<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 March 31, 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 May 12, 1997
- ------------------------ ---------------------------
Common Stock 8,005,532 Shares
<PAGE>
FINANCIAL PERFORMANCE CORPORATION
Second Quarter Report on Form 10-QSB
------------------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PART I. PAGE
----
<C> <S> <C>
Item 1. Financial Statements (Unaudited)................... 1
Accountant's Compilation Report.................... 2
Consolidated Balance Sheets
March 31, 1997 and March 31, 1996............. 3
Consolidated Statement of Changes in
Stockholders' Equity for the Six Months
Ended March 31,1997 and March 31, 1996........ 4
Consolidated Statement of Operations
For the Six Months Ended
March 31, 1997 and March 31, 1996............. 6
Consolidated Statement of Operations
For the Three Months Ended
March 31, 1997 and March 31, 1996............. 7
Consolidated Statement of Cash Flows
For the Six Months Ended
March 31, 1997 and March 31, 1996............. 8
Consolidated Statement of Cash Flows
For the Three Months Ended
March 31, 1997 and March 31, 1996............. 9
Notes to Consolidated Financial Statements......... 10
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations........... 18
PART II
Item 6. Exhibits and Reports on Form 8-K................... 23
</TABLE>
-ii-
<PAGE>
PART I
ITEM 1. FINANCIAL STATEMENTS
The financial statements of Financial Performance Corporation (the
"Company") begin on page 3.
<PAGE>
GOLDSTEIN AND MORRIS
CERTIFIED PUBLIC ACCOUNTANTS, P.C.
501 FIFTH AVENUE
NEW YORK, N.Y. 10017
EDWARD B. MORRIS TELEPHONE (212) 682-3378
ALAN J. GOLDBERGER FAX (212) 599-6438
----------
ALBERT M. GOLDSTEIN
To the Board of Directors and Shareholders
Financial Performance Corporation and Subsidiaries
We have compiled the accompanying consolidated balance sheet of Financial
Performance Corporation and Subsidiaries as of March 31, 1997 and 1996, the
related consolidated statements of changes in stockholders' equity, operations,
and cash flows for the six months and three months then ended in accordance with
Statements on Standards for Accounting and Review Services issued by the
American Institute of Certified Public Accountants.
A compilation is limited to presenting in the form of financial statements
information that is the representation of management. We have not audited or
reviewed the accompanying financial statements and, accordingly, do not express
an opinion or any other form of assurance on them.
/s/ GOLDSTEIN AND MORRIS
May 13, 1997
2
<PAGE>
FINANCIAL PERFORMANCE CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
MARCH 31, 1997 AND 1996
ASSETS
<TABLE>
<CAPTION>
1997 1996
------------ ------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C>
Current assets
Cash............................................................ $ 1,353,834 $ 496,879
Accounts receivable............................................. 1,487,393 1,004,602
Prepaid expenses and other current assets....................... 201,341 60,703
------------ ------------
Total current assets......................................... 3,042,568 1,562,184
Computer equipment, net of accumulated depreciation............... 121,678 115,199
Software development costs (Note B (3))........................... 504,641 335,643
Goodwill (Note B (8))............................................. 140,050 164,500
Security deposits................................................. 16,318 --
------------ ------------
$ 3,825,255 $ 2,177,526
------------ ------------
------------ ------------
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Current liabilities
Accounts payable and accrued expenses........................... $ 1,378,954 $ 913,646
Current portion of long-term debt (Note D)...................... -- 24,277
------------ ------------
Total current liabilities.................................... 1,378,954 937,923
------------ ------------
Long-term debt, net of current maturities (Note D)................ -- 640,374
------------ ------------
Minority interest in consolidated subsidiaries.................... 292,046 208,846
------------ ------------
Stockholders' equity
Common stock--authorized 50,000,000 shares of $.01 par value per
share: issued and outstanding 8,005,532 and 5,500,617 as of
March 31, 1997 and 1996, respectively.......................... 80,055 55,006
Additional paid in capital...................................... 7,469,421 5,622,732
Accumulated (deficit)........................................... (5,395,221) (5,287,355)
------------ ------------
Total stockholders' equity................................... 2,154,255 390,383
------------ ------------
$ 3,825,255 $ 2,177,526
------------ ------------
------------ ------------
</TABLE>
See the accompanying notes to the financial statements.
