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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 December 31, 1997
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OR
[_] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from ____________ to ____________
Commission File Number 0-17192
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CYPRESS FINANCIAL SERVICES, INC.
(Exact name of registrant as specified in its charter)
Nevada 84-1061382
(State or other jurisdiction of (I.R.S. Employer
incorporation of organization) Identification No.)
5400 Orange Avenue, Suite 200, Cypress CA 90630
(Address of Principle 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 report), 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 4,520,271 as of January 31, 1998
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Cypress Financial Services, Inc.
Form 10-QSB
INDEX
PART I. FINANCIAL INFORMATION Page
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Item 1. Condensed Consolidated Balance Sheet as
of December 31, 1997...................................... 1
Condensed Consolidated Statements of
Operations for the Three-month period
ended December 31, 1997................................... 2
Condensed Consolidated Statements of
Cash Flows for the Three-month period
ended December 31, 1997................................... 3
Notes to Condensed Consolidated Financial
Statements................................................ 4 to 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of
Operations................................................ 7 to 9
PART II. OTHER INFORMATION 10
Item 1. Legal Proceedings.........................................
Item 3. Changes in Securities.....................................
Item 4. Defaults Upon Senior Securities...........................
Item 5. Submission of Matters to a Vote of Security Holders.......
Item 6. Exhibits and Reports on Form 8-K..........................
CYPRESS FINANCIAL SERVICES, INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEET
December 31, 1997
ASSETS
Cash $ 156,280
Restricted cash 476,821
Accounts receivable, net 551,650
Portfolio receivables 316,044
Notes receivable from shareholders 4,025
Property, net 2,661,219
Prepaid expenses 97,534
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$ 4,263,573
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LIABILITIES AND SHAREHOLDERS' EQUITY
Accounts payable $ 45,001
Trust payables 476,821
Accrued liabilities 125,742
Loan payable 60,000
Line of credit 1,080,000
Long-term debt 2,700,746
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Total liabilities 4,488,310
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Commitments and contingencies
Shareholders' equity:
Preferred Stock, 5,000,000 shares authorized
authorized, 345,000 issued and outstanding 690,000
Common stock, $0.001 par value; 30,000,000
shares authorized; 4,520,271 shares issued
and outstanding 4,520
Additional paid-in capital 510,480
Accumulated deficit (1,429,737)
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Total shareholders' deficit (224,737)
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$ 4,263,573
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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
December 31, 1997 and 1996
1997 1996
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Revenues:
Service fees $ 859,445 $ 974,996
Portfolio income 426,390 212,824
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Total 1,285,835 1,187,820
Selling, general and administrative 1,257,119 1,290,071
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Income (loss) from operations 28,716 (102,251)
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Other income (expense):
Interest expense (75,255) (59,545)
Rental operations, net 33,977 29,048
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Total (41,278) (30,497)
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Loss before income taxes (12,562) (132,748)
Provision for income taxes 0 2,672
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Net loss $ (12,562) $ (135,420)
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Basic earnings (loss) per share $ (0.00) $ (0.03)
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Weighted average shares outstanding 4,520,271 4,500,271
========== ==========
See accompanying notes to condensed
consolidated financial statements
2
CYPRESS FINANCIAL SERVICES, INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Three-Month Periods Ended
December 31, 1997 and 1996
1997 1996
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Cash flows from operating activities:
Net income (loss) $ (12,562) $(135,420)
Adjustments to reconcile net loss to
net cash used in operating activities:
Depreciation and amortization 41,619 43,955
Changes in operating assets and
liabilities:
Accounts receivables (106,644) 77,657
Portfolio receivables 154,517 233,157
Prepaid expenses 2,017 (893)
Accounts payable (5,205) (27,299)
Trust payables 79,523 0
Accrued liabilities (21,230) (204,424)
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Net cash used in operating activities 132,035 (13,267)
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Cash flows from investing activities:
Purchases of property and equipment (6,604) (35,942)
Decrease (increase) in restricted cash (79,523) 0
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Net cash provided by (used in) investing
activities (86,127) (35,942)
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Cash flows from financing activities:
Loan payable 60,000 0
Net borrowings from line of credit (70,000) (142,085)
Long-term debt (151,083) (16,714)
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Net cash provided by (used in)
financing activities (161,083) (158,799)
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Net increase (decrease) in cash (115,175) (208,008)
Cash, at beginning of period 271,455 520,706
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Cash, at end of period $ 156,280 $ 312,698
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See accompanying notes to condensed
consolidated financial statements
3
CYPRESS FINANCIAL SERVICES, INC.
