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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
[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, 1997 Commission File Number: 0-17192
CYPRESS FINANCIAL SERVICES, INC.
(Name of Small Business Issuer in its Charter)
NEVADA 84-1061382
(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: $4,970,356.
The aggregate value of the Registrant's Common Stock held by non-affiliates of
the Registrant is $2,315,000.
State the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practicable date: There were 4,520,271 shares of the
Registrant's Common Stock issued and outstanding as of November 30, 1997.
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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. In addition to its third party collection business,
in January 1995, the Company started to acquire accounts receivable and other
consumer obligations for its own collection portfolio. The types of distressed
and discounted obligations the Company has or intends to acquire for its own
portfolio include performing and non-performing installment loans, secured and
unsecured consumer and commercial loans, credit card obligations, and accounts
receivable. The Company's sources for these distressed and discounted
obligations are federal and state banking and savings and loan institutions,
hospitals, finance companies, insurance companies, credit unions, consumer
credit issuers, and other collection agencies.
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 collection agency servicing the health care industry; (ii) Merchants
Recovery Services, Inc. ("MRSI"), a company that primarily offers accounts
receivable collection services to banks, credit 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; and (v) Revenue Practice Enhancements ("RPE"), a
division of MCSI that offers complete electronic billing services for doctors'
offices.
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."
From 1989 until September 12, 1995 the Company was operationally inactive
at which time 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."
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:
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MEDICAL CONTROL SERVICES, INC.
MCSI was incorporated in California in 1977 as a 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 $27 million in fiscal 1997.
MCSI also operates RPE, a division that offers medical providers outsourcing
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. In fiscal 1997, RPE received billing assignments in
excess of $ 11 million.
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 1,000 clients that include banks, credit unions, public
utilities, and wholesale and retail establishments. The volume of annual account
assignments reached in excess of $149 million in fiscal 1997. In January 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 resale. Since commencing this program in January 1995, MRSI purchased
over $221 million of such obligations for its own portfolio, including $130
million during fiscal 1997. 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 fiscal 1997, LSI received collection
assignments in excess of $17 million.
MY BOSS, INC. DBA BUSINESS OFFICE SUPPORT SERVICES
BOSS was incorporated in California in 1989 to provide its clients with
pre-collection management of their accounts receivable. 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 fiscal 1997, BOSS received
collection assignments in excess of $8 million.
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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.
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 credit and collection analysis, 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 existing collection
systems and technology.
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. As of September
30, 1997, the Company's own portfolio of distressed and discounted obligations
had an outstanding face value of $165 million.
MANAGEMENT INFORMATION SYSTEMS
The Company maintains sophisticated data processing support and management
information systems. 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 is currently upgrading its systems and believes that upon
completion its processing support and management information systems will be
sufficient to substantially expand its business without significant additional
capital expenditure.
4
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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, 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. Moreover, as the Company continues to increase the amount of
obligations acquired for its own portfolio, the Company will become less
dependent on the revenue generated from its third party clients on a contingency
basis.
MARKETING
The Company maintains a full-time staff of sales representatives that
continuously solicit business by pursuing leads from existing clients, using
multiple business and commerce directories, and utilizing promotional materials.
Recently, the Company began promoting its services on the Internet by
establishing a WEB page which describes the Company's services. In addition, the
Company has started to advertise its services through more traditional media,
including newspapers and magazines.
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 complies 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.
5
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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, 1997, the Company had 81 full time employees and 19
part-time employees, of whom 4 are management personnel, 5 are sales and
marketing personnel, 3 are legal personnel, 16 are MCSI collectors, 16 are MRSI
collectors, 14 are LSI collectors, 17 are BOSS pre-collection representatives, 6
are RPE billing clerks, 2 are accounting personnel, 1 is a computer technician,
1 is a building superintendent and 15 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 50,000 square feet
of office space. Currently, the Company occupies approximately 29,000 square
feet for its operations, and makes the remainder of the building available for
lease to third party 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, 1997, the Company is not involved in any material
litigation, although the Company is involved, from time to time, in litigation
that is incident to its collection business. The Company regularly initiates
legal proceedings as a plaintiff in connection with its routine collection
activities.
ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to a vote of security holders during
the fourth quarter of the fiscal year ended September 30, 1997.
6
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PART II
ITEM 5 MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's Common stock, $.001 par value, is traded under the symbol
"CYFS" through the OTC Electronic Bulletin Board maintained by the National
Association Securities of Security Dealers, Inc. (the "NASDAQ"), which has no
financial eligibility standards and is totally separate from NASDAQ. The
Electronic Bulletin Board does not constitute an active trading market and
trading in the Company's Common Stock is limited and sporadic. The following
table sets forth the range of high bid and low bid quotations for the Common
Stock for the periods indicated. The quotations are inter-dealer prices in the
over-the-counter market without retail mark-ups, mark-downs or commissions, and
may not represent actual transactions.
