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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB\A
[X] ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES AND EXCHANGE ACT OF 1934 [Fee Required]
For the fiscal year ended September 30, 1995 Commission File Number: 0-17192
CYPRESS FINANCIAL SERVICES, INC.
(Name of Small Business Issuer in its Charter)
NEVADA 95-3137322
(State or other jurisdiction of (I.R.S Employer
incorporation or organization) Identification No.)
5400 ORANGE AVENUE, SUITE 200, CYPRESS, CALIFORNIA 90630
(Address of principal executive offices) (Zip Code)
Issuer's Telephone Number: (714) 995-0627
Securities registered under Section 12(b) of the Exchange Act:
(Title of each class) (Name of each exchange on which registered)
NONE NONE
Securities registered under Section 12(g) of the Exchange Act:
(Title of each class)
COMMON STOCK
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 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. YES (X) NO (_)
Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B is not contained in this form, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB. (X)
State issuer's revenues for its most recent fiscal year: $3,393,637
The aggregate value of the Registrants Common Stock held by non-affiliates of
the Registrant can not be determined because there is no established trading
market for this Company's stock.
State the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practicable date: There were 4,500,271 shares of the
Registrants Common Stock issued and outstanding as of July 29, 1996.
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ITEM 1 DESCRIPTION OF BUSINESS
GENERAL
Cypress Financial Services, Inc., a Nevada corporation (together with its
subsidiaries, the "Company"), provides accounts receivable management,
administration and debt collection services primarily to health care providers,
and consumer credit issuers. The Company operates primarily through wholly-
owned subsidiaries or divisions that serve specific segments of the collection
service industry. The Company's subsidiaries or divisions include: (i) Medical
Control Services, Inc. ("MCSI"), a licensed collection agency servicing the
health care industry; (ii) Merchants Recovery Services, Inc. ("MRSI"), a company
that primarily offers accounts receivable collection services to banks, credits
unions, public utilities and retailers; (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. dba 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; (v) Revenue Practice
Enhancements ("RPE"), a division of MCSI that offers complete electronic billing
services for doctors' offices; and (vi) Pacific Process Service, Inc. ("PPS"), a
company engaged in the legal process servicing business.
Recently, the Company has started to acquire accounts receivables and other
consumer obligations for its own collection portfolio. The types of assets the
Company has or intends to acquire include performing and non-performing
installment loans, secured and unsecured consumer and commercial loans, credit
card obligations and accounts receivables. In addition to federal and state
banking and savings and loan institutions, other sources for distressed and
discounted obligations include, hospitals, finance companies, insurance
companies, credit unions, consumer credit issuers, and other collection
agencies.
HISTORY
The Company was originally incorporated under the name "Oxford Venture
Corporation" on February 7, 1987. On June 7, 1988, the Company acquired all of
the capital stock of The Christmas Group, Inc., a California corporation, which
remained a subsidiary of the Company. On June 24, 1988, the Company changed its
name to "The Christmas Guild, Inc."
Since 1989 the Company was operationally inactive until September 12, 1995
when it entered into a Definitive Securities Purchase Agreement and Plan of
Reorganization with Medical Control Services, Inc., a California corporation.
Pursuant to such agreement, the Company acquired all of the outstanding capital
stock of MCSI and its subsidiaries. MCSI has been in the accounts receivable
management administration and debt collection business since 1977. On December
7, 1995, the Company amended and restated its Articles of Incorporation to
change its name to "Cypress Financial Services, Inc."
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OPERATING SUBSIDIARIES
The Company does business through the following operating subsidiaries under
trade names which serve the collection, billing and other office support needs
of the collection service industry:
MEDICAL CONTROL SERVICES, INC.
MCSI was incorporated in California in 1977 as a licensed collection agency
servicing the health care industry. MCSI has service contracts with over 1,000
clients that include, hospitals, medical groups, doctors, laboratories,
radiology centers, emergency rooms and convalescent homes. The volume of annual
collection assignments for MCSI reached in excess of $34 million in 1995. MCSI
also operates RPE, a division that offers medical providers out sourcing
services for their patient billing process. RPE utilizes state of the art
billing software that covers all national private insurance carriers, including
Medicaid and Medicare.
MERCHANTS RECOVERY SERVICES, INC.
MRSI was incorporated in California in 1982 to serve the accounts receivable
collection needs for commercial businesses. MRSI has service contracts with
over 700 clients that include banks, credit unions, public utilities, and
wholesale and retail establishments. The volume of annual account assignments
reached in excess of $86 million in 1995. In 1995, MRSI began to diversify from
purely a debt collection service on a contingency basis to include direct
purchases of credit card debt from banks and other sources of distressed or
discounted consumer obligations for its own collection and/or re-sale. In 1995,
MRSI purchased over $53 million of such credit card debt. See "Portfolio
Management."
LIEN SOLUTIONS, INC.
LSI was incorporated in California in 1984 to provide specialized collection
services to clients that have complex collection needs. LSI has developed
sophisticated systems and procedures for resolving its clients contested workers
compensation claims which, unlike typical collection matters, are governed by
the Workers' Compensation Appeals Board, which has exclusive jurisdiction over
such claims. In addition, LSI also extends its specialized service to third-
party payor disputes, such as personal injury liens, Medicare, HMO denials and
lien subrogation. In 1995, LSI received collection assignments in excess of
$16 million.
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MY BOSS, INC. DBA BUSINESS OFFICE SUPPORT SERVICES
MY BOSS was incorporated in California in 1989 to provide its clients with
pre-collection management of their accounts receivables. BOSS acts as an
extension of its clients' accounts receivable department by utilizing its staff
of trained representatives and its sophisticated data processing support systems
to replace or supplement the traditional accounts receivable department. By
using its employees, computers and predictive dialing, BOSS is able to more
effectively receive payment from its clients' patients than the traditional
method of pre-collection demand letters. The pre-collection services offered by
BOSS are aimed at lowering the cost of collection for its clients and increasing
recovery rates of its clients receivables before the receivables become bad
debt. BOSS acts as the accounts receivable department allowing the client's
personnel to focus on other productive tasks. In 1995, BOSS received collection
assignments in excess of $24 million.
PACIFIC PROCESS SERVING, INC.
PPS was incorporated in 1982 and is engaged in the legal process servicing
business in connection with the Company's collection business activities as well
as for outside parties.
CONTINGENT COLLECTION SERVICE AGREEMENTS
The Company is generally retained on a month-to-month-basis by its clients
to administer current receivables or to collect past due debts with fees payable
on a contingent basis based upon the amount collected. The Company negotiates
its commission rate with each client, depending upon the size, aging and general
collectibility of the accounts.
PORTFOLIO MANAGEMENT
Over the past several years there has been a substantial amount of
discounted consumer debt being sold by financial institutions as a result of
changes in the financial regulatory requirements of such entities. These
changes in the financial requirements have led to numerous mergers as well as
other means of recapitalizing these institutions. One method some of these
financial institutions use to strengthen their current financial condition is to
charge-off non-performing loans or other delinquent credit facilities and sell
these accounts to third parties like the Company for immediate cash.
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Typically loans or accounts sold by the originating creditors are sold in
large portfolios that range in size from tens of thousands to multi-million
dollars in outstanding balances. By utilizing the Company's data systems and
technology, the Company is able to quickly analyze the integrity of a given
portfolio of such assets and other debtor information provided by the
originating lenders. As a result of its due diligence, and based on its
extensive collection experience, the Company is able to approximate the
collection value of the portfolio and thereby determine the amount that should
be paid for the portfolio. Although only a small percent of the total
outstanding principal balances of most of the portfolio can ultimately be
collected, the Company is able to acquire the portfolio at such deep discounts
from the portfolio's total principal amount, that the Company can generate a
significant cash flow on its investment by utilizing its collection systems and
technology.
