<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
------------------------------
FORM 10-QSB
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended March 31, 1998
Commission File Number 0-16530
-------------------------------------------------------
FINANCIAL PERFORMANCE CORPORATION
-------------------------------------------------------
(Exact name of Registrant as specified in its charter)
New York 13-3236325
- -------------------------------- ---------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
335 Madison Avenue, New York, New York 10017
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (212) 557-0401
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES [X] NO [ ]
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Class Outstanding at May 10, 1998
- -------------------------------- ------------------------------
Common Stock 8,021,534 Shares
<PAGE> 2
Financial Performance Corporation
Report on Form 10-QSB for the Quarter ended March 31, 1998
TABLE OF CONTENTS
Part I. Page
Item 1. Financial Statements (Unaudited)...........................1
Consolidated Balance Sheets
March 31, 1998 and March 31,1997.....................2
Consolidated Statements of Operations
For the Three Months Ended
March 31, 1998 and March 31, 1997....................3
Consolidated Statements of Changes in Stockholders' Equity
for the Three Months Ended
March 31,1998 and March 31, 1997.....................4
Consolidated Statements of Cash Flows
For the Three Months Ended
March 31, 1998 and March 31, 1997....................5
Notes to Consolidated Financial Statements.............. . 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations....................15
Part II
Item 6. Exhibits and Reports on Form 8-K..........................20
-ii-
<PAGE> 3
PART I
Item 1. Financial Statements
The financial statements of Financial Performance Corporation (the
"Company") begin on page 2.
<PAGE> 4
FINANCIAL PERFORMANCE CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
MARCH 31, 1998 AND 1997
ASSETS
<TABLE>
<CAPTION>
1998 1997
---- ----
(Unaudited) (Unaudited)
<S> <C> <C>
Current assets
Cash $ 1,627,979 $ 1,353,834
Accounts receivable 1,808,324 1,487,393
Prepaid expenses and other current assets 99,807 201,341
------ -------
Total current assets 3,536,110 3,042,568
Property and equipment, net of accumulated depreciation 197,391 121,678
Software development costs 135,605 504,641
Investment in subsidiary 513,186 -
Other assets 299,694 156,368
------- -------
$ 4,681,986 $ 3,825,255
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable and accrued expenses $ 1,725,079 $ 1,378,954
----------- -----------
Total current liabilities 1,725,079 1,378,954
--------- ---------
Minority interest in consolidated subsidiaries 575,646 292,046
------- -------
Stockholders' equity
Common stock - authorized 50,000,000 shares
of $.01 par value per share: issued and
outstanding 8,021,534 and 8,005,532 as of March 31,
1998 and 1997, respectively 80,215 80,055
Additional paid in capital 7,480,761 7,469,421
Accumulated (deficit) (5,179,715) (5,395,221)
---------- ----------
Total stockholders' equity 2,381,261 2,154,255
--------- ---------
$ 4,681,986 $ 3,825,255
=========== ===========
</TABLE>
See the accompanying notes to the financial statements.
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<PAGE> 5
FINANCIAL PERFORMANCE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 1998 AND 1997
<TABLE>
<CAPTION>
1998 1997
---- ----
(Unaudited) (Unaudited)
<S> <C> <C>
Revenues $ 4,488,550 $1,953,589
----------- ----------
Costs and expenses
Cost of revenues 3,362,796 1,759,703
Salaries and related expenses 54,130 70,331
Selling, general and administrative 218,246 247,309
------- -------
3,635,172 2,077,343
--------- ---------
Operating income (loss) 853,378 (123,754)
------- --------
Other income (expenses):
Interest income 14,198 10,577
Minority interest in income of
consolidated subsidiaries (207,600) ( 25,600)
-------- - ------
(193,402) (15,023)
-------- -------
Income (loss) before income taxes 659,976 ( 138,777)
Income taxes 42,834 10,325
------ ------
Net income (loss) $ 617,142 $ (149,102)
=========== ============
Per share data:
Basic and diluted earnings per share (Note K) $ .077 $ ( .019)
=========== ============
</TABLE>
See the accompanying notes to the financial statements.
