<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, 1999
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, 1999
- ------------------------- ----------------------------------------
Common Stock 9,471,534 Shares
<PAGE> 2
Financial Performance Corporation
Report on Form 10-QSB for the Quarter ended June 30, 1999
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Part I. Page
<S> <C>
Item 1. Financial Statements (Unaudited).......................................................1
Consolidated Balance Sheets
June 30, 1999 and June 30, 1998...............................................2
Consolidated Statements of Operations
For the Six Months Ended
June 30, 1999 and June 30, 1998...............................................3
Consolidated Statements of Operations
For the Three Months Ended
June 30, 1999 and June 30, 1998..............................................4
Consolidated Statements of Changes in Stockholders' Equity
for the Six Months Ended
June 30, 1999 and June 30, 1998..............................................5
Consolidated Statements of Cash Flows
for the Six Months Ended
June 30, 1999 and June 30, 1998...............................................6
Notes to Consolidated Financial Statements.......................................... . 7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations................................................15
Part II
Item 6. Exhibits and Reports on Form 8-K......................................................22
</TABLE>
-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, 1999 AND 1998
ASSETS
<TABLE>
<CAPTION>
1999 1998
----------- -----------
(Unaudited) (Unaudited)
(Restated)
Current assets
<S> <C> <C>
Cash, and cash equivalents $ 4,305,387 $ 2,283,253
Accounts receivable 2,755,203 2,691,445
Prepaid expenses and other current assets 84,260 384,439
----------- -----------
Total current assets 7,144,850 5,359,137
Property and equipment, net of accumulated depreciation 209,375 186,319
Software development costs -- 135,605
Investment in subsidiary 739,928 615,345
Other assets 301,862 315,061
----------- -----------
$ 8,396,015 $ 6,611,467
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable and accrued expenses $ 2,805,733 $ 3,240,839
----------- -----------
Total current liabilities 2,805,733 3,240,839
----------- -----------
Minority interest in consolidated subsidiary 972,046 526,046
----------- -----------
Stockholders' equity
Common stock - authorized 50,000,000 shares of $.01 par
value per share: issued and outstanding 9,471,534 as of
June 30, 1999 and 9,421,534 as of June 30, 1998 94,715 94,215
Additional paid in capital 7,756,261 7,746,761
Accumulated (deficit) (3,232,740) (4,996,394)
----------- -----------
Total stockholders' equity 4,618,236 2,844,582
----------- -----------
$ 8,396,015 $ 6,611,467
=========== ===========
</TABLE>
See the accompanying notes to the financial statements.
-2-
<PAGE> 5
FINANCIAL PERFORMANCE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
SIX MONTHS ENDED JUNE 30, 1999 AND 1998
<TABLE>
<CAPTION>
1999 1998
----------- -----------
(Unaudited) (Unaudited)
(Restated)
<S> <C> <C>
Revenues $ 8,083,213 $ 9,207,256
----------- -----------
Costs and expenses
Cost of revenues 5,970,193 6,724,405
Salaries and related expenses 652,465 921,507
Selling, general and administrative 732,398 507,948
----------- -----------
7,355,056 8,153,860
----------- -----------
Operating income 728,157 1,053,396
----------- -----------
Other income (expense):
Interest income 44,392 29,490
Minority interest in income of consolidated subsidiary (240,000) (197,000)
----------- -----------
(195,608) (167,510)
----------- -----------
Income before income taxes 532,549 885,886
Income taxes 76,139 85,423
----------- -----------
Net income $ 456,410 $ 800,463
=========== ===========
Earnings per common share:
Basic $ .048 $ .094
Diluted $ .045 $ .094
</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, 1999 AND 1998
<TABLE>
<CAPTION>
1999 1998
----------- -----------
(Unaudited) (Unaudited)
(Restated)
<S> <C> <C>
Revenues $ 4,692,824 $ 4,718,706
----------- -----------
Costs and expenses
Cost of revenues 3,712,839 3,361,609
Salaries and related expenses 301,877 574,377
Selling, general and administrative 376,853 289,702
----------- -----------
4,391,569 4,225,688
----------- -----------
Operating income 301,255 493,018
----------- -----------
Other income (expense):
Interest income 18,878 15,292
Minority interest in income of consolidated subsidiary (102,000) (48,400)
----------- -----------
(83,122) (33,108)
----------- -----------
Income before income taxes 218,133 459,910
Income taxes 34,355 42,589
----------- -----------
Net income $ 183,778 $ 417,321
=========== ===========
Earnings per common share:
Basic $ .020 $ .047
Diluted $ .019 $ .047
</TABLE>
See the accompanying notes to the financial statements.