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Once a portfolio is purchased, the Company utilizes its general accounts
receivable management and debt collection services to generate cash flow on the
portfolio. Because the cost to acquire the portfolio is extremely low for each
individual account within the portfolio, the Company can offer more attractive
settlement and payment options to the individual debtors than those debtors have
been offered by the originating lender or that can be offered by the Company on
a contingent basis. The cash flow generated from the Company's portfolio
collections is then used to acquire additional portfolio assets.
MANAGEMENT INFORMATION SYSTEMS
The Company maintains sophisticated data processing support and management
information systems. To support its collection efforts, the Company utilizes a
high penetration automatic dialer. The Company's high penetration automatic
dialer controls multiple telephone lines and automatically dials numbers from
file records in accordance with programmed instructions established by
management. If the dialer receives a busy signal or no answer, it will
generally route the number for subsequent re-call. The dialer has the ability
to distinguish pre-recorded voice and will leave appropriate digitized human
voice message on the borrower's answering machine. Generally, the dialer
transfers the call to a collector only after it has determined that there is a
live voice on the line. In most instances this is accomplished so rapidly that
individual dialing allows the Company to place as many as 3,000 telephone calls
per hour.
The high-penetration automatic dialer also monitors telephone activity and
activates more telephone lines when connect rates are low or shuts down lines
when connect rates are high. Once a call is passed to a collector, all relevant
account information automatically appears on the collector's video screen.
The automatic dialer allows the Company to sort electronically and
prioritize each collector's workload as well as to implement specific collection
strategies. Moreover the Company has adopted certain procedural controls
designed to ensure that important decisions, such as, initiating legal action or
materially modifying an account, are routed to a supervisor for review and
approval.
All departments have access to computer systems that utilizes large data
bases on CD-ROMs for skip tracing purposes that enable the Company to obtain
information about the debtors or their property from various data sources,
including, TRW, Trans Union, DataQuick, California situs, and county records.
The Company believes that the capacity of its existing processing support
and management information systems is sufficient to expand substantially its
business without significant additional capital expenditure.
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CUSTOMERS
The Company generally has a broad and well diversified client base that
includes hospitals, medical groups, laboratories, convalescent homes, banks,
credit unions, public utilities, and wholesale and retail establishments.
Although the Company has several large customers, and the loss of any one of
these customers could have a material adverse effect on the Company's
operations, no customer comprises more than 10% of the Company's consolidated
revenues.
MARKETING
The Company maintains a full-time staff of sales representatives that
continuously solicit business by following up leads from existing clients, using
multiple business and commerce directories and utilizing promotional materials.
Recently, the Company began advertising its services on the Internet by
establishing a WEB page which describes the Company's services. The Company has
not otherwise actively advertised its services, although it may do so
selectively in the future.
GOVERNMENT REGULATION
The Company is regulated by the Fair Debt Collection Practice Act and the
Telephone Consumer Protection Act which are enforced by the Federal Trade
Commission. In this regard, the Company devotes continuous efforts, through
training of personnel and monitoring of compliance in order to provide ethical,
innovative, high quality accounts receivable management and collection business
which meets the needs of its clients and that comply with the law.
Although the Company believes that it is currently in compliance with
applicable statutes and regulations, there can be no assurance that the Company
will always be able to maintain such compliance. The failure to comply with
such statutes and regulations could have a material adverse effect upon the
Company. Furthermore, the adoption of additional statutes and regulations,
changes in the interpretation and enforcement of current statutes and
regulations or the expansion of the Company's business into jurisdictions that
have adopted more stringent regulatory requirements than those in which the
Company currently conducts business could have a material adverse effect upon
the Company.
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COMPETITION
The accounts receivable management and collection business is highly
competitive. The Company competes with a number of national, local and regional
companies with operations similar to those of the Company. Many of the Company's
competitors have far greater resources than the Company and have access to
capital markets which may be unavailable to the Company.
The Company believes that the principal competitive factors affecting the
Company's receivable management and collection business is increasingly based
upon collection performance, price and services provided. These competitive
factors have generally caused a downward adjustment to commission rates. The
Company believes that it can compete effectively by offering its clients
innovative receivable management solutions and by continually enhancing its
collection procedures.
There is substantial competition for the acquisition and management of
distressed and non-performing consumer obligations and accounts receivables.
Although the amount of non-performing and other distressed obligations available
for sale is quite large, there are numerous competitors for these assets that
have more resources than the Company.
EMPLOYEES
As of September 30, 1995, the Company had 75 full time employees and 28
part-time employees, of whom 4 are management personnel, 6 are sales and
marketing personnel, 5 are legal personnel, 14 are MCSI collectors, 12 are
MRSI collectors, 17 are LSI collectors, 31 are BOSS pre-collection
representatives, 1 is an RPE billing clerk, 2 are accounting personnel and 11
are operations support personnel. The Company believes that its relations with
its employees are good. The Company is a not a party to any collective
bargaining agreement.
ITEM 2 DESCRIPTION OF PROPERTIES
The Company owns its office building and property located at 5400 Orange
Avenue, Cypress, California where it conducts its operations. The office
building, which was purchased in 1993, contains approximately 54,000 square feet
of office space. Currently, the Company occupies approximately 24,000 square
feet for its operations, and leases the remainder of the building to tenants.
Although the Company may establish remote offices to better serve its clients,
the Company believes that its current facility is suitable and adequate for its
current and anticipated operations.
ITEM 3 LEGAL PROCEEDINGS
As of September 30, 1995, except for immaterial litigation, the Company is
not involved in any litigation in which it is a defendant. The Company
regularly initiates legal proceedings as a plaintiff in connection with its
routine collection activities.
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ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On October 30, 1995, a majority of the Company's stockholders approved by
written consent the Amended and Restated Articles of Incorporation of the
Company and the adoption of the 1995 Stock Option Plan.
There were no matters submitted to a vote of security holders during the
fourth quarter of the fiscal year ended September 30, 1995.
PART II
ITEM 5 MARKET FOR THE REGISTRANTS COMMON STOCK AND RELATED SECURITY HOLDERS
MATTERS
As of the date of this report, there is no established public trading market
for the Company's Common Stock. As of July 29, 1996, there were approximately
1,543 Common Stock shareholders.
DIVIDEND POLICY
The Company has never paid a dividend and does not anticipate paying any
cash dividends in the forseeable future. The Company intends to retain any
earnings to provide funds to finance future growth.
ITEM 6 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
GENERAL
The Company is engaged primarily in the collection of receivables owned by
entities in the commercial, retail and medical industries. Commencing in
January, 1995, the Company began purchasing a significant amount of portfolio
receivables for its own collection account. The Company anticipates that the
purchase of portfolio receivables for its own collection account will become a
significant portion of its future operations.
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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 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.
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 $3,471,000 which primarily is the result of a $1,663,000 decrease in the
property to its original cost and the elimination of $2,098,000 of previously
reported goodwill.
This discussion 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.
RESULTS OF OPERATIONS
Revenues for the nine months ended September 30, 1995, were $3,394,000 as
compared to revenues of $5,159,000 for the full twelve-month period ending
December 31, 1994.
The decrease in revenues, on an annualized basis, resulted primarily from a
reduction in the Company's commission rates with its medical clients. The
Company believes that the medical industry will continue to press for lower
commission rates for the collection industry.
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Management identified this downward trend in commission rates in 1994 and, as
a result, has expanded its business to include direct purchases of delinquent
receivables and other debtor obligations for its own portfolio which will be
liquidated over an average period of five years. Management believes that the
revenues generated from its directly owned portfolios of receivables will help
to alleviate the revenue loss from the reduction in commission rates and will
eventually generate a substantial amount of MCSI's total revenues.