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<PAGE> 6
FINANCIAL PERFORMANCE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
THREE MONTHS ENDED MARCH 31, 1998 AND 1997
<TABLE>
<CAPTION>
1998 1997
(Unaudited) (Unaudited)
Cash flows provided by (used in) operating activities:
<S> <C> <C>
Net income (loss) $617,142 $(149,102)
Adjustments to reconcile net income (loss) to net cash used in
operating activities:
Depreciation and amortization 21,738 16,967
Minority interest in income of consolidated
subsidiaries 207,600 25,600
Issuance of stock for compensation -- 2,500
Changes in operating assets and liabilities:
Accounts receivable (1,087,708) (389,835)
Prepaid expenses and other current assets (20,697) (39,374)
Accounts payable and accrued expenses (183,074) 173,071
-------- -------
Net cash used in operating activities (444,999) (360,173)
-------- --------
Cash flows from investing activities:
Acquisition of equipment (16,054) (19,205)
Software development costs -- (46,000)
Investment in subsidiary (167,186) --
-------- -------
Net cash used in investing activities: (183,240) (65,205)
-------- -------
Cash flows from financing activities:
Proceeds from sale of common shares and
exercise of warrants - 134,472
-------- -------
Net increase (decrease) in cash (628,239) (290,906)
Cash, beginning of period 2,256,218 1,644,740
--------- ---------
Cash, end of period $ 1,627,979 $ 1,353,834
=========== ===========
Supplemental disclosure of cash flow information:
Cash paid during the period for interest $ 12,000 $ 23,000
</TABLE>
See the accompanying notes to the financial statements.
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<PAGE> 7
FINANCIAL PERFORMANCE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
THREE MONTHS ENDED MARCH 31, 1998 AND 1997
<TABLE>
<CAPTION>
Additional
Common Stock Paid In
Shares Parvalue Capital Deficit Total
------ -------- ------- ------- -----
<S> <C> <C> <C> <C> <C>
BALANCE,
JANUARY 1, 1998 8,021,534 $80,215 $ 7,480,761 $(5,796,857) $ 1,764,119
Net income - - - 617,142 617,142
BALANCE,
MARCH 31, 1998 8,021,534 $80,215 $ 7,480,761 $(5,179,715) $ 2,381,261
BALANCE,
JANUARY 1, 1997 7,850,782 $78,508 $ 7,341,725 $(5,246,119) $ 2,174,114
Issuance of shares
in private
placement, net of
costs 154,750 1,547 127,696 -- 129,243
Net (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.
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<PAGE> 8
FINANCIAL PERFORMANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE A - ORGANIZATION AND BUSINESS
Financial Performance Corporation (the "Company") through its subsidiaries
currently markets merger communications services and computer software to the
financial services industry. The Company was incorporated in New York on August
14, 1984. The Company ceased operations from February 1990 through November
1992.
During the fiscal year ended September 30, 1995, the Company established
three eighty percent owned subsidiaries, Michaelson Kelbick Partners Inc.
("MKP"), FPC Information Corp. ("FPC Information") and Aspen Capital Management,
LLC ("Aspen").
MKP was formed and commenced operations in October 1994. MKP is engaged in
providing specialized merger communications and marketing services to the
financial services industry (see Note B (1)).
FPC Information was formed in November 1994 for the purpose of marketing the
Company's software products.
In October 1997, the Company's investment in FPC Information Corp. was
reduced from eighty percent to fifty percent, as a result of a $225,000
additional investment by the minority shareholder. The Company has the option to
repurchase a thirty percent equity interest in FPC Information Corp. exercisable
at any time prior to September 30, 1999 at the fair market value of such
interest, but in no event less than $225,000.
Aspen was formed in January 1995 as an international sponsor of cash
management funds and planned to engage in the development, investment management
and administration of such funds. Aspen, which was in the development stage,
ceased operations in September 1996.
NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(1) Principles of Consolidation
The consolidated financial statements include the accounts of Financial
Performance Corporation and Subsidiaries. All significant intercompany accounts
and transactions have been eliminated. Investments in FPC Information Corp. in
which the Company does not have control is accounted for by the equity method.