-4-
<PAGE> 7
FINANCIAL PERFORMANCE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
SIX MONTHS ENDED JUNE 30, 1999 AND 1998
(Unaudited)
<TABLE>
<CAPTION>
COMMON STOCK Additional
----------------------------- Paid In Accumulated
Shares Par value Capital Deficit Total
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Balance, January 1, 1999 9,471,534 $ 94,715 $ 7,756,261 $(3,689,150) $ 4,161,826
Net income -- -- -- 456,410 456,410
----------- ----------- ----------- ----------- -----------
Balance, June 30, 1999 9,471,534 $ 94,715 $ 7,756,261 $(3,232,740) $ 4,618,236
=========== =========== =========== =========== ===========
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 (restated) -- -- -- 800,463 800,463
----------- ----------- ----------- ----------- -----------
Balance, June 30, 1998 9,421,534 $ 94,215 $ 7,746,761 $(4,996,394) $ 2,844,582
=========== =========== =========== =========== ===========
</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, 1999 AND 1998
<TABLE>
<CAPTION>
1999 1998
----------- -----------
(Unaudited) (Unaudited)
(Restated)
Cash flows provided by (used in) operating activities:
<S> <C> <C>
Net income $ 456,410 $ 800,463
Adjustments to reconcile to net cash
provided by operating activities:
Depreciation and amortization 60,796 31,576
Minority interest in income of consolidated
subsidiaries 240,000 197,000
Increase (decrease) in cash flows from operating activities
resulting from changes in:
Accounts receivable (2,412,420) (1,970,829)
Prepaid expenses and other current assets (52,985) (305,329)
Other assets 224 (11,255)
Accounts payable and accrued expenses (35,455) 1,332,686
----------- -----------
Net cash provided by (used in) operating activities (1,743,430) 74,312
----------- -----------
Cash flows from investing activities:
Acquisition of property and equipment (48,441) (19,091)
Investment in subsidiary (189,890) (308,186)
----------- -----------
Net cash used in investing activities (238,331) (327,277)
----------- -----------
Cash flows from financing activities:
Proceeds from sale of common shares and exercise of
warrants -- 280,000
----------- -----------
Net increase (decrease) in cash (1,981,761) 27,035
Cash, beginning of period 6,287,148 2,256,218
----------- -----------
Cash, end of period $ 4,305,387 $ 2,283,253
=========== ===========
Supplemental disclosure of cash flow information:
Cash paid during the period for interest $ 26,000 $ 24,000
=========== ===========
</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.
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.
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.
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 are 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, excluding intercompany eliminations, as of June 30, 1999 and
1998 and for the six months then ended, is as follows:
<TABLE>
<CAPTION>
1999 1998
--------- ---------
<S> <C> <C>
Cash 3,691,000 2,050,000
Accounts receivable 2,755,000 2,691,000
Other assets 182,000 182,000
Accounts payable 2,531,000 2,641,000
Revenues 8,083,000 9,207,000
Operating costs 7,433,000 8,466,000
Net income 619,000 686,000
</TABLE>
Intercompany management fees of $522,000 and $585,000 were included
in operating costs for the six months ended June 30, 1999 and 1998,
respectively. These amounts were eliminated upon consolidation.
(2) Restatement of Certain items
Certain items in the Company's financial statements for the six
months and three months ended June 30, 1998 have been restated to conform the
presentation of such financial statements with the Company's financial
statements for the six months and three months ended June 30, 1999.