The Company began to acquire portfolios in January, 1995. The revenues from
collection of the Company's portfolio receivables are recognized only after the
cost of such portfolios has been received. As of September 30, 1995, the
Company recognized approximately $21,000 of revenues from its portfolio
receivables. As of September 30, 1995, the Company had paid approximately
$952,000 and had recovered approximately $468,000 of such cost through the sale
and collection of certain portfolio receivables. As of September 30, 1995, the
Company's remaining receivable portfolios have a face value of approximately
$27,000,000.
Operating expenses for the nine months ended September 30, 1995 were
$3,369,000 as compared to $5,149,000 for the full twelve month period ended
December 31, 1994. This decrease in operating expenses, on an annualized basis,
is directly attributable to management's early recognition of the commission
rate trend and its efforts to consolidate its operations and lower its
administrative overhead. Management believes that the consolidation of its
operations and the reductions in its administrative expenses will allow the
Company to operate more efficiently.
Income from operations for the nine months ended September 30, 1995 was
approximately $25,000 as compared to approximately $11,000 for the full twelve
month period ended December 31, 1994. This increase in operating income despite
the lower annualized revenues, is directly attributable to management's
decisions to consolidate certain operations and to the across the board
reductions in its administrative overhead.
Interest expense for the nine months ended September 30, 1995 increased to
$156,000 from $133,000 for the full twelve month period ended December 31, 1994
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.
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Net rental income decreased for the nine months ended September 30,1995 to
$121,000 as compared to $189,000 for the full twelve month period ended December
31, 1994. The decrease in net rental income for these effective periods on an
annualized basis was due to an increase in the cost of utilities.
The Company reported a net loss of $24,000 for the nine month ended
September 30, 1995 as compared to net income of $37,000 for the period ended
December 31, 1994. The net loss for the nine month period ended September 30,
1995 resulted primarily from higher interest expenses to finance its portfolio
receivables and from reporting only nine-months of rental operation as compared
to a full twelve months of rental operations for the period ended December 31,
1994. In addition, the Company expensed approximately $50,000 for certain
professional fees relating to the acquisition of MCSI during the nine month
period ended September 30, 1995.
LIQUIDITY AND CAPITAL RESOURCES
At September 30, 1995, the Company has $750,000 of notes payable to the
shareholders of MCSI, which were incurred in connection with the acquisition.
These notes, which include interest of 8% per annum, are due December 31, 1996.
Management expects to service this obligation through a private placement of
equity securities; however, there are no assurances that a private placement
will be successfully completed by management.
Historically, the Company has funded its operations through cash flows from
operations. Management's intentions are to generate increased revenues through
the purchase of portfolio receivables. Such purchases will necessitate the
raising of additional capital through either debt or equity securities. In
addition, the Company's credit facility, which has been increased to $1,250,000,
carries an interest rate of prime plus 2% on any outstanding balance, ($659,095
outstanding at September 30, 1995) and expires on January 23, 1997. The credit
facility has been used primarily for the purchase of receivable portfolios.
Management intends to either renew the obligation through its existing bank, or
consider extinguishing the indebtedness through a placement of alternative debt
securities or equity securities. There are no assurances that such refinancing
will be obtained by management. The Company has also financed certain of its
equipment and fixtures with a term note that carries an interest rate of 11%
that is due in June, 2000. As of September 30,1995 the balance on this term note
was $786,442.
ITEM 7 FINANCIAL STATEMENTS
See "Index to Consolidated Financial Statements" for a listing of the
consolidated financial statements filed with this report.
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ITEM 8 CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
In October 1995, the Company's Board of Directors approved the engagement of
Corbin & Wertz to conduct an audit of the Company's financial statements for the
period ended September 30, 1995. The engagement of Corbin & Wertz as the
Company's independent auditors follows the replacement of Janet Loss, C.P.A.,
P.C. who had been engaged to audit The Christmas Guild, Inc's financial
statements for the fiscal years ended June 30, 1989 through 1994.
The audit reports provided by Janet Loss, C.P.A., P.C. did not contain an
adverse opinion or a disclaimer of opinion nor was the report qualified in any
respect.
Management of the Company knows of no past disagreements between The
Christmas Guild, Inc and Janet Loss, C.P.A., P.C. on any matter of accounting
principles or practices, financial statement disclosure or auditing, scope or
procedure.
PART III
ITEM 9 DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT.
DIRECTORS AND EXECUTIVE OFFICERS
The directors and executive officers of the Company are as follows:
<TABLE>
<CAPTION>
Name Age Position(s) Held
- ------------------- --- -----------------------------------------------------
<S> <C> <C>
Farrest Hayden 50 President, Chief Executive Officer, Director
Otto J. Lacayo 60 Chief Operating and Financial Officer, Vice President
and Secretary, Director
Thomas Ziegler 56 Senior Vice President
Daniel R. Eder 39 President, MCSI
Daniel Najor 41 Director
Graham E. Gill 64 Director
</TABLE>
All of the above persons became directors of the Company on September 12,
1995, when they were elected to fill vacancies on the Board.
Farrest Hayden has been Chief Executive Officer and President of MCSI since
1977 and became Chairman and CEO of the Company on September 12, 1995.
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Otto J. Lacayo has served as Executive Vice President of MCSI since 1977
and became Chief Operating and Financial Officer and Secretary of the Company on
September 12, 1995.
Thomas Ziegler has been the Vice President-Sales of MCSI since 1977 and
became the Senior Vice President-Sales of the Company in October 1995.
Daniel R. Eder has served as the General Manager of MCSI since 1987.
Daniel Najor has been the President of Contexual Trading Co., Inc., since
1975 and is President of DLN Financial, Inc. He is also a business and
financial consultant in the wholesale/retail grocery industry.
Graham E. Gill has served as the President of The Belgravia Fund Ltd. since
January, 1995. He also has served as President, Clifford Investments, Inc.
since 1993 and has served as President, Euro-American Productions, Ltd. since
1989.
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ITEM 10 EXECUTIVE COMPENSATION
The following table sets forth the cash compensation paid by the Company to
its Chief Executive Officer and to each of the Company's other executive
officers whose salary exceeded $100,000 for each of the past three fiscal
periods:
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
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Long-Term Compensation
----------------------------------------
Annual Compensation Awards Payout
----------------------------------- ----------------------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Name and Fiscal Restricted All Other
Principal Year Salary ($) Bonus ($) Other($) Stock Options/ LTIP Compen-
Position Award(S)($) SARs(#) Payout($) sations($)(1)
Farrest 1995(2) $ 87,500 -0- -0- -0- -0- -0- -0-
Hayden, 1994 $203,165 -0- -0- -0- -0- -0- -0-
CEO 1993 $245,505 -0- -0- -0- -0- -0- -0-
Otto 1995(2) $ 68,000 -0- -0- -0- -0- -0- -0-
Lacayo, CFO & 1994 $120,610 -0- -0- -0- -0- -0- -0-
COO, VP Finance 1993 $146,056 -0- -0- -0- -0- -0- -0-
and Sec.
Thomas 1995(2) $ 76,500 -0- -0- -0- -0- -0- -0-
Ziegler, 1994 $151,615 -0- -0- -0- -0- -0- -0-
Senior 1993 $163,939 -0- -0- -0- -0- -0- -0-
VP Sales
Daniel Eder, 1995(2) $ 69,700 -0- -0- -0- -0- -0- -0-
Director 1994 $106,450 -0- -0- -0- -0- -0- -0-
1993 $111,000 -0- -0- -0- -0- -0- -0-
====================================================================================================================================
</TABLE>
(1) The remuneration described in the table does not include the cost to the
Company of benefits furnished to the named executive officers, including
premiums for health insurance and other personal benefits provided to such
individuals that are extended in connection with conduct of the Company's
business. The value of such benefits cannot be precisely determined, but the
executive officers named above will not receive other compensation in excess of
the lesser of $50,000 or 10% of such officer's cash compensation. The Company
has not established a compensation program for directors, other than to pay
expenses related to attendance at meetings.
