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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 March 31, 1999
-----------------------
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 6,527,013 as of May 14, 1999
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CYPRESS FINANCIAL SERVICES, INC.
FORM 10Q-SB
INDEX
PART I. FINANCIAL INFORMATION Page
----
Item 1. Condensed Consolidated Balance Sheet as of
March 31, 1999........................................... 1
Condensed Consolidated Statements of
Operations for the six-month periods ended
March 31, 1999 and 1998.................................. 2
Condensed Consolidated Statements of
Operations for the three-month periods ended
March 31, 1999 and 1998.................................. 3
Condensed Consolidated Statements of
Cash Flows for the six-month periods ended
March 31, 1999 and 1998.................................. 4
Notes to Condensed Consolidated Financial
Statements............................................... 5 to 9
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations...................... 10 to 14
PART II. OTHER INFORMATION
Item 1. Legal Proceedings......................................... 15
Item 2. Changes in Securities..................................... 15
Item 3. Defaults Upon Senior Securities........................... 15
Item 4. Submission of Matters to a Vote of Security Holders....... 15
Item 5. Other Information......................................... 15
Item 6. Exhibits and Reports on Form 8-K.......................... 15
CYPRESS FINANCIAL SERVICES, INC.
--------------------------------
AND SUBSIDIARIES
----------------
CONDENSED CONSOLIDATED BALANCE SHEET
------------------------------------
MARCH 31, 1999
--------------
ASSETS
------
Cash $ 796,176
Restricted cash 516,973
Accounts receivable, net 460,162
Portfolio receivables 1,275,525
Property, net 2,980,865
Notes receivable from officers 152,013
Prepaid expenses and other 146,494
----------
Total assets $6,328,208
==========
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
Accounts payable $ 63,494
Trust payables 516,973
Accrued liabilities 274,662
Notes payable 1,833,234
Capital lease obligations 187,846
Deferred income taxes 169,482
----------
Total liabilities 3,045,691
----------
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY:
Series A convertible, redeemable preferred stock, $0.001
par value, stated at $2.00 liquidation preference
per share, 5,000,000 shares authorized; 345,000 shares
issued and outstanding 690,000
Common stock, $0.001 par value; 30,000,000 shares
authorized; 6,527,571 shares issued and outstanding 6,527
Paid-in capital 3,522,403
Accumulated deficit (935,030)
----------
3,283,900
Less common stock in treasury at cost, 401 shares 1,383
----------
Total shareholders' equity 3,282,517
----------
$6,328,208
==========
The accompanying notes are an integral part of this condensed consolidated
balance sheet.
1
CYPRESS FINANCIAL SERVICES, INC.
--------------------------------
AND SUBSIDIARIES
----------------
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
-----------------------------------------------
FOR THE SIX MONTH PERIODS ENDED MARCH 31, 1999 AND 1998
-------------------------------------------------------
1999 1998
----------- ----------
REVENUES: 2,447,131 2,546,093
OPERATING EXPENSES:
Salaries, wages and related benefits 2,053,412 1,690,834
Selling, general and administrative 890,376 700,738
Loan losses 261,647 -
Depreciation 87,043 84,079
---------- ----------
3,292,478 2,475,651
---------- ----------
INCOME (LOSS) FROM OPERATIONS (845,347) 70,442
---------- ----------
OTHER INCOME (EXPENSE):
Interest expense, net (41,091) (137,633)
Rental operations, net 42,101 60,014
---------- ----------
1,010 (77,619)
---------- ----------
LOSS BEFORE BENEFIT FOR INCOME TAXES (844,337) (7,177)
BENEFIT FOR INCOME TAXES (286,482) -
---------- ----------
NET LOSS $ (557,855) $ (7,177)
========== ==========
Earnings per share:
Basic $ (0.09) $ (0.00)
Diluted $ (0.09) $ (0.00)
Number of shares used in computing
earnings per share:
Basic 6,527,507 4,520,271
Diluted 6,527,507 4,520,271
The accompanying notes are an integral part of these condensed consolidated
financial statements.
2
CYPRESS FINANCIAL SERVICES, INC.
