<PAGE>
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U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
(Mark One)
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1999
(_) TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ____________ to ____________
Commission file number 0-17192
CYPRESS FINANCIAL SERVICES, INC.
(Exact name of small business issuer 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 offices)
Issuer's telephone number (714) 995-0627
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
--- ---
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: As of August 3, 1999 the issuer had
6,526,912 shares of common stock outstanding.
Transitional Small Business Disclosure Format (Check one): Yes No X
--- ---
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<PAGE>
CYPRESS FINANCIAL SERVICES, INC.
FORM 10-QSB
INDEX
PART I. FINANCIAL INFORMATION Page
----
Item 1. Condensed Consolidated Balance Sheet as of
June 30, 1999.............................................. 1
Condensed Consolidated Statements of
Operations for the nine month periods ended
June 30, 1999 and 1998..................................... 2
Condensed Consolidated Statements of
Operations for the three month periods ended
June 30, 1999 and 1998..................................... 3
Condensed Consolidated Statements of
Cash Flows for the nine month periods ended
June 30, 1999 and 1998..................................... 4
Notes to Condensed Consolidated Financial
Statements................................................. 5 to 8
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations........................ 9 to 13
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.......................................... 14
Item 2. Changes in Securities...................................... 14
Item 3. Defaults Upon Senior Securities............................ 14
Item 4. Submission of Matters to a Vote of Security Holders........ 14
Item 5. Other Information.......................................... 14
Item 6. Exhibits and Reports on Form 8-K........................... 14
<PAGE>
CYPRESS FINANCIAL SERVICES, INC.
--------------------------------
AND SUBSIDIARIES
----------------
CONDENSED (UNAUDITED) CONSOLIDATED BALANCE SHEET
------------------------------------------------
JUNE 30, 1999
-------------
ASSETS
------
<TABLE>
<CAPTION>
<S> <C>
Cash $ 645,972
Restricted cash 439,018
Accounts receivable, net 301,447
Portfolio receivables, net 1,071,752
Property, net 3,170,908
Notes receivable from officers 150,000
Prepaid expenses and other 143,545
----------
Total assets $5,922,642
==========
<CAPTION>
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
Accounts payable $ 75,033
Trust payables 439,018
Accrued liabilities 177,551
Notes payable 1,828,424
Capital lease obligations 378,340
Deferred income taxes 20,089
-----------
Total liabilities 2,918,455
-----------
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY:
Series A convertible, redeemable preferred stock,
$0.001 par value, stated at $2.00 liquidation
preference per share, 5,000,000 shares authorized;
345,000 shares issued and outstanding 690,000
Common stock, $0.001 par value; 30,000,000 shares
authorized; 6,527,571 shares issued and outstanding 6,527
Paid-in capital 3,522,403
Accumulated deficit (1,212,476)
-----------
3,006,454
Less common stock in treasury at cost, 659 shares 2,267
-----------
Total shareholders' equity 3,004,187
-----------
$ 5,922,642
===========
</TABLE>
The accompanying notes are an integral part of these condensed balance sheet.
1
<PAGE>
CYPRESS FINANCIAL SERVICES, INC.
--------------------------------
AND SUBSIDIARIES
----------------
CONDENSED (UNAUDITED) CONSOLIDATED STATEMENTS OF OPERATIONS
-----------------------------------------------------------
FOR THE NINE MONTH PERIODS ENDED JUNE 30, 1999 AND 1998
-------------------------------------------------------
<TABLE>
<CAPTION>
1999 1998
------------ -----------
<S> <C> <C>
REVENUES: $ 3,991,309 $3,827,772
OPERATING EXPENSES:
Salaries, wages and related benefits 3,323,505 2,576,990
Selling, general and administrative 1,378,525 1,035,773
Loan losses 406,886 -
Depreciation 141,672 128,570
----------- ----------
5,250,588 3,741,333
----------- ----------
INCOME (LOSS) FROM OPERATIONS (1,259,279) 86,439
----------- ----------
OTHER INCOME (EXPENSE):
Interest expense, net (79,604) (220,292)
Rental operations, net 67,707 71,792
Other income - 1,825
----------- ----------
(11,897) (146,675)
----------- ----------
LOSS BEFORE BENEFIT FOR INCOME TAXES (1,271,176) (60,236)
BENEFIT FOR INCOME TAXES (435,875) -
----------- ----------
NET LOSS $ (835,301) $ (60,236)
=========== ==========
Earnings per share:
Basic $ (0.13) $ (0.01)
Diluted $ (0.13) $ (0.01)
Number of shares used in computing earnings per share:
Basic 6,527,331 4,527,571
Diluted 6,527,331 4,527,571
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
2
<PAGE>
CYPRESS FINANCIAL SERVICES, INC.
