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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB/A
(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
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OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
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Commission File Number 0-17192
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CYPRESS FINANCIAL SERVICES, INC.
(Exact name of registrant as specified in its charter)
NEVADA 95-313122
(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
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(2) Yes X No
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APPLICABLE ONLY TO CORPORATE ISSUERS:
State the number of shares outstanding of each of the issuer's classes of common
equity as of the latest practicable date.
Common Stock 4,500,271 as of July 29, 1996
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CYPRESS FINANCIAL SERVICES, INC.
FORM 10-QSB
INDEX
PAGE
----
PART I. FINANCIAL INFORMATION
Item 1. Condensed Consolidated Balance Sheet
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
Condensed Consolidated Statements of Cash Flows
for the three months ended March 31, 1996 and
1995............................................... 3
Notes To Condensed Consolidated
Financial Statements............................... 4
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operation....... 8
PART II. OTHER INFORMATION
ITEM 1. Other Information.................................. 12
CYPRESS FINANCIAL SERVICES, INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEET
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 2,708,503
Other 26,557
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$ 4,378,115
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LIABILITIES AND SHAREHOLDERS' EQUITY (CAPITAL DEFICIENCY)
Accounts payable $ 58,046
Trust payables 416,802
Accrued liabilities 208,221
Notes payable to related parties 750,000
Line of credit 798,414
Long-term debt 2,650,942
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Total liabilities 4,882,425
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Commitments and contingencies
Shareholders' equity (capital deficiency):
Preferred stock, 5,000,000 shares
authorized, none outstanding -
Common stock, $0.001 par value; 30,000,000
shares authorized; 4,500,271 shares
issued and outstanding 4,500
Additional paid-in capital 495,500
Accumulated deficit (1,004,310)
-----------
Total capital deficiency (504,310)
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$ 4,378,115
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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 $1,109,546
Portfolio income 45,619 -
---------- ----------
1,358,667 1,109,546
Selling, general and administrative
expenses 1,283,773 977,328
---------- ----------
Income from operations 74,894 132,218
---------- ----------
Other income (expense):
Interest expense (57,053) (41,287)
Rental operations, net 30,603 31,110
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(26,450) (10,177)
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Income before provision for
income taxes 48,444 122,041
Provision for income taxes - 37,449
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Net income $ 48,444 $ 84,592
========== ==========
Net income per share $ 0.01 $ 0.04
========== ==========
Weighted average shares outstanding 4,500,271 2,249,000
========== ==========
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 $2,320,119
Portfolio income 48,050 -
---------- ----------
2,395,570 2,320,119
Selling, general and administrative
expenses 2,354,250 2,188,268
---------- ----------
Income from operations 41,320 131,851
---------- ----------
Other income (expense):
Interest expense (115,085) (82,574)
Rental operations, net 65,804 67,112
Loss on sale of assets - (6,548)
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(49,281) (22,010)
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Income (loss) before provision for
income taxes (7,961) 109,841
Provision for income taxes 3,949 40,400
---------- ----------
Net income (loss) $ (11,910) $ 69,441
========== ==========
Net income (loss) per share $(0.00) $0.03
========== ==========
Weighted average shares outstanding 4,500,271 2,249,000
========== ==========
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
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Cash flows from operating
activities:
Net income (loss) $(11,910) $ 69,441
Adjustments to reconcile net income
(loss) to net cash provided by
(used in) operating activities:
Depreciation and amortization 34,800 45,323
Loss on sale of assets - 6,548
Changes in operating assets and
liabilities:
Accounts receivable (65,441) (181,975)
Portfolio receivables 113,505 (189,887)
Accounts payable (41,557) 71,281
Trust payables 21,644 42,729
Accrued liabilities (32,031) 74,775
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Net cash provided by (used in)
operating activities 19,010 (61,765)
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Cash flows from investing activities:
Purchases of plant, property and
equipment (20,223) (44,012)
Notes receivable from shareholders (6,333) (64,750)
Other assets (740) 16,544
Increase in restricted cash (21,644) (43,009)
Proceeds from sale of assets - (56,760)
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Net cash used in investing
activities (48,940) (191,987)
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Cash flows from financing activities:
Net borrowings from line of credit 139,319 139,887
Repayments of long-term debt (45,662) 230,532
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Net cash provided by financing
activities 93,657 370,419
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Net increase in cash 63,727 116,667
Cash, at beginning of period 362,234 127,817
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Cash, at end of period $425,961 $ 244,484
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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 consolidated 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 nine-month period ended September 30, 1995.