<TABLE>
<CAPTION>
Fiscal Year ended September 30, 1997 High Low
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<S> <C> <C>
4th Quarter 1.75 1.19
3th Quarter 3.25 .94
2th Quarter 3.75 2.00
1th Quarter 3.87 2.75
Fiscal Year ended September 30, 1996 High Low
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4th Quarter 2.75 2.50
</TABLE>
As of September 30, 1997 there were 1,604 holders of record of the
Company's Common Stock.
DIVIDEND POLICY
The Company has never paid a dividend and does not anticipate paying any
cash dividends in the foreseeable 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.
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.
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
7
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statements as a result of certain factors, including, but not limited to,
competition, which has and will continue to put price pressure on the Company's
third party collection business, the cost and availability of capital to finance
its portfolio receivables, and overall macro-economic conditions.
RESULTS OF OPERATIONS
Service fee revenues for the year ended September 30, 1997, were
approximately $3,969,000 as compared to revenues of $4,870,000 for the year
ended September 30, 1996. The decrease in revenues was due to the continuing
downward pressure of commission rates for contingency business.
Revenues from collection of the Company's portfolio receivables are
recognized only after the cost of such portfolios has been recovered. For the
year ended September 30, 1997, the Company recognized approximately $1,002,000
in revenue from its portfolio receivables on collections and sales of
approximately $1,732,000 compared with $501,800 in revenue recognized at
September 30, 1996 on collections and sales of approximately $1,794,000. Through
September 30, 1997, the Company had paid approximately $3,038,000 to purchase
its own portfolio receivables and recovered approximately $4,092,000 through
sales and collections of those receivables, recognizing cumulative revenues of
approximately $1,525,000 and leaving a portfolio carrying value of approximately
$471,000. As of September 30, 1997, the Company's remaining outstanding balance
on its own portfolio receivables was $165 million as compared to an outstanding
balance of approximately $58 million at September 30, 1996.
Although the Company believes that its third party collection business will
continue to experience downward pressure on commission rates, increased revenues
from its own portfolio of distressed and discounted obligations will make the
Company less sensitive to competitive contingent fee price pressure. Management
believes that the revenues generated from its own portfolios will continue to
increase as a percentage of the Company's total revenues.
Operating expenses for the year ended September 30, 1997 were approximately
$5,272,000 as compared to $5,132,000 for the year ended September 30, 1996. The
increase in expenses was directly attributable to the Company's continued
expansion into direct purchases of portfolio receivables for its own account and
the related costs to collect such receivables.
Loss from operations for the year ended September 30, 1997 was
approximately $302,000 as compared to income of approximately $240,000 for the
year ended September 30, 1996. The decrease in operating income is directly
related to the decrease in contingent fee revenues due to the downward pressure
on commission rates partially offset by the Company's continued efforts into
expansion of direct purchases of portfolio receivables.
Interest expense for the year ended September 30, 1997 decreased to
approximately $306,000 as compared to $315,000 for the year ended September 30,
1996, due to the reduction of certain borrowings to acquire its portfolio
receivables as well as other Company assets. The Company expects to continue to
utilize its credit facility to finance future acquisitions of portfolio
receivables.
The Company owns the 50,000 square foot commercial building where its
headquarters are located. The Company occupies approximately 59% of the building
with the remaining 41% being occupied by tenants on short-term leases. Net
rental income for the year ended September 30, 1997 was approximately $131,000
as compared to $143,000 for the year ended September 30, 1996. The decrease in
net rental income was due to the Company occupying more space within the
building and to lower average monthly rental rates for the remaining space over
the prior period.
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The Company reported a net loss of approximately $454,000 for the year
ended September 30, 1997 as compared to income of approximately $30,000 for the
year ended September 30, 1996. The decrease in net income resulted from the
expansion into purchases of portfolio receivables for its own account and the
decrease in contingent fee revenues. In addition, other related factors
contributing to the 1997 net loss was the direct write-off of receivables of
certain bankrupt clients, the increased depreciation write-off due to additional
equipment acquisitions of approximately $290,000 and other year-end accruals.
LIQUIDITY AND CAPITAL RESOURCES
The Company funds its operations through cash flows from operations.
Management intends to generate increased revenues through additional purchases
of discounted obligations for its own portfolio. The Company's credit facility,
which has been increased to $1,500,000 and carries an interest rate of bank
reference rate plus 1.5% on any outstanding balance or 10% at September 30,
1997, and which expires on January 29, 1998, has been used primarily for the
purchase of portfolio receivables. The outstanding balance of the line of credit
at September 30, 1997 was approximately $1,150,000. 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 auto deficiency portfolio
receivables with a major California institution that carries no interest and is
payable at the rate of 35% of monthly collections of said receivables until the
note is fully paid. The outstanding balance at September 30, 1997 was $ 120,000
and any remaining unpaid balance is due and payable on August 9, 1998. 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, 1997, the balance on this term note was approximately $688,000.