3
<PAGE>
FINANCIAL PERFORMANCE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
SIX MONTHS ENDED MARCH 31, 1996
<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........ 44,192 442 39,185 -- 39,627
Issuance of common shares on
conversion of convertible note
and short-term debt............ 564,614 5,646 234,341 -- 239,987
Net income....................... -- -- -- 16,594 16,594
-------------- --------- ------------ ------------- ------------
BALANCE, DECEMBER 31, 1996....... 7,850,782 78,508 7,341,725 (5,246,119) 2,174,114
Issuance of shares in private
placement, net of costs........ 154,750 1,547 127,696 -- 129,243
Net income (loss)................ -- -- -- (149,102) (149,102)
-------------- --------- ------------ ------------- ------------
BALANCE, MARCH 31, 1997.......... 8,005,532 $ 80,055 $ 7,469,421 $ (5,395,221) $ 2,154,255
-------------- --------- ------------ ------------- ------------
-------------- --------- ------------ ------------- ------------
</TABLE>
See the accompanying notes to the financial statements.
4
<PAGE>
<TABLE>
<CAPTION>
FINANCIAL PERFORMANCE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
SIX MONTHS ENDED MARCH 31, 1996
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 $ (5,027,664) $ (849,926)
Net income (loss)................ -- -- -- (211,287) (211,287)
-------------- --------- ------------ ------------- ------------
BALANCE, DECEMBER 31, 1995....... 3,500,617 35,006 4,142,732 (5,238,951) (1,061,213)
Issuance of common shares on
conversion of short-term
borrowings..................... 2,000,000 20,000 1,480,000 -- 1,500,000
Net income (loss)................ -- -- -- (48,404) (48,404)
-------------- --------- ------------ ------------- ------------
BALANCE, MARCH 31, 1996.......... 5,500,617 $ 55,006 $ 5,622,732 $ (5,287,355) $ 390,383
-------------- --------- ------------ ------------- ------------
-------------- --------- ------------ ------------- ------------
</TABLE>
See the accompanying notes to the financial statements.
5
<PAGE>
FINANCIAL PERFORMANCE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
SIX MONTHS ENDED MARCH 31, 1997 AND 1996
<TABLE>
<CAPTION>
1997 1996
------------ ------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C>
Revenues.......................................................... $ 3,325,984 $ 2,323,090
------------ ------------
Costs and expenses
Cost of revenues................................................ 2,840,159 1,733,288
Salaries and related expenses................................... 141,932 311,691
Selling, general and administrative............................. 439,354 210,034
------------ ------------
3,421,445 2,255,013
------------ ------------
Operating income (loss)...................................... (95,461) 68,077
------------ ------------
Other income (expenses):
Interest income................................................. 24,036 32
Interest expense................................................ (2,981) (66,891)
Minority interest in income of consolidated subsidiaries........ (36,000) (53,800)
------------ ------------
(14,945) (120,659)
------------ ------------
Income (loss) from continuing operations before income taxes...... (110,406) (52,582)
Provision for income taxes........................................ 22,102 --
------------ ------------
Income (loss) from continuing operations.......................... (132,508) (52,582)
Loss from discontinued operations (Note L)........................ -- (207,109)
------------ ------------
Net income (loss)................................................. $ (132,508) $ (259,691)
------------ ------------
------------ ------------
Net income (loss) per share....................................... $ (.017) $ (.002)
------------ ------------
------------ ------------
</TABLE>
See the accompanying notes to the financial statements.
6
<PAGE>
FINANCIAL PERFORMANCE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 1997 AND 1996
<TABLE>
<CAPTION>
1997 1996
------------ ------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C>
Revenues.......................................................... $ 1,953,589 $ 1,261,013
------------ ------------
Costs and expenses
Cost of revenues................................................ 1,759,703 927,340
Salaries and related expenses................................... 70,331 156,152
Selling, general and administrative............................. 247,309 116,459
------------ ------------
2,077,343 1,199,951
------------ ------------
Operating income (loss)...................................... (123,754) 61,062
------------ ------------
Other income (expenses):
Interest income................................................. 10,577 --
Interest expense................................................ -- (35,697)
Minority interest in income of consolidated subsidiaries........ (25,600) (35,000)
------------ ------------
(15,023) (70,697)
------------ ------------
Income (loss) from continuing operations before income taxes...... (138,777) (9,635)
Provision for income taxes........................................ 10,325 --
------------ ------------
Income (loss) from continuing operations.......................... (149,102) (9,635)
Loss from discontinued operations (Note L)........................ -- (38,769)
------------ ------------
------------ ------------
Net income (loss)............................................ $ (149,102) $ (48,404)
------------ ------------
------------ ------------
Net income (loss) per share....................................... $ (.019) $ (.001)
------------ ------------
------------ ------------
</TABLE>
See the accompanying notes to the financial statements.
