<PAGE>
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
(Mark One)
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the quarterly period ended March 31, 1998
--------------
OR
[_] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from to
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Commission File Number 0-17192
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CYPRESS FINANCIAL SERVICES, INC.
(Exact name of registrant as specified in its charter)
Nevada 84-1061382
(State or other jurisdiction of (I.R.S. Employer
incorporation of organization) Identification No.)
5400 Orange Avenue, Suite 200, Cypress CA 90630
(Address of Principle Executive Office) (Zip Code)
Registrant's telephone number including area code (714) 995-0627
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such report), and (2) has been subject to such filing
requirements for the past 90 days.
(1) Yes X No
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(2) Yes X No
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APPLICABLE ONLY TO CORPORATE ISSUERS:
State the number of shares outstanding of each of the issuer's classes of common
equity as of the latest practicable date.
Common Stock 4,520,271 as of May 2, 1998
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CYPRESS FINANCIAL SERVICES, INC.
FORM 10-QSB
INDEX
<TABLE>
<CAPTION>
PART I. FINANCIAL INFORMATION Page
----
<S> <C> <C>
Item 1. Condensed Consolidated Balance Sheet as of March 31, 1998.. 1
Condensed Consolidated Statements of Operations for the
Three-month and Six-month period ended March 31, 1998...... 2 to 3
Condensed Consolidated Statements of Cash Flows for the
Six-month period ended March 31, 1998...................... 4
Notes to Condensed Consolidated Financial Statements....... 5 to 7
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations.................................. 8 to 10
PART II. OTHER INFORMATION.......................................... 11
Item 1. Legal Proceedings..........................................
Item 3. Changes in Securities......................................
Item 4. Defaults Upon Senior Securities............................
Item 5. Submission of Matters to a Vote of Security Holders........
Item 6. Exhibits and Reports on Form 8-K...........................
</TABLE>
<PAGE>
CYPRESS FINANCIAL SERVICES, INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEET
March 31, 1998
<TABLE>
<CAPTION>
ASSETS
<S> <C>
Cash $ 392,445
Restricted cash 452,689
Accounts receivable, net 499,655
Portfolio receivables 254,780
Notes receivable from shareholders 4,025
Property, net 2,630,693
Prepaid expenses 72,789
-----------
$ 4,307,076
===========
<CAPTION>
LIABILITIES AND SHAREHOLDERS' EQUITY
<S> <C>
Accounts payable $ 53,148
Trust payables 452,689
Accrued liabilities 267,149
Line of credit 1,080,000
Long-term debt 2,673,442
-----------
Total liabilities 4,526,428
-----------
Commitments and contingencies
Shareholders' equity:
Preferred Stock, 5,000,000 shares authorized,
345,000 issued and outstanding 690,000
Common stock, $ 0.001 par value; 30,000,000
shares authorized; 4,520,271 shares issued
and outstanding 4,520
Additional paid-in capital 510,480
Accumulated deficit (1,424,352)
-----------
Total shareholders' deficit (219,352)
-----------
$ 4,307,076
===========
</TABLE>
See accompanying notes to condensed
consolidated financial statements
1
<PAGE>
CYPRESS FINANCIAL SERVICES, INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
For the Six-Month Periods Ended
March 31, 1998 and 1997
<TABLE>
<CAPTION>
1998 1997
---------- ----------
<S> <C> <C>
Revenues:
Service fees $1,691,192 $2,020,125
Portfolio income 854,901 507,688
---------- ----------
Total 2,546,093 2,527,813
Selling, general and administrative 2,475,651 2,593,376
---------- ----------
Income (loss) from operations 70,442 (65,563)
---------- ----------
Other income (expense):
Interest income 0 482
Interest expense (137,633) (127,821)
Rental operations, net 60,014 64,511
---------- ----------
Total (77,619) (62,828)
---------- ----------
Loss before income taxes (7,177) (128,391)
Provision for income taxes 0 5,251
---------- ----------
Net loss $ (7,177) $ (133,642)
========== ==========
Basic earnings (loss) per share $ (0.00) $ (0.03)
========== ==========
Weighted average shares outstanding 4,520,271 4,510,271
========== ==========
</TABLE>
See accompanying notes to condensed
consolidated financial statements
2
<PAGE>
CYPRESS FINANCIAL SERVICES, INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
For the Three-Month Periods Ended
March 31, 1998 and 1997
<TABLE>
<CAPTION>
1998 1997
---------- ----------
<S> <C> <C>
Revenues:
Service fees $ 831,747 $1,045,129
Portfolio income 428,511 294,864
---------- ----------
Total 1,260,258 1,339,993
Selling, general and administrative 1,218,532 1,303,305
---------- ----------
Income from operations 41,726 36,688
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Other income (expense):
Interest income 0 482
Interest expense (62,378) (68,276)
Rental operations, net 26,037 35,463
---------- ----------
Total (36,341) (32,331)
