<PAGE>
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, 1997
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 12, 1997
------------------------------- ------------------------------
Common Stock 8,005,532 Shares
<PAGE>
Financial Performance Corporation
Third Quarter Report on Form 10-QSB
-----------------------------------
TABLE OF CONTENTS
Part I. Page
----
Item 1. Financial Statements (Unaudited)................................1
Consolidated Balance Sheets
June 30, 1997 and June 30, 1996............................2
Consolidated Statement of Operations
For the Nine Months Ended
June 30, 1997 and June 30, 1996............................3
Consolidated Statement of Operations
For the Three Months Ended
June 30, 1997 and June 30, 1996............................4
Consolidated Statement of Cash Flows
For the Nine Months Ended
June 30, 1997 and June 30, 1996............................5
Consolidated Statement of Cash Flows
For the Three Months Ended
June 30, 1997 and June 30, 1996............................6
Consolidated Statement of Changes in Stockholders' Equity
for the Nine Months Ended
June 30,1997 and June 30, 1996.............................7
Notes to Consolidated Financial Statements......................9
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations.........................17
Part II
Item 6. Exhibits and Reports on Form 8-K...............................23
-ii-
<PAGE>
Part I
Item 1. Financial Statements
The financial statements of Financial Performance Corporation (the
"Company") begin on page 2.
<PAGE>
FINANCIAL PERFORMANCE CORPORATION AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS FOR THE PERIODS ENDED JUNE 30, 1997 AND 1996
PAGE
NO.
-----
CONSOLIDATED FINANCIAL STATEMENTS
Balance Sheet as of June 30, 1997 and 1996.............................. 3
Statement of Operations
Nine months Ended June 30, 1997 and 1996............................... 4
Three Months Ended June 30, 1997 and 1996.............................. 5
Statement of Cash flows
Nine Months Ended June 30, 1997 and 1996............................... 6
Statement of Changes in Stockholders' Equity
Nine Months Ended June 30, 1997........................................ 7
Nine Months Ended June 30, 1996........................................ 8
Notes to Financial Statements............................................ 9
2
<PAGE>
FINANCIAL PERFORMANCE CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
JUNE 30, 1997 AND 1996
<TABLE>
<CAPTION>
1997 1996
(UNAUDITED) (UNAUDITED)
------------ ------------
<S> <C> <C>
ASSETS
Current assets
Cash..................................................................... $ 2,179,705 $ 791,404
Accounts receivable...................................................... 709,284 3,285,949
Prepaid expenses and other current assets................................ 196,397 90,857
------------ ------------
Total current assets................................................... 3,085,386 4,168,210
Computer equipment, net (Note B (6))..................................... 170,040 106,456
Software development costs (Note B (3)).................................. 540,571 417,046
Other assets............................................................. 152,368 164,500
------------ ------------
$ 3,948,365 $ 4,856,212
------------ ------------
------------ ------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable and accrued expenses.................................... $ 1,353,520 $ 1,954,918
Current portion of long-term debt (Note D)............................... -- 21,228
Short-term borrowings (Note C)........................................... -- 113,000
------------ ------------
Total current liabilities.............................................. 1,353,520 2,089,146
------------ ------------
Long-term debt, net of current maturities (Note D)......................... -- 168,095
------------ ------------
Minority interest in consolidated subsidiaries............................. 346,046 424,046
------------ ------------
Stockholders' equity
Common stock--authorized 50,000,000 shares of $.01 par value per
share: issued and outstanding 8,005,532 and 6,897,252 as of
June 30,1997 and 1996.................................................. 80,055 68,973
Additional paid in capital............................................... 7,469,421 6,706,439
Accumulated (deficit).................................................... (5,300,677) (4,600,487)
------------ ------------
Total stockholders' equity............................................. 2,248,799 2,174,925
------------ ------------
$ 3,948,365 $ 4,856,212
------------ ------------
------------ ------------
</TABLE>
See the accompanying notes to the financial statements.