(3) 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.
(4) 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, 1999 and 1998.
-8-
<PAGE> 11
FINANCIAL PERFORMANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
(4) Software Development Costs and Amortization (continued)
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.
Software Development Costs are summarized as follows:
<TABLE>
<CAPTION>
1999 1998
--------- --------
<S> <C> <C>
Balance, beginning of period $ -- $135,605
Additions -- --
Amortization -- --
--------- --------
Balance, end of period $ -- $135,605
========= ========
</TABLE>
(5) Earning per common share
Basic earnings per common share was calculated by dividing net income
by the weighted average number of common shares outstanding during the year.
Diluted earnings per share was calculated by dividing net income by the sum of
the weighted average number of common shares outstanding plus all additional
common shares that would have been outstanding if potentially dilutive common
shares had been issued.
(6) 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.
(7) 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.
-9-
<PAGE> 12
FINANCIAL PERFORMANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
(8) Depreciation and amortization
Property and equipment are stated at cost. Depreciation is computed
using the straight line method over the estimated useful lives of the assets, 5
to 7 years. When assets are retired or otherwise disposed of, the cost and
related accumulated depreciation are removed from the accounts and any resulting
gain or loss is reflected in operations for the period. The cost of maintenance
and repairs is charged to operations as incurred. Significant renewals and
betterments are capitalized.
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.
Property and equipment consists of the following:
<TABLE>
<CAPTION>
1999 1998
-------- --------
<S> <C> <C>
Computer equipment $209,776 $126,366
Furniture and fixtures 191,157 155,581
Leasehold improvements 33,977 33,977
-------- --------
434,910 315,924
Less: accumulated depreciation
and amortization 225,535 129,605
-------- --------
$209,375 $186,319
======== ========
</TABLE>
(9) 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 December 31, 1998, the Company had net operating loss carry
forwards of approximately $3,567,000, which would expire by 2012, available to
offset future taxable income. 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 December 31, 1998, the
Company had a deferred tax asset amounting to approximately $1,700,000. 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 represents state and local income taxes on the
income of MKP.
-10-
<PAGE> 13
FINANCIAL PERFORMANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
NOTE C - SIGNIFICANT CUSTOMERS
For the six months ended June 30, 1999, one customer of the Company's
subsidiary, MKP, accounted for 86% of the Company's consolidated revenues.
The total accounts receivable from this customer at June 30, 1999
amounted to 80% of the total accounts receivable balance.
NOTE D - WARRANTS TO PURCHASE COMMON STOCK
At June 30, 1999, the Company had outstanding warrants as follows:
<TABLE>
<CAPTION>
Number of Exercise Expiration
Shares Price Date
------- ----------- -----------
<S> <C> <C>
250,000 $ .50 November 30, 1999
550,000 .50 October 31, 2001
725,000 1.00 September 15, 2006
20,000 1.00 September 16, 2006
200,000 .50 September 15, 2010
</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. The plan expired by its terms in October 1998.
Presented below is a summary of the status of the Company's stock options
for the six months ended June 30, 1999 and 1998:
<TABLE>
<CAPTION>
1999 1998
------------------------------ ------------------------------------
Weighted Weighted
Shares Average Shares Average
under Exercise under Exercise
Options Price Options Price
------------- ---------- ------------ -----------
<S> <C> <C> <C> <C>
Balance, beginning of period - $ - 70,000 $ 2.31
Granted - - - -
Exercised - - - -
Expired - - - -
------------- ---------- ------------ -----------
Balance, end of period - $ - 70,000 $ 2.31
============= ========== ============ ===========
</TABLE>
-11-
<PAGE> 14
FINANCIAL PERFORMANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
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.
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. Total
contributions to the plans, (401(k) and profit sharing), were $127,000 and
$82,000 for the years ended December 31, 1998 and 1997, respectively.