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
For the Three Month Periods Ended
December 31, 1997 and 1996
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 condensed consolidated
financial statements should be read in conjunction with the consolidated
financial statements contained in the Company's 1997 Annual Report on Form 10-
KSB.
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 and results of operations for the
interim periods. The operating results are not necessarily indicative of
results to be expected for the year ending September 30, 1998.
NOTE 2 - 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.
The following is the activity of Portfolio Receivables, on a cost basis, during
the three-month period ended December 31, 1997:
Portfolio Receivables, September 30, 1997 $470,561
Less: Proceeds from sales (cost recovery) (56,782)
Collections (cost recovery) (97,735)
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Portfolio Receivables, December 31, 1997 $316,044
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4
CYPRESS FINANCIAL SERVICES, INC.
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued
For the Three Month Periods ended
December 31, 1997 and 1996
As reflected in the accompanying 1997 condensed consolidated statement of
operations as revenues, the Company collected or received proceeds from sales of
its Portfolio Receivables, in excess of their original cost on a portfolio by
portfolio basis, aggregating $426,390. Total cash received from all collections
and sales of the Company's Portfolio Receivables during the three-month period
ended December 31, 1997 totaled $580,906.
NOTE 3 - PROPERTY
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Property consists of the following at December 31, 1997:
Land $ 866,575
Building 1,540,577
Equipment and furnishings 1,687,673
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4,094,825
Less: accumulated depreciation (1,433,606)
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Property - net $ 2,661,219
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NOTE 4 - INDEBTEDNESS
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On January 28, 1997, the Company and its bank amended the maximum borrowings
under the line of credit agreement from $1,250,000 to $1,500,000. Net
borrowings from the line of credit at December 31, 1997 amounted to $1,080,000.
Interest on the borrowings are charged monthly based a commercial bank's prime
rate plus 1.5% per annum (10.25% at December 31, 1997). The line of credit
renewed on January 29, 1998 for an additional one year period.
Long-term debt at December 31, 1997 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 June, 2000 at which time the entire
principal balance is due and payable. $674,827
5
CYPRESS FINANCIAL SERVICES, INC.
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued
For the Three Month Periods ended
December 31, 1997 and 1996
Capital leases payable to Colonial Pacific
Leasing, Ikon Office Solutions and Graybar
Financial, due in monthly installments of
$5,264 including interest 168,136
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, 2000 at which time
the entire principal balance is due
and payable. 1,857,783
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Long-term debt $2,700,746
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NOTE 5 - 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 December 31, 1997, were not considered significant.
6
Item 2 Management's Discussion and Analysis of Financial Condition and
Results of Operations
General
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The Company is engaged in servicing delinquent consumer debt primarily in the
commercial, retail, auto and medical industries. The Company collects,
purchases, manages and sells receivables for its own account ("Portfolio
Receivables") and for third parties. Historically, the Company has been
dependent on its third party collection operations, but since 1995, continues to
allocate more resources toward acquiring and servicing Portfolio Receivables for
its own account. The Company is aggressively increasing its Portfolio
Receivables operations and anticipates that this will continue to increase as a
percentage of overall operations. The Company's accounting policy does not
recognize revenue from ongoing collection and resale of its Portfolio
Receivables until after 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 consolidated financial statements
and notes thereto included elsewhere in this report.