--------------------------------
AND SUBSIDIARIES
----------------
CONDENSED (UNAUDITED) CONSOLIDATED STATEMENTS OF OPERATIONS
-----------------------------------------------------------
FOR THE THREE MONTH PERIODS ENDED JUNE 30, 1999 AND 1998
--------------------------------------------------------
<TABLE>
<CAPTION>
1999 1998
----------- -----------
<S> <C> <C>
REVENUES: $1,544,178 $1,286,873
OPERATING EXPENSES:
Salaries, wages and related benefits 1,270,094 880,399
Selling, general and administrative 488,149 345,982
Loan losses 145,239 -
Depreciation 54,629 44,491
---------- ----------
1,958,111 1,270,872
---------- ----------
INCOME (LOSS) FROM OPERATIONS (413,933) 16,001
---------- ----------
OTHER INCOME (EXPENSE):
Interest expense, net (38,513) (82,659)
Rental operations, net 25,606 11,778
Other income - 1,825
---------- ----------
(12,907) (69,056)
---------- ----------
LOSS BEFORE BENEFIT FOR INCOME TAXES (426,840) (53,055)
BENEFIT FOR INCOME TAXES (149,394) -
---------- ----------
NET LOSS $ (277,446) $ (53,055)
========== ==========
Earnings per share:
Basic $ (0.04) $ (0.01)
Diluted $ (0.04) $ (0.01)
Number of shares used in computing earnings per share:
Basic 6,526,978 4,527,571
Diluted 6,526,978 4,527,571
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
3
<PAGE>
CYPRESS FINANCIAL SERVICES, INC.
--------------------------------
AND SUBSIDIARIES
----------------
CONDENSED (UNAUDITED) CONSOLIDATED STATEMENTS OF CASH FLOWS
-----------------------------------------------------------
FOR THE NINE MONTH PERIODS ENDED JUNE 30, 1999 AND 1998
-------------------------------------------------------
<TABLE>
<CAPTION>
1999 1998
------------ ----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (835,301) $ (60,236)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Depreciation and amortization 154,023 129,050
Decrease in deferred income taxes (444,911) -
Changes in operating assets and liabilities:
(Increase) decrease in restricted cash (20,850) (100,434)
(Increase) decrease in accounts receivable, net 92,339 (114,814)
(Increase) decrease in portfolio receivables (306,719) (78,590)
(Increase) decrease in prepaid expenses and other (22,566) 34,001
Increase (decrease) in accounts payable 20,703 921
Increase (decrease) in trust payables 20,850 100,434
Increase (decrease) in accrued liabilities 15,048 112,023
----------- ---------
Net cash provided by (used in) operating activities (1,327,384) 22,355
----------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property (330,990) (38,924)
Proceeds from sale of property 26,483 -
----------- ---------
Net cash used in investing activities (304,507) (38,924)
----------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Purchases of treasury stock (2,267) -
Payments received on loans to officers 2,013 -
Net borrowings on line of credit - 313,000
Principal payments on notes payable (15,319) (25,850)
Principal payments on capital lease obligations (36,315) (180,698)
----------- ---------
Net cash provided by (used in) financing activities (51,888) 106,452
----------- ---------
NET INCREASE (DECREASE) IN CASH (1,683,779) 89,883
CASH, at beginning of period 2,329,751 271,455
----------- ---------
CASH, at end of period $ 645,972 $ 361,338
=========== =========
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
4
<PAGE>
CYPRESS FINANCIAL SERVICES, INC.