The Company continues to execute an aggressive business plan to ultimately
immerse itself in purchasing its own accounts receivable base for collection and
resale while maintaining its position in collecting debt for third parties on
contingency.
ITEM 7 FINANCIAL STATEMENTS
See "Index to Consolidated Financial Statements" for a listing of the
consolidated financial statements filed with this report.
ITEM 8 CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
On April 28, 1997, the Company's Board of Directors approved the engagement
of Arthur Andersen, LLP to serve as the Company's independent public accountants
and to conduct the audit of the Company's financial statements for the fiscal
year ending September 30, 1997, replacing the firm of Corbin & Wertz, CPAs, who
had been engaged to audit the Company's financial statement for the fiscal years
ended September 30, 1995 and 1996. The change in accountants was made with the
view that it was in the best interests of the Company and its shareholders to
engage a nationally-recognized accounting firm to audit its financial
statements. The audit reports provided by Corbin & Wertz, CPAs for the fiscal
years ended September 30, 1995 and 1996 did not contain any adverse opinion or a
disclaimer of opinion nor any report qualified in any respect, and management of
the Company knows of no past disagreements between the Company and Corbin &
Wertz, CPAs on any matter of accounting principles of practice, financial
statement disclosure or auditing, scope or procedure.
9
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PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE
WITH SECTION 16(A) OF THE EXCHANGE ACT.
Information required by this item will be contained in the Company's
Information Statement to be filed with the Securities and Exchange Commission
within 120 days after September 30, 1997 and is incorporated herein by
reference.
ITEM 10. EXECUTIVE COMPENSATION
The information required by this item will be contained in the Company's
Information Statement to be filed with the Securities and Exchange Commission
within 120 days after September 30, 1997 and is incorporated herein by
reference.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this item will be contained in the Company's
Information Statement to be filed with the Securities and Exchange Commission
within 120 days after September 30, 1997 and is incorporated herein by
reference.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item will be contained in the Company's
Information Statement to be filed with the Securities and Exchange Commission
within 120 days after September 30, 1997 and is incorporated herein by
reference.
PART IV
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits: See "Exhibit Index".
(b) Reports on Form 8-K. No reports on Form 8-K were filed during the
last quarter of the fiscal year ended September 30, 1997.
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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: December 26, 1997 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.
Signatures Title Date Signed
- --------------------------------------------------------------------------------
/s/ Farrest Hayden Chairman of the Board December 26, 1997
- --------------------
Farrest Hayden Chief Executive Officer
and President
/s/ Otto J. Lacayo Director, Chief Financial December 26, 1997
- --------------------
Otto J. Lacayo Officer and Vice President
(Principal Accounting Officer)
/s/ Graham E. Gill Director December 26, 1997
- --------------------
Graham E. Gill
11
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<TABLE>
<CAPTION>
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
Page
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<S> <C>
Reports of Independent Public Accountants F-2 to F-3
Consolidated Balance Sheet as of September 30, 1997 F-4
Consolidated Statements of Operations for the years ended
September 30, 1997 and 1996 F-5
Consolidated Statements of Shareholders' Equity (Deficit)
for the years ended September 30, 1997 and 1996 F-6
Consolidated Statements of Cash Flows for the years ended
September 30, 1997 and 1996 F-7 to F-8
Notes to Consolidated Financial Statements F-9 to F-18
</TABLE>
F-1
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[LETTERHEAD OF ARTHUR ANDERSEN APPEARS HERE]
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
----------------------------------------
To the Shareholders of Cypress Financial Services, Inc.:
We have audited the accompanying consolidated balance sheet of Cypress Financial
Services, Inc. (a Nevada Corporation) and subsidiaries as of September 30, 1997,
and the related consolidated statements of operations, shareholders' equity
(deficit) and cash flows for the year then ended. 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 audit.
We conducted our audit 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 audit provides 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, 1997, and the results of
their operations and their cash flows for the year then ended in conformity with
generally accepted accounting principles.
/s/ Arthur Andersen LLP
ARTHUR ANDERSEN LLP
Orange County, California
November 14, 1997
F-2
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INDEPENDENT AUDITORS' REPORT
----------------------------
The Board of Directors
Cypress Financial Services, Inc.
We have audited the accompanying consolidated statements of operations,
shareholders' equity (capital deficiency) and cash flows for the year ended
September 30, 1996 of Cypress Financial Services, Inc. and subsidiary (the
"Company"). 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 audit.
We conducted our audit 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 audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the results of operations and cash flows of
Cypress Financial Services, Inc. and subsidiaries for the year ended September
30, 1996 in conformity with generally accepted accounting principles.
/s/ Corbin & Wertz
CORBIN & WERTZ
Irvine, California
November 1, 1996
F-3
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CYPRESS FINANCIAL SERVICES, INC.