--------------------------------
AND SUBSIDIARIES
----------------
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
-----------------------------------------------
FOR THE THREE MONTH PERIODS ENDED MARCH 31, 1999 AND 1998
---------------------------------------------------------
1999 1998
----------- ----------
REVENUES: 1,327,761 1,260,258
OPERATING EXPENSES:
Salaries, wages and related benefits 1,139,713 878,402
Selling, general and administrative 558,040 297,670
Loan losses 164,634 -
Depreciation 43,521 42,460
---------- ----------
1,905,908 1,218,532
---------- ----------
INCOME (LOSS) FROM OPERATIONS (578,147) 41,726
---------- ----------
OTHER INCOME (EXPENSE):
Interest expense, net (26,681) (62,378)
Rental operations, net 15,990 26,037
---------- ----------
(10,691) (36,341)
---------- ----------
INCOME (LOSS) BEFORE BENEFIT FOR INCOME TAXES (588,838) 5,385
BENEFIT FOR INCOME TAXES (199,137) -
---------- ----------
NET INCOME (LOSS) $ (389,701) $ 5,385
========== ==========
Earnings per share:
Basic $ (0.06) $ (0.00)
Diluted $ (0.06) $ (0.00)
Number of shares used in computing
earnings per share:
Basic 6,527,507 4,520,271
Diluted 6,527,507 4,520,271
The accompanying notes are an integral part of these 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, 1999 AND 1998
-------------------------------------------------------
1999 1998
------------ ----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (557,855) $ (7,177)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Depreciation and amortization 91,064 84,079
Changes in operating assets and liabilities:
(Increase) decrease in restricted cash (98,805) (55,391)
(Increase) decrease in accounts receivable, net (66,376) (54,649)
(Increase) decrease in portfolio receivables (510,492) 215,781
(Increase) decrease in prepaid expenses and other (25,123) 26,936
Increase (decrease) in accounts payable 9,167 2,942
Increase (decrease) in trust payables 98,805 55,391
Increase (decrease) in accrued liabilities 112,159 120,003
Increase (decrease) in deferred income taxes (295,518) -
----------- ---------
Net cash provided by (used in) operating activities (1,242,974) 387,915
----------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property (259,615) (18,538)
----------- ---------
Net cash used in investing activities (259,615) (18,538)
----------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Purchases of treasury stock (1,383) -
Net repayments on line of credit - (70,000)
Proceeds from notes payable - 60,000
Principal payments on notes payable (10,509) (216,518)
Principal payments on capital lease obligations (19,094) (21,869)
----------- ---------
Net cash used in financing activities (30,986) (248,387)
----------- ---------
NET DECREASE IN CASH (1,533,575) 120,990
CASH, at beginning of period 2,329,751 271,455
----------- ---------
CASH, at end of period $ 796,176 $ 392,445
=========== =========
The accompanying notes are an integral part of these condensed consolidated
financial statements.
4
CYPRESS FINANCIAL SERVICES, INC.
--------------------------------
AND SUBSIDIARIES
----------------
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
----------------------------------------------------
MARCH 31, 1999
--------------
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., a Nevada corporation, (together with its subsidiaries, the
Company). These condensed consolidated financial statements should be read in
conjunction with the consolidated financial statements contained in the
Company's 1998 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, 1999.
2. Organization and Summary of Significant Accounting Policies
-----------------------------------------------------------
a. Organization and Basis of Presentation
--------------------------------------
The Company provides accounts receivable management, administration, and
debt collection services primarily to health care providers and consumer
credit issuers. In addition to its third party collection business, in
January 1995, the Company began acquiring accounts receivable and other
consumer obligations for its own collection portfolio.
The Company operates primarily through wholly owned subsidiaries that
serve specific segments of the collections service industry. The
Company's subsidiaries include: (i) Merchants Recovery Services, Inc.
(MRSI), a company that primarily offers accounts receivable collection
services to banks, credit unions, public utilities, and retailers; (ii)
Medical Control Services, Inc. (MCSI), a collection agency servicing the
health care industry; (iii) Lien Solutions, Inc. (LSI), a company that
specializes in the recovery of unpaid worker's compensation claims
primarily for healthcare service providers, including hospitals and
doctors; (iv) My Boss, Inc. d.b.a. Business Office Support Services
(BOSS), a company that provides pre-collection consulting and credit
monitoring services to medical providers and other businesses that
extend credit; and (v) Pacific Process Serving, Inc. (PPS), a statewide
legal document process service company.
b. Principles of Consolidation
---------------------------
The condensed consolidated financial statements include the accounts of
Cypress Financial Services, Inc. and its wholly owned subsidiaries. All
significant intercompany accounts have been eliminated in consolidation.
5
c. Accounts Receivable
-------------------
Accounts receivable represent accounts in which the Company provides
collection services for entities in the commercial, retail and medical
industries for a fee. Service fees are reported as income when earned.