3
<PAGE>
FINANCIAL PERFORMANCE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
NINE MONTHS ENDED JUNE 30, 1997 AND 1996
<TABLE>
<CAPTION>
1997 1996
(UNAUDITED) (UNAUDITED)
------------- ------------
<S> <C> <C>
Revenues................................................................... $ 5,848,661 $ 7,657,608
------------ ------------
Costs and expenses
Cost of revenues......................................................... 4,825,018 5,785,693
Salaries and related expenses............................................ 242,785 483,607
Selling, general and administrative...................................... 712,253 420,089
------------ ------------
5,780,056 6,689,389
------------ ------------
Operating income....................................................... 68,605 968,219
------------ ------------
Other income (expenses)
Interest income.......................................................... 39,343 3,075
Interest expense......................................................... (2,981) (77,556)
Minority interest in income of consolidated subsidiaries................. (90,000) (269,000)
------------ ------------
(53,638) (343,481)
------------ ------------
Income from continuing operations before income taxes...................... 14,967 624,738
Provision for income taxes................................................. 52,931 --
------------ ------------
Income (loss) from continuing operations................................... (37,964) 624,738
Loss from discontinued operations (Note K)................................. -- (197,563)
------------ ------------
Net income (loss)...................................................... $ (37,964) $ 427,175
------------ ------------
------------ ------------
Per share data:
Income (loss) from continuing operations................................. $ (.005) $ .15
------------ ------------
------------ ------------
Net income (loss)........................................................ $ (.005) $ .10
------------ ------------
------------ ------------
Average outstanding common shares........................................ 7,675,158 4,117,032
------------ ------------
------------ ------------
</TABLE>
See the accompanying notes to the financial statements.
4
<PAGE>
FINANCIAL PERFORMANCE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
THREE MONTHS ENDED JUNE 30, 1997 AND 1996
<TABLE>
<CAPTION>
1997 1996
(UNAUDITED) (UNAUDITED)
------------ ------------
<S> <C> <C>
Revenues................................................................... $ 2,522,677 $ 5,334,518
------------ ------------
Costs and expenses
Cost of revenues......................................................... 1,984,859 4,052,405
Salaries and related expenses............................................ 100,853 171,916
Selling, general and administrative...................................... 272,899 210,055
------------ ------------
2,358,611 4,434,376
------------ ------------
Operating income....................................................... 164,066 900,142
------------ ------------
Other income (expenses)
Interest income.......................................................... 15,307 3,043
Interest expense......................................................... -- (1,119)
Minority interest in income of consolidated subsidiaries................. (54,000) (215,200)
------------ ------------
(38,693) (213,276)
------------ ------------
Income before income taxes................................................. 125,373 686,866
Provision for income taxes................................................. 30,829 --
------------ ------------
Net income............................................................. $ 94,544 $ 686,866
------------ ------------
------------ ------------
Per share data:
Net income............................................................... $ .01 $ .12
------------ ------------
Average outstanding common shares........................................ 8,005,532 5,617,032
------------ ------------
------------ ------------
</TABLE>
See the accompanying notes to the financial statements.
5
<PAGE>
FINANCIAL PERFORMANCE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
NINE MONTHS ENDED JUNE 30, 1997 AND 1996
<TABLE>
<CAPTION>
1997 1996
------------ -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C>
Cash flows provided by operating activities:
Net income (loss).............................................. $ (37,964) $ 427,175
Adjustments to reconcile net income (loss) to net
cash
Provided by (used for) operating activities:
Depreciation and amortization................................ 82,517 22,805
Minority interest in income of consolidated subsidiaries..... 90,000 269,000
Issuance of stock for compensation............................ 2,500 --
Changes in operating assets and liabilities:
Decrease (increase) in accounts receivable.................. 193,232 (3,058,562)
Increase in prepaid expenses and other current assets....... (139,057) (53,559)
Decrease in other assets.................................... 100,000 --
Increase in accounts payable and accrued expenses........... 9,051 1,628,803
------------ -----------
Net cash provided by (used for) operating
activities............................................ 300,279 (764,338)
------------ -----------
Cash flows from investing activities:
Acquisition of property and equipment........................... (97,279) (55,423)
Software development costs...................................... (145,799) (183,196)
------------ -----------
Net cash used for investing activities.................. (243,078) (238,619)
------------ -----------
Cash flows from financing activities:
Repayments on notes payable to stockholders..................... -- (17,172)
Proceeds from sale of common shares and exercise of warrants.... 150,448 580,200
Proceeds from borrowings........................................ -- 882,578
------------ -----------
Net cash provided by financing activities............... 150,448 1,445,606
------------ -----------
Net increase in cash............................................. 207,649 442,649
Cash, beginning of period........................................ 1,972,056 348,755
------------ -----------
Cash, end of period.............................................. $ 2,179,705 $ 791,404
------------ -----------
------------ -----------
Supplemental disclosure of cash flow information:
Cash paid during the period for interest....................... $ -- $ 1,750
------------ -----------
------------ -----------
</TABLE>
See the accompanying notes to the financial statements.
