<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended June 30, 1998
Commission File Number 0-16530
FINANCIAL PERFORMANCE CORPORATION
(Exact name of Registrant as specified in its charter)
New York 13-3236325
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
335 Madison Avenue, New York, New York 10017
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (212) 557-0401
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES /X/ NO / /
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Class Outstanding at August 10, 1998
- ------------ ------------------------------
Common Stock 9,421,534 Shares
<PAGE> 2
Financial Performance Corporation
Report on Form 10-QSB for the Quarter ended June 30, 1998
TABLE OF CONTENTS
Part I. Page
Item 1. Financial Statements (Unaudited).............................1
Consolidated Balance Sheets
June 30, 1998 and June 30,1997......................2
Consolidated Statements of Operations
For the Six Months Ended
June 30, 1998 and June 30, 1997.....................3
Consolidated Statements of Operations
For the Three Months Ended
June 30, 1998 and June 30, 1997.....................4
Consolidated Statements of Changes in Stockholders' Equity
for the Six Months Ended
June 30,1998 and June 30, 1997......................5
Consolidated Statements of Cash Flows
for the Six Months Ended
June 30,1998 and June 30, 1997......................6
Notes to Consolidated Financial Statements...................7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations.........................16
Part II
Item 6. Exhibits and Reports on Form 8-K............................22
-ii-
<PAGE> 3
PART I
Item 1. Financial Statements
The financial statements of Financial Performance Corporation (the
"Company") begin on page 2.
<PAGE> 4
FINANCIAL PERFORMANCE CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
JUNE 30, 1998 AND 1997
<TABLE>
<CAPTION>
1998 1997
----------- -----------
(Unaudited) (Unaudited)
<S> <C> <C>
ASSETS
Current assets
Cash, and cash equivalents $ 2,283,253 $ 2,179,705
Accounts receivable 2,691,445 709,284
Prepaid expenses and other current assets 384,439 196,397
----------- -----------
Total current assets 5,359,137 3,085,386
Property and equipment, net of accumulated depreciation 186,319 170,040
Software development costs 135,605 540,571
Investment in subsidiary 615,345 --
Other assets 315,061 152,368
----------- -----------
$ 6,611,467 $ 3,948,365
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable and accrued expenses $ 2,655,839 $ 1,353,520
----------- -----------
Total current liabilities 2,655,839 1,353,520
----------- -----------
Minority interest in consolidated subsidiaries 643,046 346,046
----------- -----------
Stockholders' equity
Common stock - authorized 50,000,000 shares
of $.01 par value per share: issued and
outstanding 9,421,534 and 8,005,532 as of
June 30,1998 and 1997, respectively 94,215 80,055
Additional paid in capital 7,746,761 7,469,421
Accumulated (deficit) (4,528,394) (5,300,677)
----------- -----------
Total stockholders' equity 3,312,582 2,248,799
----------- -----------
$ 6,611,467 $ 3,948,365
=========== ===========
</TABLE>
See the accompanying notes to the financial statements.
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<PAGE> 5
FINANCIAL PERFORMANCE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
SIX MONTHS ENDED JUNE 30, 1998 AND 1997
<TABLE>
<CAPTION>
1998 1997
----------- -----------
(Unaudited) (Unaudited)
<S> <C> <C>
Revenues $ 9,207,256 $ 4,476,266
----------- -----------
Costs and expenses
Cost of revenues 6,724,405 3,744,562
Salaries and related expenses 336,507 171,184
Selling, general and administrative 507,948 520,208
----------- -----------
7,568,860 4,435,954
----------- -----------
Operating income 1,638,396 40,312
Other income (expenses):
Interest income 29,490 25,884
Interest expense -- --
Minority interest in income of
consolidated subsidiaries (314,000) (79,600)
----------- -----------
(284,510) (53,716)
----------- -----------
Income (loss) before income taxes 1,353,886 (13,404)
Income taxes 85,423 41,154
----------- -----------
Net income (loss) $ 1,268,463 $ (54,558)
=========== ===========
Per share data:
Basic and diluted earnings (loss) per share $ .149 $ (.006)
=========== ===========
Average shares outstanding 8,488,532 7,928,157
=========== ===========
</TABLE>
See the accompanying notes to the financial statements.
-3-
<PAGE> 6
FINANCIAL PERFORMANCE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
THREE MONTHS ENDED JUNE 30, 1998 AND 1997
<TABLE>
<CAPTION>
1998 1997
----------- -----------
(Unaudited) (Unaudited)
<S> <C> <C>
Revenues $ 4,718,706 $ 2,522,677
----------- -----------
Costs and expenses
Cost of revenues 3,361,609 1,984,859
Salaries and related expenses 282,377 100,853
Selling, general and administrative 289,702 272,899
----------- -----------
3,933,688 2,358,611
----------- -----------
Operating income 785,018 164,066
----------- -----------
Other income (expenses):
Interest income 15,292 15,307
Interest expense -- --
Minority interest in income of
consolidated subsidiaries (106,400) (54,000)
----------- -----------
(91,108) (38,693)
----------- -----------
Income before income taxes 693,910 125,373
Income taxes 42,589 30,829
----------- -----------
Net income $ 651,321 $ 94,544
=========== ===========
Per share data:
Basic and diluted earnings per share $ .073 $ .01
=========== ===========
Average shares outstanding 8,954,532 8,005,532
=========== ===========
</TABLE>
See the accompanying notes to the financial statements.