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Income before income taxes 5,385 4,357
Provision for income taxes 0 2,579
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Net income $ 5,385 $ 1,778
========== ==========
Basic earnings per share $ 0.00 $ 0.00
========== ==========
Weighted average shares outstanding 4,520,271 4,510,271
========== ==========
</TABLE>
See accompanying notes to condensed
consolidated financial statements
3
<PAGE>
CYPRESS FINANCIAL SERVICES, INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Six-Month Periods Ended
March 31, 1998 and 1997
<TABLE>
<CAPTION>
1998 1997
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<S> <C> <C>
Cash flows from operating activities:
Net loss $ (7,177) $(133,642)
Adjustments to reconcile net loss to
net cash used in operating activities:
Depreciation and amortization 84,079 89,351
Changes in operating assets and
liabilities:
Accounts receivables (54,649) 73,275
Portfolio receivables 215,781 (56,702)
Accounts payable 2,942 (28,600)
Trust payables 55,391 26,414
Accrued liabilities 120,003 (97,620)
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Net cash used in operating activities 416,370 (127,524)
--------- ---------
Cash flows from investing activities:
Purchases of property and equipment (18,538) (63,408)
Notes receivable from shareholder 0 (1,250)
Decrease (increase) in other assets 26,936 (10,981)
Decrease in restricted cash (55,391) (26,414)
--------- ---------
Net cash provided by (used in) investing
activities (46,993) (102,053)
--------- ---------
Cash flows from financing activities:
Common stock purchase 0 2,500
Net borrowings from line of credit (70,000) 151,160
Long-term debt (178,387) (34,493)
--------- ---------
Net cash provided by (used in)
financing activities (248,387) 119,167
--------- ---------
Net increase(decrease) in cash 120,990 (110,410)
Cash, at beginning of period 271,455 520,706
--------- ---------
Cash, at end of period $ 392,445 $ 410,296
========= =========
</TABLE>
See accompanying notes to condensed
consolidated financial statements
4
<PAGE>
CYPRESS FINANCIAL SERVICES, INC.
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
For the Six-Month Periods Ended
March 31, 1998 and 1997
NOTE 1 - QUARTERLY INFORMATION
- ------------------------------
The accompanying unaudited, condensed and consolidated financial statements have
been prepared in accordance with Securities and Exchange Commission requirements
for interim financial statements. Therefore, they do not include all
disclosures that would be presented in the Annual Report on Form 10-KSB of
Cypress Financial Services, Inc. (the "Company"). These condensed consolidated
financial statements should be read in conjunction with the consolidated
financial statements contained in the Company's 1997 Annual Report on Form 10-
KSB.
The information furnished reflects all adjustments (consisting only of normal
recurring adjustments) which are, in the opinion of management, necessary for a
fair presentation of financial position and results of operations for the
interim periods. The operating results are not necessarily indicative of
results to be expected for the year ending September 30, 1998.
NOTE 2 - PORTFOLIO RECEIVABLES
- ------------------------------
Portfolio receivables represent liquidating portfolios of delinquent accounts
which have been purchased by the Company for collection and are stated at cost.
Cost is reduced by cash collections on a portfolio by portfolio basis and
revenue is recognized when cash collections for a portfolio exceed its cost
basis.
The following is the activity of Portfolio Receivables, on a cost basis, during
the six-month period ended March 31, 1998:
<TABLE>
<S> <C>
Portfolio Receivables, September 30, 1997 $ 470,561
Less: Proceeds from sales (cost recovery) (82,390)
Collections (cost recovery) (133,391)
---------
Portfolio Receivables, March 31, 1998 $ 254,780
=========
</TABLE>
5
<PAGE>
CYPRESS FINANCIAL SERVICES, INC.
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued
For the Six-Month Periods ended
March 31, 1998 and 1997
As reflected in the accompanying condensed consolidated statement of operations
for the six months ended March 31, 1998, as revenues, the Company collected or
received proceeds from sales of its Portfolio Receivables, in excess of their
original cost on a portfolio by portfolio basis, aggregating $854,901. Total
cash received from all collections and sales of the Company's Portfolio
Receivables during the six-month period ended March 31, 1998 totaled $1,070,681.
NOTE 3 - PROPERTY
- -----------------
Property consists of the following at March 31, 1998:
<TABLE>
<S> <C>
Land $ 866,575
Building 1,540,577
Equipment and furnishings 1,699,607
-----------
4,106,759
Less: accumulated depreciation (1,476,066)
-----------
Property - net $ 2,630,693
===========
</TABLE>
NOTE 4 - INDEBTEDNESS
- ---------------------
On January 28, 1997, the Company and its bank amended the maximum borrowings
under the line of credit agreement from $1,250,000 to $1,500,000. Net
borrowings from the line of credit at March 31, 1998 amounted to $1,080,000.