Servicing costs are charged to expense as incurred.
d. Portfolio Receivables
---------------------
Portfolio receivables (Receivables) represent liquidating portfolios of
delinquent accounts which have been purchased by the Company for
collection and are stated at the lower of cost or net realizable value.
Cost is reduced by cash collections on an account by account basis until
such time collections equal cost. Net realizable value represents
management's estimate of the remaining net proceeds to be realized from
a given portfolio, based on an account by account evaluation of the
remaining uncollected delinquent receivables and on the historical
collection experience of the specific portfolio and similar portfolios.
Revenues from collections on purchased portfolios of receivables are
recognized on an account by account basis after the cost of each account
has been recovered. Gains and losses are recorded as appropriate when
Receivables are sold. The Company considers a transfer of Receivables
where the Company surrenders control over the Receivables a sale to the
extent that consideration other than beneficial interests in the
transferred Receivables is received in exchange for the Receivables.
e. Property
--------
Equipment, furnishings and automobiles are carried at cost and
depreciated using both straight-line and accelerated methods over the
estimated useful lives of the assets, which are generally 5 to 7 years.
The building is being depreciated over a period of 39 years.
Repairs and maintenance are charged to expense as incurred; replacements
and betterments are capitalized.
f. Trust Accounts and Restricted Cash
----------------------------------
The Company maintains trust accounts for the benefit of its customers.
Related funds are deposited in trust bank accounts and reflected as a
trust liability until such amounts held in trust are remitted to
customers. The trust accounts cash balances of $516,973 are reflected as
restricted cash and trust payables in the accompanying condensed
consolidated balance sheet.
g. Fair Value of Financial Instruments
-----------------------------------
Fair values of financial instruments are estimated using available
market information and other valuation methodologies. The fair values of
the Company's financial instruments are estimated to approximate the
related book value, unless otherwise indicated.
6
h. Earnings Per Share
------------------
Basic Earnings per Share (EPS) is computed by dividing reported earnings
by weighted average shares outstanding. Diluted EPS is computed in the
same way as fully diluted EPS, except that the calculation uses the
average share price for the reporting period to compute dilution from
options under the treasury stock method.
i. Income Taxes
------------
The Company accounts for income taxes using the asset and liability
method.
j. Use of Estimates
----------------
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make certain
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 revenues
and expenses during the reported periods. Actual results could
materially differ from those estimates.
k. Reclassification
----------------
Certain amounts in the accompanying 1998 financial statements have been
reclassified to conform to 1999 presentation.
3. Portfolio Receivables
---------------------
The cost basis of portfolio receivables (Receivables) activity consists of the
following as of March 31, 1999, and for the six months then ended:
Portfolio receivables at September 30, 1998 $ 765,033
Purchases of portfolio receivables 1,122,685
Increase in allowance for loan losses (261,647)
Collections applied to cost basis (51,188)
Sales of portfolio receivables applied to cost basis (299,358)
----------
Portfolio receivables at March 31, 1999 $1,275,525
==========
For the six months ended March 31, 1999 and 1998, the Company had gross
collections from the Receivables of $507,416 and $832,309, respectively. After
applying $51,188 and $133,391 to the cost basis for the six months ended March
31, 1999 and 1998, respectively, $456,228 and $698,918 was recognized as
portfolio receivables revenue in the accompanying condensed consolidated
statements of operations.
7
For the six months ended March 31, 1999 and 1998, the Company had proceeds from
sales of the Receivables of $470,298 and $238,373, respectively. After applying
$299,358 and $82,390 to the cost basis for the six months ended March 31, 1999
and 1998, respectively, $170,940 and $155,983 was recognized as portfolio
receivables revenue in the accompanying condensed consolidated statements of
operations.
On August 14, 1998 the Company sold Receivables with a book value of $224,634 to
a wholly-owned subsidiary for $2,750,000, which issued interest-bearing asset-
backed securities to Pacific Life Insurance Company for the same amount. For the
six months ended March 31, 1999, the Company had gross collections from these
Receivables of $764,868, of which $170,818 was recognized as service fee revenue
in the accompanying condensed consolidated statements of operations.
Due to the nature of these Receivables, there is no assurance that historical
collection results will reflect the future collectibility of the face value of
the Receivables.