6
<PAGE>
FINANCIAL PERFORMANCE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
NINE MONTHS ENDED JUNE 30, 1997
(Unaudited)
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL
--------------------- PAID IN
SHARES PARVALUE CAPITAL DEFICIT TOTAL
---------- --------- ------------ ------------- ------------
<S> <C> <C> <C> <C> <C>
BALANCE,
SEPTEMBER 30, 1996........................... 7,192,562 $ 71,926 $ 7,043,986 $ (5,262,713) $ 1,853,199
Issuance of common shares on exercise of
warrants..................................... 49,414 494 24,213 -- 24,707
Issuance of shares in private placement,
net of costs................................. 198,942 1,989 166,881 -- 168,870
Issuance of common shares on conversion of
convertible note and short-term debt......... 564,614 5,646 234,341 -- 239,987
Net income (loss).............................. -- -- -- (37,964) (37,964)
---------- --------- ------------ ------------- ------------
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.
7
<PAGE>
FINANCIAL PERFORMANCE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
NINE MONTHS ENDED JUNE 30, 1996
(Unaudited)
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL
--------------------- PAID IN
SHARES PARVALUE CAPITAL DEFICIT TOTAL
---------- --------- ------------ ------------- ------------
<S> <C> <C> <C> <C> <C>
BALANCE,
SEPTEMBER 30, 1995........................... 3,500,617 $ 35,006 $ 4,142,732 $ (5,027,662) $ (849,924)
Issuance of common shares on conversion of
short-term borrowings........................ 2,000,000 20,000 1,997,474 -- 2,017,474
Proceeds from sale of common shares and
exercise of warrants,net of expenses......... 1,396,635 13,967 566,233 -- 580,200
Net income..................................... -- -- -- 427,175 427,175
---------- --------- ------------ ------------- ------------
BALANCE,
JUNE 30, 1996................................ 6,897,252 $ 68,973 $ 6,706,439 $ (4,600,487) $ 2,174,925
---------- --------- ------------ ------------- ------------
---------- --------- ------------ ------------- ------------
</TABLE>
See the accompanying notes to the financial statements.
8
<PAGE>
FINANCIAL PERFORMANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE A--ORGANIZATION AND BUSINESS
Financial Performance Corporation (the "Company") currently markets
computer software and specialized consulting services 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"), Aspen Capital Management, LLC ("Aspen"), and FPC Information Corp.
("FPC Information").
MKP was formed and commenced operations in October 1994. MKP is engaged
in providing specialized business and marketing services to the financial
services industry. (See Note B (1)).
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 (See Note L).
FPC Information was formed in November 1994 for the purpose of marketing
the Company's software products.
NOTE B--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(1) Consolidated financial statements
The consolidated financial statements include the accounts of Financial
Performance Corporation and Subsidiaries (its three eighty percent owned
subsidiaries). The Company's investment in the subsidiaries is accounted for
by the equity method. All significant intercompany accounts and transactions
have been eliminated.
Condensed financial information of its eighty percent owned subsidiary,
MKP, excluding intercompany eliminations, as of June 30, 1997 and 1996 and
for the nine months then ended, is as follows:
<TABLE>
<CAPTION>
1997 1996
------------ ----------
<S> <C> <C>
Cash.................................... $ 2,059,000 $ 316,000
Accounts receivable..................... 709,000 3,286,000
Other assets............................ 20,000 11,000
Accounts payable........................ 1,189,000 1,876,000
Revenues................................ 5,849,000 7,658,000
Operating costs......................... 5,172,000 6,318,000
Net income.............................. 662,000 1,343,000
</TABLE>
9
<PAGE>
FINANCIAL PERFORMANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
NOTE B--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
(1) Consolidated financial statements (continued)
Condensed financial information for the Company's other two eighty
percent subsidiaries, Aspen Capital Management, LLC and FPC Information
Corp., have not been separately disclosed. These entities had no revenues and
their assets and liabilities are immaterial.
