SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
(Mark One)
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the quarterly period ended March 31, 1996
----------------------
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _____________ to ______________
Commission File Number 0-17192
-------------------------
CYPRESS FINANCIAL SERVICES, INC.
(Exact name of registrant as specified in its charter)
Nevada 95-3137322
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
5400 Orange Avenue, Suite 200, Cypress, CA 90630
(Address of Principal Executive Office) (Zip Code)
Registrant's telephone number including area code (714) 995-0627
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.
(1)Yes X No
------- -------
(2)Yes X No
------- -------
APPLICABLE ONLY TO CORPORATE ISSUERS:
State the number of shares outstanding of each of the issuer's classes of common
equity as of the lastest practicable date.
Common Stock 4,500,271 as of May 1, 1996
---------- -----------
CYPRESS FINANCIAL SERVICES, INC.
FORM 10-QSB
INDEX
PART I. FINANCIAL INFORMATION Page
------
Item 1. Condensed Consolidated Balance Sheets as of
March 31, 1996.......................................... 1
Condensed Consolidated Statements of Operations
for the three and six-month periods ended
March 31, 1996 and 1995................................. 2 to 3
Condensed Consolidated Statements of Cash Flows
for the three months ended March 31, 1996
and 1995................................................ 4
Notes to Condensed Consolidated
Financial Statements.................................... 5 to 8
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations........... 9 to 11
PART II. OTHER INFORMATION
Item 1. Other Information....................................... 12
CYPRESS FINANCIAL SERVICES, INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
March 31, 1996
ASSETS
Cash $ 425,961
Restricted cash 416,802
Notes receivable from shareholders 66,833
Accounts receivable, net 363,631
Portfolio receivables 369,828
Property, net 4,363,566
Reimbursable collection costs 673,566
Goodwill 2,028,182
Other 26,504
-----------
$ 8,734,926
===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Accounts payable $ 58,046
Trust payables 416,802
Accrued liabilities 193,505
Notes payable to shareholders 750,000
Line of credit 798,414
Long-term debt 2,650,942
Deferred income taxes 907,927
-----------
Total liabilities 5,775,636
-----------
Commitments and contingencies
Shareholders' equity:
Preferred stock, 5,000,000 shares
authorized, none outstanding ---
Common stock, $0.001 par value; 30,000,000
shares authorized; 4,500,271 shares
issued and outstanding 4,500
Additional paid-in capital 6,224,116
Accumulated deficit (3,269,326)
-----------
Total shareholders' equity 2,959,290
-----------
$ 8,734,926
===========
See accompanying notes to condensed
consolidated financial statements
1
CYPRESS FINANCIAL SERVICES, INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
For The Three-Month Periods Ended
March 31, 1996 and 1995
1996 1995
----------- --------
Revenues:
Service fees $1,313,048 $ ---
Portfolio income 45,619 ---
---------- --------
1,358,667 ---
---------- --------
Operating expenses:
Selling, general and administrative 1,233,028 ---
Depreciation and amortization 46,750 ---
---------- --------
1,279,778 ---
---------- --------
Income from operations 78,889 ---
---------- --------
Other income (expense):
Interest expense (36,028) ---
Rental income, net 9,578 ---
---------- --------
(26,450) ---
---------- --------
Income before benefit for income taxes 52,439 ---
Benefit for income taxes 2,505 ---
---------- --------
Net income $ 54,944 $ ---
========== ========
Net income per share $.01 $ ---
========== ========
Weighted average shares outstanding 4,500,271 150,000
========== ========
See accompanying notes to condensed
consolidated financial statements
2
CYPRESS FINANCIAL SERVICES, INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS - CONTINUED
For The Six-Month Periods Ended
March 31, 1996 and 1995
1996 1995
----------- --------
Revenues:
Service fees $2,347,520 $ ---
Portfolio income 48,050 ---
---------- --------
2,395,570 ---
---------- --------
Operating expenses:
Selling, general and administrative 2,274,390 ---
Depreciation and amortization 93,500 ---
---------- --------
2,367,890 ---
---------- --------
Income from operations 27,680 ---
---------- --------
Other income (expense):
Interest expense (76,047) ---
Rental income, net 25,132 ---
---------- --------
(50,915) ---
---------- --------
Loss before benefit for income taxes (23,235) ---
Benefit for income taxes 3,949 ---
---------- --------
Net loss $ (19,286) $ ---
========== ========
Net loss per share $.00 $ ---
========== ========
Weighted average shares outstanding 4,500,271 150,000
========== ========
See accompanying notes to condensed
consolidated financial statements
3
CYPRESS FINANCIAL SERVICES, INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
For The Six-Month Periods Ended
March 31, 1996 and 1995
1996 1995
---------- -----
Cash flows from operating
activities:
Net loss $(19,286) $ ---
Adjustments to reconcile net loss to
net cash used in operating activities:
Depreciation and amortization 113,210 ---
Changes in operating assets and
liabilities:
Restricted cash (21,644) ---
Accounts receivable (65,441) ---
Portfolio receivables 113,505 ---
Reimbursable collection costs (69,137) ---
Accounts payable (41,557) ---
Trust payables 21,644 ---
Accrued liabilities (47,216) ---
Deferred income taxes (4,812) ---
-------- -----
Net cash used in operating activities (20,734) ---
-------- -----
Cash flows from investing activities:
Purchases of plant, property and
equipment (20,223) ---
Notes receivable from shareholders (6,333) ---
Increase in other assets (687) ---
-------- -----
Net cash used in investing activities (27,243) ---
-------- -----
Cash flows from financing activities:
Net borrowings from line of credit 139,319 ---
Repayments of long-term debt (45,662) ---
-------- -----
Net cash provided by financing activities 93,657 ---
-------- -----
Net change in cash 45,680 ---
Cash, at beginning of period 380,281 ---
-------- -----
Cash, at end of period $425,961 $ ---
======== =====
See accompanying notes to condensed
consolidated financial statements
4
CYPRESS FINANCIAL SERVICES, INC.