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<PAGE> 7
FINANCIAL PERFORMANCE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
SIX MONTHS ENDED JUNE 30, 1998 AND 1997
(Unaudited)
<TABLE>
<CAPTION>
Common Stock Additional
------------------------ Paid In
Shares Par value Capital Deficit Total
--------- ------- ---------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Balance, January 1, 1998 8,021,534 $80,215 $7,480,761 $(5,796,857) $ 1,764,119
Issuance of shares in private
placement, net of costs 1,400,000 14,000 266,000 -- 280,000
Net income -- -- -- 1,268,463 1,268,463
--------- ------- ---------- ----------- -----------
Balance, June 30, 1998 9,421,534 $94,215 $7,746,761 $(4,528,394) $ 3,312,582
========= ======= ========== =========== ===========
Balance, January 1, 1997 7,850,782 $78,508 $7,341,725 $(5,246,119) $ 2,174,114
Issuance of shares in private
placement, net of costs 154,750 1,547 127,696 -- 129,243
Net income (loss) -- -- -- (54,558) (54,558)
--------- ------- ---------- ----------- -----------
Balance, June 30, 1997 8,005,532 $80,055 $7,469,421 $(5,300,677) $ 2,248,799
========= ======= ========== =========== ===========
</TABLE>
See the accompanying notes to the financial statements.
-5-
<PAGE> 8
FINANCIAL PERFORMANCE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
SIX MONTHS ENDED JUNE 30, 1998 AND 1997
<TABLE>
<CAPTION>
1998 1997
----------- -----------
(Unaudited) (Unaudited)
<S> <C> <C>
Cash flows provided by operating activities:
Net income (loss) $ 1,268,463 $ (54,558)
Adjustments to reconcile to net cash
provided by operating activities:
Depreciation and amortization 31,576 56,946
Minority interest in income of consolidated
subsidiaries 314,000 79,600
Changes in operating assets and liabilities:
Accounts receivable (1,970,829) 388,274
Prepaid expenses and other current assets (305,329) (34,700)
Other assets (11,255) 7,888
Accounts payable and accrued expenses 747,686 147,637
----------- -----------
Net cash provided by operating activities 74,312 591,087
----------- -----------
Cash flows from investing activities:
Acquisition of property and equipment (19,091) (81,566)
Software development costs -- (103,799)
Investment in subsidiary (308,186) --
----------- -----------
Net cash used in investing activities (327,277) (185,365)
----------- -----------
Cash flows from financing activities:
Proceeds from sale of common shares and exercise of
warrants 280,000 129,243
----------- -----------
Net increase in cash 27,035 534,965
Cash, beginning of period 2,256,218 1,644,740
----------- -----------
Cash, end of period $ 2,283,253 $ 2,179,705
=========== ===========
Supplemental disclosure of cash flow information:
Cash paid during the period for interest $ 24,000 $ 23,000
=========== ===========
</TABLE>
See the accompanying notes to the financial statements.
-6-
<PAGE> 9
FINANCIAL PERFORMANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE A - ORGANIZATION AND BUSINESS
Financial Performance Corporation (the "Company") through its
subsidiaries currently markets merger communications services and computer
software to the financial services industry. The Company was incorporated in New
York on August 14, 1984. The Company ceased operations from February 1990
through November 1992.
During the fiscal year ended September 30, 1995, the Company
established three eighty percent owned subsidiaries, Michaelson Kelbick Partners
Inc. ("MKP"), FPC Information Corp. ("FPC Information") and Aspen Capital
Management, LLC ("Aspen").
MKP was formed and commenced operations in October 1994. MKP is engaged
in providing specialized merger communications and marketing services to the
financial services industry (see Note B (1)).
FPC Information was formed in November 1994 for the purpose of
marketing the Company's software products.
In October 1997, the Company's investment in FPC Information Corp. was
reduced from eighty percent to fifty percent, as a result of a $225,000
additional investment by the minority shareholder. The Company has the option to
repurchase a thirty percent equity interest in FPC Information Corp. exercisable
at any time prior to September 30, 1999 at the fair market value of such
interest, but in no event less than $225,000.
Aspen was formed in January 1995 as an international sponsor of cash
management funds and planned to engage in the development, investment management
and administration of such funds. Aspen, which was in the development stage,
ceased operations in September 1996.
NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(1) Principles of Consolidation
The consolidated financial statements include the accounts of Financial
Performance Corporation and Subsidiaries. All significant intercompany accounts
and transactions have been eliminated. Investments in FPC Information Corp. in
which the Company does not have control is accounted for by the equity method.
-7-
<PAGE> 10
FINANCIAL PERFORMANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
(1) Principles of Consolidation (continued)
Condensed financial information of its eighty percent owned subsidiary,
MKP, before intercompany eliminations, as of June 30, 1998 and 1997 and for the
six months then ended, is as follows:
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Cash $2,050,000 $2,059,000
Accounts receivable 2,691,000 709,000
Other assets 182,000 20,000
Accounts payable 2,400,000 1,189,000
Revenues 9,207,000 4,477,000
Operating costs 7,880,000 4,113,000
Net income 1,271,000 348,000
</TABLE>
Intercompany management fees of $585,000 and $166,000 were included in
operating costs for the six months ended June 30, 1998 and 1997, respectively.
These amounts were eliminated upon consolidation.
Condensed financial information for the Company's other subsidiaries,
Aspen Capital Management, LLC and FPC Information Corp. for the six months ended
June 30, 1998 and 1997, has not been separately disclosed. These entities had no
revenues and their assets and liabilities are immaterial.
(2) Revenue recognition
Revenue from software products is recognized upon delivery to the
customer, provided that no significant vendor obligations remain, and collection
of the resulting receivable is deemed probable.
(3) Software Development Costs and Amortization
Costs associated with software development subsequent to the
establishment of technological feasibility, including enhancements to software
products, are capitalized and amortized as required by Statement of Financial
Accounting Standards No. 86. Costs incurred prior to achieving technological
feasibility are expensed as incurred and classified as research and development
costs. There were no research and development costs incurred for the six months
ended June 30, 1998 and 1997.
Amortization of capitalized software development costs is generally
provided on a product-by-product basis at the greater of the amount computed by
using the ratio that current gross revenue bears to the total current and
anticipated gross revenue of the product or on the straight-line method over the
sixty-month estimated useful life of the product commencing when the product is
available for general release to customers.
-8-
<PAGE> 11
FINANCIAL PERFORMANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
(4) Earning (loss) per share
The consolidated financial statements are presented in accordance with
SFAS No. 128, "Earnings per Share". Basic earnings per common share are computed
using the weighted average number of common shares outstanding during the
period. Diluted earnings per common share incorporate the incremental shares
issuable upon the assumed exercise of stock options and warrants.
(5) Cash and cash equivalents
The Company considers all highly liquid investments with a maturity of
three months or less when purchased to be cash equivalents.
(6) 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 financial
statements and the reported amounts of revenue and expenses during the reporting
period. Actual results could differ from those estimates.
(7) Depreciation and amortization
Computer equipment is stated at cost. Depreciation is provided using
the straight-line method over the estimated useful lives of the assets.
Amortization of an intangible asset, a customer list of $164,000,
included on the balance sheet under the caption, other assets, is being
amortized on the straight line basis, over ten years.
-9-
<PAGE> 12
FINANCIAL PERFORMANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
(8) Income Taxes
Income taxes are computed in accordance with the provisions of
Financial Accounting Standards Board Statement No. 109, "Accounting for Income
Taxes" ("SFAS 109"), which requires, among other things, a liability approach to
calculating deferred income taxes. SFAS 109 requires a company to recognize
deferred tax liabilities and assets for the expected future tax consequences of
events that have been recognized in a company's financial statements or tax
returns. Under this method, deferred tax liabilities and assets are determined
based on the difference between the financial statement carrying amounts and tax
basis of assets and liabilities using enacted tax rates in effect in the years
in which the differences are expected to reverse.
At September 30, 1997, the Company had net operating loss carry
forwards of approximately $1,150,000, which would expire by 2012. Certain
provisions of the tax law may limit the net operating loss carry forwards
available for use in any given year in the event of a significant change in
ownership interest. At September 30, 1997, the Company had a deferred tax asset
amounting to approximately $460,000. The deferred tax asset consisted primarily
of net operating loss carry forwards and has been fully offset by a valuation
allowance of the same amount.
The income tax expense for the six months ended June 30,1998 and 1997
represents state and local income taxes on the income of MKP.
NOTE C - SIGNIFICANT CUSTOMERS
For the six months ended June 30, 1998 three customers of the Company's
subsidiary, MKP, accounted for 91% of the Company's consolidated revenues in the
following respective percentages:
Customer A 16%
Customer B 59%
Customer C 16%
--
91%
==
The total accounts receivable from these customers at June 30, 1998
amounted to 85% of the total accounts receivable balance.