Aspen, whose operations commenced in March 1995, suspended its operations
in September 1996 (See Note L). Aspen had no revenues and incurred losses of
$197,563 for the nine months ended June 30, 1996. FPC Information Corp. had
no revenues and incurred losses of $234,787 and $220,987 for the nine months
ended June 30, 1997 and 1996, respectively.
(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 nine and three months ended June 30, 1997 and 1996.
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>
1997 1996
---------- ----------
<S> <C> <C>
Balance--beginning of period...................... $ 452,299 $ 238,289
Additions......................................... 145,799 183,196
Amortization...................................... (57,527) (4,439)
---------- ----------
Balance--end of period............................ $ 540,571 $ 417,046
---------- ----------
---------- ----------
</TABLE>
10
<PAGE>
FINANCIAL PERFORMANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
NOTE B--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
(4) Income (loss) per common share
Income (loss) per common share is computed using the weighted average
number of common shares outstanding for each period adjusted for incremental
shares assumed issued for common stock equivalents using the treasury stock
method, provided that the effect is not antidilutive.
(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) 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.
(7) 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, 1996, the Company had net operating loss carryforwards
of approximately $487,000, which would expire in 2011. Certain provisions of
the tax law may limit the net operating loss carryforwards available for use
in any given year in the event of a significant change in ownership interest.
At September 30, 1996, the Company had a deferred tax asset amounting to
approximately $195,000. The deferred tax asset consisted primarily of net
operating loss carryforwards and has been fully offset by a valuation
allowance of the same amount.
The income tax expense for the nine and three months ended June 30, 1997
represents state and local income taxes on the income of MKP.
11
<PAGE>
FINANCIAL PERFORMANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
NOTE C--SHORT-TERM BORROWINGS
During the fiscal year ended September 30, 1996, $675,000 of short-term
financing was advanced to the Company by a principal shareholder. These
advances plus prior short-term borrowings which aggregated $425,000 at
December 31, 1995 totaled $800,000. This aggregate amount ($800,000) was
converted into 800,000 shares of the Company's common stock on March 29, 1996
and June 20, 1996. Subsequent to the conversion, an additional $113,000 was
advanced to the Company by the same principal shareholder. In November 1996,
the short-term debt of $113,000 was converted into 113,000 shares of the
Company's common stock, at a conversion price of $1.00 per share.
NOTE D--LONG-TERM DEBT
Long-term debt as of June 30, 1997 and 1996 consists of the following:
<TABLE>
<CAPTION>
1997 1996
--------- ----------
<S> <C> <C>
Note payable, stockholders, matured on
October 1, 1996 and required monthly
payments of $3,575 including interest at
9% per annum................................................ $ -- $ 21,228
Amended and restated secured convertible note
payable to a principal shareholder, matures on
December 31, 1997 with accrued interest from
January 1, 1995 at 8% per annum, see Note D (1)
and (2)..................................................... -- 168,095
--------- ----------
-- 189,323
Less: current portion due within one year................... -- 21,228
--------- ----------
$ -- $ 168,095
--------- ----------
--------- ----------
</TABLE>
12
<PAGE>
FINANCIAL PERFORMANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
NOTE D--LONG-TERM DEBT--(Continued)
(1) The note was converted in November 1996 into 400,000 shares of the
Company's common stock.
(2) Until such time as the convertible note was paid, the Company was
obligated to cause an amount equal to 30% of the pre-tax income of all of the
operating income of the Company and its subsidiaries to be paid to the holder
of the note annually in arrears, on or before the 60th day following the end
of the Company's fiscal year commencing with the fiscal year ending September
30, 1995. Such payments were to be applied first to accrued interest with the
balance applied to principal. The note was secured by the Company's accounts
receivable, contract rights, patents, trademarks and any other rights in
computer software. In November 1996, the outstanding amount due under this
note, was converted into shares of the Company's common stock at a conversion
rate of $1.00 per share. Accordingly, the Company's obligations under the
note and the security interests granted as collateral therein are no longer
in effect.
NOTE E--SIGNIFICANT CUSTOMERS
For the nine months ended June 30, 1997 three customers of the Company's
subsidiary, MKP, accounted for 88% of the Company's consolidated revenues in
the following respective percentages:
<TABLE>
<S> <C> <C>
Customer................................ A 61%
Customer................................ B 14%
Customer................................ C 13%
---
88%
---
---
</TABLE>
The total accounts receivable from these customers at June 30, 1997
amounted to 65% of the total accounts receivable balance.