--------------------------------
AND SUBSIDIARIES
----------------
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
----------------------------------------------------
JUNE 30, 1999
-------------
1. Quarterly Information
---------------------
The accompanying unaudited, condensed and consolidated financial statements have
been prepared in accordance with Securities and Exchange Commission requirements
for interim financial statements. Therefore, they do not include all disclosures
that would be presented in the Annual Report on Form 10-KSB of Cypress Financial
Services, Inc., a Nevada corporation, (together with its subsidiaries, the
Company). These condensed consolidated financial statements should be read in
conjunction with the consolidated financial statements contained in the
Company's 1998 Annual Report on Form 10-KSB.
The information furnished reflects all adjustments (consisting only of normal
recurring adjustments) which are, in the opinion of management, necessary for a
fair presentation of financial position and results of operations for the
interim periods. The operating results are not necessarily indicative of results
to be expected for the year ending September 30, 1999.
2. Organization and Summary of Significant Accounting Policies
-----------------------------------------------------------
a. Organization and Basis of Presentation
--------------------------------------
The Company provides accounts receivable management, administration, and
debt collection services primarily to health care providers and consumer
credit issuers. In addition to its third party collection business, in
January 1995, the Company began acquiring accounts receivable and other
consumer obligations for its own collection portfolio.
The Company operates primarily through wholly owned subsidiaries that serve
specific segments of the collections service industry. The Company's
subsidiaries include: (i) Merchants Recovery Services, Inc. (MRSI), a
company that primarily offers accounts receivable collection services to
banks, credit unions, public utilities, and retailers; (ii) Medical Control
Services, Inc. (MCSI), a collection agency servicing the health care
industry; (iii) Lien Solutions, Inc. (LSI), a company that specializes in
the recovery of unpaid worker's compensation claims primarily for
healthcare service providers, including hospitals and doctors; (iv) My
Boss, Inc. d.b.a. Business Office Support Services (BOSS), a company that
provides pre-collection consulting and credit monitoring services to
medical providers and other businesses that extend credit; and (v) Pacific
Process Serving, Inc. (PPS), a statewide legal document process service
company.
b. Principles of Consolidation
---------------------------
The condensed consolidated financial statements include the accounts of
Cypress Financial Services, Inc. and its wholly owned subsidiaries. All
significant intercompany accounts have been eliminated in consolidation.
5
<PAGE>
c. Accounts Receivable
-------------------
Accounts receivable represent accounts in which the Company provides
collection services for entities in the commercial, retail and medical
industries for a fee. Service fees are reported as income when earned.
Servicing costs are charged to expense as incurred.
d. Portfolio Receivables
---------------------
Portfolio receivables (Receivables) represent liquidating portfolios of
delinquent accounts which have been purchased by the Company for collection
and are stated at the lower of cost or net realizable value. Cost is
reduced by cash collections on an account by account basis until such time
that collections equal cost. Net realizable value represents management's
estimate of the remaining net proceeds to be realized from a given
portfolio, based on an account by account evaluation of the remaining
uncollected delinquent receivables and on the historical collection
experience of the specific portfolio and similar portfolios. Revenues from
collections on purchased portfolios of receivables are recognized on an
account by account basis after the cost of each account has been recovered.
Gains and losses are recorded as appropriate when Receivables are sold. The
Company considers a transfer of Receivables where the Company surrenders
control over the Receivables a sale to the extent that consideration other
than beneficial interests in the transferred Receivables is received in
exchange for the Receivables.
e. Property
--------
Equipment, furnishings and automobiles are carried at cost and depreciated
using both straight-line and accelerated methods over the estimated useful
lives of the assets, which are generally 5 to 7 years. The building is
being depreciated over a period of 39 years.
Repairs and maintenance are charged to expense as incurred; replacements
and betterments are capitalized.
f. Trust Accounts and Restricted Cash
----------------------------------
The Company maintains trust accounts for the benefit of its customers.
