to his work in the mortgage industry, Mr. Goldberg co-founded an early stage technology company and held senior positions at Anheuser Busch and Grey Advertising.


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PARTNERSFairway has entered into relationships with the following companies to provide outsourced services to the Company. CFO will act as an outsourced CFO, providing senior financial management, accounting controls and reporting. Sheffield and Associates and Contrax Systems will provide portfolio valuation services, portfolio scoring and analytics support. Below are summaries of Fairway’s partners:

Part-Time CFO/Controller – vCFO Kevin HanksWith more than 25 years of experience in professional services, high-tech, and real estate, Kevin’s areas of expertise include capital raising, financial analysis, valuation, M&A, general financial management, and board-level governance for early and growth-stage businesses, both privately and publicly owned.

Prior to joining vCFO®, Kevin served as the CFO of Everest Group, an operations strategy firm with global offices in North America, Europe, India, and Australia. In this role, in addition to supervising the accounting department, Kevin developed a comprehensive management reporting framework and was responsible for coordinating activities among the firm’s executive team and its principals to support strategic planning, performance appraisals, staff development and administration of remote offices. Healso developed procedures for international tax compliance to optimize staffing flexibility and corporate tax efficiency.

Earlier, Kevin was the CFO of CommerceQuest, Inc., a subsidiary of publicly held Internet Capital Group that was recently bought by MetaStorm. There, he managed all administrative, legal and finance functions to support rapid growth during the B2B era and restructured $50 million in convertible debt held by five separate investment groups. Kevin also completed two international acquisitions, in the UK and South Africa. Kevin began his career as an associate for PriceWaterhouse. Kevin received his MBA from Harvard Business School and a BS with Honors in Accounting from the University of Florida.

Sheffield and Associates – Nick Rose and Sara DaviesSheffield provides tools that leverage its client’s institutional knowledge and data in a platform of industry best practices. Tools are built and calibrated using client data and information and supplemented by industry information sources when applicable. Installations are made using an iterative process that ensures sustainable results are delivered and maintained. Sheffield trains in-house teams to manage and conduct routine maintenance to ensure each tool remains tuned to the client environment. Additionally,In order to ensure any systemic or environmental shifts in behavior are captured, Sheffield conducts performance audits at mutually agreed points in time with the objective of updating the tools as necessary.


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Sheffield’s Recent Solutions Workflow Process Designer - increased net receivables by 17% Contact Score – right party contact rate improved by 25% Account Prioritization Engine - Monies collected improved by 20% with

a 5% reduction in fte utilization Account Assignment Strategy across on-shore, near-shore and off-

shore locations – cost to collect reduced by 30% Pricing and Yield Segmentation model for portfolio debt purchasing –

enables sub-portfolio sales at 5%-15% over purchase price

Contrax Systems - Dawn HorstContrax Systems is a Maryland based debt services provider. Contrax offers a wide range of services including debt buying, debt collection and evaluation software, and post sale management. Contrax Systems is owned by Dawn Horst. Dawn has over 12 year’s industry experience which started with CitiFinancial in Northern Maryland. Dawn held the title VP of Recovery and managed a 150 FTE facility where she was responsible for all Recovery Operations including collections and specifically the Consumer Finance Debt Sales for North America and Puerto Rico. During those years with CitiFinancial, she developed long term relationships with other industry veterans and decided to go out into the private sector in September of 2005. During the first year she formed DHC Consulting Services, LLC, where she participated actively on several industry advisory boards. In 2006 Dawn formed a technology company now known as Contrax Systems, where should could offer her services in a more formal environment. While still actively consulting, Dawn has expanded her coverage to include debt sales and evaluations.

StratX takes data from a diligence file and provides data groupings and percentages. Within these groupings an algorithm is applied based on customer demographics, age and history on a portfolio. This evaluation gives insight to the portfolio’s true market value, liquidation expectations and resale value. Her technology mixed with experience brings a unique and new view on the industry. Fairway Financial has a current and active contract with Contrax that gives them access to the features of the StratX evaluation tool. With this contract, a VIP status has been given, which allows Dawn to review the stratifications and provide detailed feedback on liquidation predictions, market trends, and resale strategies.


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INFRASTRUCTUREFairway is fully operational and tested; the company has spent the last year building the infrastructure into a scalable, profitable Accounts Receivable Management company.

Fairway’s founders have invested more than $750,000 of their own money to develop the company’s platform. Fairway’s infrastructure investments include:

Installed an accounts receivable management system (Win Debt XL) as the official system of record for all portfolios

Implemented three independent scoring and valuation models that will act to triangulate the correct target pricing on portfolios with the return parameters in mind

Established relationships with initial 3rd party vendor collection agencies Documented all policies and procedures including a continuity of business

plan and corporate governance program Developed two independent account-scoring models that enable optimization

of collection strategies Fully licensed to operate as a debt purchaser and a collection agency in all 50

US states Established relationships with major creditors, brokers and resellers to enter

the “deal-flow” cycles Tested processes with initial portfolio acquisition in October 2007 Legal, accounting, financial analysis, CFO and controller infrastructure in

place


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INDUSTRY OVERVIEWThe Accounts Receivable Management industry encompasses the businesses involved in the purchase, collection, and management of distressed receivable assets. Generally, the industry is broken up into three distinct subgroups, Collection Agencies, Debt Purchasers, and Collection Law Firms. All three subgroups generate income by turning non-performing loans into paying accounts. Debt purchasers typically purchase portfolios of accounts at steep discounts to the face value of the loans seeking to generate repayment of the loans either internally or through the use of 3rd party collection agencies or law firms. Collection Agencies attempt to collect upon non-paying loans through the use of telephone contact or letter contact. Law Firms typically attempt to collect on the non-paying loans through acombination of telephone, letters and legal action.