4. Property
--------
Property consists of the following:
Land $ 866,575
Building 1,540,577
Equipment and furnishings 2,082,944
Autos 132,415
----------
4,622,511
Less--Accumulated depreciation 1,641,646
----------
$2,980,865
==========
5. Notes Payable
-------------
Notes payable consists of a mortgage note payable to a bank, collateralized by
land and a building, due in monthly payments of $14,089, including interest at 8
percent per annum, through December 2000, at which time the entire principal
balance is due and payable.
6. Income Taxes
------------
Income tax expense for the periods presented are based on the estimated
affective tax rate to be incurred for the year. Because certain items of income
and expense are not recognized in the same year in the financial statements of
the Company as in its Federal and California tax returns, deferred assets and
liabilities are created. As of March 31, 1999, the accompanying condensed
consolidated balance sheet reflects net deferred tax liabilities of $169,482.
8
7. Stockholders' Equity Transactions
---------------------------------
On February 12, 1999, the Company issued a warrant to Batchelder & Partners,
Inc. to purchase up to 400,000 shares of the Company's common stock in
connection with their agreement to act as the Company's non-exclusive financial
advisor. This warrant is subject to specific exercise price and vesting
provisions as described in the agreement and will be exercisable until November
13, 2005.
Pursuant to an odd-lot tender offer dated January 30, 1999 whereby the Company
offered to purchase all outstanding shares of common stock held in odd-lots of
1-99 shares at $3.00 per share and a minimum tender offer of $5.00 to each
tendering shareholder, the Company purchased 401 shares of common stock through
March 31, 1999 at an aggregate cost of $1,383.
9
Item 2 Management's Discussion and Analysis of Financial Condition and Results
of Operations
General
The Company provides accounts receivable management services to various health
care providers, banks, financial institutions, and retail firms. These services
include, among other things, billing, delinquent debt recovery, management of
litigation and bankruptcy claims, and workers' compensation lien claim
resolution. In the early nineties, financial institutions, primarily credit card
issuers, began changing their approach regarding the management of charged off
consumer receivables. These financial institutions started to sell portions of
their charged off portfolios to certain delinquent debt recovery firms and
investment groups in lieu of third party placements. Accordingly, in February
1994, the Company began to purchase portfolios of consumer receivables for its
own account, and has continued to do so through March 31, 1999.
The following discussion of the financial condition and results of operations of
the Company should be read in conjunction with the condensed consolidated
financial statements and notes thereto included elsewhere in this report.
Certain statements included in this Management's Discussion and Analysis of
Financial Condition and Results of Operations, as well as elsewhere in this
Quarterly Report on Form 10-QSB are forward-looking statements, and the actual
results and developments may be materially different from those expressed in or
implied by such statements.
Results of Operations
Six months ended March 31, 1999 versus six months ended March 31, 1998
The following table summarizes the gross collection and revenue activities for
the six months ended March 31, 1999 and 1998.
% Positive
1999 % 1998 % (Negative)
----------- ---- ----------- ---- ----------
Gross collections $ 8,095,824 100% $ 6,453,388 100% 25.5%
Less: Remittances to holders of
portfolio backed securities (595,581) -7% - 0% N/A
Less: Clients' share of collections (5,203,980) -64% (4,113,729) -64% -26.5%
----------- ----------- -----
Net fees 2,296,263 28% 2,339,659 36% -1.9%
Less: Fees applied to cost basis
of portfolio receivables (51,188) -1% (133,391) -2% 61.6%
----------- ----------- -----
Fee revenue (core operations) $ 2,245,075 28% $ 2,206,268 34% 1.8%
Gain on sale of portfolio receivables 178,676 155,982 14.5%
Fee revenue (non-core operations) 23,380 183,843 -87.3%
----------- ----------- -----
Total revenue $ 2,447,131 $ 2,546,093 -3.9%
=========== =========== =====
10
Gross collections increased by $1,642,436, or 25.5%, from $6,453,388 for the six
months ended March 31, 1998 to $8,095,824 for the six months ended March 31,
1999. This increase is directly attributable to the Company's ongoing strategic
growth plan, which was initiated in the first quarter of 1999. The Company is
actively pursuing additional business in all three of its business segments;
health care, banking and retail.
Net fees recognized from gross collections decreased by $43,396, or 1.9%, from
$2,339,659 for the six months ended March 31, 1998 to $2,296,263 for the six
months ended March 31, 1999. Net fees recognized from gross collections is
calculated by reducing gross collections by remittances to clients' for their
share of collections and by remittances to holders of portfolio backed
securities. As a percentage of gross collections, remittances to clients' for
their share of collections remained flat at 64%. However, remittances to holders
of portfolio backed securities increased by $595,581 from $0 for the six months
ended March 31, 1998 to $595,581 for the six months ended March 31, 1999. This
increase is the result of the Company completing a sale of certain portfolio
receivables totaling $149.5 million through the private securitization in August
1998.