(2) For the nine-month Fiscal Period ended September 30, 1995.
STOCK OPTION PLAN
In 1995, the Company adopted, and the shareholders approved, the Cypress
Financial Services, Inc. 1995 Stock Option Plan (the "Plan") which provides for
the grant by the Company of options to purchase up to 450,000 shares of the
Company's Common Stock.
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The Plan provides for the grant by the Company of options to purchase shares
of the Company's Common Stock to its officers, directors, employees, consultants
and advisors. The Plan provides that it is to be administered by a committee
appointed by the Board of Directors (the "Committee") all of whom are
"disinterested" under 16b-3 of the Securities Exchange Act of 1934, as amended.
The Committee has discretion, subject to the terms of the Plan, to select the
persons entitled to receive options under the Plan, the terms and conditions on
which options are granted, the exercise price, the time period for vesting such
shares, the number of shares subject thereto, and whether such options shall
qualify as "incentive stock options" within the meaning of Section 422 of the
Internal Revenue code, or "non-qualified stock options."
As of the date of this Report, the Company has not granted any options under
the Plan.
ITEM 11 SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information as to beneficial
ownership of the Company's common stock by directors, executive officers and
persons known to the Company to own 5% or more of the outstanding common stock.
<TABLE>
<CAPTION>
*Name and Address Amount and Nature of Percent
of Beneficial Owner Beneficial Ownership of Class
---------------------------------------- -------------------- ---------
<S> <C> <C>
Farrest Hayden 906,124 20.1%
Otto Lacayo 702,048 15.6%
Thomas Ziegler 640,828 14.2%
Daniel Najor(1) 1,223,917 27.2%
The Belgravia Fund, Ltd. (2) 433,500 9.3%
The Peninsula Group Trust 412,500 9.2%
The Keyes Family Trust 412,500 9.2%
All Directors and officers
as a Group (6 persons) 3,157,500 70.2%
</TABLE>
* The business address of each named person is 5400 Orange Avenue, Suite 200,
Cypress, CA 90630.
(1) Includes 475,000 shares of common stock owned by the Najor Family
Investment Trust to which Daniel Najor is a trustee and life income
beneficiary, and 748,917 shares for which Daniel Najor has voting rights
pursuant to proxies granted to him by the beneficial owners of such
shares. Mr. Najor disclaims beneficial ownership of the 748,917 shares to
which he has such proxy.
(2) Mr. Gill, a director of the Company, is the President of The Belgravia
Fund, Ltd.
16
<PAGE>
ITEM 12 CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
On September 12, 1995, the Company entered into a Definitive Securities
Purchase Agreement and Plan of Reorganization (the "Agreement") by which the
Company acquired all of the capital stock of MCSI and control of the Company was
transferred to the present management group and other entities and individuals.
Prior to execution of the Agreement, the previous Board of Directors of the
Company effected a 1-for-750 reverse stock split of the Company's then
outstanding shares of common stock. As a result of the reorganization, the
former shareholders of the Company own approximately 3.5% of the issued and
outstanding shares of the Company's common stock and the Company's new
shareholders own approximately 96.5%.
Pursuant to the terms of the Agreement, on September 12, 1995, the Najor
Family Investment Trust, the Belgravia Fund, Ltd., the Keyes Family Trust and
the Peninsula Group Trust and four other persons purchased 2,100,000 shares
(post-split) of the Company's common stock for $400,000 in cash and a one-month
note for $100,000 which note has been paid in full). Immediately thereafter the
Company purchased all of the outstanding capital stock of MCSI (consisting of
8,265 shares of MCSI common stock) from Farrest Hayden, Otto Lacayo and Thomas
Ziegler in exchange for $400,000 in cash, a one-month note for $100,000 (which
note has been paid in full), a note for $750,000 secured by the Company's office
building located in Cypress, California and 2,249,000 shares of common stock
(post-split as reflected in Item 11 above) of the Company.
In addition to the above terms, the sellers of the MCSI shares granted to
Daniel Najor, a shareholder of the Company, a proxy for a period of three years
to vote one-third of the 2,249,000 shares issued to them. The former MCSI
shareholders also agreed not to purchase Company shares such that, after any
purchase of Company shares, they will collectively own more than 49.9% of the
total number of outstanding Company shares immediately after such purchase.
Pursuant to the terms of the Agreement, on September 12, 1995, the Board of
Directors of the Company appointed Farrest Hayden, CEO of MCSI, Otto Lacayo,
Vice President and Secretary of MCSI, Daniel Najor, Graham Gill and Rebecca
Welch (who resigned December, 1995) to the Board of Directors of the Company.
The Board of Directors of the Company then accepted the resignation of Albert
Kezes, John J. MacDonald, II and Cathy MacDonald as Directors of the Company.
The Board of Directors of the Company subsequently appointed Farrest Hayden,
President and CEO of the Company, Otto Lacayo, Vice President and Secretary of
the Company and Thomas Ziegler, Vice President of the Company. These three
individuals will continue to conduct the ongoing business of MCSI as they have
over the past eighteen years as well as the business of the Company.
ITEM 13 EXHIBITS AND REPORTS ON FORM 8-K.
(a) Description of Exhibits.
-----------------------
2.1 Definitive Purchase Agreement and Plan of Reorganization dated
September 12, 1995 incorporated by reference from Registrant's
Form 8-K dated September 12, 1995, Exhibit 7(b)(i).
3.1 Amended and Restated Articles of Incorporation as filed with the
Secretary of State of Nevada on December 7, 1995, incorporated by
reference from Registrant's Form 8-K filed on December 20, 1995,
Exhibit 3.1.
17
<PAGE>
3.2 Bylaws of the registrant, incorporated by reference from
Registrant's Registration Statement on Form S-18 (SEC No. 33-
12361-LA) filed on March, 1987, Exhibit 3.2.
4.1 Specimen of Common Stock of Registrant, incorporated by reference
from Registrant's Form 8-K filed on December 20, 1995, Exhibit
4.2.
10.2 1995 Stock Option Plan of Registrant, incorporated by reference
from Registrant's Form 8-K filed on December 20, 1995, Exhibit
10.2.
(b) Reports on Form 8-K.
-------------------
The following reports on Form 8-K were filed by the Registrant during
the last quarter of the period covered by this report and through December 31,
1995.
(i) Form 8-K dated September 12, 1995 reporting the Company's entering
into a Definitive Securities Purchase Agreement and Plan of
Reorganization dated as of September 12, 1995, under which control
of the Registrant was transferred to new individuals and entities
and the Registrant acquired Medical Control Services, Inc., a
California corporation.
(ii) Amendment No. 1 to Form 8-K dated September 12, 1995 filing
financial statements of the Registrant for the year ended December
31, 1994; and pro forma consolidated financial statements of
Medical Control Services, Inc. and Registrant for and as of August
31, 1995;
(iii) Form 8-K dated October 30, 1995 reporting a change of the
Registrant's fiscal year end from June 30 to September 30.
(iv) Form 8-K dated December 20, 1995 reporting the filing of Amendment
and Restated Articles of Incorporation of the Registrant with the
Secretary of State of Nevada on December 7, 1995.
(v) Form 8-K dated March 18, 1996 reporting the change in accountant
and filing the former accountant's letter as required by Item 304
of Regulation SB.
18
<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the registrant
caused this amended 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
In accordance with the Exchange Act, this amended report has been signed
below by the following persons on behalf of the registrant and in the capacities
and on the date indicated.