7
<PAGE>
FINANCIAL PERFORMANCE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
SIX MONTHS ENDED MARCH 31, 1997 AND 1996
<TABLE>
<CAPTION>
1997 1996
------------ -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C>
Cash flows provided by operating activities:
Net (loss)........................................................ $ (132,508) $(259,691)
Adjustments to reconcile net (loss) to net cash used for operating
activities:
Depreciation and amortization.................................... 45,038 14,062
Minority interest in income of consolidated subsidiaries......... 36,000 53,800
Issuance of stock for compensation............................... 2,500 --
Changes in operating assets and liabilities:
Increase in accounts receivable................................. (584,877) (777,215)
(Increase) decrease in prepaid expenses and other current assets (144,001) (23,405)
Decrease in security deposits................................... 100,000 --
Increase (decrease) in accounts payable and accrued expenses.... 16,383 587,531
------------ -----------
Net cash used for operating activities......................... (661,465) (404,918)
------------ -----------
Cash flows from investing activities:
Purchase of equipment............................................. (19,205) (55,423)
Software development costs........................................ (88,000) (101,793)
------------ -----------
Net cash used for investing activities......................... (107,205) (157,216)
------------ -----------
Cash flows from financing activities:
Repayments on notes payable to stockholders....................... -- (20,417)
Proceeds from notes payable....................................... -- 55,675
Proceeds from sale of common shares and exercise of warrants...... 150,448 --
Proceeds from short-term borrowings converted to common stock..... -- 675,000
------------ -----------
Net cash provided by financing activities...................... 150,448 710,258
------------ -----------
Net increase (decrease) in cash.................................... (618,222) 148,124
Cash, beginning of period.......................................... 1,972,056 348,755
------------ -----------
Cash, end of period................................................ $ 1,353,834 $ 496,879
------------ -----------
------------ -----------
Supplemental disclosure of cash flow information:
Cash paid during the period for interest.......................... $ -- $ 1,500
------------ -----------
------------ -----------
</TABLE>
See the accompanying notes to the financial statements.
8
<PAGE>
FINANCIAL PERFORMANCE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
THREE MONTHS ENDED MARCH 31, 1997 AND 1996
<TABLE>
<CAPTION>
1997 1996
------------ -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C>
Cash flows provided by operating activities:
Net (loss)........................................................ $ (149,102) $ (48,404)
Adjustments to reconcile net (loss) to net cash used for operating
activities:
Depreciation and amortization.................................... 16,967 8,482
Minority interest in income of consolidated subsidiaries......... 25,600 35,000
Issuance of stock for compensation............................... 2,500 --
Changes in operating assets and liabilities:
Increase in accounts receivable................................. (389,835) (351,588)
(Increase) decrease in prepaid expenses and other current assets (39,374) (18,792)
Increase (decrease) in accounts payable and accrued expenses.... 173,071 96,057
------------ -----------
Net cash used for operating activities......................... (360,173) (279,245)
------------ -----------
Cash flows from investing activities:
Purchase of equipment............................................. (19,205) --
Software development costs........................................ (46,000) (32,793)
------------ -----------
Net cash used for investing activities......................... (65,205) (32,793)
------------ -----------
Cash flows from financing activities:
Repayments on notes payable to stockholders....................... -- (9,860)
Proceeds from notes payable....................................... -- 29,981
Proceeds from sale of common shares and exercise of warrants...... 134,472 --
Proceeds from short-term borrowings converted to common stock..... -- 375,000
------------ -----------
Net cash provided by financing activities...................... 134,472 395,121
------------ -----------
Net increase (decrease) in cash.................................... (290,906) 83,083
Cash, beginning of period.......................................... 1,644,740 413,796
------------ -----------
Cash, end of period................................................ $ 1,353,834 $ 496,879
------------ -----------
------------ -----------
Supplemental disclosure of cash flow information:
Cash paid during the period for interest.......................... $ -- $ 1,500
------------ -----------
------------ -----------
</TABLE>
See the accompanying notes to the financial statements.
9
<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 merger communications 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 merger communications 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 March 31, 1997 and 1996 and for
the six months then ended, is as follows:
<TABLE>
<CAPTION>
1997 1996
---------- ----------
<S> <C> <C>
Cash................................................................ $ 933,000 $ 354,000
Accounts receivable................................................. 1,487,000 1,005,000
Other assets........................................................ 9,000 1,100
Accounts payable.................................................... 1,258,000 698,000
Revenues............................................................ 3,326,000 2,323,000
Operating costs..................................................... 3,029,000 2,055,000
Net income.......................................................... 299,000 268,000
</TABLE>
10
<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
$207,109 for the six months ended March 31, 1996. FPC Information Corp. had no
revenues and incurred losses of $144,312 and $118,377 for the six months ended
March 31, 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 six and three months
ended March 31, 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............................................................. 88,000 101,793
Amortization.......................................................... (35,658) (4,439)
---------- ----------
Balance--end of period................................................ $ 504,641 $ 335,643
---------- ----------
---------- ----------
</TABLE>
11
<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 six and three months ended March 31, 1997
represents state and local income taxes on the income of MKP.