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<PAGE> 9
FINANCIAL PERFORMANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
(1) Principles of Consolidation (continued)
Condensed financial information of its eighty percent owned subsidiary,
MKP, excluding intercompany eliminations, as of March 31, 1998 and 1997 and for
the three months then ended, is as follows:
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Cash $ 1,610,000 $ 933,000
Accounts receivable 1,808,000 1,487,000
Other assets 15,000 9,000
Accounts payable 1,364,000 1,258,000
Revenues 4,489,000 1,954,000
Operating costs 3,823,000 1,876,000
Net income 638,000 78,000
</TABLE>
Condensed financial information for the Company's other subsidiaries,
Aspen Capital Management, LC and FPC Information Corp. for the three months
ended March 31, 1998 and 1997, has not been separately disclosed. These entities
had no revenues and their assets and liabilities are immaterial.
(2) Revenue recognition
Revenue from software products is recognized upon delivery to the
customer, provided that no significant vendor obligations remain, and collection
of the resulting receivable is deemed probable.
(3) Software Development Costs and Amortization
Costs associated with software development subsequent to the
establishment of technological feasibility, including enhancements to software
products, are capitalized and amortized as required by Statement of Financial
Accounting Standards No. 86. Costs incurred prior to achieving technological
feasibility are expensed as incurred and classified as research and development
costs. There were no research and development costs incurred for the three
months ended March 31, 1998 and 1997.
Amortization of capitalized software development costs is generally
provided on a product-by-product basis at the greater of the amount computed by
using the ratio that current gross revenue bears to the total current and
anticipated gross revenue of the product or on the straight-line method over the
sixty-month estimated useful life of the product commencing when the product is
available for general release to customers.
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<PAGE> 10
FINANCIAL PERFORMANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
(4) Earning (loss) per share
The consolidated financial statements are presented in accordance with
SFAS No. 128, "Earnings per Share". Basic earnings per common share are computed
using the weighted average number of common shares outstanding during the
period. Diluted earnings per common share incorporate the incremental shares
issuable upon the assumed exercise of stock options and warrants.
(5) Cash and cash equivalents
The Company considers all highly liquid investments with a maturity of
three months or less when purchased to be cash equivalents.
(6) Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenue and expenses during the reporting
period. Actual results could differ from those estimates.
(7) Depreciation and amortization
Computer equipment is stated at cost. Depreciation is provided using the
straight-line method over the estimated useful lives of the assets.
Amortization of an intangible asset, a customer list of $164,000,
included on the balance sheet under the caption, other assets, is being
amortized on the straight line basis, over ten years.
-8-
<PAGE> 11
FINANCIAL PERFORMANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
(8) Income Taxes
Income taxes are computed in accordance with the provisions of Financial
Accounting Standards Board Statement No. 109, "Accounting for Income Taxes"
("SFAS 109"), which requires, among other things, a liability approach to
calculating deferred income taxes. SFAS 109 requires a company to recognize
deferred tax liabilities and assets for the expected future tax consequences of
events that have been recognized in a company's financial statements or tax
returns. Under this method, deferred tax liabilities and assets are determined
based on the difference between the financial statement carrying amounts and tax
basis of assets and liabilities using enacted tax rates in effect in the years
in which the differences are expected to reverse.
At September 30, 1997, the Company had net operating loss carry forwards
of approximately $1,150,000, which would expire by 2012. Certain provisions of
the tax law may limit the net operating loss carry forwards available for use in
any given year in the event of a significant change in ownership interest. At
September 30, 1997, the Company had a deferred tax asset amounting to
approximately $460,000. The deferred tax asset consisted primarily of net
operating loss carry forwards and has been fully offset by a valuation allowance
of the same amount.
The income tax expense for the three months ended March 31, 1998 and
1997 represents state and local income taxes on the income of MKP.
NOTE C - SIGNIFICANT CUSTOMERS
For the three months ended March 31, 1998 two customers of the Company's
subsidiary, MKP, accounted for 73% of the Company's consolidated revenues in the
following respective percentages:
<TABLE>
<CAPTION>
<S> <C>
Customer A 13%
--
Customer B 60%
--
73%
==
</TABLE>
The total accounts receivable from these customers at March 31, 1998 amounted
to 56% of the total accounts receivable balance.