--------------------------------
AND SUBSIDIARIES
----------------
CONSOLIDATED BALANCE SHEET
--------------------------
SEPTEMBER 30, 1997
------------------
ASSETS
------
<TABLE>
<CAPTION>
1997
----------
<S> <C>
Cash $ 271,455
Restricted cash 397,298
Accounts receivable, net of allowance for doubtful
accounts of $95,845 445,006
Portfolio receivables 470,561
Property, net of accumulated depreciation of $1,391,987 2,696,234
Notes receivable from shareholders 4,025
Prepaid expenses and other 99,725
----------
$4,384,304
==========
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
----------------------------------------------
Accounts payable $ 50,206
Trust payables 397,298
Accrued liabilities 146,972
Line of credit 1,150,000
Notes payable 2,671,131
Capital lease obligations 180,698
----------
Total liabilities 4,596,305
----------
COMMITMENTS
SHAREHOLDERS' EQUITY (DEFICIT):
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;
4,520,271 shares issued and outstanding 4,520
Paid-in capital 510,480
Accumulated deficit (1,417,001)
----------
Total shareholders' deficit (212,001)
----------
$4,384,304
==========
</TABLE>
The accompanying notes are an integral part of this consolidated balance sheet.
F-4
<PAGE>
CYPRESS FINANCIAL SERVCIES, INC.
--------------------------------
AND SUBSIDIARIES
----------------
CONSOLIDATED STATEMENTS OF OPERATIONS
-------------------------------------
FOR THE YEARS ENDED SEPTEMBER 30, 1997 AND 1996
-----------------------------------------------
<TABLE>
<CAPTION>
1997 1996
----------- -----------
<S> <C> <C>
REVENUES:
Service fees $3,968,741 $4,870,062
Portfolio receivables revenue 1,001,615 501,880
---------- ----------
4,970,356 5,371,942
---------- ----------
OPERATING EXPENSES:
Salaries, wages and related benefits 3,438,660 3,401,800
Selling, general and administrative 1,636,711 1,595,105
Depreciation 196,499 134,736
---------- ----------
5,271,870 5,131,641
---------- ----------
INCOME (LOSS) FROM OPERATIONS (301,514) 240,301
---------- ----------
OTHER INCOME (EXPENSE):
Interest expense, net (305,796) (314,850)
Rental operations 131,081 143,475
---------- ----------
(174,715) (171,375)
---------- ----------
INCOME (LOSS) BEFORE PROVISION (BENEFIT)
FOR INCOME TAXES (476,229) 68,926
PROVISION (BENEFIT) FOR INCOME TAXES (21,702) 39,000
---------- ----------
NET INCOME (LOSS) $ (454,527) $ 29,926
========== ==========
NET INCOME (LOSS) PER SHARE $(0.10) $0.01
========== ==========
WEIGHTED AVERAGE SHARES OUTSTANDING 4,509,914 4,500,271
========== ==========
</TABLE>
The accompanying notes are an integral part of this consolidated balance
sheet.
F-5
<PAGE>
CYPRESS FINANCIAL SERVICES, INC.
--------------------------------
AND SUBSIDIARIES
----------------
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT)
---------------------------------------------------------
FOR THE YEARS ENDED SEPTEMBER 30, 1997 AND 1996
-----------------------------------------------
<TABLE>
<CAPTION>
Series A Convertible,
Redeemable
Preferred Stock Common Stock Total
----------------- ------------------- Paid-in Accumulated Shareholders'
Shares Amount Shares Amount Capital Deficit Equity (Deficit)
------- --------- --------- -------- -------- ------------- ----------------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCES, at September 30, 1995 - $ - 4,500,271 $ 4,500 $495,500 $ (992,400) $ (492,400)
Preferred stock issued in
satisfaction of related
party notes payable 345,000 690,000 - - - - 690,000
Net income - - - - - 29,926 29,926
------- --------- --------- -------- -------- ------------ ----------
BALANCES, at September 30, 1996 345,000 690,000 4,500,271 4,500 495,500 (962,474) 227,526
Stock issued in exchange for services
provided - - 10,000 10 12,490 - 12,500
Warrants exercised - - 10,000 10 2,490 - 2,500
Net loss - - - - - (454,527) (454,527)
------- --------- --------- -------- -------- ------------- ----------
BALANCES, at September 30, 1997 345,000 $690,000 4,520,271 $4,520 $510,480 $(1,417,001) $ (212,001)
======= ========= ========= ======== ======== ============= ==========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-6
<PAGE>
CYPRESS FINANCIAL SERVICES, INC.