<TABLE>
<CAPTION>
Signatures Title Date Signed
- ----------------------- -------------------------- --------------
<S> <C> <C>
/s/ FARREST HAYDEN Chairman of the Board July 29, 1996
- ----------------------- Chief Executive Officer
Farrest Hayden and President
/s/ OTTO J. LACAYO Director, Chief Financial July 29, 1996
- ----------------------- Officer and Vice
Otto J. Lacayo President (Principal
Accounting Officer)
/s/ DANIEL NAJOR Director July 29, 1996
- -----------------------
Daniel Najor
/s/ GRAHAM E. GILL Director July 29, 1996
- -----------------------
Graham E. Gill
</TABLE>
<PAGE>
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
CYPRESS FINANCIAL SERVICES, INC. AND SUBSIDIARIES
Independent Auditors' Report . . . . . . . . . . . . . . . F-2
Consolidated Balance Sheet As Of September
30, 1995 . . . . . . . . . . . . . . . . . . . . . . . . F-3
Consolidated Statements of Operations For The
Period From January 1, 1995 To September
30, 1995 And For The Year Ended December
31, 1994 . . . . . . . . . . . . . . . . . . . . . . . . F-4
Consolidated Statements Of Shareholders'
Equity (Capital Deficiency) For The Period
From January 1, 1995 To September 30, 1995
And For The Year Ended December 31, 1994 . . . . . . . F-5
Consolidated Statements Of Cash Flows For
The Period From January 1, 1995 To
September 30, 1995 And For The Year Ended
December 31, 1994 . . . . . . . . . . . . . . . . . . . F-6
Notes To Consolidated Financial Statements
For The Period From January 1, 1995 To
September 30, 1995 And For The Year Ended
December 31, 1994 . . . . . . . . . . . . . . . . . . . F-8 to F-21
</TABLE>
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
----------------------------
The Board of Directors of Cypress Financial Services, Inc.
and Subsidiaries
We have audited the accompanying consolidated balance sheet of Cypress Financial
Services, Inc. and subsidiaries (the "Company") as of September 30, 1995, and
the related consolidated statements of operations, shareholders' equity (capital
deficiency) and cash flows for the period from January 1, 1995 to September 30,
1995, and for the year ended December 31, 1994. These consolidated financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Cypress Financial
Services, Inc. and subsidiaries as of September 30, 1995, and the results of
their operations and their cash flows for the period from January 1, 1995 to
September 30, 1995 and for the year ended December 31, 1994 in conformity with
generally accepted accounting principles.
As more fully described in Note 1 to the consolidated financial statements, the
Company has restated its 1995 and 1994 consolidated financial statements to
reflect its revised accounting for the reverse acquisition of The Christmas
Guild, Inc. by Medical Control Services, Inc.
CORBIN & WERTZ
Irvine, California
January 5, 1996 (except for
Notes 1, 6 and 7, as to which
the date is July 24, 1996)
F-2
<PAGE>
CYPRESS FINANCIAL SERVICES, INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
September 30, 1995
ASSETS (Note 4)
<TABLE>
<CAPTION>
<S> <C>
Cash (Note 11) $ 362,234
Restricted cash (Notes 1 and 11) 395,158
Accounts receivable, net of allowance for
doubtful accounts of $13,509 as of 1995
and 1994 (Note 11) 298,190
Portfolio receivables (Notes 1 and 2) 483,333
Property, net (Notes 1 and 5) 2,723,080
Notes receivable from shareholders (Note 3) 60,500
Other 25,817
----------
$4,348,312
==========
</TABLE>
LIABILITIES AND SHAREHOLDERS' EQUITY (CAPITAL DEFICIENCY)
<TABLE>
<CAPTION>
<S> <C>
Accounts payable $ 99,603
Trust payables (Note 1) 395,158
Accrued liabilities 240,252
Notes payable to related parties (Note 6) 750,000
Line of credit (Note 4) 659,095
Long-term debt (Note 5) 2,696,604
----------
Total liabilities 4,840,712
----------
Commitments and contingencies (Notes 7, 8 and 9)
Shareholders' equity (capital deficiency) (Notes
1, 6 and 7):
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
Paid-in capital 495,500
Retained deficit (992,400)
----------
Total shareholders' equity (capital
deficiency) (492,400)
----------
$4,348,312
==========
</TABLE>
See independent auditors' report and accompanying
notes to consolidated financial statements
F-3
<PAGE>
CYPRESS FINANCIAL SERVICES, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
For The
Period From
January 1, For The
1995 To Year Ended
September 30, December 31,
1995 1994
------------- ------------
<S> <C> <C>
Revenues (Note 1):
Service fees $3,372,408 $5,159,750
Income on portfolio receivables 21,229 ---
---------- ----------
3,393,637 5,159,750
---------- ----------
Operating expenses:
Selling, general and administrative
(Notes 1 and 8) 3,259,558 5,009,745
Depreciation 109,318 139,368
---------- ----------
3,368,876 5,149,113
---------- ----------
Income from operations 24,761 10,637
---------- ----------
Other income (expense):
Interest expense (Notes 1, 4 and 5) (155,967) (133,275)
Rental operations (Notes 1 and 8) 121,399 189,082
Other (11,798) (6,548)
---------- ----------
(46,366) 49,259
---------- ----------
Income (loss) before provision for income
taxes (21,605) 59,896
Provision for income taxes
(Notes 1 and 10) 3,200 23,073
---------- ----------
Net income (loss) $ (24,805) $ 36,823
========== ==========
Net income (loss) per share (Note 1) $ (0.01) $ 0.02
========== ==========
Weighted average shares outstanding
(Note 1) 2,399,085 2,249,000
========== ==========
</TABLE>
See independent auditors' report and accompanying
notes to consolidated financial statements
F-4
<PAGE>
CYPRESS FINANCIAL SERVICES, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(CAPITAL DEFICIENCY)
For The Period From January 1, 1995 To September 30, 1995
And For The Year Ended December 31, 1994
<TABLE>
<CAPTION>
Common Stock Additional Retained
----------------------- Paid-in Earnings
Shares Amount Capital (Deficit) Total
------------ -------- ---------- --------- ---------
<S> <C> <C> <C> <C> <C>
Balances at
January 1, 1994, as
previously reported 2,040,835 $ 2,041 $ 5,459 $ 200,304 $ 207,804
Prior period adjustment
(Note 1) --- --- --- (102,981) (102,981)
Shares issued for
acquired companies
(Notes 1 and 7) 208,165 208 1,792 138,759 140,759
------------ -------- -------- --------- ---------
Balances at
January 1, 1994 -
as restated 2,249,000 2,249 7,251 236,082 245,582
Net income --- --- --- 36,823 36,823
------------ -------- -------- --------- ---------
Balances at
December 31, 1994 2,249,000 2,249 7,251 272,905 282,405
Common stock issued
for cash
(Notes 1 and 7) 2,100,000 2,100 497,900 --- 500,000
Common stock of TCG
retained in connection
with reverse acquisition
(Notes 1 and 7) 151,271 151 (151) --- ---
Dividend to MCSI
shareholders (Notes
1 and 7) --- --- (9,500) (390,500) (400,000)
Accrued dividend to
MCSI shareholders
(Notes 1, 6 and 7) --- --- --- (850,000) (850,000)
Net loss --- --- --- (24,805) (24,805)
------------ -------- -------- --------- ---------
Balances at
September 30, 1995 4,500,271 $ 4,500 $495,500 $(992,400) $(492,400)
============ ======== ======== ========= =========
</TABLE>
See independent auditors' report and accompanying
notes to consolidated financial statements
F-5
<PAGE>
CYPRESS FINANCIAL SERVICES, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
For The
Period From
January 1, For The
1995 To Year Ended
September 30, December 31,
1995 1994
------------- ------------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $ (24,805) $ 36,823
Adjustments to reconcile net income
(loss) to net cash provided by
(used in) operating activities:
Depreciation and amortization 123,129 157,862
Loss on sale of assets --- 6,548
Changes in operating assets and
liabilities:
Accounts receivable, net (109,716) (188,474)
Portfolio receivables (483,333) ---
Accounts payable (36,627) 90,336
Accrued liabilities 151,765 (49,635)
Other 11,798 ---
--------- ---------
Net cash provided by (used in)
operating activities (367,789) 53,460
--------- ---------
Cash flows from investing activities:
Other assets (4,860) 1,537
Notes receivable from shareholders (6,250) (44,250)
Proceeds from sale of equipment --- 12,500
Purchases of equipment (63,272) (274,043)
--------- ---------
Net cash used in investing activities (74,382) (304,256)
--------- ---------
Cash flows from financing activities:
Net borrowings from line of credit 659,095 275,000
Proceeds received from long-term debt 182,012 ---
Repayments on long-term debt (51,582) (82,373)
Dividends paid to former MCSI
shareholders (Notes 1, 6 and 7) (500,000) ---
Proceeds from issuance of common stock
(Notes 1 and 7) 500,000 ---
--------- ---------
Net cash provided by financing activities 789,525 192,627
--------- ---------
Net increase (decrease) in cash 347,354 (58,169)
Cash, at beginning of period 14,880 73,049
--------- ---------
Cash, at end of period $ 362,234 $ 14,880
========= =========
Continued
</TABLE>
F-6
<PAGE>
CYPRESS FINANCIAL SERVICES, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS - CONTINUED
For The
Period From
January 1, For The
1995 To Year Ended
September 30, December 31,
1995 1994
------------- ------------
[C] [C] [C]
Supplemental disclosure of cash flow
information -
Cash paid during the period for:
Interest $ 201,244 $ 186,742
========== ==========
Income taxes $ 7,973 $ 16,778
========== ==========
See independent auditors' report and accompanying
notes to consolidated financial statements
F-7
<PAGE>
CYPRESS FINANCIAL SERVICES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For The Period From January 1, 1995 To September 30, 1995
And For The Year Ended December 31, 1994
NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
- --------------------------------------------------------------------
Organization and Basis of Presentation
- --------------------------------------
Cypress Financial Services, Inc. (formerly The Christmas Guild, Inc.), is a
Nevada Corporation organized in February 1987 under the name Oxford Venture
Corporation.