13
<PAGE>
FINANCIAL PERFORMANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
NOTE F--WARRANTS TO PURCHASE COMMON STOCK
At June 30, 1997, 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
300,000 .50 November 30, 1999
20,000 1.00 September 16, 2006
</TABLE>
NOTE G--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, 1997, are as follows:
<TABLE>
<CAPTION>
EXERCISABLE
NUMBER OF EXERCISE AT
SHARES PRICE JUNE 30, 1997
- ----------- ----------- -------------
<S> <C> <C>
40,000 $ .4375 40,000
30,000 4.8125 30,000
</TABLE>
14
<PAGE>
FINANCIAL PERFORMANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
NOTE H--PENSION AND PROFIT SHARING PLAN
In September 1996, the Company established a non-contributory 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.
NOTE I--STOCKHOLDERS' EQUITY
In September 1996, the Company effectuated a one-for-five reverse stock
split of its common stock. All share and price per share information in the
consolidated financial statements and related notes have been adjusted to
give retroactive effect for this reverse stock split.
NOTE J--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:
YEARS ENDING
SEPTEMBER 30,
--------------
1997..................... $ 198,000
1998..................... 292,000
1999..................... 292,000
2000..................... 292,000
2001..................... 281,000
Thereafter............... 2,095,000
------------
$ 3,450,000
------------
------------
15
<PAGE>
FINANCIAL PERFORMANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
NOTE K--EMPLOYMENT AGREEMENTS
The Company has entered into a five-year employment agreement with the
Company's Chairman of the Board, Chief Executive Officer, Chief Financial
Officer and President commencing September 1, 1995, subject to prior
termination. At the conclusion of the five-year term, the agreement provides
for an automatic one year renewal, subject to prior termination. Under the
agreement, Mr. Finley's initial annual salary was $125,000, subject to
increases determined by the Board of Directors. Mr. Finley's current annual
salary is $150,000. In the event Mr. Finley's employment is terminated for
any reason, he is entitled to receive all accrued salary and vacation due
through the date of termination plus a severance payment of $100,000.
The Company's subsidiary, MKP, entered into two three-year employment
agreements with the Managing Directors commencing October 18, 1994, subject
to prior termination. At the conclusion of the initial three-year term, the
agreements provide for an automatic one year renewal, subject to prior
termination. Under the agreements, the initial annual salary to each Managing
Director, was $80,000. Such agreements were amended to provide the Managing
Directors with an annual salary of $115,000. The employment agreements also
provide for the establishment of an annual compensation pool payable to the
Managing Director equal to a percentage, determined annually by the Board of
Directors (initially 30%), of the net income before taxes of MKP as if MKP
was not a member of the Company's consolidated group. The Company has issued
these Managing Directors an aggregate of 200,000 and 20 shares of the
Company's common stock and of MKP's common stock, respectively.
NOTE L--DISCONTINUED OPERATIONS
Effective September 1996, the Company elected to suspend operations of
Aspen. Accordingly, Aspen, which was in the development stage, was reported
as a discontinued operation at September 30, 1996. The net assets and
liabilities relating to the disposal of the discontinued operation is
immaterial. Aspen had no revenues and incurred losses of $168,340 for the
three months ended December 31, 1995. Prior year consolidated financial
statements have been restated to present Aspen as a discontinued operation.
16
<PAGE>
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 three fiscal years ended September
30, 1996, it incurred losses of $146,036, $801,296 and $235,049 for the
fiscal years ended September 30, 1994, 1995 and 1996, 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, 1996, six customers accounted for approximately 98% for the
Company's revenues, with one customer accounting for approximately 75% 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.
Revenues from software products are recognized upon delivery to the
customer provided that no significant vendor obligations remain and
collection of the resulting receivable is deemed probable. Because of the
nature of the Company's software and the overall commitment to a software
based, integrated sales marketing approach, the Company anticipates that the
installation of MARS-TM- can take from up to several months for a single
customer and up to twelve months for an entire integrated system. The period
of installation is also dependent upon the level of commitment made by the
customer to installation as well as the learning speed of the customer's
personnel. Lengthy installation periods can delay the recognition of
revenues related to the
-17-
<PAGE>
Company's software.