--------------------------------
AND SUBSIDIARIES
----------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
-------------------------------------
FOR THE YEARS ENDED SEPTEMBER 30, 1997 AND 1996
-----------------------------------------------
<TABLE>
<CAPTION>
1997 1996
---------- ----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $(454,527) $ 29,926
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Depreciation and amortization 218,607 153,151
Stock issued in exchange for services provided 12,500 -
Changes in operating assets and liabilities:
(Increase) in prepaid expenses and other (77,538) (3,200)
(Increase) decrease in accounts receivable, net 147,566 (294,382)
(Increase) decrease in portfolio receivables 15,944 (3,172)
Decrease in accounts payable (22,736) (26,661)
Increase (decrease) in accrued liabilities (186,098) 150,543
--------- ---------
Net cash provided by (used in) operating activities (346,282) 6,205
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property (90,881) (44,145)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowings from line of credit 157,915 332,990
Principal payment on notes payable to related parties - (60,000)
Proceeds from notes payable 120,000 -
Principal payments on notes payable (68,895) (76,578)
Principal payments on capital lease obligations (23,608) -
Proceeds from warrants exercised 2,500 -
--------- ---------
Net cash provided by financing activities 187,912 196,412
--------- ---------
NET INCREASE (DECREASE) IN CASH (249,251) 158,472
CASH, at beginning of period 520,706 362,234
--------- ---------
CASH, at end of period $ 271,455 $ 520,706
========= =========
</TABLE>
F-7
<PAGE>
CYPRESS FINANCIAL SERVICES, INC.
--------------------------------
AND SUBSIDIARIES
----------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
--------------------------------------
FOR THE YEARS ENDED SEPTEMBER 30, 1997 AND 1996 - Continued
-----------------------------------------------------------
<TABLE>
<CAPTION>
1997 1996
-------- --------
<S> <C> <C>
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION--
Cash paid during the period for:
Interest $428,482 $362,231
======== ========
Income taxes $ 88,979 $ 6,330
======== ========
</TABLE>
SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING, FINANCING AND OPERATING
ACTIVITIES--
During the year ended September 30, 1996, the Company issued 345,000 shares of
its Series A convertible, redeemable preferred stock in satisfaction of
$690,000 in notes payable to the former shareholders of MCSI, which are
current shareholders and officers of the Company (see Note 6).
During the year ended September 30, 1997, the Company issued 10,000 shares of
its common stock to a consultant in exchange for services provided. The
services were valued at the market value of the common stock on the date
issued, which totaled $12,500.
Based upon agreement between the parties, the Company offset interest payable to
shareholders with notes receivable from shareholders in the amount of $57,725.
The Company entered into four capital leases during the year. The value of the
property purchased totaled $204,306. Future obligations under these leases
totaled $180,698 at September 30, 1997.
The accompanying notes are an integral part of these consolidated financial
statements.
F-8
<PAGE>
CYPRESS FINANCIAL SERVICES, INC.
--------------------------------
AND SUBSIDIARIES
----------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
SEPTEMBER 30, 1997
------------------
1. Organization and Summary of Significant Accounting Policies
-----------------------------------------------------------
a. 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 September 12, 1995, The Christmas Guild, Inc. (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 Note 6).
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.
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. 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.
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. The
majority of the Company's collection efforts are concentrated in
California. In 1995, the Company began purchasing liquidating portfolios of
delinquent unsecured consumer receivables for its own account.
b. 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.
F-9
<PAGE>
c. 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.
d. Revenue Recognition
-------------------
Accounts receivable represent accounts in which the Company provides
collection services for entities in the commercial, retail and medical
industries for a fee. Service fee revenue is recognized upon the collection
of the receivables owned by the Company's customers. No one customer
accounted for more than 10 percent of total revenues for the years
presented.
Portfolio receivables represent liquidating portfolios of delinquent
accounts which have been purchased by the Company for collection and are
stated on a portfolio by portfolio basis at the lower of cost or net
realizable value. Cost is reduced by cash collections on a portfolio by
portfolio 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 after the cost of each portfolio has been recovered.
e. 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.
f. 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.
g. 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 account cash balance of $397,298 is reflected as restricted cash and
trust payable in the accompanying consolidated balance sheet at September
30, 1997.
F-10
<PAGE>
h. Income Taxes
------------
The Company accounts for income taxes using the liability method in
accordance with Statement of Financial Accounting Standards (SFAS) No. 109,
"Accounting for Income Taxes," which requires the asset and liability
method of accounting for income taxes.
i. Net Income (Loss) Per Common Share
----------------------------------
The number of shares used in computing net income (loss) per common share
is equal to the weighted average number of common and common equivalent
shares outstanding during the respective period. Outstanding stock options
are treated under the treasury stock method as common stock equivalents
when dilution results from their assumed exercise.
j. Rental Operations
-----------------
The Company leases a portion of its building to unrelated parties.