On June 7, 1988, Oxford Venture Corporation acquired all of the capital stock of
The Christmas Group, Inc., a California corporation organized in August 1980.
Concurrently, Oxford Venture Corporation changed its name to The Christmas
Guild, Inc. ("TCG").
On September 12, 1995, TCG acquired the issued and outstanding common stock of
Medical Control Services, Inc. and its wholly owned subsidiaries ("MCSI") for
2,249,000 shares of its common stock, $400,000 in cash and notes payable
totaling $850,000 (see Notes 6 and 7). Concurrently, TCG issued 2,100,000
shares of its common stock to new investors for $400,000 in cash and a 30-day
note receivable for $100,000 (which was paid prior to September 30, 1995). The
original shareholders of TCG retained 151,271 shares after the consummation of
the above transactions. Concurrent with the acquisition, TCG changed its name
to Cypress Financial Services, Inc. ("Cypress").
As TCG had no significant operations prior to the acquisition, the purchase was
accounted for as a reverse acquisition whereby MCSI has been identified as the
acquiring corporation. Accordingly, the accompanying consolidated financial
statements reflect the accounts of MCSI for all periods presented. The
accompanying consolidated financial statements include the accounts of TCG from
the date (September 12, 1995) of the stock-for-stock exchange.
The 2,249,000 shares issued to acquire the common stock of MCSI are reflected in
the accompanying consolidated financial statements as if the shares were issued
and outstanding for all periods presented. The 151,271 shares retained by the
original Cypress shareholders are reflected in the accompanying financial
statements as consideration issued by MCSI to acquire the net assets of TCG.
Management determined that the fair value of the 151,271 shares was nominal
based on the fair value of the net assets received from TCG. The 2,100,000
shares issued to new investors is reflected as
Continued
F-8
<PAGE>
CYPRESS FINANCIAL SERVICES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
For The Period From January 1, 1995 To September 30, 1995
And For The Year Ended December 31, 1994
NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, continued
- -------------------------------------------------------------------------------
a recapitalization of MCSI in the accompanying consolidated statement of
shareholders' equity (capital deficiency). The $400,000 of cash paid, and the
$850,000 of notes issued, to the former shareholders of MCSI have been reflected
as dividends in the accompanying consolidated statement of shareholders' equity
(capital deficiency) (see Notes 6 and 7).
The proforma results of operations of Cypress as a result of the reverse
acquisition for the nine month period ended September 30, 1995 would not be
materially different from the historical information presented herein.
Restatement
- -----------
Cypress previously reported the reverse merger with TCG as an acquisition by TCG
of MCSI. The estimated fair value of the consideration given by TCG was
determined to be $6,872,500. The consideration was allocated to net assets
acquired, resulting in goodwill totaling $2,003,311 (after taking into effect a
$3,240,000 impairment adjustment recorded after the acquisition in September
1995). On July 8, 1996, Cypress requested guidance from the Office of the Chief
Accountant of the Securities and Exchange Commission (the "Commission") as to
the appropriateness of the accounting applied with respect to the acquisition.
On July 15, 1996, Cypress received a response from the Commission which
indicated that 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 effect of the restatement on the consolidated balance sheet of Cypress as of
September 30, 1995 is as follows:
<TABLE>
<CAPTION>
<S> <C>
Decrease in property, net $(1,663,535)
Decrease in reimbursable collection
costs (604,482)
Decrease in goodwill (2,098,120)
Decrease in deferred income taxes 912,739
Other (17,578)
-----------
Net decrease in shareholders' equity $(3,470,976)
===========
</TABLE>
Continued
F-9
<PAGE>
CYPRESS FINANCIAL SERVICES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
For The Period From January 1, 1995 To September 30, 1995
And For The Year Ended December 31, 1994
NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, continued
- -------------------------------------------------------------------------------
Medical Control Services, Inc. and Subsidiaries
- -----------------------------------------------
On December 30, 1994, MCSI acquired the issued and outstanding common shares of
Lien Solutions, Inc. (LSI) in a tax-free stock-for-stock exchange. Because LSI
and MCSI were entities under common control, the acquisition of LSI was
accounted for as a transfer of assets at historical cost similar to a pooling of
interests. Accordingly, the consolidated financial statements for the year
ended December 31, 1994 have been restated to include the results of operations
and cash flows of LSI. Also see Note 7.
On December 30, 1994, MCSI acquired the issued and outstanding common shares of
My Boss, Inc. (MBI) in a tax-free stock-for-stock exchange. Because MBI and
MCSI were entities under common control, the acquisition of MBI was accounted
for as a transfer of assets at historical cost similar to a pooling of
interests. Accordingly, the consolidated financial statements for the year
ended December 31, 1994, have been restated to include the results of
operations, and cash flows of MBI. Also see Note 7.
Revenues, net income (loss) and per share information for the year ended
December 31, 1994 for LSI and MBI are as follows:
<TABLE>
<CAPTION>
LSI MBI Total
---------- ----------- -----------
<S> <C> <C> <C>
Revenues $ 928,503 $ 526,966 $1,455,469
========== ========== ==========
Net income (loss) $ 15,461 $ (3,575) $ 11,886
========== ========== ==========
Net income (loss) per
share $ 0.01 $ (0.00) $ 0.01
========== ========== ==========
Weighted average shares
outstanding 2,249,000 2,249,000 2,249,000
========== ========== ==========
</TABLE>
Continued
F-10
<PAGE>
CYPRESS FINANCIAL SERVICES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
For The Period From January 1, 1995 To September 30, 1995
And For The Year Ended December 31, 1994
NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, continued
- -------------------------------------------------------------------------------
Business
- --------
Cypress Financial Services, Inc. and its wholly-owned subsidiaries (collectively
the "Company") are engaged in the collection of receivables owned by entities in
the commercial, retail and medical industries. In addition, the Company
purchases portfolio receivables for its own account.