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 - RESTATEMENT OF FINANCIAL INFORMATION
- ---------------------------------------------
As described in the Company's Annual Report on Form 10-KSB, The Christmas Guild,
Inc. ("TCG") acquired the issued and outstanding common stock of Medical Control
Services, Inc. ("MCSI"). The Company previously reported the transaction as an
acquisition by TCG of MCSI. The acquisition should have been accounted for as a
reverse acquisition, with MCSI being the acquiring corporation. Accordingly,
management has retroactively restated the consolidated financial statements for
all periods presented to properly reflect the effects of the reverse
acquisition. The accompanying condensed consolidated statements of operations
and of cash flows have been presented for the three and six months ended March
31, 1995 to include the accounts of MCSI previously excluded.
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 - RESTATEMENT OF FINANCIAL INFORMATION, continued
- --------------------------------------------------------
The effect of the restatement on the condensed consolidated balance sheet of the
Company as of March 31, 1996 is as follows:
Decrease in property, net $(1,655,063)
Decrease in reimbursable collection costs (673,566)
Decrease in goodwill (2,028,182)
Decrease in deferred income taxes 907,927
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Net decrease in shareholders' equity $(3,448,884)
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The effects of the restatement on the results of the Company's operations for
the three and six months ended March 31, 1996 was to decrease net income by
$6,500 and decrease net loss by $7,376, respectively; net income (loss) per
share was not impacted during either period.
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
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Original purchase price $ 1,565,926
Proceeds from sales (816,109)
Collections (cost recovery) (379,989)
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Portfolio receivables $ 369,828
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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 4 - PROPERTY
- -----------------
Property consists of the following at March 31, 1996:
Land $ 866,575
Building 1,540,577
Equipment and furnishings 1,433,226
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3,840,378
Less accumulated depreciation (1,131,875)
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$ 2,708,503
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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 December 5, 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
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Long-term debt $ 2,650,942
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NOTE 6 - INCOME TAXES
- ---------------------
Income tax expense for the periods presented are based on the estimated
effective tax rate to be incurred for the year. Deferred tax assets and
liabilities at March 31, 1996, were not considered significant.
7
ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULT OF OPERATIONS
GENERAL
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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 January 1995, the Company began purchasing a significant amount of
receivables for its 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.
The following discussion of the financial condition and results of
operations of the Company should be read in conjunction with the consolidated
financial statements and notes thereto included elsewhere in this report.
Management has retroactively restated the Consolidated Financial Statements for
all periods presented in this report to properly reflect the effect of the
acquisition of Medical Control Services, Inc. ("MCSI") by the Company. The
acquisition had previously been reported as an acquisition of MCSI by the
Company rather than a recapitalization of MCSI and the acquisition of The
Christmas Guild through the issuance of new shares.
Generally, the effects of such restatement on the Company's
Consolidated Balance Sheet as of September 30, 1995 is a net decrease in
shareholder's equity of approximately $3,471,000 which primarily is the result
of an approximately $1,663,000 decrease in the property to its original cost and
the elimination of approximately $2,098,000 of previously reported goodwill.
This report contains forward-looking statements that involve risks and
uncertainties. The Company's actual results may differ materially from those
anticipated in these forward-looking statements as a result of certain factors,
including, but not limited to, competition which has and will continue to put
price pressure on the Company's third party collection business, the cost and
availability of capital to finance its receivables portfolio and overall macro
economic conditions which generally have a direct effect on the Company's
ability to collect on the receivables.
RESULTS OF OPERATIONS
- ---------------------
THREE MONTHS ENDED MARCH 31, 1996 VERSUS THREE MONTHS ENDED MARCH 31, 1995
The Company's operating revenues of approximately $1,358,667 for the three
months ended March 31, 1996 are compared to its operating revenues for the three
months ended March 31,1995 of approximately $1,109,000. The increase of
approximately $249,000 in the Company's operating revenues for the three months
ended March 31, 1996 as compared to its operating revenues for the three months
ended March 31, 1995, is primarily the result of an increase of approximately
$203,000 in revenues in the Company's billing services division and
approximately $45,000 from collection of Portfolio Receivables, after recovery
of 100% of the cost of purchasing such accounts. Revenues related to the
Company's other collection divisions have either decreased or remained
relatively constant because the Company began devoting its
8
efforts primarily 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 approximately $38,388,000 as compared to a
remaining face value of approximately $35,226,000 as of March 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
approximately $351,000 as compared to approximately $423,000 for the three
months ended March 31,1995. The difference in comparison of the two quarters is
due to the Company's emphasis on retaining the collection of the Company's
Portfolio Receivables for a longer time period to produce greater revenue, and
by extending the resale time period of Portfolio Receivables. This is evidenced
by the comparison of sales of approximately $305,000 and collections of
approximately $117,966 for the quarter ending March 31, 1995 and sales of
approximately $157,303 and collections of approximately $194,000 for the quarter
ending March 31, 1996.