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
For The Three and Six-Month Periods Ended
March 31, 1996 and 1995
NOTE 1 - QUARTERLY INFORMATION
- ------------------------------
The accompanying unaudited, condensed and consolidated financial statements have
been prepared in accordance with Securities and Exchange Commission requirements
for interim financial statements. Therefore, they do not include all
disclosures that would be presented in the Annual Report on Form 10-KSB of
Cypress Financial Services, Inc. (the "Company"). These financial statements
should be read in conjunction with the consolidated financial statements
contained in the Company's Annual Report on Form 10-KSB as of and for the three-
month period ended September 30, 1995.
During the six months ended March 31, 1995, the Company had no significant
operations. The condensed, consolidated financial statements include the
accounts of Medical Control Services, Inc. and its subsidiaries from September
12, 1995 (See Note 2).
The information furnished reflects all adjustments (consisting only of normal
recurring adjustments) which are, in the opinion of management, necessary for a
fair presentation of financial position for the interim periods. The results
are not necessarily indicative of results to be expected for the full year.
NOTE 2 - ACQUISITION OF MEDICAL CONTROL SERVICES, INC.
- ------------------------------------------------------
On September 12, 1995, the Company acquired the issued and outstanding common
stock of Medical Control Services, Inc. In connection therewith, pro forma
results of operations for the six-month period ended March 31, 1995, assuming
the acquisition was consummated at the beginning of the period, are as follows:
Revenues $2,319,588
==========
Net loss $ (122,282)
==========
Net loss per share $ (0.03)
==========
The pro forma results of operations are not necessarily indicative of the actual
results which may have resulted had the acquisition been consummated at the
beginning of this period.
Continued
5
CYPRESS FINANCIAL SERVICES, INC.
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
For The Three and Six-Month Periods Ended
March 31, 1996 and 1995
NOTE 2 - ACQUISITION OF MEDICAL CONTROL SERVICES, INC., continued
- -----------------------------------------------------------------
Goodwill, which represents the excess of the purchase price over the fair value
of net assets acquired, is amortized on a straight-line basis over a 15-year
life and, during the three months ended March 31, 1996, no impairment of
goodwill was determined by management.
NOTE 3 - PORTFOLIO RECEIVABLES
- ------------------------------
Portfolio receivables represent liquidating portfolios of delinquent accounts
which have been purchased by the Company for collection and are stated at cost.
Cost is reduced by cash collections on a portfolio by portfolio basis and
revenue is recognized when cash collections for a portfolio exceed its cost
basis. Portfolio receivables consist of the following as of March 31, 1996:
Face value $38,388,673
===========
Original purchase price $ 1,565,926
Proceeds from sales (816,109)
Collections (cost recovery) (379,989)
-----------
Portfolio receivables $ 369,828
===========
NOTE 4 - PROPERTY
- -----------------
Property consists of the following at March 31, 1996:
Land $2,138,000
Building 1,862,000
Equipment and furnishings 409,898
----------
4,409,898
Less accumulated depreciation (46,332)
----------
$4,363,566
==========
Continued
6
CYPRESS FINANCIAL SERVICES, INC.
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
For The Three and Six-Month Periods Ended
March 31, 1996 and 1995
NOTE 5 - INDEBTEDNESS
- ---------------------
On January 24, 1996, the Company and its bank amended the maximum borrowings
under the agreement from $750,000 to $1,250,000. Net borrowings from the line of
credit at March 31, 1996 amounted to $798,414. Interest on the borrowings are
charged monthly based on a commercial bank's prime rate plus 2.0% per annum (11%
at March 31, 1996).