Principles of Consolidation
- ---------------------------
The consolidated financial statements include the accounts of Cypress Financial
Services, Inc. and its subsidiaries. All significant intercompany accounts have
been eliminated in consolidation.
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 until such time collections equal cost.
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.
In November 1993, the Company acquired land and building from a bank. Assets
acquired in connection with the acquisition of LSI and MBI (see "Organization")
in December 1994 have been reflected in the accompanying consolidated balance
sheet at the historical costs of the acquired companies. The building is being
depreciated over a period of approximately 30 years.
Continued
F-11
<PAGE>
CYPRESS FINANCIAL SERVICES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
For The Period From January 1, 1995 To September 30, 1995
And For The Year Ended December 31, 1994
NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, continued
- -------------------------------------------------------------------------------
Property consists of the following at September 30, 1995:
<TABLE>
<CAPTION>
<S> <C>
Land $ 866,575
Building 1,540,577
Equipment and furnishings 1,280,588
Autos 132,415
-----------
3,820,155
Less accumulated depreciation (1,097,075)
-----------
Property, net $ 2,723,080
===========
</TABLE>
Trust Account
- -------------
The Company maintains a trust account for the benefit of clients. Related funds
are deposited in trust bank accounts and reflected as a trust liability until
such amounts held in trust are remitted to clients. The trust account cash
balance of $395,158 is reflected as restricted cash in the accompanying
consolidated balance sheet at September 30, 1995.
Income Taxes
- ------------
The Company accounts for income taxes in accordance with Statement of Financial
Accounting Standards No. 109 (Statement 109), "Accounting for Income Taxes."
Under the asset and liability method of Statement 109, deferred tax assets and
liabilities are recognized for the future tax consequences attributable to
differences between the financial statement carrying amounts of existing assets
and liabilities and their respective tax bases. Deferred tax assets and
liabilities are measured using enacted income tax rates in the years in which
those temporary differences are expected to be recovered or settled. A
valuation allowance for deferred tax assets is provided when it is more likely
than not that some or all of the deferred tax assets will not be realized
through future operations.
Continued
F-12
<PAGE>
CYPRESS FINANCIAL SERVICES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
For The Period From January 1, 1995 To September 30, 1995
And For The Year Ended December 31, 1994
NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, continued
- -------------------------------------------------------------------------------
Revenue Recognition
- -------------------
Fees related to the collection of receivables owned by the Company's customers
are recognized upon the collection of the receivables. As of September 30,
1995, the Company has obtained legal judgments for the collection of receivables
(and related interest) owned by the Company's customers amounting to
approximately $32,000,000 (unaudited). In addition, as of September 30, 1995,
the Company has incurred approximately $604,482 in legal and court costs which
have not been collected and have been charged to operations over prior periods.
Revenues from collections on purchased portfolios are recognized after the cost
of such portfolios have been recovered.
Earnings Per Share
- ------------------
Net income per share is computed using the weighted average shares outstanding.
There were no common stock equivalents outstanding during the periods presented
herein.
Rental Operations
- -----------------
The Company leases a portion of the building it occupies to unrelated parties.
The results of rental operations for the nine month period ended September 30,
1995 and for the year ended December 31, 1994 are as follows:
<TABLE>
<CAPTION>
1995 1994
---------- ----------
<S> <C> <C>
Rental income $243,950 $328,793
Interest expense (50,839) (67,786)
Utilities (58,381) (54,150)
Depreciation (13,331) (17,775)
-------- --------
$121,399 $189,082
======== ========
</TABLE>
Continued
F-13
<PAGE>
CYPRESS FINANCIAL SERVICES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
For The Period From January 1, 1995 To September 30, 1995
And For The Year Ended December 31, 1994
NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, continued
- -------------------------------------------------------------------------------
Prior Period Adjustment
- -----------------------
The Company adjusted its 1994 financial statements to properly restate the
carrying value of a note receivable and a note payable. The effect of such
adjustment was to reduce retained earnings as of December 31, 1993 in the amount
of $102,981 and reduce 1994 net income in the amount of $15,471. Also see Note
1 for discussion of the restatement of the acquisition of MCSI.
NOTE 2 - PORTFOLIO RECEIVABLES
- ------------------------------
Portfolio receivables consist of the following as of September 30, 1995:
<TABLE>
<CAPTION>
<S> <C>
Face value $26,944,985
===========
Original purchase price $ 951,913
Proceeds from sales (353,191)
Collections (cost recovery) (115,389)
-----------
Portfolio receivables $ 483,333
===========
</TABLE>
NOTE 3 - NOTES RECEIVABLE FROM SHAREHOLDERS
- -------------------------------------------
The notes receivable from shareholders bear an interest rate of 6% per annum and
are due on various dates from March 16, 1997 to December 12, 1997.
NOTE 4 - LINE OF CREDIT
- -----------------------
On August 16, 1995, the Company entered into a $750,000 line of credit agreement
with a bank which expires on August 30, 1996. Interest on the borrowings are
charged monthly based on a commercial bank's prime rate plus 2.0% per annum
(10.75% at September 30, 1995). The borrowings are secured by substantially all
of the Company's assets as defined under a security agreement. The Company must
comply with certain covenants as defined under the agreement.
Continued
F-14
<PAGE>
CYPRESS FINANCIAL SERVICES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
For The Period From January 1, 1995 To September 30, 1995
And For The Year Ended December 31, 1994
NOTE 4 - LINE OF CREDIT, continued
- ----------------------------------
Net borrowings from the line of credit at September 30, 1995 amounted to
$659,095. Proceeds from the line of credit were to be used to acquire
portfolio receivables. At September 30, 1995, the Company has $90,905 available
under this line of credit.
On June 27, 1995, the Company refinanced the then outstanding borrowings from
its line of credit amounting to $515,000 and the then outstanding term notes
payable amounting to $281,285; the aggregate balance refinanced on June 27, 1995
was $796,285 (see Note 5).
NOTE 5 - LONG-TERM DEBT
- -----------------------
Long-term debt consists of the following at September 30, 1995:
<TABLE>
<CAPTION>
<S> <C>
Note payable to bank, secured by
certain equipment, due in monthly
payments of$10,969, including interest
at 11% per annum, through 2000 at which
time the entire principal balance
is due and payable. $ 786,442
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. 1,895,135
Note payable to an unrelated retirement trust
collateralized by certain equipment, interest at
11% per annum, due in monthly installments of
$1,957 through May 3, 1996. 15,027
----------
Total long-term debt $2,696,604
==========
</TABLE>
Continued
F-15
<PAGE>
CYPRESS FINANCIAL SERVICES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
For The Period From January 1, 1995 To September 30, 1995
And For The Year Ended December 31, 1994
NOTE 5 - LONG-TERM DEBT, continued
- ----------------------------------
Annual maturities of long-term debt at September 30, 1995 are as follows:
<TABLE>
<CAPTION>
Years Ending
September 30,
-------------
<S> <C>
1996 $ 81,126
1997 73,140
1998 80,943
1999 89,599
2000 586,282
Thereafter 1,785,514
----------
$2,696,604
==========
</TABLE>
The Company must comply with certain covenants as defined under the agreements.
NOTE 6 - NOTES PAYABLE TO RELATED PARTIES
- -----------------------------------------
In connection with the acquisition of MCSI (Note 1), the Company issued notes
aggregating $850,000 payable to the former MCSI shareholders, $100,000 of which
was paid in September 1995, with the remaining balance due on or about June 12,
1996, together with interest at 8%, per annum. In June 1996, the note was
extended to December 31, 1996.
The Company has reflected the issuance of the notes payable as an accrued
dividend and, accordingly, such amounts have been deducted in the accompanying
consolidated statement of shareholders' equity (capital deficiency) (see Note
7).