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> <C>
1999 $ 281,000
2000 281,000
2001 374,000
2002 415,000
2003 419,000
Thereafter 1,292,000
-----------
$ 3,062,000
===========
</TABLE>
Rent and equipment leasing expense was $176,000 for the six months ended
June 30, 1999 and 1998.
-12-
<PAGE> 15
FINANCIAL PERFORMANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
NOTE H - RESTRICTED CASH AND CONTINGENCIES
At June 30, 1999, $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 I - CONCENTRATION OF CREDIT RISK
The Company maintains its cash and cash equivalents with a major financial
institution. The balance at times, may exceed federally insured limits. The
Company performs periodic evaluations of the relative credit standing of this
financial institution.
NOTE J - FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying value amounts of cash and cash equivalents, prepaid expenses
and accrued expenses approximate fair value because of the short maturity of
these items.
NOTE K - EARNINGS PER SHARE INFORMATION
The calculation of basic and diluted earnings per share for the six months
ended June 30, 1999 and 1998 is as follows:
<TABLE>
<CAPTION>
1999 1998
----------- -----------
<S> <C> <C>
Net income available to
Common share owners $ 456,410 $ 800,463
=========== ===========
Average shares outstanding (a) 9,471,534 8,488,201
Dilutive securities
Stock options and warrants (b) 676,930 --
----------- -----------
Average shares outstanding assuming dilution (c) 10,148,464 8,488,201
=========== ===========
</TABLE>
(a) Used to compute basic earnings per share.
(b) Excluded for 1998 because exercise price exceeded market value.
(c) Used to compute diluted earnings per share.
-13-
<PAGE> 16
FINANCIAL PERFORMANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
NOTE K - EARNINGS PER SHARE INFORMATION (Continued)
The calculation of basic and diluted earnings per share for the three months
ended June 30, 1999 and 1998 is as follows:
<TABLE>
<CAPTION>
1999 1998
---------- ----------
<S> <C> <C>
Net income available to
Common share owners $ 183,778 $ 417,321
========== ==========
Average shares outstanding (a) 9,471,534 8,954,865
Dilutive securities
Stock options and warrants (b) 450,546 --
---------- ----------
Average shares outstanding assuming dilution (c) 9,922,080 8,954,865
========== ==========
</TABLE>
(a) Used to compute basic earnings per share.
(b) Excluded for 1998 because exercise price exceeded market value.
(c) Used to compute diluted earnings per share.
NOTE L - CHANGE IN FISCAL YEAR
In February 1998, the Company's fiscal year end was changed from September
30 to December 31.
-14-
<PAGE> 17
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.
Aspen is currently inactive and MKP accounts for 100% of the Company's revenues.
Although the Company generated revenues for each of the last four fiscal years
ended September 30, 1997 and for the fiscal year ended December 31, 1998, 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. The Company
had net income of $2,107,707 for the fiscal year ended December 31, 1998. In
February 1998, the Company changed its fiscal year end from September 30 to
December 31.
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 fiscal year ended
September 30, 1997, two customers of MKP accounted for approximately 72% for the
Company's revenues, with one customer accounting for approximately 56% of its
revenues. For the fiscal year ended December 31, 1998, three customers of MKP
accounted for approximately 82% of the Company's revenues, with one customer of
MKP accounting for approximately 55% of its revenues. For the six months ended
June 30, 1999, one customer of MKP accounted for approximately 86% of the
Company's revenues. 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. 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.
Restatement. Certain items in the Company's financial statements for
the three months and six months ended June 30, 1998 have been restated to
reflect the quarterly accrual of bonus payments for the fiscal year ended
December 31, 1998, in order to conform the presentation of such financial
statements with the Company's financial statements for the three months and six
months ended June 30, 1999.
-15-
<PAGE> 18
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.