Interest on the borrowings are charged monthly based a commercial bank's prime
rate plus 1.5% per annum (10.25% at March 31, 1998). The line of credit renewed
on January 29, 1998 for an additional one year period.
Long-term debt at March 31, 1998 consists of the following:
<TABLE>
<S> <C>
Note payable to bank, secured by certain equipment,
due in monthly payments of $10,969, including
interest at 11% per annum, through June, 2000 at
which time the entire principal balance is due
and payable. $663,281
</TABLE>
6
<PAGE>
CYPRESS FINANCIAL SERVICES, INC.
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued
For the Six-Month Periods ended
March 31, 1998 and 1997
<TABLE>
<S> <C>
Capital leases payable to certain leasing
companies due in monthly installments of
$5,264 including interest. 158,829
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. 1,851,332
----------
Long-term debt $2,673,442
==========
</TABLE>
NOTE 5 - INCOME TAXES
- ---------------------
Income tax expense for the periods presented are based on the estimated
effective tax rate to be incurred for the year. Deferred tax assets and
liabilities at March 31, 1998, were not considered significant.
7
<PAGE>
Item 2 Management's Discussion and Analysis of Financial Condition and
Results of Operations
General
- -------
The Company is engaged in servicing delinquent consumer debt primarily in the
commercial, retail, auto and medical industries. The Company also collects,
purchases, manages and sells receivables for its own account ("Portfolio
Receivables") and for third parties. Historically, the Company has been
dependent on its third party collection operations, but since 1995, continues to
allocate more resources toward acquiring and servicing Portfolio Receivables for
its own account. The Company is aggressively increasing its Portfolio
Receivables operations and anticipates that this will continue to increase as a
percentage of overall operations. The Company's accounting policy does not
recognize revenue from ongoing collection and resale of its Portfolio
Receivables until after recovery of the cost of each portfolio.
The following discussion of the financial condition and results of operations of
the Company should be read in conjunction with consolidated financial statements
and notes thereto included elsewhere in this report.
This report contains forward-looking statements that involve risks and
uncertainties. The Company's actual results may differ materially from those
anticipated in these forward-looking statements as a result of certain factors,
including, but not limited to, competition which has and will continue to put
price pressure on the Company's third party collection business, the cost and
availability of capital to finance its Portfolio Receivables and overall macro
economic conditions which generally have a direct effect on the Company's
ability to collect on the receivables.
Results of Operations
- ---------------------
Six-months ended March 31, 1998 versus Six-months ended March 31, 1997
The Company's operating revenues of approximately $2,546,000 for the six-months
ended March 31, 1998 are compared to its operating revenues for the six-months
ended March 31, 1997 of approximately $2,528,000. The increase in operating
revenues of approximately $18,000 is due to the revenues generated from the
Company's own Purchased Portfolios Receivables. The Company recognized revenues
of approximately $854,900 for the six-months ended March 31, 1998 as compared
to revenues of approximately $507,700 for the six-months ended March 31, 1997
on its Purchased Portfolio Receivables. The Company's 68% increase in its
portfolio receivable revenues more than offset the approximate 16.3% decrease
in its contingency revenues. The decrease in contingency revenues result from
the Company's continued efforts to expand its operations into the purchasing of
Portfolio Receivables for its own account.
8
<PAGE>
As of March 31, 1998, the Company's direct purchases of Portfolio Receivables
had a remaining face value of approximately $157,162,000 as compared to a
remaining face value of approximately of $63,468,000 as of March 31, 1997.
This increase was due in large part to the acquisition of $109,000,000
portfolio of auto loan receivables acquired in September, 1997. The Company's
accounting policy does not recognize revenue from the sales or collections of
its Portfolio Receivables until after the recovery of the cost of each
portfolio. During the six-months ended March 31, 1998, the Company received
proceeds from sales and collections of Portfolio Receivables of approximately
$1,071,000 or a 17.2% increase, as compared to approximately $913,000 for the
six-months ended March 31, 1997.
Operating expenses for the six-months ended March 31, 1998 were approximately
$2,475,600 as compared to operating expenses of approximately $2,593,000 for the
six-months ended March 31, 1997. The 4.5% decrease in operating expenses was
due to lower overhead costs to collect its own Portfolio Receivables as compared
to labor intensive collection efforts required to collect contingency business.
Interest expense for the six-months ended March 31, 1998 increased to $137,633
from $127,821 for the six-months ended March 31, 1997. The 7.7% increase
relates to the Company's borrowings to finance its capital leases of computer
equipment. The Company also expects to continue to utilize its credit facility
to finance future acquisitions of Portfolio Receivables.