-10-
<PAGE> 13
FINANCIAL PERFORMANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
NOTE D - WARRANTS TO PURCHASE COMMON STOCK
At June 30, 1998, the Company had outstanding warrants as follows:
<TABLE>
<CAPTION>
Number of Exercise Expiration
Shares Price Date
--------- -------- ------------------
<S> <C> <C>
330,586 $ .50 August 31, 1998
427,063 .50 September 30, 1998
200,000 .50 September 15, 2010
725,000 1.00 September 15, 2006
250,000 .50 November 30, 1999
20,000 1.00 September 16, 2006
</TABLE>
NOTE E - INCENTIVE STOCK OPTION PLAN
In March 1988, the Company adopted a stock option plan. The plan
provides for the granting of options to purchase up to 140,000 shares of common
stock to key employees, officers and directors at an exercise price equal to
fair market value at the date of grant. The right to exercise options granted
under the plan commences one year from the date of the grant and such options
are exercisable in increments of 25% each year provided employment with the
Company is continuous.
Outstanding options granted pursuant to the stock option plan, as of
June 30, 1998, are as follows:
<TABLE>
<CAPTION>
Number of Exercise Exercisable at
Shares Price June 30, 1998
------ ----- -------------
<S> <C> <C>
40,000 $ .4375 40,000
30,000 4.8125 30,000
</TABLE>
NOTE F - EMPLOYEE BENEFIT PLANS
In September 1996, the Company established a non-contributory deferred
contribution pension and profit sharing plan for the benefit of eligible
full-time employees. The plan provides for annual contributions to a trust fund,
which are based upon a percentage of qualifying employees' annual compensation.
Total contributions are limited to the maximum amount deductible for federal
income tax purposes.
The plan was terminated in March 1997.
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<PAGE> 14
FINANCIAL PERFORMANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
NOTE F - EMPLOYEE BENEFIT PLANS (continued)
In January 1997, the Company established a 401(k) salary deferred
benefit plan covering substantially all employees who have met certain
requirements. The plan requires Company contributions equal to 50% to a maximum
of 3% of each participant's contribution percentage.
In September 1997, the Company amended its 401(k) plan to provide a
provision for discretionary profit sharing plan contributions.
NOTE G - COMMITMENTS
The Company has commitments under non-cancelable operating leases for
office space and equipment, which expire on October 31, 2006 and September 30,
2000, respectively. The office lease includes provisions requiring the Company
to pay a proportionate share of increases in real estate taxes and operating
expenses over base period amounts.
Minimum payments for the leased properties for subsequent years are as
follows:
<TABLE>
<CAPTION>
Years Ending December 31,
- -------------------------
<S> <C>
1998 $ 281,000
1999 281,000
2000 281,000
2001 374,000
2002 415,000
Thereafter 1,711,000
-----------
$ 3,343,000
===========
</TABLE>
Rent and equipment leasing expense for the six months ended June 30,
1998 and 1997 was $207,519 and $150,382, respectively.
-12-
<PAGE> 15
FINANCIAL PERFORMANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
NOTE H - EMPLOYMENT AGREEMENTS
On September 1, 1995, the Company entered into a five year employment
agreement with Mr. Finley which expires on August 31, 2000. Under the agreement,
Mr. Finley's initial annual salary was $125,000, subject to increases as
determined by the Company's Board of Directors, and Mr. Finley's salary was
subsequently increased to $150,000.
Effective as of October 1, 1997, the Company entered into a new three
year employment agreement with Mr. Finley which expires on September 30, 2000.
Under the new employment agreement, Mr. Finley's initial salary is $150,000 per
annum, subject to periodic increases as shall be determined by the Company's
Board of Directors. In the event of the termination of Mr. Finley's employment
by reason of a "change in control" (as such term is defined in the employment
agreement) of the Company or certain other events, then in addition to paying
Mr. Finley's salary and accrued benefits through the date of termination of
employment, the Company shall be obligated to pay to Mr. Finley, as severance
pay, an amount equal to 200% of Mr. Finley's annual base salary rate as of the
effective date of termination and to maintain through the remaining balance of
the term of the employment agreement (but not less than two years from the date
of termination of Mr. Finley's employment agreement) all employee benefit plans
and programs in which Mr. Finley was entitled to participate. The Company agreed
to pay reasonable travel and entertainment expenses incurred by Mr. Finley on
behalf of the Company and to provide Mr. Finley with a leased automobile. If Mr.
Finley does not elect not to renew his employment agreement at the expiration of
the term and the Company does not elect to renew Mr. Finley's employment upon
the expiration of the term thereof, then Mr. Finley shall be entitled to receive
a severance payment of $100,000.
In October 1994, MKP entered into executive employment agreements with
each of Ms. Michaelson and Ms. Kelbick for a term of three years ended October
17, 1997. Under the terms of the agreements, the initial annual salary for each
of Ms. Michaelson and Ms. Kelbick was $80,000. The annual base salary payable to
each of Ms. Michaelson and Ms. Kelbick was subsequently increased to $115,000.