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<PAGE> 12
FINANCIAL PERFORMANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
NOTE D - WARRANTS TO PURCHASE COMMON STOCK
At March 31, 1998, the Company had outstanding warrants as follows:
<TABLE>
<CAPTION>
Number of Exercise Expiration
Shares Price Date
------ ----- ----
<S> <C> <C> <C>
330,586 $ .50 August 31, 1998
427,063 .50 September 30, 1998
200,000 .50 September 15, 2010
725,000 1.00 September 15, 2006
250,000 .50 November 30, 1999
20,000 1.00 September 16, 2006
</TABLE>
NOTE E- INCENTIVE STOCK OPTION PLAN
In March 1988, the Company adopted a stock option plan. The plan provides for
the granting of options to purchase up to 140,000 shares of common stock to key
employees, officers and directors at an exercise price equal to fair market
value at the date of grant. The right to exercise options granted under the plan
commences one year from the date of the grant and such options are exercisable
in increments of 25% each year provided employment with the Company is
continuous.
Outstanding options granted pursuant to the stock option plan, as of March
31, 1998, are as follows:
<TABLE>
<CAPTION>
Number of Exercise Exercisable at
Shares Price March 31, 1998
------ ----- --------------
<S> <C> <C>
40,000 $ .4375 40,000
30,000 4.8125 30,000
</TABLE>
NOTE F -EMPLOYEE BENEFIT PLANS
In September 1996, the Company established a non-contributory deferred
contribution pension and profit sharing plan for the benefit of eligible
full-time employees. The plan provides for annual contributions to a trust fund,
which are based upon a percentage of qualifying employees' annual compensation.
Total contributions are limited to the maximum amount deductible for federal
income tax purposes.
The plan was terminated in March, 1997.
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<PAGE> 13
FINANCIAL PERFORMANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
NOTE F -EMPLOYEE BENEFIT PLANS (continued)
In January, 1997, the Company established a 401(k) salary deferred benefit
plan covering substantially all employees who have met certain requirements. The
plan requires Company contributions equal to 50% to a maximum of 3% of each
participant's contribution percentage.
In September, 1997, the Company amended its 401(k) plan to provide a
provision for discretionary profit sharing plan contributions.
NOTE G - COMMITMENTS
The Company has commitments under non-cancelable operating leases for office
space and equipment, which expire on October 31, 2006 and September 30, 2000,
respectively. The office lease includes provisions requiring the Company to pay
a proportionate share of increases in real estate taxes and operating expenses
over base period amounts.
Minimum payments for the leased properties for subsequent years are as
follows:
<TABLE>
<CAPTION>
Years Ending
September 30,
-------------
<S> <C> <C>
1998 $ 281,000
1999 281,000
2000 281,000
2001 374,000
2002 415,000
Thereafter 1,711,000
---------
$ 3,343,000
===========
</TABLE>
Rent and equipment leasing expense for the three months ended March 31, 1998
and 1997 was $88,000 and $65,000, respectively.
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<PAGE> 14
FINANCIAL PERFORMANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
NOTE H - EMPLOYMENT AGREEMENTS
On September 1, 1995, the Company entered into a five year employment
agreement with Mr. Finley which expired on August 31, 2000. Under the agreement,
Mr. Finley's initial annual salary was $125,000, subject to increases as
determined by the Company's Board of Directors, and Mr. Finley's salary was
subsequently increased to $150,000.