Management allocates certain costs incurred to rental operations based on a
ratio of square footage to the total square footage of the respective
building. The results of rental operations for the years ended September
30, 1997 and 1996 are as follows:
<TABLE>
<CAPTION>
1997 1996
--------- ---------
<S> <C> <C>
Rental income $288,139 $318,634
Interest expense (63,303) (69,106)
Utilities (77,287) (88,278)
Depreciation (16,468) (17,775)
-------- --------
$131,081 $143,475
======== ========
</TABLE>
k. New Pronouncements
------------------
In fiscal 1997, the Company adopted Statement of Financial Accounting
Standards No. 123, "Accounting for Stock Based Compensation." As permitted
under the standard, the Company continued to account for employee stock
options in accordance with APB Opinion No. 25 and made necessary proforma
disclosures mandated by SFAS No. 123. The adoption of this standard had no
impact on the Company's results of operations.
In fiscal 1998, the Company will be required to adopt SFAS No. 129,
"Disclosure on Information about Capital Structure," which continues the
existing requirements to disclose the pertinent rights and privileges of
all securities other than ordinary common stock but expands the number of
companies subject to portions of its requirements. The adoption of this
standard will have no effect on the Company's results of operations.
F-11
<PAGE>
The Financial Accounting Standards Board (FASB) has issued SFAS No. 128,
"Earnings per Share (EPS)." This standard is effective for both interim and
annual reporting periods ending after December 15, 1997. SFAS No. 128
replaces primary EPS with basic EPS and fully diluted EPS with diluted EPS.
Basic 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 now uses the average share price
for the reporting period to compute dilution from options under the
treasury stock method. Management believes that the adoption of this
standard will not have a significant impact on EPS. Earlier adoption is not
permitted.
In June 1997, the 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.
2. Portfolio Receivables
---------------------
Portfolio receivables activity consists of the following as of September 30,
1997 and 1996, and for the years then ended:
<TABLE>
<CAPTION>
Cost Basis
----------
<S> <C>
Portfolio receivables at September 30, 1995 $ 483,333
Purchases of portfolio receivables 1,350,637
Collections applied to cost basis (389,172)
Sales of portfolio receivables applied to cost basis (958,293)
----------
Portfolio receivables at September 30, 1996 486,505
Purchases of portfolio receivables 735,862
Collections applied to cost basis (272,538)
Sales of portfolio receivables applied to cost basis (479,268)
----------
Portfolio receivables at September 30, 1997 $ 470,561
==========
</TABLE>
For the years ended September 30, 1997 and 1996, the Company had gross
collections from the portfolio receivables of $1,252,407 and $836,307,
respectively, of which $1,001,615 and $501,880 were recognized as revenue in the
accompanying consolidated financial of operations.
Due to the nature of these portfolio receivables, there is no assurance that
historical collection results will reflect the future collectibility of the face
value of the portfolio receivables.
F-12
<PAGE>
3. Property
--------
Property consists of the following at September 30, 1997:
<TABLE>
<S> <C>
Land $ 866,575
Building 1,540,577
Equipment and furnishings 1,548,654
Autos 132,415
----------
4,088,221
Less--Accumulated depreciation 1,391,987
----------
$2,696,234
==========
</TABLE>
Depreciation expense for the years ended September 30, 1997 and 1996 totaled
$212,967 and $152,511, respectively. At September 30, 1997, the net book value
of equipment under capital leases was $170,255.
4. Line of Credit
--------------
The Company has a line of credit agreement (the Agreement) with a financial
institution which expires on January 29, 1998. Under the terms of the Agreement,
the Company may borrow up to $1,500,000. The Company is required to pay interest
monthly at the bank's reference rate plus 1.5 percent (10.0 percent at September
30, 1997). As of September 30, 1997, net borrowings amounted to $1,150,000. At
September 30, 1997, the Company has $350,000 available under this line of
credit. The borrowings are secured by substantially all of the Company's assets
as defined under an Agreement. The financial institution has agreed to renew the
line of credit for a one-year period.
5. Notes Payable
-------------
Notes payable consists of the following at September 30, 1997:
<TABLE>
<S> <C>
Note payable to bank, secured by certain equipment,
due in monthly payments of $10,969, including
interest at 11 percent per annum, through June 2000
at which time the entire principal balance is due and payable. $ 688,721
Mortgage note payable to bank, collateralized by land
and 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. 1,862,410
Note payable to a financial institution, secured by
portfolio receivables, due in monthly payments based
on collections through August 1998, at which time the entire
principal balance is due and payable. 120,000
----------
$2,671,131
==========
</TABLE>
F-13
<PAGE>
Annual maturities of notes payable at September 30, 1997 are as follows:
<TABLE>
<CAPTION>
Years Ending
September 30,
-------------
<S> <C>
1998 $ 199,599
1999 88,129
2000 588,806
2001 1,794,597
----------
$2,671,131
==========
</TABLE>
6. Capital Transactions
--------------------
a. Series A Convertible, Redeemable Preferred Stock
------------------------------------------------
In connection with the acquisition of MCSI (see Note 1), the Company issued
notes aggregating $850,000 payable to the former MCSI shareholders,
$100,000 and $60,000 of which were paid in September 1995 and April 1996,
respectively.