Effective as of September 11, 1997, MKP entered into a new three year employment
agreement with each of Ms. Michaelson and Ms. Kelbick which expires on September
10, 2000. Under the new agreements, the initial annual base salary payable to
each of Ms. Michaelson and Ms. Kelbick is $150,000, subject to periodic
increases as shall be determined by MKP's Board of Directors. The employment
agreements further provide for an annual incentive compensation payment for each
of Ms. Michaelson and Ms. Kelbick equal to a percentage not to exceed 30%,
determined annually by the Board of Directors, (such percentage initially
established at 30%) of the net income before taxes of MKP as if MKP was not a
member of the Company's consolidated group. Ms. Michaelson and Ms. Kelbick have
the option to take all or a portion of the bonus in the Company's securities.
-13-
<PAGE> 16
FINANCIAL PERFORMANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
NOTE H - EMPLOYMENT AGREEMENTS (continued)
If either Ms. Michaelson or Ms. Kelbick does not elect to renew her
respective employment agreement with MKP at the expiration of the term and MKP
elects not to renew the employment agreement, the respective executive will be
entitled to receive a severance payment in the amount of $250,000. The
employment agreements provide each of Ms. Michaelson and Ms. Kelbick with a
clothing expense allowance of $10,000 for each year of the term of the agreement
and a leased automobile throughout the term.
In the event of the termination of employment of either Ms. Michaelson
or Ms. Kelbick by reason of a "change in control" (as such term is defined in
the employment agreement) of MKP or the Company, or certain other events, then
in addition to paying all salary and accrued benefits through the date of
termination of employment, MKP shall be obligated to pay to the employee, as
severance pay, an amount equal to 200% of the employee's annual base salary rate
in effect as of the date of termination and to maintain through the remaining
balance of the term of the employment agreement (but not less than two years
from the date of termination of the employee's employment agreement) all
employee benefit plans and programs in which the employee was entitled to
participate. The Company has issued 20 shares of MKP and 200,000 shares of the
Company, in the aggregate, to Ms. Michaelson and Ms. Kelbick.
NOTE I - RESTRICTED CASH AND CONTINGENCIES
At June 30, 1998 $180,000 was invested in a Certificate of Deposit and
is pledged as security for a letter of credit issued in connection with the
lease for office space (see Note G). The $180,000 Certificate of Deposit is
included on the balance sheet under the caption, other assets. This exceeds the
federally insured limit.
NOTE J - CONCENTRATION OF CREDIT RISK
The Company maintains it's cash in bank deposit accounts at one
financial institution. The balance at times, may exceed federally insured
limits. At June 30, 1998 and 1997, the Company exceeded the insured limit by
approximately $1,560,000 and $1,440,000, respectively.
-14-
<PAGE> 17
FINANCIAL PERFORMANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
NOTE K - EARNINGS PER SHARE INFORMATION
<TABLE>
<CAPTION>
SIX MONTHS ENDED
------------------------------------------------------------------
1998 1997
---------------------------- -------------------------------
Basic Diluted Basic Diluted
---------- ----------- ----------- ------------
<S> <C> <C> <C> <C>
Net income (loss) available to
Common share owners $1,268,463 $ 1,268,463 $ (54,558) $ (54,558)
========== =========== =========== ============
Average shares outstanding 8,488,532 8,488,532 7,928,157 7,928,157
Dilutive securities
Stock options and warrants (1) -- 2,022,649 -- 2,072,649
---------- ----------- ----------- ------------
Average shares outstanding 8,488,532 10,511,181 7,928,157 10,000,806
========== =========== =========== ============
</TABLE>
(1) Excluded because exercise price exceeds market value.
NOTE L - CHANGE IN FISCAL YEAR
In February 1998, the Company's Board of Directors unanimously approved
a resolution to change the Company's fiscal year end from September 30 to
December 31.
-15-
<PAGE> 18
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
OVERVIEW
History. The Company was incorporated in New York in 1984 under the
name Performance Services Group, Inc. and at that time was primarily engaged in
offering banking institutions a range of proprietary sales and marketing
products, strategic planning and product consulting services and financial
software products. In July 1989, the Company's Common Stock was delisted from
the Nasdaq over-the-counter market and from February 1990 to November 1992 the
Company was inactive.
In January 1993, the Company recommenced its operations and raised
working capital through private debt and equity issuances, including issuances
to one of the Company's principal stockholders. In 1994, the Company began
implementing a business strategy of establishing subsidiary companies to engage
in related or complementary areas of the financial services industry. As a
result, the Company, together with other parties, formed three subsidiaries
(Michaelson Kelbick Partners Inc. ("MKP"), Aspen Capital Management, LLC
("Aspen") and FPC Information Corp. ("FPC Information")). MKP is engaged in
providing merger communications and marketing services to the financial services
industry. FPC Information was formed to market the Company's software and Aspen
was formed to operate as an international sponsor of cash management funds.