Summary financial information concerning MKP, excluding intercompany
eliminations, as of June 30, 1999 and 1998 and for the six months then ended, is
as follows:
<TABLE>
<CAPTION>
1999 1998
<S> <C> <C>
Cash .............. $3,691,000 $2,050,000
Accounts receivable $2,755,000 $2,691,000
Other assets ...... $ 182,000 $ 182,000
Accounts payable .. $2,531,000 $2,641,000
Revenues .......... $8,083,000 $9,207,000
Operating costs ... $7,433,000 $8,466,000
Net income ........ $ 619,000 $ 686,000
</TABLE>
Summary financial information concerning the Company's other two
subsidiaries, Aspen and FPC Information, as of June 30, 1999 and for the three
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 to the Company.
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. In February 1998, the Company changed its fiscal
year end from September 30 to December 31.
Year 2000. The Company recognizes the potential business impact
relating to the Year 2000 computer system issue and has implemented a plan to
assess and improve the Company's state of readiness with respect to such issue.
The Year 2000 issue is one where computer systems recognize the designation "00"
as 1900 instead of 2000, potentially resulting in system failure or
miscalculations.
In recognition of the Year 2000 issue, commencing in 1998, the Company
initiated a comprehensive review of its information technology systems, which
the Company is dependent upon for the conduct of its business operations, as
well as the computer hardware and software products, components and other
equipment supplied to the Company by third parties, in order to determine the
adequacy of those systems in light of the Company's future business
requirements. Year 2000 readiness was one of the factors considered in the
review of the Company's systems. Such review included testing and analysis of
the Company's systems and inquiries of third parties supplying information
technology systems, computer hardware and software products and components, and
other equipment to the Company in order to receive assurances from such third
parties that these systems, products and components are Year 2000 compliant. The
Company completed its review in January 1999.
-16-
<PAGE> 19
As a result of its review, the Company has determined that its internal
financial software systems are adequate for the Company's future business needs,
including Year 2000 compliance, and do not need to be replaced. Also, the
Company has completed all necessary Year 2000 modifications with regard to the
MARS(TM) computer software product being developed by the Company's subsidiary,
FPC Information Corp. The Company believes that the MARS(TM) computer software
product is Year 2000 compliant. The cost of the Company's Year 2000 compliance
efforts is immaterial.
The Company has not assessed the Year 2000 readiness of any third
parties with whom the Company has relationships, such as the Company's banking
clients and vendors. Due to the Company's uncertainty concerning the Year 2000
readiness of these third parties, the Company is unable to determine whether the
failure by one or more of these parties to be Year 2000 complaint will
materially impact the Company's business, financial condition or results of
operations.
The Company has not developed a "worst case" scenario with respect to
Year 2000 issues, but instead has focused its resources on identifying any
material, remediable problems and reducing uncertainties generally, through the
review procedures described above.
The Company has not developed Year 2000 contingency plans, other than
the review described above, and the Company does not believe such plans are
merited by the results of the Company's Year 2000 review. The Company maintains
and deploys contingency plans designed to address various other potential
business interruptions. These plans may be applicable to address the possible
interruption of support provided by third parties resulting from their failure
to be Year 2000 compliant.
If the Company or the third parties with which it has relationships
were to not successfully meet its or their Year 2000 compliance requirements,
the Company would likely encounter disruptions to its business that could have a
material adverse effect on its business, financial position and results of
operations. The Company could be materially and adversely impacted by widespread
economic or financial market disruption or by Year 2000 computer system failures
of third parties with which it has relationships.
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 December 31, 1998, the Company had net operating loss carryforwards
of approximately $3,567,000, which will expire in various years through and
including 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 December 31,
1998, the Company had a deferred tax asset of approximately $1,700,000. The
deferred tax asset consisted primarily of net operating loss carryforwards and
was fully offset by a valuation allowance of the same amount.
-17-
<PAGE> 20
The income tax expense of $76,139 and $34,355 for the six months and
three months ended June 30, 1999, and the income tax expense of $85,423 and
$42,589 for the six months and three months ended June 30, 1998, 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, 1999 and 1998.