Effective as of October 1, 1997, the Company entered into a new three year
employment agreement with Mr. Finley which expires on September 30, 2000. Under
the new employment agreement, Mr. Finley's initial salary is $150,000 per annum,
subject to periodic increases as shall be determined by the Company's Board of
Directors. In the event of the termination of Mr. Finley's employment by reason
of a "change in control" (as such term is defined in the employment agreement)
of the Company or certain other events, then in addition to paying Mr. Finley's
salary and accrued benefits through the date of termination of employment, the
Company shall be obligated to pay to Mr. Finley, as severance pay, an amount
equal to 200% of Mr. Finley's annual base salary rate as of the effective date
of termination and to maintain through the remaining balance of the term of the
employment agreement (but not less than two years from the date of termination
of Mr. Finley's employment agreement) all employee benefit plans and programs in
which Mr. Finley was entitled to participate. The Company agreed to pay
reasonable travel and entertainment expenses incurred by Mr. Finley on behalf of
the Company and to provide Mr. Finley with a leased automobile. If Mr. Finley
does not elect not to renew his employment agreement at the expiration of the
term and the Company does not elect to renew Mr. Finley's employment upon the
expiration of the term thereof, then Mr. Finley shall be entitled to receive a
severance payment of $100,000.
In October, 1994, MKP entered into executive employment agreements with each
of Ms. Michaelson and Ms. Kelbick for a term of three years ended October 17,
1997. Under the terms of the agreements, the initial annual salary for each of
Ms. Michaelson and Ms. Kelbick was $80,000. The annual base salary payable to
each of Ms. Michaelson and Ms. Kelbick was subsequently increased to $115,000.
Effective as of September 11, 1997, MKP entered into a new three year employment
agreement with each of Ms. Michaelson and Ms. Kelbick which expires on September
10, 2000. Under the new agreements, the initial annual base salary payable to
each of Ms. Michaelson and Ms. Kelbick is $150,000, subject to periodic
increases as shall be determined by MKP's Board of Directors. The employment
agreements further provide for an annual incentive compensation payment for each
of Ms. Michaelson and Ms. Kelbick equal to a percentage not to exceed 30%,
determined annually by the Board of Directors, (such percentage initially
established at 30%) of the net income before taxes of MKP as if MKP was not a
member of the Company's consolidated group. Ms. Michaelson and Ms. Kelbick have
the option to take all or a portion of the bonus in the Company's securities.
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<PAGE> 15
FINANCIAL PERFORMANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
NOTE H - EMPLOYMENT AGREEMENTS (continued)
If either Ms. Michaelson or Ms. Kelbick does not elect to renew her
respective employment agreement with MKP at the expiration of the term and MKP
elects not to renew the employment agreement, the respective executive will be
entitled to receive a severance payment in the amount of $250,000. The
employment agreements provide each of Ms. Michaelson and Ms. Kelbick with a
clothing expense allowance of $10,000 for each year of the term of the agreement
and a leased automobile throughout the term.
In the event of the termination of employment of either Ms. Michaelson or Ms.
Kelbick by reason of a "change in control" (as such term is defined in the
employment agreement) of MKP or the Company, or certain other events, then in
addition to paying all salary and accrued benefits through the date of
termination of employment, MKP shall be obligated to pay to the employee, as
severance pay, an amount equal to 200% of the employee's annual base salary rate
in effect as of the date of termination and to maintain through the remaining
balance of the term of the employment agreement (but not less than two years
from the date of termination of the employee's employment agreement) all
employee benefit plans and programs in which the employee was entitled to
participate. The Company has issued 20 shares of MKP and 200,000 shares of the
Company, in the aggregate, to Ms. Michaelson and Ms. Kelbick.
NOTE I - RESTRICTED CASH AND CONTINGENCIES
At March 31, 1998 $160,000 was invested in a Certificate of Deposit and is
pledged as security for a letter of credit issued in connection with the lease
for office space (see Note G). The $160,000 Certificate of Deposit is included
on the balance sheet under the caption, other assets. This exceeds the federally
insured limit.
NOTE J - CONCENTRATION OF CREDIT RISK
The Company maintains it's cash in bank deposit accounts at one financial
institution. The balance at times, may exceed federally insured limits. At March
31, 1998 and 1997, the Company exceeded the insured limit by approximately
$1,528,000 and $1,254,000, respectively.