On September 30, 1996, the Company converted the balance of such notes
totaling $690,000 into 345,000 shares of the Company's Series A
convertible, redeemable preferred stock. The preferred stock is convertible
into shares of common stock at $2.00 per share at the option of the holders
through September 29, 1999, at which time the shares may be converted at a
rate of $1.50 per share of common stock, subject to antidilution
provisions. The underlying common stock reserved for conversion are subject
to registration rights under the Securities Act of 1933, at which time such
shares will be automatically converted into common stock. The Company has
the right to redeem these preferred shares at $2.00 per share. If such
shares have not been redeemed or converted by September 29, 1999, the
redemption price increases to $2.50 per share, subject to antidilution
provisions. The holders of the Company's Series A convertible, redeemable
preferred shares are entitled to the same voting and dividend rights as the
common shareholders. Such preferred shares have a liquidation preference at
$2.00 per share over common shareholders.
b. Common Stock Issuances
----------------------
On June 2, 1997, the Company issued 10,000 shares of its common stock as
payment for services provided by an outside consultant. The services were
valued at the market value of the common stock on the date issued, which
totaled $12,500.
On February 12, 1997, a former owner of TCG exercised warrants to purchase
10,000 shares of the Company's common stock at $0.25 per share.
c. Stock Option Plan
-----------------
In 1995, the Company adopted, and the shareholders approved, the Cypress
Financial Services, Inc. 1995 Stock Option Plan (the Plan) which authorized
450,000 stock option grants to purchase the Company's common stock.
F-14
<PAGE>
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."
The Company accounts for this Plan under APB Opinion No. 25, under which no
compensation cost has been recognized. SFAS No. 123 "Accounting for Stock-
Based Compensation" was issued in 1995 and, if fully adopted, changes the
methods for recognition of cost on plans similar to those of the Company.
Adoption of SFAS No. 123 is optional, however pro forma disclosures as if
the Company had adopted the cost recognition method are required. Had
compensation cost for stock options awarded under this plan been determined
consistent with SFAS No. 123, the Company's net income and earnings per
share for the year ended September 30, 1997 would have reflected the
following pro forma amounts:
<TABLE>
<S> <C> <C>
Net Loss: As Reported $(454,527)
Pro Forma $(702,066)
Primary EPS: As Reported $ (0.10)
Pro Forma $ (0.16)
</TABLE>
The Company has granted 129,400 options under the Plan. These options are
issued at fair market value or at a 10 percent premium if the individual is
a 10 percent or more shareholder. At the discretion of the Board of
Directors, these options become vested immediately, are exercisable in
whole or in installments, and expire ten years from the date of grant.
A summary of the status of the Plan at September 30, 1996 and 1997 and
changes during the years then ended is presented in the table and narrative
below:
F-15
<PAGE>
<TABLE>
<CAPTION>
September 30, 1996 September 30, 1997
------------------------------- ---------------------------------
Weighted Weighted
Average Average
Exercise Exercise
Shares Price Shares Price
------------ ------------- --------------- -------------
<S> <C> <C> <C> <C>
Outstanding at beg. of year - - - -
Granted - - 129,400 $2.75
Exercised - - - -
Forfeited - - (10,750) $2.75
------ ------ ------- -----
Outstanding at end of year - - 118,650 $2.75
====== ====== ======= =====
Exercisable at end of year - - 118,650 $2.75
====== ====== ======= =====
Weighted average fair value of
options granted =====
$2.09
=====
</TABLE>
The 118,650 options outstanding at September 30, 1997 have an exercise
price of $2.75, a fair value of $2.09, a weighted average remaining
contractual life of 9 years, and all are exercisable.
The fair value of each option grant is estimated on the date of grant
using the Black Scholes pricing model with the following assumptions
used for the grants in fiscal year 1997: weighted average risk-free
interest rate of 6.56 percent; a weighted average volatility of 77.1
percent; an expected life of 7 years; and no expected dividend yield.
7. Commitments and Contingencies
-----------------------------
a. Lessee
------
The Company leases certain equipment under non-cancelable capital and
operating leases which expire at various times through fiscal 2002.
Future annual minimum lease payments, in the aggregate, under capital
and operating leases at September 30, 1997 are as follows:
<TABLE>
<CAPTION>
Years Ending
September 30, Capital Operating
------------- --------- ---------
<S> <C> <C>
1998 $ 61,976 $26,119
1999 61,976 6,731
2000 61,976 -
2001 61,976 -
2002 10,329 -
-------- -------
Total minimum 2002 lease payments 258,233 $32,850
=======
Less-- Amounts representing interest 77,535
--------
Present value of capital lease obligations $180,698
========
</TABLE>
F-16
<PAGE>
Rent expense under all operating leases totaled $48,795 in 1997 and
$61,270 in 1996.