Net rental income for the six-months ended March 31, 1998 was $ 60,014 as
compared to $ 64,511 for the six-months ended March 31, 1997. The 7% decrease
in net rental income is directly attributable to the Company reserving vacant
space for future expansion.
The Company reported a net loss of $7,177 for the six-months ended March 31,
1998 as compared to a net loss of $133,642 for the six-months ended March 31,
1997. The decrease in net loss is primarily due to the increase in Portfolio
Receivables revenues and the associated lower costs.
Liquidity and Capital Resources
- -------------------------------
The Company is funded primarily through cash flows from operations. The Company
has recently used its existing credit facility, which has an outstanding balance
of approximately $1,080,000 as of March 31, 1998, to acquire Portfolio
Receivables. The Company's credit facility, which carries an interest rate of
prime plus 1.5%, has been increased to $1,500,000, and was renewed on January
29, 1998 for an additional one year term. Management plans to accelerate its
purchase of Portfolio Receivables, which will necessitate the raising of
additional capital through the issuance of either debt or equity securities.
There are no assurances that such financing will be obtained and any delays in
9
<PAGE>
raising additional capital will limit the Company's ability to substantially
increase the acquisition of additional Portfolio Receivables.
The Company currently has outstanding long-term debt with financial institutions
of approximately $2,673,442 which is secured by a mortgage and certain
equipment. The Company's equipment debt is a term note with a remaining balance
of approximately $663,300 is due in December, 2000 and carries an interest rate
of 11% per annum. The Company's mortgage note has a remaining balance of
approximately $1,851,300, carries an interest rate of 8% per annum and is due on
March 5, 2000. Management is currently evaluating the feasibility of
refinancing the mortgage note payable. The Company also finances certain
capital leases for computer equipment that had a remaining balance of
approximately $158,800 at March 31, 1998. Management expects to continue to
service its outstanding long-term debt through its cash flows from operations.
Year 2000
The Year 2000 issue is the result of computer programs being written using two
digits rather than four to define the applicable year. Any of the Company's
computer programs that have time sensitive software may recognize a date using
the "00" as the year 1900 rather than the year 2000. This could result in a
system failure or miscalculations causing disruptions of operations. The
Company has assessed and implemented corrective measures to address the Year
2000 issues. The Company has also made inquiries regarding the Year 2000 issue
of certain third parties with whom the Company does business. The Company
believes that its internal systems and those supplied to it by third parties are
or will be Year 2000 compliant by the Year 2000 without any material additional
expense. Year 2000 considerations may, however, impact vendors or other
institutions with which the Company has relationships, indirectly affecting the
Company.
10
<PAGE>
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
Not Applicable
Item 2. Changes in Securities
Not Applicable
Item 3. Defaults Upon Senior Securities
Not Applicable
Item 4. Submission of Matters to a Vote of Security Holders
Not Applicable
Item 5. Other Information
Not Applicable
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Not Applicable
(b) Reports on Form 8-K
Not Applicable
11
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
CYPRESS FINANCIAL SERVICES, INC.
Date: May 2, 1998 By: /s/ Farrest Hayden
----------------------------------------
Farrest Hayden
Chairman of the Board and
Chief Executive Officer
Date: May 2, 1998 By: /s/ Otto J. Lacayo
-----------------------------------------
Otto J. Lacayo
Director, Chief Financial
Officer and Vice President
(Principle Accounting Officer)
12
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C> <C>
<PERIOD-TYPE> 6-MOS 3-MOS
<FISCAL-YEAR-END> MAR-31-1998 MAR-31-1998
<PERIOD-END> MAR-31-1998 MAR-31-1998
<CASH> 392,445 0
<SECURITIES> 0 0
<RECEIVABLES> 579,618 0
<ALLOWANCES> 79,963 0
<INVENTORY> 0 0
<CURRENT-ASSETS> 1,603,594 0
<PP&E> 4,106,759 0
<DEPRECIATION> 1,476,066 0
<TOTAL-ASSETS> 4,307,076 0
<CURRENT-LIABILITIES> 1,852,986 0
<BONDS> 2,673,442 0
0 0
690,000 0
<COMMON> 515,000 0
<OTHER-SE> (1,424,352) 0
<TOTAL-LIABILITY-AND-EQUITY> 4,307,076 0
<SALES> 2,546,093 1,260,258
<TOTAL-REVENUES> 2,606,107 1,286,295
<CGS> 0 0
<TOTAL-COSTS> 2,475,651 1,218,532
<OTHER-EXPENSES> 0 0
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 137,633 62,378
<INCOME-PRETAX> (7,177) 5,385
<INCOME-TAX> 0 0
<INCOME-CONTINUING> 0 0
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (7,177) 5,385
<EPS-PRIMARY> (0.00) 0.00
<EPS-DILUTED> 0 0
</TABLE>