Operating expenses for the three months ended March 31, 1996 were approximately
$1,283,000 as compared to operating expenses of approximately $977,000 for the
three months ended March 31, 1995. The increase is primarily attributable to an
increase in payroll costs, accounting fees, reimbursable collection costs, skip
tracing costs, and an increase in personnel and other support for the collection
of the Company's Portfolio Receivables.
The Company had income from operations for the three months ended March 31, 1996
of approximately $75,000 as compared to the income from operations of
approximately $132,000 for the three months ended March 31, 1995 as a result of
the factors described above.
Interest expense for the three months ended March 31, 1996 increased to
approximately $57,000 from approximately $41,000 for the three month period
ended March 31, 1995 due to an increase in borrowings to acquire its Portfolio
Receivables. The Company expects to continue to utilize its credit facility to
finance future acquisitions of Portfolio Receivables.
Net rental income for the three months ended March 31,1996 was approximately
$30,000 as compared to approximately $31,000 for the three month period ended
March 31, 1995.
The Company reported a net income of approximately $48,000 for the three months
ended March 31, 1996 as compared to a net income of approximately $84,000 for
the three months ended March 31, 1995. The decrease in net income resulted
primarily from the increase in operating expenses and an increase in interest
expense to finance the acquisition of its Portfolio Receivables.
SIX MONTHS ENDED MARCH 31, 1996 VERSUS SIX MONTHS ENDED MARCH 31, 1995
The Company's operating revenues of approximately $2,395,000 for the six months
ended March 31, 1996 are compared to its operating revenues for the six months
ended March 31, 1995 of approximately $2,320,000. The increase of
approximately $75,000 in the Company's operating revenues for the six months
ended March 31, 1996 as compared to its operating revenues for the six months
ended March 31, 1995 are primarily from collection of Portfolio Receivables,
after recovery of 100% of the cost of purchasing such accounts. Revenues
relating
9
to Company collection divisions, other than its billing services division, have
either decreased or remained relatively constant since the Company began
devoting its efforts primarily 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 approximately $38,388,000. During the six months
ended March 31, 1996, the Company received proceeds from sales and collections
of Portfolio Receivables of approximately $774,000. 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 recognize an increasing portion of its revenues from
Portfolio Receivables as it recovers the cost of acquiring such Portfolio
Receivables.
Operating expenses for the six months ended March 31, 1996 were approximately
$2,354,000 as compared to operating expenses of approximately $2,188,000 for the
three months ended March 31, 1995. The increase in operating expenses is
primarily attributable to an increase in payroll costs, reimbursable collection
costs, skip tracing costs and an increase in personnel and other support for the
collection of the Portfolio Receivable, and an increase in costs related to the
acquisition of MCSI.
The Company had income from operations for the six months ended March 31, 1996
of approximately $41,000 as compared to the income from operations of
approximately $131,000 for the six months ended March 31, 1995 as a result of
the factors described above.
Interest expense for the six months ended March 31, 1996 increased to
approximately $115,000 from approximately $82,000 for the six month period ended
March 31, 1995. The Company expects to continue to utilize its credit facility
to finance future acquisitions of Portfolio Receivables.
Net rental income for the six months ended March 31,1996 was approximately
$65,000 as compared to approximately $67,000 for the three month period ended
March 31, 1995.
The Company reported a net loss of approximately $11,000 for the six months
ended March 31, 1996 as compared to a net income of approximately $69,000 for
the six months ended March 31, 1995. The net loss resulted primarily from an
increase in operating expenses as a result of its Portfolio Receivables business
and to costs associated with the acquisition of MCSI, and higher interest
expenses to finance its Portfolio Receivables.
10
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% has been increased to $1,250,000 and 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 $2,650,942 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 March 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 approximately $750,000
which are payable to the shareholders of MCSI 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 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, or otherwise
through general working capital. There are no assurances that such debt or
equity 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: July 29, 1996 By: /s/ FARREST HAYDEN
-------------------------
Farrest Hayden
Chairman of the Board and
Chief Executive Officer
Date: July 29, 1996 By: /s/ OTTO LACAYO
---------------------------
Otto J. Lacayo
Director, Chief Financial
Officer and Vice President
(Principal Accounting
Officer)
12