b. Lessor
------
As discussed in Note 1, the Company leases a portion of its building
to unrelated entities under operating leases which expire at various
times through December 1, 2000. The Company leases to several tenants
on a month-to-month basis. Future annual collections under non-
cancelable operating leases as of September 30, 1997 are scheduled as
follows:
<TABLE>
<CAPTION>
Years Ending
September 30,
-------------
<S> <C>
1998 $147,977
1999 41,263
2000 41,263
2001 6,877
--------
$237,380
========
</TABLE>
c. Employment Agreements
---------------------
In August 1995, the Company entered into three-year employment
agreements with four of its officers. In November 1996, the Company
entered into a three-year agreement with an additional officer. The
agreements provide for annual salaries, paid vacations and other
related benefits. The minimum annual compensation pursuant to such
agreements, excluding provisions for fringe benefits (e.g., vacations,
etc.), will be approximately $600,000 in fiscal 1998.
d. Litigation
----------
As of September 30, 1997, the Company is not involved in any material
litigation, although the Company is involved, from time to time, in
litigation that is incidental to its collection business. The Company
regularly initiates legal proceedings as a plaintiff in connection
with its routine collection activities.
8. Income Taxes
------------
The benefit for income taxes for the year ended September 30, 1997 consists of:
<TABLE>
<CAPTION>
Current Deferred Total
--------- --------- ---------
<S> <C> <C> <C>
U.S. Federal $(27,767) $ - $(27,767)
State and local 6,065 - 6,065
-------- -------- --------
$(21,702) $ - $(21,702)
======== ======== ========
</TABLE>
F-17
<PAGE>
The provision for income taxes for the year ended September 30, 1996 consists
of:
<TABLE>
<CAPTION>
Current Deferred Total
------- -------- -------
<S> <C> <C> <C>
U.S. Federal $26,000 $ - $26,000
State and local 13,000 - 13,000
------- -------- -------
$39,000 $ - $39,000
======= ======== =======
</TABLE>
The tax effect of temporary differences that give rise to significant portions
of the deferred tax assets at September 30, 1997 are presented below:
<TABLE>
<S> <C>
Accounts receivable, principally due to allowance
for doubtful accounts $ 32,587
Compensated absences principally due to
accrual for financial reporting 169,809
Less--Valuation allowance (202,396)
---------
$ -
=========
</TABLE>
The valuation allowance increased $157,438 and $16,297 during years ended
September 30, 1997 and 1996, respectively.
Income tax expense for the years ended September 30, 1997 and 1996 differs from
the amounts computed by applying the U.S. Federal income tax rate of 34 percent
to income before income taxes as a result of the following:
<TABLE>
<CAPTION>
1997 1996
---------- --------
<S> <C> <C>
Computed "expected" tax expense $(161,918) $23,435
Increase (reduction) in income taxes resulting from:
Non-deductible meals and entertainment expense 3,478 1,357
Change in valuation allowance 157,438 16,297
State and local income taxes 5,978 4,259
Net operating loss carryback (27,768) -
Other 1,090 (6,348)
--------- -------
$ (21,702) $39,000
========= =======
</TABLE>
F-18
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT DESCRIPTION
NUMBER -----------
- --------------------------------------------------------------------------------
<C> <S>
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.
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.
3.3 Certificate of Determination re: Series A Preferred Stock,
incorporated by reference from Registrant's Form 10-K filed on
December 27, 1996.
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.
10.3 Preferred Stock Purchase Agreement dated September 30, 1996,
incorporated by reference from Registrant's Form 10-K filed on
December 27, 1996.
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C> <C>
<PERIOD-TYPE> 12-MOS 3-MOS
<FISCAL-YEAR-END> SEP-30-1997 SEP-30-1997
<PERIOD-START> OCT-01-1996 JUL-01-1997
<PERIOD-END> SEP-30-1997 SEP-30-1997
<CASH> 271,455 0
<SECURITIES> 0 0
<RECEIVABLES> 445,006 0
<ALLOWANCES> 95,845 0
<INVENTORY> 0 0
<CURRENT-ASSETS> 1,584,320 0
<PP&E> 4,088,221 0
<DEPRECIATION> 1,391,987 0
<TOTAL-ASSETS> 4,384,304 0
<CURRENT-LIABILITIES> 1,744,476 0
<BONDS> 2,851,829 0
0 0
690,000 0
<COMMON> 515,000 0
<OTHER-SE> (1,417,001) 0
<TOTAL-LIABILITY-AND-EQUITY> 4,384,304 0
<SALES> 4,970,356 1,120,592
<TOTAL-REVENUES> 5,101,437 1,164,514
<CGS> 0 0
<TOTAL-COSTS> 5,271,870 1,405,298
<OTHER-EXPENSES> 0 0
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 305,796 108,117
<INCOME-PRETAX> (476,229) (348,901)
<INCOME-TAX> (21,702) (26,953)
<INCOME-CONTINUING> 0 0
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (454,527) (321,948)
<EPS-PRIMARY> (0.10) (0.07)
<EPS-DILUTED> 0 0
</TABLE>