Although the Company generated revenues for each of the last four fiscal years
ended September 30, 1997, it incurred losses of $146,036, $801,296, $235,049 and
$544,848 for the fiscal years ended September 30, 1994, 1995, 1996 and 1997,
respectively.
Revenues. The Company's revenues historically have been derived from a
limited number of customers, due principally to the nature of the merger
communications business which has generally required concentration of the
Company's personnel and resources on a limited number of large projects from
different merger clients during any particular period. For the year ended
September 30, 1997, two customers accounted for approximately 72% for the
Company's revenues, with one customer accounting for approximately 56% of its
revenues. In view of the nature of the merger communications business as
aforesaid, the Company anticipates that a substantial amount of its revenues
will continue to be derived from a limited number of customers. As a result, the
Company's sales and operating results are subject to substantial variations in
any given year and from quarter to quarter. The Company's sales and net income
(if any) in a particular quarter may be lower than the sales and net income (if
any) of the Company for the comparable quarter in the prior year. In addition,
sales and net income (if any) of the Company in any particular quarter may not
necessarily reflect the results of operations for the Company for the full year.
Subsidiaries. The Company's consolidated financial statements include
the accounts of Financial Performance Corporation and its subsidiaries. All
significant intercompany accounts and transactions have been eliminated.
-16-
<PAGE> 19
Summary financial information concerning MKP, excluding intercompany
eliminations, as of June 30, 1998 and 1997 and for the six months then ended, is
as follows:
<TABLE>
<CAPTION>
1998 1997
<S> <C> <C>
Cash ............................. $2,050,000 $2,059,000
Accounts receivable .............. $2,691,000 $ 709,000
Other assets ..................... $ 182,000 $ 20,000
Accounts payable ................. $2,400,000 $1,189,000
Revenues ......................... $9,207,000 $4,477,000
Operating costs .................. $7,880,000 $4,113,000
Net income ....................... $1,271,000 $ 348,000
</TABLE>
For the six months ended June 30, 1998, three customers of MKP
accounted for approximately 91% of the Company's revenues, with one customer
accounting for approximately 59% of its revenues.
Summary financial information concerning the Company's other two
subsidiaries, Aspen and FPC Information, as of June 30, 1998 and 1997 and for
the six months then ended, is not separately set forth as these entities had no
revenues for such periods and their assets and liabilities during such periods
were immaterial.
Aspen, whose operations commenced in March 1995, suspended its
operations in September 1996. Aspen was reported as a discontinued operation at
September 30, 1996.
Change in Fiscal Year. On February 23, 1998, the Company's Board of
Directors unanimously approved a resolution to change the Company's fiscal year
end from September 30 to December 31. A Transition Report on Form 10-QSB was
filed by the Company for the transition period commencing October 1, 1997
through December 31, 1997 pursuant to Rule 15d- 10 of the Securities Exchange
Act of 1934.
Other. Income taxes are computed in accordance with the provisions of
Financial Accounting Standards Board Statement No. 109, "Accounting for Income
Taxes" ("SFAS 109"), which requires, among other things, a liability approach to
calculating deferred income taxes. SFAS 109 requires a company to recognize
deferred tax liabilities and assets for the expected future tax consequences of
events that have been recognized in a company's financial statements or tax
returns. Under this method, deferred tax liabilities and assets are determined
based on the difference between the financial statement carrying amounts and tax
basis of assets and liabilities using enacted tax rates in effect in the years
in which the differences are expected to reverse.
At September 30, 1997, the Company had net operating loss carryforwards
of approximately $1,150,000, which will expire in 2012. Certain provisions of
the tax law may limit the net operating loss carryforwards available for use by
the Company in the event of a significant change in the ownership interest of
the Company. At September 30, 1997, the Company had a
-17-
<PAGE> 20
deferred tax asset of approximately $460,000. The deferred tax asset consisted
primarily of net operating loss carryforwards and was fully offset by a
valuation allowance of the same amount.
The income tax expense of $85,423 and $42,589 for the six months and
three months ended June 30, 1998 and the income tax expense of $41,154 and
$30,829 for the six months and three months ended June 30, 1997, respectively,
represents state and local income taxes on the income of MKP.
Costs associated with software development subsequent to the
establishment of technological feasibility, including enhancements to software
products, are capitalized and amortized as required by Statement of Financial
Accounting Standards No. 86. Costs incurred prior to achieving technological
feasibility are expensed as incurred and classified as research and development
costs. There were no research and development costs incurred by the Company for
the three months ended June 30, 1998 and 1997.
Amortization of capitalized software development costs is generally
provided on a product-by-product basis at the greater of the amount computed by
using the ratio of current gross revenue to total current and anticipated gross
revenue of the product or on the straight-line method over the sixty-month
estimated useful life of the product, commencing when the product is available
for general release to customers.