Subsidiaries. The Company's consolidated financial statements include
the accounts of Financial Performance Corporation and its three 80% owned
subsidiaries. The Company's investment in the subsidiaries is accounted for
by the equity method. All significant intercompany accounts and transactions
have been eliminated.
Summary financial information concerning MKP, excluding intercompany
eliminations, as of June 30, 1997 and 1996 and for the nine months then
ended, is as follows:
1997 1996
Cash................................. $ 2,059,000 $ 316,000
Accounts receivable.................. $ 709,000 $ 3,286,000
Other assets......................... $ 20,000 $ 11,000
Accounts payable..................... $ 1,189,000 $ 1,876,000
Revenues............................. $ 5,849,000 $ 7,658,000
Operating costs...................... $ 5,172,000 $ 6,318,000
Net income........................... $ 662,000 $ 1,343,000
Summary financial information concerning the Company's other two 80%
owned subsidiaries, Aspen and FPC Information, as of June 30, 1997 and 1996
and for the nine 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.
FPC Information had no revenues and incurred losses of $234,787 and
$220,987 for the nine months ended June 30, 1997 and 1996, respectively.
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, 1996, the Company had net operating loss carryforwards
of approximately $487,000, which will expire in 2001. 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
-18-
<PAGE>
change in the ownership interest of the Company. At September 30, 1996, the
Company had a deferred tax asset of approximately $195,000. 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 $52,931 and $30,829 for the nine 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, 1997 and 1996.
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
Quarterly 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
Quarterly Report on Form 10-QSB.
Results of Operations
Three Months Ended June 30, 1997 vs. Three Months Ended June 30, 1996
Revenues. Total revenues decreased by $2,811,841 or 52.7% to $2,522,677
for the three months ended June 30, 1997 from $5,334,518 for the three months
ended June 30, 1996. This decrease was attributable to fluctuations in the
timing of billings under contract by MKP primarily resulting from the
commencement of a new major merger communications project during this
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<PAGE>
period. MKP generated approximately 100% of the consolidated revenues of the
Company for the quarter ended June 30, 1997.
Cost of Revenues. Cost of revenues decreased by $2,067,546 or 51.0% to
$1,984,859 for the three months ended June 30, 1997 from $4,052,405 for the
three months ended June 30, 1996. This decrease resulted primarily from a
substantial decrease in outsourcing expenses and fees for independent
contractors retained by MKP during such period.
Salaries and Related Expenses. Payroll expenses decreased by $71,063 or
41.3% to $100,853 for the three months ended June 30, 1997 from $171,916 for
the three months ended June 30, 1996. This decrease resulted principally
from a reallocation for accounting purposes of certain salary-related
expenses to cost of revenues. The basis for this reallocation is to reflect
the substantial amount of specific project-related work performed by the
executive officers of MKP.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased by $62,844 or 29.9% to $272,899 for the
three months ended June 30, 1997 from $210,055 for the three months ended
June 30, 1996. This increase was due primarily to increased expenditures
related to additional Company personnel and independent contractors, and
certain non-recurring expenses relating to the Company's construction of new
office space.
Other Income (Expenses). Other expenses decreased by $174,583 or 81.9%
to $38,693 for the three months ended June 30, 1997 from $213,276 for the
three months ended June 30, 1996. This decrease was attributable principally
to a substantial decrease in the Company's minority interest in income of
consolidated subsidiaries.
Operating Profit. The Company had an operating profit of $164,066 for the
three months ended June 30, 1997 compared to an operating profit of $900,142
for the three months ended June 30, 1996.
Net Income (Loss). The Company had net income of $94,544 for the three
months ended June 30, 1997 as compared to net income of $686,866 for the
three months ended June 30, 1996.
Nine Months Ended June 30, 1997 vs. Nine Months Ended June 30, 1996
Revenues. Total revenues decreased by $1,808,947, or 23.6% to
$5,848,661 for the nine months ended June 30, 1997 from $7,657,608 for the
nine months ended June 30, 1996. This decrease was attributable to
fluctuations in the timing of billings under contract by MKP primarily
resulting from the completion of a major merger communications project in the
third quarter of the Company's fiscal year ended September 30, 1996 as
opposed to the anticipated completion of a major merger communications
project during the fourth quarter of the Company's current fiscal year. MKP
generated approximately 100% of the consolidated revenues of the Company for
the nine months ended June 30, 1997.