Fee revenue from core operations increased by $38,807, or 1.8%, from $2,206,268
for the six months ended March 31, 1998 to $2,245,075 for the six months ended
March 31, 1999. Fee revenue is calculated by reducing net fees recognized from
gross collections by fees applied to cost basis of portfolio receivables. These
applied fees decreased by 61.6% primarily due to the sale of substantially all
of the Company's portfolio receivables in the securitization discussed above. In
fact, as of March 31, 1999, the Company's direct purchases of portfolio
receivables had a remaining face value of $38.2 million as compared to a
remaining face value of $157.2 million as of March 31, 1998. During the six
months ended March 31, 1999, the Company purchased and retained approximately
$25 million of such obligations for its own account.
The balance of total revenue consists of gain on sale of portfolio receivables
and fee revenue from non-core operations. Gain on sale of portfolio receivables
increased by $22,694, or 14.5%, from $155,982 for the six months ended March 31,
1998 to $178,676 for the six months ended March 31, 1999. Fee revenue from non-
core operations decreased by $160,463, or 87.3%, from $183,843 for the six
months ended March 31, 1998 to $23,380 for the six months ended March 31, 1999.
This decrease can be attributed to a decision made by the Company to discontinue
efforts regarding certain non-core operating units (principally Revenue Practice
Enhancements). These units were determined to be non-essential to the Company's
overall strategic growth plan, which was initiated in the first quarter of 1999.
Operating expenses increased by $816,827, or 33.0%, from $2,475,651 for the six
months ended March 31, 1998 to $3,292,478 for the six months ended March 31,
1999. The significant components of this increase can be attributed to the
Company's ongoing strategic growth plan and are discussed below.
Salaries, wages and related benefits increased by $362,578, or 21.4%, from
$1,690,834 for the six months ended March 31, 1998 to $2,053,412 for the six
months ended March 31, 1999. Due to growth in the Company's billing and
collecting staff, operating salaries paid increased by $308,600 from $1,025,853
for the six months ended March 31, 1998 to $1,334,453 for the six months ended
March 31, 1999. This growth in billers and collectors is directly attributable
to the growth of $1,642,436 in gross collections noted above. The remaining
increase of $53,978 resulted from increased benefit expenses associated with
these additional billers and collectors as well as specific additions to the
Company's management team.
11
Selling, general and administrative expenses increased to $890,376 for the six
months ended March 31, 1999 from $700,738 for the six months ended March 31,
1998. This 27.1% increase is principally attributable to certain non-recurring,
non-operating expenses associated with the execution of the Company's strategic
growth plan, which include, among other things, fees paid for due diligence work
related to acquisition activities, attorney fees, and fees paid to third party
financial advisors. Although these costs are not capitalizable, management
believes significant future value will be obtained from these expenditures.
The Company ratably allocates the cost of purchased loans receivable portfolios
on an account by account basis. Collections received from any one account are
applied first to the basis of the respective account before revenue is
recognized. Integral to the Company's collection operations is the timely
identification of accounts that are deemed uncollectible. The uncollectibility
of an account is primarily based on the current status of the account (i.e.
bankrupt, deceased, etc.) and the historical experience of the specific
portfolio as well as similar portfolios. The Company records an allowance for
loan losses reflecting the accumulated costs allocated to those accounts deemed
uncollectible to properly reflect management's estimate of the remaining net
proceeds to be realized from a given portfolio. Due to the nature of these
receivables at purchase date, it is not uncommon for the Company to immediately
identify certain accounts to be uncollectible at the time of acquisition.
Accordingly, for the six months ended March 31, 1999, the Company increased its
allowance for loan losses on acquired portfolios by $261,647.
Depreciation expense increased 3.5% over the same period last year principally
due to certain technology upgrades as well as furniture purchases made by the
Company in the fourth quarter of 1998.
Interest expense decreased to $41,091 for the six months ended March 31, 1999
from $137,633 for the six months ended March 31, 1998. This 70.1% decrease
resulted from retiring the Company's credit facility and equipment loans in the
fourth quarter of 1998 using proceeds of a $3,000,000 private placement as well
as a $2,750,000 securitization (see discussion below).