(8) Goodwill
--------
The Company's goodwill arises from the establishment of MKP, which is
included in the Company's consolidated financial statements. Goodwill is
amortized over a ten-year period utilizing the straight-line method.
12
<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 March 31, 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..................................................... $ -- $ 24,277
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).............................................. -- 161,046
Secured notes payable to a principal shareholder, matures on
December 31, 1997 and bear interest at 8% per annum, see
Note D (2)......................................................... -- 479,328
--------- ----------
-- 664,651
Less: current portion due within one year........................... -- 24,217
--------- ----------
$ -- $ 640,374
--------- ----------
--------- ----------
</TABLE>
13
<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 six months ended March 31, 1997 three customers of the Company's
subsidiary, MKP, accounted for 89% of the Company's consolidated revenues in the
following respective percentages:
<TABLE>
<S> <C> <C>
Customer A 49%
Customer B 17%
Customer C 23%
---
89%
---
---
</TABLE>
The total accounts receivable from these customers at March 31, 1997
amounted to 90% of the total accounts receivable balance.
14
<PAGE>
FINANCIAL PERFORMANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
NOTE F--WARRANTS TO PURCHASE COMMON STOCK
- -----------------------------------------
At March 31, 1997, the Company had outstanding warrants as follows:
<TABLE>
<CAPTION>
NUMBER OF EXERCISE EXPIRATION
SHARES PRICE DATE
--------- -------- --------------------
<C> <C> <S>
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 March
31, 1997, are as follows:
<TABLE>
<CAPTION>
NUMBER OF EXERCISE EXERCISABLE AT
SHARES PRICE MARCH 31,1997
--------- -------- ------------------------
<S> <C> <C>
40,000 $ .4375 40,000
30,000 4.8125 30,000
</TABLE>
15
<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 Company did not contribute any amounts to this plan for the six months
ended March 31, 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:
<TABLE>
<CAPTION>
YEARS ENDING
SEPTEMBER 30,
-------------
<S> <C>
1997 $ 198,000
1998 292,000
1999 292,000
2000 292,000
2001 281,000
Thereafter 2,095,000
------------
$ 3,450,000
------------
------------
</TABLE>
16
<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 (initiallly 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. If both MKP and a Managing
Director elect not to renew the agreement by June 1, 1997, the individual will
be entitled to receive a severance payment in the amount of $30,000.
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.
17
<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% of 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
18
<PAGE>
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 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 March 31, 1997 and 1996 and for the three months then ended,
is as follows:
<TABLE>
1997 1996
<S> <C> <C>
Cash................................... $ 933,000 $ 354,000
Accounts receivable.................... $ 1,487,000 $ 1,005,000
Other assets........................... $ 9,000 $ 1,100
Accounts payable....................... $ 1,258,000 $ 698,000
Revenues............................... $ 3,326,000 $ 2,323,000
Operating costs........................ $ 3,029,000 $ 2,055,000
Net income (loss)...................... $ 299,000 $ 268,000
</TABLE>
Summary financial information concerning the Company's other two 80% owned
subsidiaries, Aspen and FPC Information, as of March 31, 1997 and 1996 and for
the six months then ended, is not separately set forth as these entities had no
revenues for such periods and their assets and liabilities during such periods
were immaterial.
Aspen, whose operations commenced in March 1995, suspended its operations in
September 1996. Aspen was reported as a discontinued operation at September 30,
1996.
FPC Information had no revenues and incurred losses of $144,312 and $118,377
for the six months ended March 31, 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
19
<PAGE>
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 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 $22,102 and 10,325 for the six months and three
months ended March 31, 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 March 31, 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
20
<PAGE>
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 MARCH 31, 1997 VS. THREE MONTHS ENDED MARCH 31, 1996
REVENUES. Total revenues increased by $692,576 or 54.9% to $1,953,589 for
the three months ended March 31, 1997 from $1,261,013 for the three months ended
March 31, 1996. This increase was attributable to increased revenues generated
by MKP. During this period, MKP was awarded a contract to work on merger and
marketing communications for two major banking institutions. MKP generated
approximately 100% of the consolidated revenues of the Company for the quarter
ended March 31, 1997.