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: the continued services of key
employees of the Company and its subsidiaries; technological, engineering,
manufacturing, quality control or other problems which could delay the
development and sale of the Company's software; the development, testing and
market acceptance of the Company's software; competition; changes in business
strategy or development plans; 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; the Company's ability to
obtain sufficient financing to continue operations; and general economic and
business conditions, both nationally and in the regions in which the Company
operates. Certain of these factors are discussed in more detail elsewhere in
this Quarterly Report on Form 10-QSB and in the Company's Annual Report on Form
10-KSB for the fiscal year ended December 31, 1998. Given the risks,
uncertainties and unknown factors referred to above, undue reliance should not
be placed on such forward-looking statements. The Company disclaims any
obligation to update any such factors or to publicly announce the results of any
revisions to any of the forward-looking statements contained herein to reflect
future events or developments.
RESULTS OF OPERATIONS
Three Months Ended June 30, 1999 vs. Three Months Ended June 30, 1998
Revenues. Total revenues decreased by $25,882 or approximately 0.6% to
$4,692,824 for the three months ended June 30, 1999 from $4,718,706 for the
three months ended June 30, 1998. This decrease was attributable to a decrease
in billings by MKP during this period. The
-18-
<PAGE> 21
Company believes the decrease in MKP's billings was primarily attributable to
quarterly variations arising from the nature of MKP's business, based upon the
different stages of merger communications projects for which MKP was engaged in
during the three months ended June 30, 1999. MKP generated 100% of the
consolidated revenues of the Company for the three months ended June 30, 1999
and for the three months ended June 30, 1998.
Cost of Revenues. Cost of revenues increased by $351,230 or
approximately 10.4% to $3,712,839 for the three months ended June 30, 1999 from
$3,361,609 for the three months ended June 30, 1998. This increase was primarily
attributable to reduced profit margins for certain of the projects performed by
MKP during the three month period ended June 30, 1999.
Salaries and Related Expenses. Payroll expenses decreased by $272,500
or approximately 47.4% to $301,877 for the three months ended June 30, 1999 from
$574,377 for the three months ended June 30, 1998. This decrease was
attributable primarily to the decreased bonus payments payable by MKP during the
three month period ended June 30, 1999.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased by $87,151 or approximately 30.1% to $376,853
for the three months ended June 30, 1999 from $289,702 for the three months
ended June 30, 1998. This increase was attributable principally to an increase
in a number of general overhead expenses, including consulting fees, insurance
costs, professional fees and other administrative expenses. Certain of the
professional fees incurred during the three months ended June 30, 1999 related
to the Company's filing of a registration statement and are non-recurring in
nature.
Other Income (Expense). Other expense increased by $50,014 or
approximately 151.1% to other expense of $83,122 for the three months ended June
30, 1999 from other expense of $33,108 for the three months ended June 30, 1998.
This increase was primarily attributable to an increase in the deduction
attributable to the Company's minority interest in income of consolidated
subsidiaries.
Operating Profit. The Company's operating profit decreased by $191,763
or approximately 38.9% to $301,255 for the three months ended June 30, 1999
compared to an operating profit of $493,018 for the three months ended June 30,
1998.
Net Income. The Company's net income decreased by $233,543 or
approximately 56.0% to $183,778 for the three months ended June 30, 1999
compared to net income of $417,321 for the three months ended June 30, 1998.
Six Months Ended June 30, 1999 vs. Six Months Ended June 30, 1998
Revenues. Total revenues decreased by $1,124,043 or approximately 12.2%
to $8,083,213 for the six months ended June 30, 1999 from $9,207,256 for the six
months ended June 30, 1998. This decrease was attributable to a decrease in
billings by MKP during this period. The Company believes the decrease in MKP's
billings was primarily attributable to quarterly variations arising from the
nature of MKP's business, based upon the different stages of merger
communications projects for which MKP was engaged in during the six months ended
June 30, 1999. MKP generated 100% of the consolidated revenues of the Company
for the six months ended June 30, 1999 and for the six months ended June 30,
1998.
