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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 June 30, 1998
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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
----- ------
(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 latest practicable date.
Common Stock 6,527,571 as of August 12, 1998
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Cypress Financial Services, Inc.
Form 10-QSB
INDEX
PART I. FINANCIAL INFORMATION Page
-------
Item 1. Condensed Consolidated Balance Sheet as
of June 30, 1998.................................... 1
Condensed Consolidated Statements of
Operations for the Three-month and Nine-
Month period ended June 30, 1998.................... 2 to 3
Condensed Consolidated Statements of
Cash Flows for the Nine-month period
ended June 30, 1998................................. 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 12
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
June 30, 1998
ASSETS
Cash $ 361,338
Restricted cash 497,732
Accounts receivable, net 559,820
Portfolio receivables 549,151
Notes receivable from shareholders 4,025
Property, net 2,606,588
Prepaid expenses 65,244
-----------
$ 4,643,898
===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Accounts payable $ 51,301
Trust payables 497,732
Accrued liabilities 258,995
Line of credit 1,463,000
Long-term debt 2,645,281
-----------
Total liabilities 4,916,309
-----------
Commitments and contingencies
Shareholders' equity:
Preferred Stock, 5,000,000 shares authorized,
345,000 issued and outstanding 690,000
Common stock, $ 0.001 par value; 30,000,000
shares authorized; 4,527,571 shares issued
and outstanding 4,520
Additional paid-in capital 510,480
Accumulated deficit (1,477,411)
-----------
Total shareholders' deficit (272,411)
-----------
$ 4,643,898
===========
See accompanying notes to condensed
consolidated financial statements
1
CYPRESS FINANCIAL SERVICES, INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
For the Nine-Month Periods Ended
June 30, 1998 and 1997
1998 1997
----------- -----------
Revenues:
Service fees $2,558,301 $3,096,041
Portfolio income 1,269,471 753,723
----------- -----------
Total 3,827,772 3,849,764
Selling, general and administrative 3,741,333 3,866,572
----------- -----------
Income (loss) from operations 86,439 (16,808)
----------- -----------
Other income (expense):
Interest income 0 482
Miscellaneous income 1,825 0
Interest expense (220,292) (197,679)
Rental operations, net 71,792 86,677
----------- -----------
Total (146,675) (110,520)
----------- -----------
Loss before income taxes ( 60,236) (127,328)
Provision for income taxes 0 5,251
----------- -----------
Net loss $ ( 60,236) $ (132,579)
=========== ===========
Basic earnings (loss) per share $(0.01) $( 0.03)
=========== ===========
Weighted average shares outstanding 4,527,571 4,515,271
=========== ===========
See accompanying notes to condensed
consolidated financial statements
2
CYPRESS FINANCIAL SERVICES, INC
AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
For the Three-Month Periods Ended
June 30, 1998 and 1997
1998 1997
---------- ------------
Revenues:
Service fees $ 872,303 $1,075,916
Portfolio income 414,570 246,035
---------- ----------
Total 1,286,873 1,321,951
Selling, general and administrative 1,270,872 1,273,196
---------- ----------
Income from operations 16,001 48,755
---------- ----------
Other income (expense):
Miscellaneous income 1,825 0
Interest expense (82,659) (69,858)
Rental operations, net 11,778 22,167
---------- ----------
Total (69,056) (47,691)
---------- ----------
Income (loss) before income taxes (53,055) 1,064
Provision for income taxes 0 0
---------- ----------
Net income (loss) $ (53,055) $ 1,064
========== ==========
Basic earnings (loss) per share $ (0.01) $ 0.00
========== ==========
Weighted average shares outstanding 4,527,571 4,515,271
========== ==========
See accompanying notes to condensed
consolidated financial statements
3
CYPRESS FINANCIAL SERVICES, INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Nine-Month Periods Ended
June 30, 1998 and 1997
1998 1997
---------- ----------
Cash flows from operating activities:
Net loss $ (60,236) $(132,579)
Adjustments to reconcile net loss to net cash used
in operating activities:
Depreciation and amortization 128,570 135,567
Changes in operating assets and liabilities:
Accounts receivables (114,814) (53,047)
Portfolio receivables (78,590) (74,953)
Accounts payable 921 (40,978)
Trust payables 100,434 (16,017)
Accrued liabilities 112,023 (132,080)
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Net cash used in operating activities 88,308 (314,087)
--------- ---------
Cash flows from investing activities:
Purchases of property and equipment (38,924) (74,788)
Decrease (increase) in other assets 34,481 1,825
Decrease (increase) in restricted cash (100,434) 16,017
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Net cash provided by (used in) investing activities (104,877) (56,896)
--------- ---------
Cash flows from financing activities:
Common stock purchase 0 2,500
Net borrowings from line of credit 313,000 240,777
Long-term debt (206,548) (51,461)
--------- ---------
Net cash provided by (used in) financing
activities 106,452 191,816
--------- ---------
Net increase (decrease) in cash 89,883 (179,167)
Cash, at beginning of period 271,455 520,706
--------- ---------
Cash, at end of period $ 361,338 $ 341,539
========= =========
See accompanying notes to condensed
consolidated financial statements
4
CYPRESS FINANCIAL SERVICES, INC.