Net income from rental operations decreased by $17,913, or 29.8%, from $60,014
for the six months ended March 31, 1998 to $42,101 for the six months ended
March 31, 1999. This decrease is directly attributable to the growth of the
Company into areas of its building which were leased to unrelated third parties
in prior years.
Liquidity and Capital Resources
The Company is funded primarily through cash flows from operations.
Historically, the Company has used its credit facility to acquire portfolio
receivables. However, in July 1998, the Company sold 2,000,000 shares of its
common stock to Pacific Life Insurance Company for $3,000,000, representing 28%
of the outstanding common stock of the Company on a fully diluted basis.
Additionally, in August 1998, the Company completed its first securitization of
portfolio receivables which generated net cash flows to the Company of
$2,552,000. The combined $5,552,000 was used to retire the Company's credit
facility and existing equipment loans leaving the balance available for
expansion as well as ongoing purchases of portfolio receivables under a forward
flow contract with a major financial institution.
12
The Company currently has outstanding long-term debt with financial institutions
of $2,021,000 which is secured by a mortgage and certain equipment. The
Company's mortgage note has a remaining balance of $1,833,000, carries an
interest rate of 8% per annum and is due in December 2000. Management is
currently evaluating the feasibility of refinancing the mortgage note payable.
The Company also finances certain capital leases for computer equipment that
have a remaining balance of approximately $188,000 at March 31, 1999. Management
expects to continue to service its outstanding long-term debt through its cash
flows from operations.
In addition to capital required for the Company's existing business and its
growth, the Company may require additional capital resources if it should choose
to expand its operations by acquisitions of other businesses. Although the
Company has no commitments to make any acquisitions, it does regularly review
proposals to make acquisitions in the accounts receivable management field and
considers acquisitions a significant component of its strategic plan.
There can be no assurance that such additional financing, if required, will be
available to the Company, nor can there be any assurance as to the cost of any
such financing that may be available. The Company is exploring the possibility
of issuing additional debt and/or equity to provide additional capital, but has
no commitment to do so.
Year 2000
State of Readiness -- Since early 1997, the Company has been addressing the
impact of the Year 2000 to its data processing systems. Key financial
information and operational systems were addressed and detailed plans were
developed to ensure that Year 2000 system modifications were in place by
September 1998 for all critical systems. As most of the critical software is
purchased from vendors which have already made the necessary Year 2000 changes,
the Company is concentrating its efforts on testing its "Year 2000 Compliant"
systems.
Costs to Address Year 2000 Issues -- In the process of identifying the Company's
critical systems and determining the extent to which they must be modified or
replaced, management has found no systems which need to be replaced or
extensively modified to ensure they will function as intended. Accordingly,
management does not anticipate a material adverse impact to the Company's
results of operations or financial position.
Risks for the Company -- The primary risk of failure to adequately address the
Year 2000 problem would be the inability to accurately process and track
financial records and transactions. Additionally, the Company is exposed to risk
if its customers, clients, and financial institutions are unable to adequately
address the Year 2000 dates in their own data processing systems. The Company
has contacted all of the major customers, clients and financial institutions
with whom it does business to ensure that they are addressing the issue for
themselves and their customers.
Contingency Plans -- Should the Company's vendor for its core processing
applications fail to provide the modifications necessary to correctly recognize
Year 2000 dates, as a contingency plan for core operations, the Company would
out source its mainframe computer applications. For non-core operations, the
Company will rely on manual processing until modifications or replacement
systems are in place.
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Recent Accounting Pronouncements
In June 1997, the Financial Accounting Standards Board (FASB) issued SFAS Nos.
130 and 131, "Reporting Comprehensive Income" and "Disclosures about Segments of
an Enterprise and Related Information," respectively. SFAS Nos. 130 and 131 are
effective for fiscal years beginning after December 15, 1997, with earlier
adoption permitted. The Company believes that adoption of these standards will
not have a material impact on the Company.
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." SFAS No. 133 is effective for fiscal years
beginning after June 15, 1999, with earlier adoption permitted. The Company
believes that adoption of this standard will not have a material impact on the
Company.
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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
Exhibit 27
(b) Reports on Form 8-K
Not Applicable
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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 14, 1999 By: /s/ Manuel Occiano
-------------------------------------
Manuel Occiano
Director and Chief Executive Officer
Date: May 14, 1999 By: /s/ John C. Hindman
-------------------------------------
John C. Hindman
Chief Financial Officer and Treasurer
(Principal Accounting Officer)
16