Forward-Looking Statements. Certain statements contained in this Report
on Form 10-QSB, including without limitation, statements containing the words
"believes," "anticipates," "may," "intends," "expects" and words of similar
import, constitute "forward-looking statements" within the meaning of the
Private Securities Litigation Reform Act of 1995. Such forward-looking
statements involve known and unknown risks, uncertainties and other factors that
may cause the actual results, performance or achievements of the Company or
industry results to be materially different from any future results, performance
or achievements expressed or implied by such forward-looking statements. Such
factors include, among others, the following: general economic and business
conditions, both nationally and in the regions in which the Company operates;
competition; changes in business strategy or development plans; the development
or testing of the Company's software; technological, engineering, manufacturing,
quality control or other problems which could delay the sale of the Company's
software; the Company's ability to obtain appropriate licenses from third
parties, protect its trade secrets, operate without infringing upon the
proprietary rights of others and prevent others from infringing on the
proprietary rights of the Company; and the Company's ability to obtain
sufficient financing to continue operations. Certain of these factors are
discussed in more detail elsewhere in this Report on Form 10-QSB.
RESULTS OF OPERATIONS
Three Months Ended June 30, 1998 vs. Three Months Ended June 30, 1997
Revenues. Total revenues increased by $2,196,029 or 87.1% to $4,718,706
for the three months ended June 30, 1998 from $2,522,677 for the three months
ended June 30, 1997. This increase was attributable principally to an increase
in billings under contract by MKP during this
-18-
<PAGE> 21
period. MKP generated 100% of the consolidated revenues of the Company for the
three months ended June 30, 1998 and for the three months ended June 30, 1997.
Cost of Revenues. Cost of revenues increased by $1,376,750 or 69.4% to
$3,361,609 for the three months ended June 30, 1998 from $1,984,859 for the
three months ended June 30, 1997. This increase is primarily attributable to the
increased level of business of MKP during this period. MKP realized an average
profit margin of approximately 29% for the three months ended June 30, 1998
compared to an average profit margin of approximately 21% for the three months
ended June 30, 1997.
Salaries and Related Expenses. Payroll expenses increased by $181,524
or 180.0% to $282,377 for the three months ended June 30, 1998 from $100,853 for
the three months ended June 30, 1997. This increase is attributable principally
to an increase in incentive compensation paid to members of MKP's staff.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased by $16,803 or 6.2% to $289,702 for the three
months ended June 30, 1998 from $272,899 for the three months ended June 30,
1997. This increase was not significant and is reflective of the Company's
control of its overhead expenses notwithstanding the increased level of business
of MKP during this period.
Other Income (Expenses). Other expenses increased by $52,415 or 135.5%
to other expenses of $91,108 for the three months ended June 30, 1998 from other
expenses of $38,693 for the three months ended June 30, 1997. This increase was
attributable principally to an increase in the Company's minority interest in
income of consolidated subsidiaries.
Operating Profit. The Company had an operating profit of $785,018 for
the three months ended June 30, 1998 compared to operating profit of $164,066
for the three months ended June 30, 1997.
Net Income. The Company had net income of $651,321 for the three months
ended June 30, 1998 as compared to net income of $94,544 for the three months
ended June 30, 1997.
Six Months Ended June 30, 1998 vs. Six Months Ended June 30, 1997
Revenues. Total revenues increased by $4,730,990 or 105.7% to
$9,207,256 for the six months ended June 30, 1998 from $4,476,266 for the six
months ended June 30, 1997. This increase was attributed principally to an
increase in billings under contract by MKP during this period. MKP generated
100% of the consolidated revenues of the Company for the six months ended June
30, 1998 and for the six months ended June 30, 1997.
Cost of Revenues. Cost of revenues increased by $2,979,843 or 79.6% to
$6,724,405 for the six months ended June 30, 1998 from $3,744,562 for the six
months ended June 30, 1997. This increase is primarily attributable to the
increased level of business of MKP during this period. MKP realized an average
profit margin of approximately 27% for the six months ended June 30, 1998
compared to an average profit margin of approximately 16% for the six months
ended June
-19-
<PAGE> 22
30, 1997.
Salaries and Related Expenses. Payroll expenses increased by $165,323
or 96.6% to $336,507 for the six months ended June 30, 1998 from $171,184 for
the six months ended June 30, 1997. This increase is attributable principally to
an increase in incentive compensation paid to members of MKP's staff.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses decreased by $12,260 or 2.4% to $507,948 for the six
months ended June 30, 1998 from $520,208 for the six months ended June 30, 1997.
This decrease was not significant and is reflective of the Company's control of
its overhead expenses notwithstanding the increased level of MKP's business
during this period.