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
For the Nine-Month Periods Ended
June 30, 1998 and 1997
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 nine-month period ended June 30, 1998:
Portfolio Receivables, September 30, 1997 $ 470,561
Add: Purchases of portfolio receivables 402,398
Less: Proceeds from sales (cost recovery) (32,969)
Collections (cost recovery) (290,839)
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Portfolio Receivables, June 30, 1998 $ 549,151
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5
CYPRESS FINANCIAL SERVICES, INC.
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued
For the Nine-Month Periods ended
June 30, 1998 and 1997
As reflected in the accompanying condensed consolidated statement of operations
for the nine months ended June 30, 1998, 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 $1,269,471. Total
cash received from all collections and sales of the Company's Portfolio
Receivables during the nine-month period ended June 30, 1998 totaled $1,593,277.
NOTE 3 - PROPERTY
- -----------------
Property consists of the following at June 30, 1998:
Land $ 866,575
Building 1,540,577
Equipment and furnishings 1,719,993
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4,127,145
Less: accumulated depreciation (1,520,557)
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Property - net $ 2,606,588
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NOTE 4 - INDEBTEDNESS
- ---------------------
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 June 30, 1998 amounted to $1,463,000.
Interest on the borrowings are charged monthly based a commercial bank's prime
rate plus 1.5% per annum (10.25% at June 30, 1998). The line of credit renewed
on January 29, 1998 for an additional one year period. This line of credit has
been subsequently paid off in July, 1998.
Long-term debt at June 30, 1998 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,
6
CYPRESS FINANCIAL SERVICES, INC.
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued
For the Nine-Month Periods ended
June 30, 1998 and 1997
through June, 2000 at which time the entire balance
is due and payable. This loan was subsequently paid off
in August, 1998 $ 644,205
Capital leases payable to certain leasing companies due
in monthly installments of $5,264 including interest 152,830
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. 1,848,246
----------
Long-term debt $2,645,281
==========
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 June 30, 1998, were not considered significant. The Company has
a net operating loss carryforward of $ 243,167 available to offset future
taxable incomes.
SUBSEQUENT EVENTS
- -----------------
During June, 1998, the Company entered into agreement with Pacific Life
Insurance Company to sell 2,000,000 shares of common stock at a price of $ 1.50
per share. The Company received the $3,000,000 in July, 1998, at which time $
1,463,000 was used to pay down the line of credit to zero and $ 644,205 was used
to retire the equipment loan.
7
CYPRESS FINANCIAL SERVICES, INC.
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued
For the Nine-Month Periods Ended
June 30, 1998 and 1997
Effective on or after August 14, 1998, the Company expects to complete the sell
of the majority of its portfolio receivables in a private placement using a
wholly-owned special purpose entity. The Company will remain as servicer of the
receivables and will retain an indirect interest in the residual value. The
Company estimates a gain on sale of approximately $2,500,000 will be recognized
during the fourth quarter.
8
Item 2 Management's Discussion and Analysis of Financial Condition and Results
of Operations
General
- -------
The Company is engaged in servicing delinquent consumer debt primarily in the
commercial, retail, auto and medical industries. The Company also 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 Portfolio Receivables and overall macro
economic conditions which generally have a direct effect on the Company's
ability to collect on the receivables.
Results of Operations
- ---------------------
Nine-months ended June 30, 1998 versus Nine-months ended June 30, 1997
The Company's operating revenues of approximately $3,828,000 for the nine-months
ended June 30, 1998 are compared to its operating revenues for the nine-months
ended June 30, 1997 of approximately $3,850,000. On its Purchased Portfolio
Receivables, the Company recognized revenues of approximately $1,269,000 for the
nine-months ended June 30, 1998 as compared to revenues of approximately
$754,000 for the nine-months ended June 30, 1997. The Company's 68% increase in
its portfolio receivable revenues offset the approximate 17% decrease in its
contingency revenues. The decrease in contingency revenues result from the
Company's continued efforts to expand its operations into the purchasing of
Portfolio Receivables for its own account.