Costs of Revenues. Cost of revenues decreased by $960,675 or 16.6% to
$4,825,018 for the nine months ended June 30, 1997 from $5,785,693 for the
nine months ended June 30, 1996.
-20-
<PAGE>
This decrease was attributable to a decrease in outsourcing expenses and fees
for independent contractors retained by MKP in connection with its decreased
level of business during such period.
Salaries and Related Expenses. Payroll expenses decreased by $240,822
or 49.8% to $242,785 for the nine months ended June 30, 1997 from $483,607
for the nine months ended June 30, 1996. This decrease resulted principally
from a reallocation for accounting purposes of certain salary-related
expenses to cost of revenues. The basis for this reallocation is to reflect
the substantial amount of specific project-related work performed by the
executive officers of MKP.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased by $292,164 or 69.5% to $712,253 for the
nine months ended June 30, 1997 from $420,089 for the nine months ended June
30, 1996. This increase was attributable primarily to increased expenditures
related to additional Company personnel and independent contractors, legal,
accounting and other expenses associated with the preparation and filing of
the Company's Registration Statement in February 1997 and related matters and
certain non-recurring expenses relating to the Company's construction of new
office space.
Other Income (Expenses). Other expenses decreased by $289,843 or 84.4%
to $53,638 for the nine months ended June 30, 1997 from $343,481 for the nine
months ended June 30, 1996. This decrease was attributable principally to a
substantial decrease in the Company's minority interest in the income of its
consolidated subsidiaries, a substantial decrease in interest expense due to
a decrease in the Company's debt and an increase in interest income due to
the increase in the Company's cash and cash equivalents.
Operating Profit (Loss). The Company had an operating profit from
operations of $68,605 for the nine months ended June 30, 1997 compared to an
operating profit of $968,219 for the nine months ended June 30, 1996.
Net Income (Loss). The Company had a net loss of $37,964 for the nine
months ended June 30, 1997 as compared to net income of $427,175 for the nine
months ended June 30, 1996.
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.
As of June 30, 1997, the Company had working capital of $1,731,866,
stockholders' equity of $2,248,799 and a working capital ratio (current
assets to current liabilities) of approximately 2.3:1. As of June 30, 1997
and 1996, the Company had cash and cash equivalents of $2,179,705 and
$791,404, respectively. For the nine months ended June 30, 1997 and 1996,
the Company provided cash by operations of $300,279 and used cash for
operations of $764,338, respectively, and utilized $243,078 and $238,619 for
investing activities during the nine months ended June 30, 1997 and 1996,
respectively. Net cash provided by the Company's financing
-21-
<PAGE>
activities for the nine months ended June 30, 1997 and June 30, 1996 were
$150,448 and $1,445,606, 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 through June 30, 1998.
However, there can be no assurance that the Company will not require
additional financing prior to that time. For the years ending September 30,
1997, 1998, 1999 and 2000, the Company's minimum payments in connection with
the leases will be approximately $198,000, $292,000, $292,000 and $292,000,
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, including those related to
MARS-TM-, the progress and costs of the Company's research and development
programs, the ability of the Company to successfully market its software and
services 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.
-22-
<PAGE>
Part II
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits.
27 Financial Data Schedule
b) Reports on Form 8-K.
None
-23-
<PAGE>
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 18, 1997
FINANCIAL PERFORMANCE CORPORATION
By: /s/
-------------------------------
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)
-24-
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<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> JUN-30-1997
<PERIOD-START> OCT-01-1996
<PERIOD-END> JUN-30-1997
<CASH> 2,179,705
<SECURITIES> 0
<RECEIVABLES> 709,284
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 3,085,386
<PP&E> 863,823
<DEPRECIATION> 153,312
<TOTAL-ASSETS> 3,948,365
<CURRENT-LIABILITIES> 1,353,520
<BONDS> 0
0
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<COMMON> 80,055
<OTHER-SE> 2,168,744
<TOTAL-LIABILITY-AND-EQUITY> 3,948,365
<SALES> 5,848,661
<TOTAL-REVENUES> 5,888,004
<CGS> 4,825,018
<TOTAL-COSTS> 4,825,018
<OTHER-EXPENSES> 955,038
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<INCOME-TAX> 52,931
<INCOME-CONTINUING> (37,964)
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