Other Income (Expenses). Other expenses increased by $230,794 or 429.7%
to other expenses of $284,510 for the six months ended June 30, 1998 from other
expenses of $53,716 for the six months ended June 30, 1997. This increase was
attributable principally to an increase in the Company's minority interest in
income of consolidated subsidiaries.
Operating Profit (Loss). The Company had an operating profit of
$1,638,396 for the six months ended June 30, 1998 compared to an operating
profit of $40,312 for the six months ended June 30, 1997.
Net Income (Loss). The Company had net income of $1,268,463 for the six
months ended June 30, 1998 compared to a net loss of $54,558 for the six months
ended June 30, 1997.
LIQUIDITY AND CAPITAL RESOURCES
In the past, the Company required continuous capital to fund its
operating losses which were primarily attributable to expenses in connection
with marketing activities, research and development costs and other expenses
including salaries and related expenses and selling, general and administrative
expenses. The Company has financed its operations to date primarily through
public and private sales of its debt and equity securities, including
significant sales to one of its principal stockholders, and more recently
revenues generated by the Company's subsidiary, MKP. In addition, in October
1997, the Company sold an additional 30% equity interest in FPC Information to a
principal shareholder for a purchase price of $225,000.
As of June 30, 1998, the Company had working capital of $2,703,298,
stockholders' equity of $3,312,582 and a working capital ratio (current assets
to current liabilities) of approximately 2.0:1. As of June 30, 1998 and 1997,
the Company had cash and cash equivalents of $2,283,253 and $2,179,705,
respectively.
For the six months ended June 30, 1998 and 1997, net cash provided by
the Company's operating activities was $74,312 and $591,087, respectively. For
the six months ended June 30, 1998 and 1997, the Company utilized $327,277 and
$185,365 for investing activities. Net cash provided by the Company's financing
activities for the six months ended June 30, 1998 and 1997 were $280,000 and
$129,243, respectively.
-20-
<PAGE> 23
Based on the Company's current plan of operations, it is anticipated
that the Company's existing working capital and expected operating revenues will
provide sufficient working capital for operations through June 30, 1999.
However, there can be no assurance that the Company will not require additional
financing prior to that time. For the years ending December 31, 1998, 1999, 2000
and 2001, the Company's minimum payments in connection with the leases will be
approximately $281,000, $281,000, $281,000 and $374,000 per year, respectively.
The Company anticipates that it will require additional capital to fund its
operations. The Company's capital requirements depend on, among other things,
whether the Company is successful in generating revenues and income from its
marketing efforts, the progress and costs of the Company's research and
development programs, the ability of the Company to successfully market its
services and software and the effect of such efforts on the Company's
operations, competing technological and market developments, the costs involved
in protecting and enforcing its proprietary rights and any litigation related
thereto and the cost and availability of third-party financing.
The Company may also seek additional financing in connection with the
acquisition of one or more products (or rights related thereto) or entities or
the consummation of other business combinations. Although the Company has
engaged in discussions with third parties from time to time concerning potential
acquisitions and other business combinations and anticipates continuing such
activities in the future, the Company has no current commitments regarding such
acquisitions or other business combinations.
Financing may be raised by the Company through additional equity
offerings, joint ventures or other collaborative relationships, borrowings and
other transactions. The Company may seek additional funding through any such
transaction or a combination thereof. There can be no assurance that additional
financing will be available to the Company or, if available, that such financing
will be available on acceptable terms.
-21-
<PAGE> 24
PART II
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits.
27 Financial Data Schedule
(b) Reports on Form 8-K.
None
-22-
<PAGE> 25
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this Report to be signed on its behalf by the
undersigned thereunto duly authorized.
Dated: August 13, 1998
FINANCIAL PERFORMANCE CORPORATION
By: /s/ William F. Finley
--------------------------------
William F. Finley
Chief Executive Officer and
President
(Principal Executive Officer and
Principal Financial and Accounting
Officer and Officer Duly Authorized
to Sign on Behalf of Registrant)
-23-
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> JUN-30-1998
<CASH> 2,283,253
<SECURITIES> 0
<RECEIVABLES> 2,691,445
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 5,359,137
<PP&E> 419,359
<DEPRECIATION> 122,500
<TOTAL-ASSETS> 6,611,467
<CURRENT-LIABILITIES> 2,655,839
<BONDS> 0
0
0
<COMMON> 94,215
<OTHER-SE> 2,952,367
<TOTAL-LIABILITY-AND-EQUITY> 6,611,467
<SALES> 9,207,256
<TOTAL-REVENUES> 9,207,256
<CGS> 6,724,405
<TOTAL-COSTS> 6,724,405
<OTHER-EXPENSES> 844,455
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 1,353,886
<INCOME-TAX> 85,423
<INCOME-CONTINUING> 1,268,463
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,268,463
<EPS-PRIMARY> 0.149<F1>
<EPS-DILUTED> 0.149
<FN>
<F1>Amount reported is EPS-BASIC.
</FN>
</TABLE>