Long-term debt at March 31, 1996 consists of the following:
Note payable to bank, secured by certain equipment, due
in monthly payments of $10,969, including interest at
11% per annum, through 2000 at which time the entire
principal balance is due and payable. $ 763,813
Mortgage note payable to bank, collateralized by land
and building, due in monthly payments of $14,089,
including interest at 8% per annum through December
5, 2000, at which time the entire principal balance
is due and payable. 1,887,129
Note payable to an unrelated retirement trust
collateralized by certain equipment, interest
at 11% per annum, paid in March 1996. ---
----------
Long-term debt $ 2,650,942
==========
Continued
7
CYPRESS FINANCIAL SERVICES, INC.
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
For The Three and Six-Month Periods Ended
March 31, 1996 and 1995
NOTE 6 - INCOME TAXES
- ---------------------
Income tax expense for the periods presented was not significant. Deferred tax
liabilities at March 31, 1996, represent the difference between income tax bases
for financial reporting and income tax reporting of land, building and
reimbursable collection costs acquired from Medical Control Services, Inc. (see
Note 1). At March 31, 1996, the Company provided a valuation allowance of
approximately $350,000 for its deferred tax assets, which primarily consist of
net operating loss carryforwards.
8
ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
INTRODUCTION
- ------------
The Company is engaged in the collection of receivables owned by entities in the
commercial, retail and medical industries. The Company earns commission on
receivables collected for the Company's clients. In 1994, management identified
a downward trend in the commission rate structure of the collection business and
commencing in July 1995, the Company began purchasing a significant amount of
receivables for it own collection account ("Portfolio Receivables"). The Company
has aggressively increased its purchases of Portfolio Receivables for its own
collection and anticipates that this will become a significant portion of its
future operations. The Company's accounting policy does not recognize revenue
from ongoing collection and resale of its Portfolio Receivables until after the
recovery of the cost of each portfolio.
RESULTS OF OPERATIONS
- ---------------------
THREE MONTHS ENDED MARCH 31, 1996 VERSUS THREE MONTHS ENDED MARCH 31, 1995
The Company's operating revenues of $1,358,667 for the three months ended March
31, 1996 are compared to its pro-forma operating revenues for the three months
ended March 31, 1995 of $1,109,546 (see Note 2 to the financial statements).
Operating revenues for the three months ended March 31, 1995 represent fees
related to the collection of receivables owned by the Company's clients and do
not include any revenues from the Portfolio Receivables purchased directly by
the Company. The increase of $249,121 in the Company's operating revenues for
the three months ended March 31, 1996 as compared to its pro-forma operating
revenues for the three months ended March 31, 1995, is primarily the result of
an increase of $203,502 in revenues earned by the ongoing collection of
receivables owned by the Company's clients and $45,619 from collection of
Portfolio Receivables, after recovery of 100% of the cost of purchasing such
accounts. Revenues related to Company owned subsidiaries have either decreased
or remained relatively constant because the Company primarily has devoted its
efforts to expand its purchases of receivables and other debtor obligations for
its own portfolio.
As of March 31, 1996, the Company's direct purchases of Portfolio Receivables
had a remaining face value of $38,388,673 as compared to a remaining face value
of $35,226,000 as of December 31, 1995. The Company's accounting policy does
not recognize revenue from the sales or collections of its Portfolio Receivables
until after the recovery of the cost of each portfolio. During the three months
ended March 31, 1996, the Company received proceeds from sales and collections
of Portfolio Receivables of $351,856 as compared to $423,581 for the three
months ended December 31, 1995. The difference in comparison of the two
quarters is due to the Company's effort to maximize shareholder value through
emphasis on retaining the collection of the Company's Portfolio Receivables for
a longer time period to produce greater revenue, and by extending the
9
resale time period of Portfolio Receivables. This trend is evident by the
comparison of sales of $305,615 and collections of $117,966 for the quarter
ending December 31, 1995 and sales of $157,303 and collections of $194,553 for
the quarter ending March 31, 1996. The Company expects to start to recognize a
significant portion of its revenues from Portfolio Receivables after it recovers
the cost of acquiring such receivables.
Operating expenses for the three months ended March 31, 1996 were $1,279,778 as
compared to pro-forma operating expenses of $1,053,113 for the three months
ended March 31, 1995. The increase is primarily attributable to an increase in
payroll costs, accounting fees, reimbursable collection costs and skip tracing
costs, and is directly related to an increase in personnel and activities to
support the collection of the Portfolio Receivables and/or continuing costs
related to the acquisition of Medical Control Services, Inc.