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<PAGE> 16
FINANCIAL PERFORMANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
NOTE K - EARNINGS PER SHARE INFORMATION
<TABLE>
<CAPTION>
1998 1997
---- ----
Basic Diluted Basic Diluted
----- ------- ----- -------
<S> <C> <C> <C> <C>
Net income (loss) available to
Common share owners $ 617,142 $ 617,142 $ (149,102) $ (149,102)
Average shares outstanding 8,021,534 8,021,534 7,902,365 7,902,365
Dilutive securities
Stock options and warrants (1) -- 2,022,649 -- 2,072,649
Average shares outstanding 8,021,534 10,044,183 7,902,365 9,975,014
</TABLE>
(1) Excluded because exercise price exceeds market value.
In March, 1998 the company received a subscription to purchase 1,000,000 common
shares for $200,000, $.20 per share. $50,000 was received in March, 1998 and the
balance, $150,000, was received in April 1998. The 1,000,000 shares were issued
in May, 1998.
NOTE L - CHANGE IN FISCAL YEAR
In February 1998, the Company's Board of Directors unanimously approved a
resolution to change the Company's fiscal year end from September 30 to December
31.
-14-
<PAGE> 17
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
OVERVIEW
History. The Company was incorporated in New York in 1984 under the name
Performance Services Group, Inc. and at that time was primarily engaged in
offering banking institutions a range of proprietary sales and marketing
products, strategic planning and product consulting services and financial
software products. In July 1989, the Company's Common Stock was delisted from
the Nasdaq over-the-counter market and from February 1990 to November 1992 the
Company was inactive.
In January 1993, the Company recommenced its operations and raised working
capital through private debt and equity issuances, including issuances to one of
the Company's principal stockholders. In 1994, the Company began implementing a
business strategy of establishing subsidiary companies to engage in related or
complementary areas of the financial services industry. As a result, the
Company, together with other parties, formed three subsidiaries (Michaelson
Kelbick Partners Inc. ("MKP"), Aspen Capital Management, LLC ("Aspen") and FPC
Information Corp. ("FPC Information")). MKP is engaged in providing merger
communications and marketing services to the financial services industry. FPC
Information was formed to market the Company's software and Aspen was formed to
operate as an international sponsor of cash management funds. Although the
Company generated revenues for each of the last four fiscal years ended
September 30, 1997, it incurred losses of $146,036, $801,296, $235,049 and
$544,848 for the fiscal years ended September 30, 1994, 1995, 1996 and 1997,
respectively.
Revenues. The Company's revenues historically have been derived from a
limited number of customers, due principally to the nature of the merger
communications business which has generally required concentration of the
Company's personnel and resources on a limited number of large projects from
different merger clients during any particular period. For the year ended
September 30, 1997, two customers accounted for approximately 72% for the
Company's revenues, with one customer accounting for approximately 56% of its
revenues. In view of the nature of the merger communications business as
aforesaid, the Company anticipates that a substantial amount of its revenues
will continue to be derived from a limited number of customers. As a result, the
Company's sales and operating results are subject to substantial variations in
any given year and from quarter to quarter. The Company's sales and net income
(if any) in a particular quarter may be lower than the sales and net income (if
any) of the Company for the comparable quarter in the prior year. In addition,
sales and net income (if any) of the Company in any particular quarter may not
necessarily reflect the results of operations for the Company for the full year.
Subsidiaries. The Company's consolidated financial statements include the
accounts of Financial Performance Corporation and its subsidiaries. All
significant intercompany accounts and transactions have been eliminated.
Summary financial information concerning MKP, excluding intercompany
eliminations, as of March 31, 1998 and 1997 and for the three months then ended,
is as follows:
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<PAGE> 18
<TABLE>
<CAPTION>
1998 1997
<S> <C> <C>
Cash...................................... $1,610,000 $ 933,000
Accounts receivable....................... $1,808,000 $1,487,000
Other assets.............................. $ 15,000 $ 9,000
Accounts payable.......................... $1,364,000 $1,258,000
Revenues.................................. $4,489,000 $1,954,000
Operating costs........................... $3,823,000 $1,876,000
Net income ............................... $ 638,000 $ 78,000
</TABLE>
Summary financial information concerning the Company's other two
subsidiaries, Aspen and FPC Information, as of March 31, 1998 and 1997 and for
the three months then ended, is not separately set forth as these entities had
no revenues for such periods and their assets and liabilities during such
periods were immaterial.