Overall, the industry has experienced significant growth following the growth of consumer credit in the United States.


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Several major factors fueling growth in the ARM industry include:

Record level consumer debt service ratios, up 20% over the last 10 yrs Increasing delinquency trends in both revolving and mortgage lending Rising loss rates in both credit card and mortgage lending Current economic conditions , Rising unemployment rate and declining

consumer confidence Housing crisis


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One of the best leading indicators of increasing charged-off accounts is an increase in non-current loans. Non-current loans, that is, those loans more than 90 days since last payment, have increased steadily through 2008, with a dramatic increase in the fourth quarter as seen below:

Source Federal Reserve Statistical Release


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This increase in non-current loans suggests an increased pipeline of accounts headed toward charge off in the next 90 days. The ARM industry as a whole should expect to benefit from this increase as more accounts cycle through the industry. Specifically, debt-purchasing companies can expect an increase in available accounts for purchase due to this increase in delinquent accounts. The numbers of accounts sold actually decreased in 2006 as charge-offs went down (credit card charge off rates bottomed out in 2006 at 3.13% vs. 6.3% in 2008), contributing to increases in pricing, but with additional accounts headed to discharge, that trend has already reversed. Volume sold in 2008 dropped because of the credit crunch, volumes are expected to beat 2007’s in 2010.

The chart below reflects total consumer debt sold by year.

Source – Kaulkin Ginsberg


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Pricing: Returning to more rational levelsWhile the industry went through a rapid pricing escalation from 2001-2006, prices have leveled off or in fact, decreased in the last year. The driving factors behind the sharp run-up in pricing were decreased supply of charged- off accounts in 2006, increased demand from debt purchasers to support infrastructure investments, “smart-money” investment chasing non-correlated higher yields available to the industry in the early part of the decade, and irrational pricing models that in many cases depended upon unattainable performance or that overvalued the secondary demand for the paper upon sale. The return to more rational pricing bodes well for the industry as a whole. In general pricing has declined because of the rise in supply of charged off consumer paper and a decline in demand as funding has become more difficult. The historical pricing trends of bankcard paper, and the recent “pricing rationalization”, can be seen in the chart below:

Source – Kaulkin Ginsberg


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FINANCIAL MODEL Fairway’s financial model takes advantage of its ability to efficiently handle large-scale purchases without incremental increases to its fixed costs. Fairway’s model is also driven by purchasing portfolios in a precise band of gross collections to purchase price. Fairway will use a 2.25x to 2.5x gross collections to purchase price model, as this is currently right in the middle of the marketplace as a whole. In 2007 Encore Capital Group (NASDAQ: ECPG), a publically traded debt purchaser, averaged a multiple paid estimated at 2.3x as indicated by the chart below:

While the total expected multiple of gross collections to purchase price has decreased since 2000, the decrease in prices paid on bankcard debt as shown in a previous chart suggests a possible increase in multiples going forward. Still, Fairway is conservatively using a 2.375x multiple on its financial projections as seen in Figure 3 on the following page.


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Projected Cash Flows on Initial Targeted PortfolioFairway is initially targeting a Credit Card portfolio available in June. Fairway estimates total purchase price at $2,000,000 in June, then an additional $2,000,000 in September, $5,000,000 in December and finally $10,000,000 in March 2010.

Using our projected 2.25 multiple, Figure 3 below is an illustration of the performance of a projected 1st acquisition.

FIGURE 3: ESTIMATED NET CASH FLOW

Year 1 Year 2 Year 3

Investment 2,000,000Gross Collection____________

2,320,839 3,713,925 4,500,000

Third Party Collection Costs 35%____________

812,294 1,299,874 1,575,000

Gross Investment Return____________

1,508,545 2,414,051 2,925,000

Management Fee 5%____________

116,890

Performance Fee25%____________

160,554 354,292

Cumulative Cash to Investor 1.23x____________

1,391,655 2,136,607 2,453,817

Cumulative IRR27%


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BALANCE SHEETThe Company uses Quick Books for its accounting. A third-party accounting firm is auditing 2007 financials with the report expected by the end of February. As of January 31, 2008, Fairway’s founders had capitalized the company with more than $750,000.


Assets 31-Jan-08Cash $142,071

Net debt portfolio $118,836Net fixed assets $29,981Other $1,595Total Assets $292,483

Liabilities and EquityCurrent liabilities 30,451

Paid-in capital 750,000Retained earnings -487,968Net Equity $262,032

Total Liabilities and Equity $292,483

Balance SheetFairway Financial Solutions, LLC

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Documents

Fairway Financial Solutions Fin Memo April 2009