As of June 30, 1998, the Company's direct purchases of Portfolio Receivables had
a remaining face value of approximately $169,951,000 as compared to a remaining
face
9
value of approximately of $64,200,000 as of June 30, 1997. This increase was due
in large part to the acquisitions of approximately $122,000,000 in portfolios,
including $109,000,000 of auto loan receivables acquired in September, 1997. 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 nine-months ended June 30, 1998, the Company received
proceeds from sales and collections of Portfolio Receivables of approximately
$1,593,000 or a 23.5% increase, as compared to approximately $1,290,000 for the
nine-months ended June 30, 1997.
Operating expenses for the nine-months ended June 30, 1998 were approximately
$3,741,000 as compared to operating expenses of approximately $3,867,000 for the
nine-months ended June 30, 1997. The 3% decrease in operating expenses was due
to lower overhead costs to collect its own Portfolio Receivables as compared to
labor intensive collection efforts required to collect contingency business.
Interest expense for the nine-months ended June 30, 1998 increased to $220,292
from $197,679 for the nine-months ended June 30, 1997. The 1% increase relates
to the Company's borrowings to finance its additional purchases of portfolio
receivables. The Company expects to continue to utilize its credit facility to
finance future acquisitions of Portfolio Receivables.
Net rental income for the nine-months ended June 30, 1998 was $71,792 as
compared to $ 86,677 for the nine-months ended June 30, 1997. The 17% decrease
in net rental income is directly attributable to the Company continuing to
reserve vacant space for future expansion.
The Company reported a net loss of $60,236 for the nine-months ended June 30,
1998 as compared to a net loss of $132,579 for the nine-months ended June 30,
1997. The decrease in net loss is primarily due to the increase in Portfolio
Receivables revenues and the associated lower costs to collect. A measure of
free cash flow of a company is calculated in a company's EBITDA earnings. EBITDA
is defined as earnings before interest and taxes plus depreciation and
amortization. The Company's EBITDA for the nine-months ended June 30, 1998 was
$336,065 as compared to EBITDA for the nine-months ended June 30, 1997 of $
262,343.
Liquidity and Capital Resources
- -------------------------------
The Company is funded primarily through cash flows from operations. The Company
has recently used its existing credit facility, which had an outstanding balance
of approximately $1,463,000 as of June 30, 1998, to acquire Portfolio
Receivables. The Company's credit facility, which carries an interest rate of
prime plus 1.5%, was increased to $1,500,000, and was renewed on January 29,
1998 for an additional one year term. The balance of the line of credit, which
was approximately $1,463,000 as of June 30, 1998, was paid down to zero in July,
1998 from the proceeds of $3,000,000 capital
10
equity financing. Management plans to accelerate its purchase of Portfolio
Receivables with the remainder of proceeds of $3,000,000 capital equity
financing in July, 1998.
The Company currently has outstanding long-term debt with financial institutions
of approximately $2,645,281 which is secured by a mortgage and certain
equipment. The Company's equipment debt, which was retired in August, 1998 from
the proceeds of the $3,000,000 capital equity financing, was a term note with a
remaining balance of approximately $644,200 at June 30, 1998. The Company's
mortgage note has a remaining balance of approximately $1,848,200, 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 $152,800 at June 30, 1998. Management
expects to continue to service its outstanding long-term debt through its cash
flows from operations.
Year 2000
The Year 2000 issue is the result of computer programs being written using two
digits rather than four to define the applicable year. Any of the Company's
computer programs that have time sensitive software may recognize a date using
the "00" as the year 1900 rather than the year 2000. This could result in a
system failure or miscalculations causing disruptions of operations. The
Company has assessed and implemented corrective measures to address the Year
2000 issues. The Company has also made inquiries regarding the Year 2000 issue
of certain third parties with whom the Company does business. The Company
believes that its internal systems and those supplied to it by third parties are
or will be Year 2000 compliant by the Year 2000 without any material additional
expense. Year 2000 considerations may, however, impact vendors or other
institutions with which the Company has relationships, indirectly affecting the
Company.
11
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
12
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: August 12, 1998 By: /s/ Farrest Hayden
-------------------------------
Farrest Hayden
Chairman of the Board and
President
Date: August 12, 1998 By: /s/ Otto J. Lacayo
-------------------------------
Otto J. Lacayo
Director, Chief Financial
Officer and Secretary
(Principle Accounting Officer)
13