-19-
<PAGE> 22
Cost of Revenues. Cost of revenues decreased by $754,212 or
approximately 11.2% to $5,970,193 for the six months ended June 30, 1999 from
$6,724,405 for the six months ended June 30, 1998. This decrease was primarily
attributable to the decreased level of business of MKP during the three month
period ended June 30, 1999.
Salaries and Related Expenses. Payroll expenses decreased by $269,042
or approximately 29.2% to $652,465 for the six months ended June 30, 1999 from
$921,507 for the six months ended June 30, 1998. This decrease was attributable
primarily to the decreased bonus payments payable by MKP during the three month
period ended June 30, 1999.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased by $224,450 or approximately 44.2% to $732,398
for the six months ended June 30, 1999 from $507,948 for the six months ended
June 30, 1998. This increase was attributable principally to an increase in a
number of general overhead expenses, including consulting fees, insurance costs,
professional fees and other administrative expenses. Certain of the professional
fees incurred during the six months ended June 30, 1999 are related to the
Company's filing of a registration statement and are non-recurring in nature.
Other Income (Expense). Other expense increased by $28,098 or
approximately 16.8% to other expense of $195,608 for the six months ended June
30, 1999 from other expense of $167,510 for the six months ended June 30, 1998.
This increase was primarily attributable to an increase in the deduction
attributable to the Company's minority interest in income of consolidated
subsidiaries.
Operating Profit. The Company's operating profit decreased by $325,239
or approximately 30.9% to $728,157 for the six months ended June 30, 1999
compared to an operating profit of $1,053,396 for the six months ended June 30,
1998.
Net Income. The Company's net income decreased by $344,053 or
approximately 43.0% to $456,410 for the six months ended June 30, 1999 compared
to net income of $800,463 for the six months ended June 30, 1998.
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 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, 1999, the Company had working capital of $4,339,117,
stockholders' equity of $4,618,236 and a working capital ratio (current assets
to current liabilities) of approximately 2.5:1. As of June 30, 1999 and June 30,
1998, the Company had cash and cash equivalents of $4,305,387 and $2,283,253,
respectively.
-20-
<PAGE> 23
For the six months ended June 30, 1999, net cash used in the Company's
operating activities was $1,743,430 compared to net cash provided by operating
activities of $74,312 for the six months ended June 30, 1998. For the six months
ended June 30, 1999 and June 30, 1998, the Company utilized $238,331 and
$327,277 for investing activities, respectively. For the six months ended June
30, 1999 and June 30, 1998, net cash provided by the Company's financing
activities was $0 and $280,000, respectively.
For the years ending December 31, 1999, 2000, 2001 and 2002, the
Company's minimum payments in connection with non-cancelable operating leases
for office space and equipment will be approximately $281,000, $281,000,
$374,000 and $415,000 per year, respectively.
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 for the foreseeable future.
However, there can be no assurance that the Company will not require additional
financing. The Company's capital requirements depend on, among other things,
whether the Company is successful in continuing to generate revenues and income
from MKP, the Company's marketing efforts, including those related to our
MARS(TM) computer software, the ability of the Company to successfully market
its services and software, competing technological and market developments, any
costs involved in protecting and enforcing the Company's 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 12, 1999
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-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> JUN-30-1999
<CASH> 4,305,387
<SECURITIES> 0
<RECEIVABLES> 2,755,203
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 7,144,850
<PP&E> 434,910
<DEPRECIATION> 225,375
<TOTAL-ASSETS> 8,396,015
<CURRENT-LIABILITIES> 2,805,733
<BONDS> 0
0
0
<COMMON> 94,715
<OTHER-SE> 4,523,521
<TOTAL-LIABILITY-AND-EQUITY> 8,396,015
<SALES> 8,083,213
<TOTAL-REVENUES> 8,083,213
<CGS> 5,970,193
<TOTAL-COSTS> 5,970,193
<OTHER-EXPENSES> 1,384,863
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 532,549
<INCOME-TAX> 76,139
<INCOME-CONTINUING> 456,410
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 456,410
<EPS-BASIC> 0.048
<EPS-DILUTED> 0.045
</TABLE>