COST OF REVENUES. Cost of revenues increased by $832,363 or 89.8% to
$1,759,703 for the three months ended March 31, 1997 from $927,340 for the three
months ended March 31, 1996. This increase resulted primarily from a substantial
increase in outsourcing expenses and fees for independent contractors retained
by MKP in connection with its increased business during such period, as well as
the reallocation for accounting purposes of certain salary-related expenses to
cost of revenues.
SALARIES AND RELATED EXPENSES. Payroll expenses decreased by $85,821 or
55.0% to $70,331 for the three months ended March 31, 1997 from $156,152 for the
three months ended March 31, 1996. This decrease was primarily due to the
reallocation for accounting purposes of certain salary-related expenses to cost
of revenues.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased by $130,850 or 112.4% to $247,309 for the
three months ended March 31, 1997 from $116,459 for the three months ended
March 31, 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.
OPERATING PROFIT (LOSS). The Company had an operating loss of $123,754 for
the three months ended March 31, 1997 compared to an operating profit of $61,062
for the three months ended March 31, 1996.
NET INCOME (LOSS). The Company had a net loss of $149,102 for the three
months ended March 31, 1997 as compared to a net loss of $48,404 for the three
months ended March 31, 1996.
21
<PAGE>
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 March 31, 1997, the Company had working capital of $1,663,614,
stockholders' equity of $2,154,255 and a working capital ratio (current assets
to current liabilities) of 2.2:1. As of March 31, 1997 and 1996, the Company had
cash and cash equivalents of $1,353,834 and $496,879, respectively. For the
three months ended March 31, 1997 and 1996, the Company used cash for operations
of $360,173 and $279,245, respectively, primarily as a result of an increase in
revenues and utilized $65,205 and $32,793 for investing activities during the
three months ended March 31, 1997 and 1996, respectively. Net cash provided by
the Company's financing activities for the three months ended March 31, 1997 and
March 31, 1996 were $134,472 and $395,121, 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 September 30, 1997.
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
22
<PAGE>
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.
23
<PAGE>
PART II
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits.
11 Statements Re Computation of Per Share Earnings
27 Financial Data Schedule
b) Reports on Form 8-K.
None
24
<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: May 19, 1997
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)
25
<PAGE>
Exhibit 11
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
MARCH 31, MARCH 31,
-------------------------------------------------------
1997 1996 1997 1996
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
FINANCIAL PERFORMANCE CORPORATION AND SUBSIDIARIES
STATEMENT RECOMPUTATION OF EARNINGS PER SHARE
AVERAGE NUMBER OF SHARES USED IN PRIMARY AND FULLY DILUTED CALCULATION:
WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING 7,504,057 4,125,200 7,504,057 4,125,200
INCREMENTAL SHARES AFTER APPLICATION OF TREASURY
STOCK METHOD, OF STOCK OPTIONS AND WARRANTS 2,073,000 2,077,063 2,073,000 2,077,063
---------- ---------- ---------- ----------
SHARES USED IN CALCULATION OF PRIMARY AND FULLY DILUTED
INCOME (LOSS) PER COMMON SHARE 9,577,057 6,202,263 9,577,057 6,202,263
========== ========== ========== ==========
PRIMARY AND FULLY DILUTED
INCOME PER SHARE OF COMMON STOCK:
NET INCOME (LOSS) PER SHARE (0.016) (0.008) (0.014) (0.042)
========== ========== ========== ==========
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> MAR-31-1997
<PERIOD-START> OCT-01-1996
<PERIOD-END> MAR-31-1997
<CASH> 1,353,834
<SECURITIES> 0
<RECEIVABLES> 1,487,393
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 201,341
<PP&E> 3,042,568
<DEPRECIATION> 766,369
<TOTAL-ASSETS> 125,456
<CURRENT-LIABILITIES> 3,825,255
<BONDS> 1,378,954
0
0
<COMMON> 80,055
<OTHER-SE> 2,074,200
<TOTAL-LIABILITY-AND-EQUITY> 3,825,255
<SALES> 3,325,984
<TOTAL-REVENUES> 3,350,020
<CGS> 2,840,159
<TOTAL-COSTS> 2,840,159
<OTHER-EXPENSES> 617,286
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 2,981
<INCOME-PRETAX> (110,406)
<INCOME-TAX> 22,102
<INCOME-CONTINUING> (132,508)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (132,508)
<EPS-PRIMARY> (0.017)
<EPS-DILUTED> (0.017)
</TABLE>