Related funds are deposited in trust bank accounts and reflected as a trust
liability until such amounts held in trust are remitted to customers. The
trust accounts cash balances of $439,018 are reflected as restricted cash
and trust payables in the accompanying condensed consolidated balance
sheet.
g. Fair Value of Financial Instruments
-----------------------------------
Fair values of financial instruments are estimated using available market
information and other valuation methodologies. The fair values of the
Company's financial instruments are estimated to approximate the related
book value, unless otherwise indicated.
h. Earnings Per Share
------------------
Basic Earnings per Share (EPS) is computed by dividing reported earnings by
weighted average shares outstanding. Diluted EPS is computed in the same
way as fully diluted EPS, except that the calculation uses the average
share price for the reporting period to compute dilution from options under
the treasury stock method.
6
<PAGE>
i. Income Taxes
------------
The Company accounts for income taxes using the asset and liability method.
j. Use of Estimates
----------------
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make certain
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date
of the financial statements, and the reported amounts of revenues and
expenses during the reported periods. Actual results could materially
differ from those estimates.
k. Reclassification
----------------
Certain amounts in the accompanying 1998 financial statements have been
reclassified to conform to 1999 presentation.
3. Portfolio Receivables
---------------------
The cost basis of portfolio receivables (Receivables) activity consists of the
following as of June 30, 1999, and for the nine months then ended:
Portfolio receivables at September 30, 1998 $ 765,033
Purchases of portfolio receivables 1,100,885
Increase in allowance for loan losses (406,886)
Collections applied to cost basis (92,368)
Sales of portfolio receivables applied to cost basis (294,912)
----------
Portfolio receivables at June 30, 1999 $1,071,752
==========
For the nine months ended June 30, 1999 and 1998, the Company had gross
collections from the Receivables of $794,870 and $1,308,729, respectively. After
applying $92,368 and $290,839 to the cost basis for the nine months ended June
30, 1999 and 1998, respectively, $702,502 and $1,017,890 was recognized as
portfolio receivables revenue in the accompanying condensed consolidated
statements of operations.
For the nine months ended June 30, 1999 and 1998, the Company had proceeds from
sales of the Receivables of $472,000 and $284,550, respectively. After applying
$294,912 and $32,969 to the cost basis for the nine months ended June 30, 1999
and 1998, respectively, $177,088 and $251,581 was recognized as portfolio
receivables revenue in the accompanying condensed consolidated statements of
operations.
On August 14, 1998 the Company sold Receivables with a book value of $224,634 to
a wholly-owned subsidiary for $2,750,000, which issued interest-bearing asset-
backed securities to Pacific Life Insurance Company for the same amount. As
permitted by SFAS No. 125, the Company considers the transfer of Receivables
where the Company surrenders control over the Receivables a sale and does not
include the wholly-owned subsidiary in its consolidated financial statements.
For the nine months ended June 30, 1999, the Company had gross collections from
these Receivables of $1,151,477, of which $256,085 was recognized as service fee
revenue in the accompanying condensed consolidated statements of operations.
Due to the nature of these Receivables, there is no assurance that historical
collection results will reflect the future collectibility of the face value of
the Receivables.
7
<PAGE>
4. Property
--------
Property consists of the following:
Land $ 866,575
Building 1,540,577
Equipment and furnishings 2,362,035
----------
4,769,187
Less--Accumulated depreciation 1,598,279
----------
$3,170,908
==========
5. Notes Payable
-------------
Notes payable consists of a mortgage note payable to a bank, collateralized by
land and a building, due in monthly payments of $14,089, including interest at 8
percent per annum, through December 2000, at which time the entire principal
balance is due and payable.
6. Income Taxes
------------
Income tax expense for the periods presented are based on the estimated
affective tax rate to be incurred for the year. Because certain items of income
and expense are not recognized in the same year in the financial statements of
the Company as in its Federal and California tax returns, deferred assets and
liabilities are created. As of June 30, 1999, the accompanying condensed
consolidated balance sheet reflects net deferred tax liabilities of $20,089.
7. Stockholders' Equity Transactions
---------------------------------
On February 12, 1999, the Company issued a warrant to Batchelder & Partners,
Inc. to purchase up to 400,000 shares of the Company's common stock in
connection with their agreement to act as the Company's non-exclusive financial
advisor. This warrant is subject to specific exercise price and vesting
provisions as described in the agreement and will be exercisable until November
13, 2005.