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 December 31, 1997 versus Three-months ended December 31, 1996
The Company's operating revenues of approximately $1,286,000 for the three-
months ended December 31, 1997 are compared to its operating revenues for the
three-months ended December 31, 1996 of approximately $1,188,000. The increase
in operating revenues of approximately 8.2% is due to the revenues generated
from the Company's own Purchased Portfolio Receivables. The Company recognized
profits of approximately $426,400 for the three-months ended December 31, 1997
as compared to profits of approximately $212,800 for the three-months ended
December 31, 1996 on its Purchased Portfolio Receivables. The Company's 100%
increase in its portfolio receivable revenues more than offset the approximate
13.4% decrease in its contingency revenues.
7
As of December 31, 1997, the Company's direct purchases of Portfolio Receivables
had a remaining face value of approximately $157,000,000 as compared to a
remaining face value of approximately of $57,500,000 as of December 31, 1996.
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 December 31, 1997, the Company
received proceeds from sales and collections of Portfolio Receivables of
approximately $580,000, or a 27.5% increase, as compared to approximately
$455,000 for the three-months ended December 31, 1996. The increase in proceeds
from Portfolio Receivables was due to collections from the auto deficiency
portfolio of $ 109,000,000 acquired in September, 1997.
Operating expenses for the three-months ended December 31, 1997 were
approximately $1,257,000 as compared to operating expenses of approximately
$1,290,000 for the three-months ended December 31, 1996. The 2.6% decrease in
operating expenses was due to lower overhead costs to collect its own Portfolio
Receivables as compared to collecting accounts on behalf of clients on a
contingency basis.
Interest expense for the three-months ended December 31, 1997 increased to
$75,255 from $59,545 for the three-months ended December 31, 1996. The 26.4%
increase relates to the Company's borrowings to finance its capital leases of
computer equipment. The Company also expects to continue to utilize its credit
facility to finance future acquisitions of Portfolio Receivables.
Net rental income for the three-months ended December 31, 1997 was $33,977 as
compared to $29,048 for the three-months ended December 31, 1996. The 17%
increase in net rental income is directly attributable to the Company hiring on-
site maintenance personnel to maintain the facilities and eliminating the more
expensive outside services.
The Company reported a net loss of $12,562 for the three-months ended December
31, 1997 as compared to a net loss of $135,420 for the three-months ended
December 31, 1996. The decrease in net loss is primarily due to the increased
revenues recognized and the lower costs associated with its Portfolio
Receivables collections.
Liquidity and Capital Resources
- -------------------------------
The Company is funded primarily through cash flows from operations. The Company
has recently used its existing credit facility, which has an outstanding balance
of approximately $1,080,000 as of December 31, 1997, to acquire Portfolio
Receivables. The Company's credit facility, which carries an interest rate of
prime plus 1.5%, has been increased to $1,500,000, and was renewed on January
29, 1998 for an additional one year term. Management plans to accelerate its
purchase of 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 limit the Company's ability to substantially
increase the acquisition of additional Portfolio Receivables.
8
The Company currently has outstanding long-term debt with financial institutions
of approximately $2,700,746 which is secured by a mortgage and certain
equipment. The Company's equipment debt is a term note with a remaining balance
of approximately $674,800 is due in December, 2000 and carries an interest rate
of 11% per annum. The Company's mortgage note has a remaining balance of
approximately $1,857,700, 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. The Company also finances certain
capital leases for computer equipment that had a remaining balance of
approximately $ 168,000 at December 31, 1997. Management expects to continue
to service its outstanding long-term debt through its cash flows from
operations.
9
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
Not Applicable
Item 2. Changes in Securities
Not Applicable
Item 3. Defaults Upon Senior Securities
Not Applicable
Item 4. Submission of Matters to a Vote of Security Holders
Not Applicable
Item 5. Other Information
Not Applicable
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Not Applicable
(b) Reports on Form 8-K
Not Applicable
10
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: February 2, 1998 By: /s/ Farrest Hayden
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Farrest Hayden
Chairman of the Board and
Chief Executive Officer
Date: February 2, 1998 By: /s/ Otto J. Lacayo
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Otto J. Lacayo
Director, Chief Financial
Officer and Vice President
(Principle Accounting Officer)
11