Aspen, whose operations commenced in March 1995, suspended its operations
in September 1996. Aspen was reported as a discontinued operation at September
30, 1996.
Change in Fiscal Year. On February 23, 1998, the Company's Board of
Directors unanimously approved a resolution to change the Company's fiscal year
end from September 30 to December 31. A Transition Report on Form 10-QSB was
filed by the Company for the transition period commencing October 1, 1997
through December 31, 1997 pursuant to Rule 15d- 10 of the Securities Exchange
Act of 1934.
Other. Income taxes are computed in accordance with the provisions of
Financial Accounting Standards Board Statement No. 109, "Accounting for Income
Taxes" ("SFAS 109"), which requires, among other things, a liability approach to
calculating deferred income taxes. SFAS 109 requires a company to recognize
deferred tax liabilities and assets for the expected future tax consequences of
events that have been recognized in a company's financial statements or tax
returns. Under this method, deferred tax liabilities and assets are determined
based on the difference between the financial statement carrying amounts and tax
basis of assets and liabilities using enacted tax rates in effect in the years
in which the differences are expected to reverse.
At September 30, 1997, the Company had net operating loss carryforwards of
approximately $1,150,000, which will expire in 2012. Certain provisions of the
tax law may limit the net operating loss carryforwards available for use by the
Company in the event of a significant change in the ownership interest of the
Company. At September 30, 1997, the Company had a deferred tax asset of
approximately $460,000. The deferred tax asset consisted primarily of net
operating loss carryforwards and was fully offset by a valuation allowance of
the same amount.
The income tax expense of $42,834 and $10,325 for the three months ended
March 31, 1998 and 1997, respectively, represents state and local income taxes
on the income of MKP.
-16-
<PAGE> 19
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, 1998 and 1997.
Amortization of capitalized software development costs is generally
provided on a product-by-product basis at the greater of the amount computed by
using the ratio of current gross revenue to total current and anticipated gross
revenue of the product or on the straight-line method over the sixty-month
estimated useful life of the product, commencing when the product is available
for general release to customers.
Forward-Looking Statements. Certain statements contained in this Report on
Form 10-QSB, including without limitation, statements containing the words
"believes," "anticipates," "may," "intends," "expects" and words of similar
import, constitute "forward-looking statements" within the meaning of the
Private Securities Litigation Reform Act of 1995. Such forward-looking
statements involve known and unknown risks, uncertainties and other factors that
may cause the actual results, performance or achievements of the Company or
industry results to be materially different from any future results, performance
or achievements expressed or implied by such forward-looking statements. Such
factors include, among others, the following: general economic and business
conditions, both nationally and in the regions in which the Company operates;
competition; changes in business strategy or development plans; the development
or testing of the Company's software; technological, engineering, manufacturing,
quality control or other problems which could delay the sale of the Company's
software; the Company's ability to obtain appropriate licenses from third
parties, protect its trade secrets, operate without infringing upon the
proprietary rights of others and prevent others from infringing on the
proprietary rights of the Company; and the Company's ability to obtain
sufficient financing to continue operations. Certain of these factors are
discussed in more detail elsewhere in this Report on Form 10-QSB.
RESULTS OF OPERATIONS
Three Months Ended March 31, 1998 vs. Three Months Ended March 31, 1997
Revenues. Total revenues increased by $2,534,961 or 129.8% to $4,488,550
for the three months ended March 31, 1998 from $1,953,589 for the three months
ended March 31, 1997. This increase was attributable principally to an increase
in billings under contract by MKP during this period. MKP generated 100% of the
consolidated revenues of the Company for the three months ended March 31, 1998.
Cost of Revenues. Cost of revenues increased by $1,603,093 or 91.1% to
$3,362,796 for the three months ended March 31, 1998 from $1,759,703 for the
three months ended March 31, 1997. This increase is primarily attributable to
the increased level of business of MKP during this period, as well as the
reallocation for accounting purposes of certain salary-related expenses to cost
of revenues.