The Company had income from operations for the three months ended March 31,
1996 of $78,889 as compared to the pro-forma income from operations of $56,433
for the three months ended March 31, 1995 as a result of the factors described
above.
SIX MONTHS ENDED MARCH 31, 1996 VERSUS SIX MONTHS ENDED MARCH 31, 1995
The Company's operating revenues of $2,395,570 for the six months ended March
31, 1996 are compared to its pro-forma operating revenues for the six months
ended March 31, 1995 of $2,319,588 (see Note 2 to the financial statements).
Operating revenues for the six months ended March 31, 1995 represent fees
related to the collection of receivables owned by the Company's clients and do
not include any revenues from the Portfolio Receivables purchased directly by
the Company. The increase of $75,982 in the Company's operating revenues for
the six months ended March 31, 1996 as compared to its pro-forma operating
revenues for the six months ended March 31, 1995 is primarily from realization
of an increase of $27,932 in revenues earned by the ongoing collection of
receivables owned by the Company's clients and $48,050 from collection of
Portfolio Receivables, after recovery of 100% of the cost of purchasing such
accounts. Revenues relating to Company owned subsidiaries have either
decreased or remained relatively constant since the Company primarily has
devoted its efforts to expand its purchases of receivables and other debtor
obligations for its own portfolio.
As of March 31, 1996, the Company's direct purchases of Portfolio Receivables
had a remaining face value of $38,388,673 as compared to a remaining face value
of $26,944,000 as of September 30, 1995. During the six months ended March 31,
1996, the Company received proceeds from sales and collections of Portfolio
Receivables of $774,478. The Company's accounting policy does not recognize
revenue from the sales or collections of its Portfolio Receivables until after
the recovery of the cost of its portfolio. Therefore, the Company expects to
start to recognize a significant portion of its revenues from Portfolio
Receivables after it recovers the cost of acquiring such receivables.
10
Operating expenses for the six months ended March 31, 1996 were $2,367,890 as
compared to pro-forma operating expenses of $2,410,842 for the three months
ended March 31, 1995. The decrease is primarily attributable to three factors:
(i) a decrease in operating expenses relating to the collection segment and
resulting from management's early recognition of the decreases in commission
rate trends; (ii) an increase in payroll costs, reimbursable collection costs
and skip tracing costs directly related to an increase in personnel and
activities to support the collection of the Portfolio Receivables and (iii) an
increase in costs related to the acquisition of Medical Control Services, Inc.
The Company had income from operations for the six months ended March 31, 1996
of $27,680 as compared to the pro-forma loss from operations of $91,254 for the
six months ended March 31, 1995 as a result of the factors described above.
LIQUIDITY AND CAPITAL RESOURCES
The Company has historically been funded through cash flows from operations. The
Company has recently used its existing credit facility which has an outstanding
balance of $798,414 as of March 31, 1996 to acquire Portfolio Receivables. The
Company's credit facility, which carries an interest rate of prime plus 2%, is
due to expire on January 24, 1997. Management plans to purchase additional
Portfolio Receivables which will necessitate the raising of additional capital
through the issuance of either debt or equity securities. There are no
assurances that such financing will be obtained and any delays in raising
additional capital will affect the Company's ability to acquire a material
amount of additional portfolios.
The Company currently has outstanding long-term debt with financial institutions
of $2,696,604 which is collateralized by a mortgage and certain equipment. The
Company's equipment debt is a term note with a remaining balance of $763,813
which is due in 2000 and carries an interest rate of 11% per annum. The
Company's mortgage note has a remaining balance of $1,887,129 and carries an
interest rate of 8% per annum and is due on December 5, 2000. Management is
currently evaluating the feasibility of refinancing the mortgage note payable.
In either case, management expects to continue to service its outstanding long-
term debt through its cash flows from operations.
The Company also has outstanding notes with a balance of $750,000 which are
payable to the shareholders of Medical Control Services, Inc. and were incurred
in connection with the acquisition of such entity. These notes carry an
interest rate of 8% per annum and are due on May 31, 1996 (the due date has been
extended to December 31, 1996). Management expects to satisfy this obligation
through either the proceeds from the refinancing of the mortgage note or through
the issuance of either debt or equity securities. However, there are no
assurances that such financing will be obtained.
11
PART II OTHER INFORMATION
None.
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.
CYPRESS FINANCIAL SERVICES, INC.
Date: May 8, 1996 By: /s/ Farrest Hayden
-----------------------------
Farrest Hayden
Chairman of the Board and
Chief Executive Officer
Date: May 8, 1996 By: /s/ Otto J. Lacayo
-----------------------------
Otto J. Lacayo
Director, Chief Financial
Officer and Vice President
(Principal Accounting Officer)
12