NOTE 7 - SHAREHOLDERS' EQUITY (CAPITAL DEFICIENCY)
- --------------------------------------------------
LSI and MBI Acquisitions
- ------------------------
In connection with the Company's stock-for-stock acquisitions of LSI and MBI in
December 1994 (see Note 1), the Company issued an aggregate of 208,165 shares
(restated for the effect of the reverse acquisition) of the Company's common
stock in exchange for 100% of the outstanding common stock of the acquirees (LSI
and MBI). Since the acquisitions were accounted as a transfer of assets at
historical costs similar to a pooling of interests, such shares have been
reflected as outstanding since January 1, 1994, in the accompanying consolidated
statement of shareholders' equity (capital deficiency).
Continued
F-16
<PAGE>
CYPRESS FINANCIAL SERVICES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
For The Period From January 1, 1995 To September 30, 1995
And For The Year Ended December 31, 1994
NOTE 7 - SHAREHOLDERS' EQUITY (CAPITAL DEFICIENCY), continued
- -------------------------------------------------------------
Common Stock Issuances
- ----------------------
On September 12, 1995, the Company issued 2,100,000 shares of its common stock
for $400,000 and a $100,000 non-interest bearing note which was paid in
September 1995.
On the same date, the Company reflected 151,271 shares of its common stock
retained in connection with the reverse acquisition of TCG (see Note 1).
Management determined such shares to be of no value as TCG had no operations nor
underlying assets.
Dividends
- ---------
As discussed in Note 6, in connection with the reverse acquisition of TCG (see
Note 1), the $850,000 notes payable issued to the former MCSI shareholders have
been reflected as an accrued dividend in the accompanying consolidated statement
of shareholders' equity (capital deficiency). In addition, concurrently with
the consummation of the reverse acquisition (see Note 1), the former MCSI
shareholders received $400,000 in cash which has also been reflected as a
dividend.
Stock Option Plan
- -----------------
In October 1995, the Board of Directors approved the 1995 Stock Option Plan and
reserved a total of 450,000 shares of the Company's stock available for non-
qualified and qualified stock options under the plan. The plan stipulates that
no officer, director or 5% shareholder may participate. No options to purchase
shares have been granted.
Continued
F-17
<PAGE>
CYPRESS FINANCIAL SERVICES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
For The Period From January 1, 1995 To September 30, 1995
And For The Year Ended December 31, 1994
NOTE 8 - LEASES
- ---------------
Lessee
- ------
The Company leases certain equipment under non-cancelable operating leases which
expire at various times through fiscal 1999. Future annual minimum lease
payments, in the aggregate, under operating leases at September 30, 1995 are as
follows:
<TABLE>
<CAPTION>
Years Ending
September 30,
-------------
<S> <C>
1996 $ 51,916
1997 51,447
1998 20,539
1999 5,982
--------
$129,884
========
</TABLE>
Rent expense under all operating leases totaled $46,942 in 1995 and $158,149 in
1994. From January 1, 1994 to November 30, 1994, the Company leased its
corporate facilities from a partnership, affiliated through common ownership of
the Company, under an operating lease. Through the lease, the Company paid
approximately $135,100 during the year ended December 31, 1994 which is included
in rent expense above.
Lessor
- ------
The Company leases a portion of its building to unrelated entities under
operating leases which expire at various times through December 1, 2000. Future
annual collections under these non-cancelable operating leases as of September
30, 1995 are as follows:
<TABLE>
<CAPTION>
Years Ended
September 30,
-------------
<S> <C>
1996 $229,766
1997 167,080
1998 98,802
1999 41,263
2000 41,263
--------
$578,174
========
</TABLE>
Continued
F-18
<PAGE>
CYPRESS FINANCIAL SERVICES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
For The Period From January 1, 1995 To September 30, 1995
And For The Year Ended December 31, 1994
NOTE 9 - PROFIT SHARING
- -----------------------
Through December 31, 1994, the Company maintained a non-contributory profit
sharing plan covering all employees having one year of service or more. The
Company did not make a contribution to the plan in 1994. Effective January 1,
1995, the Company terminated the profit sharing plan. In connection with such
termination, all employees became fully vested and no liability was incurred by
the Company.
NOTE 10 - INCOME TAXES
- ----------------------
Income tax expense for the nine-month period ended September 30, 1995 consists
of:
<TABLE>
<CAPTION>
Current Deferred Total
-------- -------- --------
<S> <C> <C> <C>
U.S. Federal $ --- $ --- $ ---
State and local 3,200 --- 3,200
-------- -------- --------
$ 3,200 $ --- $ 3,200
======== ======== ========
</TABLE>
Income tax expense for the year ended December 31, 1994 consists of:
<TABLE>
<CAPTION>
Current Deferred Total
-------- -------- --------
<S> <C> <C> <C>
U.S. Federal $14,956 $ --- $ 14,956
State and local 8,117 --- 8,117
-------- -------- --------
$23,073 $ --- $ 23,073
======== ======== ========
</TABLE>
The tax effect of temporary differences that give rise to significant portions
of the deferred tax assets and liabilities at September 30, 1995 are presented
below:
<TABLE>
<CAPTION>
Deferred tax assets:
<S> <C>
Net operating loss carryforwards $ 8,858
Accounts receivable, principally due to
allowance for doubtful accounts 5,422
Compensated absences principally due to
accrual for financial reporting 14,381
Less valuation allowance (28,661)
--------
Net deferred tax assets $ ---
========
</TABLE>
Continued
F-19
<PAGE>
CYPRESS FINANCIAL SERVICES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
For The Period From January 1, 1995 To September 30, 1995
And For The Year Ended December 31, 1994
NOTE 10 - INCOME TAXES, continued
- ---------------------------------
The valuation allowance increased $4,455 and $5,967 during the nine-month period
ended September 30, 1995 and the year ended December 31, 1994, respectively.
Income tax expense for the nine-month period ended September 30, 1995 differs
from the amounts computed by applying the U.S. Federal income tax rate of 34% to
income before income taxes as a result of the following:
<TABLE>
<CAPTION>
$ %
---------- -------
<S> <C> <C>
Computed "expected" tax benefit $(7,346) (34.0%)
Increase (reduction) in income taxes
resulting from:
Non-deductible meals and entertainment
expense 3,000 13.9
Change in valuation allowance 4,455 20.6
State and local income taxes (1,340) (6.2)
Other 4,431 20.5
---------- -------
$ 3,200 14.8%
========== =======
</TABLE>
Income tax expense for the year ended December 31, 1994 differs from the amounts
computed by applying the U.S. Federal income tax rate of 34% to income before
income taxes as a result of the following:
<TABLE>
<CAPTION>
$ %
---------- -------
<S> <C> <C>
Computed "expected" tax expense $ 20,365 34.0%
Increase (reduction) in income taxes
resulting from:
Non-deductible meals and entertainment
expense 2,112 3.5
Change in valuation allowance 5,967 10.0
State and local income taxes 3,713 6.2
Other (9,084) (15.2)
---------- -------
$ 23,073 38.5%
========== =======
</TABLE>
Continued
F-20
<PAGE>
CYPRESS FINANCIAL SERVICES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
For The Period From January 1, 1995 To September 30, 1995
And For The Year Ended December 31, 1994
NOTE 11 - CONCENTRATION OF CREDIT RISK
- --------------------------------------
The Company maintains cash balances in a financial institution in excess of
amounts insured by Federal agencies. The potential uninsured amount aggregates
approximately $657,392 at September 30, 1995.
The Company conducts business primarily in the commercial, retail and medical
industries. The Company performs ongoing credit evaluations of its customers
and generally does not require collateral. The Company maintains allowances for
potential credit losses and such losses to date have been within management's
expectations. At September 30, 1995, two customers accounted for 24% and 14% of
total accounts receivable. The revenues for the period from January 1, 1995 to
September 30, 1995 and for the year ended December 31, 1994 were substantially
comprised of collection efforts relating to a few customers.
F-21