-17-
<PAGE> 20
Salaries and Related Expenses. Payroll expenses decreased by $16,201 or
23.0% to $54,130 for the three months ended March 31, 1998 from $70,331 for the
three months ended March 31, 1997. This decrease is attributable principally 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 decreased by $29,063 or 11.8% to $218,246 for the three
months ended March 31, 1998 from $247,309 for the three months ended March 31,
1997. This decrease was attributable primarily to reduced legal and accounting
expenses as well as the lack of certain non-recurring expenses relating to the
Company's construction of new office space and the Company's filing of a
Registration Statement which were incurred during the three months ended March
31, 1997.
Other Income (Expense). Other expenses increased by $178,379 or 1,187.4%
to $193,402 for the three months ended March 31, 1998 from $15,023 for the three
months ended March 31, 1997. This increase was attributable principally to an
increase in the Company's minority interest in income of consolidated
subsidiaries.
Operating Profit. The Company had an operating profit of $853,378 for the
three months ended March 31, 1998 compared to an operating loss of $123,754 for
the three months ended March 31, 1997.
Net Income. The Company had net income of $617,142 for the three months
ended March 31, 1998 as compared to a net loss of $149,102 for the three months
ended March 31, 1997.
LIQUIDITY AND CAPITAL RESOURCES
In the past, the Company required continuous capital to fund its operating
losses which were primarily attributable to expenses in connection with
marketing activities, research and development costs and other expenses
including salaries and related expenses and selling, general and administrative
expenses. The Company has financed its operations to date primarily through
public and private sales of its debt and equity securities, including
significant sales to one of its principal stockholders, and more recently
revenues generated by the Company's subsidiary, MKP. In addition, in October
1997, the Company sold an additional 30% equity interest in FPC Information to a
principal shareholder for a purchase price of $225,000.
As of March 31, 1998, the Company had working capital of $1,811,031,
stockholders' equity of $2,381,261 and a working capital ratio (current assets
to current liabilities) of approximately 2.0:1. As of March 31, 1998 and 1997,
the Company had cash and cash equivalents of $1,627,979 and $1,353,834,
respectively. For the three months ended March 31, 1998 and 1997, the Company
used cash for operations of $444,999 and $360,173, respectively, and utilized
$183,240 and $65,205 for investing activities during the three months ended
March 31, 1998 and 1997, respectively. Net cash provided by the Company's
financing activities for the three months ended March 31, 1998 and March 31,
1997 were $0 and $134,472, respectively.
-18-
<PAGE> 21
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 March 31, 1999.
However, there can be no assurance that the Company will not require additional
financing prior to that time. For the years ending September 30, 1998, 1999,
2000 and 2001, the Company's minimum payments in connection with the leases will
be approximately $281,000, $281,000, $281,000 and $374,000 per year,
respectively. The Company anticipates that it will require additional capital to
fund its operations. The Company's capital requirements depend on, among other
things, whether the Company is successful in generating revenues and income from
its marketing efforts, 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.
-19-
<PAGE> 22
PART II
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits.
27 Financial Data Schedule
(b) Reports on Form 8-K.
None
-20-
<PAGE> 23
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 15, 1998
FINANCIAL PERFORMANCE CORPORATION
By: /s/ WILLIAM F. FINLEY
----------------------------------------
William F. Finley
Chief Executive Officer and
President
(Principal Executive Officer and
Principal Financial and Accounting
Officer and Officer Duly Authorized
to Sign on Behalf of Registrant)
-21-
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<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> MAR-31-1998
<CASH> 1,627,979
<SECURITIES> 0
<RECEIVABLES> 1,808,324
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 3,536,110
<PP&E> 991,554
<DEPRECIATION> 798,275
<TOTAL-ASSETS> 4,681,986
<CURRENT-LIABILITIES> 1,725,079
<BONDS> 0
0
0
<COMMON> 80,215
<OTHER-SE> 2,301,046
<TOTAL-LIABILITY-AND-EQUITY> 4,681,986
<SALES> 4,488,550
<TOTAL-REVENUES> 4,488,550
<CGS> 3,362,796
<TOTAL-COSTS> 3,362,796
<OTHER-EXPENSES> 272,376
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 659,976
<INCOME-TAX> 42,834
<INCOME-CONTINUING> 617,142
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 617,142
<EPS-PRIMARY> 0.077
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