Pursuant to an odd-lot tender offer dated January 30, 1999 whereby the Company
offered to purchase all outstanding shares of common stock held in odd-lots of
1-99 shares at $3.00 per share and a minimum tender offer of $5.00 to each
tendering shareholder, the Company purchased 659 shares of common stock through
June 30, 1999 at an aggregate cost of $2,267.
8
<PAGE>
Item 2 Management's Discussion and Analysis of Financial Condition and Results
of Operations
General
The Company provides accounts receivable management services to various health
care providers, banks, financial institutions, and retail firms. These services
include, among other things, billing, delinquent debt recovery, management of
litigation and bankruptcy claims, and workers' compensation lien claim
resolution. In the early nineties, financial institutions, primarily credit card
issuers, began changing their approach regarding the management of charged off
consumer receivables. These financial institutions started to sell portions of
their charged off portfolios to certain delinquent debt recovery firms and
investment groups in lieu of third party placements. Accordingly, in February
1994, the Company began to purchase portfolios of consumer receivables for its
own account, and has continued to do so into 1999.
The following discussion of the financial condition and results of operations of
the Company should be read in conjunction with the condensed consolidated
financial statements and notes thereto included elsewhere in this report.
Certain statements included in this Management's Discussion and Analysis of
Financial Condition and Results of Operations, as well as elsewhere in this
Quarterly Report on Form 10-QSB are forward-looking statements, and the actual
results and developments may be materially different from those expressed in or
implied by such statements.
Results of Operations
Nine months ended June 30, 1999 versus nine months ended June 30, 1998
The following table summarizes the gross collection and revenue activities for
the nine months ended June 30, 1999 and 1998.
<TABLE>
<CAPTION>
% A Positive
1999 % 1998 % (Negative)
------------ --- ------------ --- -------------
<S> <C> <C> <C> <C> <C>
Gross collections $12,426,114 100% $ 9,731,390 100% 27.7%
Less: Remittances to holders of
portfolio backed securities (897,907) -7% - 0% N/A
Less: Clients' share of collections (7,646,852) -62% (6,120,801) -63% -24.9%
----------- ----------- -----
Net fees 3,881,355 31% 3,610,589 37% 7.5%
Less: Fees applied to cost basis
of portfolio receivables (92,368) -1% (290,839) -3% 68.2%
----------- ----------- -----
Fee revenue (core operations) $ 3,788,987 30% $ 3,319,750 34% 14.1%
Gain on sale of portfolio receivables 177,088 251,581 -29.6%
Fee revenue (non-core operations) 25,234 256,441 -90.2%
----------- ----------- -----
Total revenue $ 3,991,309 $ 3,827,772 4.3%
=========== =========== =====
</TABLE>
9
<PAGE>
Gross collections increased by $2,694,724, or 27.7%, from $9,731,390 for the
nine months ended June 30, 1998 to $12,426,114 for the nine months ended June
30, 1999. This increase is directly attributable to the Company's ongoing
strategic growth plan, which was initiated in the first quarter of 1999. The
Company is actively pursuing additional business in all three of its business
segments; health care, banking and retail.
Net fees recognized from gross collections increased by $270,766, or 7.5%, from
$3,610,589 for the nine months ended June 30, 1998 to $3,881,355 for the nine
months ended June 30, 1999. Net fees recognized from gross collections is
calculated by reducing gross collections by remittances to clients' for their
share of collections and by remittances to holders of portfolio backed
securities. As a percentage of gross collections, remittances to clients' for
their share of collections remained flat at approximately 63%. However,
remittances to holders of portfolio backed securities increased by $897,907 from
$0 for the nine months ended June 30, 1998 to $897,907 for the nine months ended
June 30, 1999. This increase is the result of the Company completing a sale of
certain portfolio receivables totaling $149.5 million through the private
securitization in August 1998.
Fee revenue from core operations increased by $469,237, or 14.1%, from
$3,319,750 for the nine months ended June 30, 1998 to $3,788,987 for the nine
months ended June 30, 1999. Fee revenue is calculated by reducing net fees
recognized from gross collections by fees applied to cost basis of portfolio
receivables. These applied fees decreased by 68.2% primarily due to the sale of
substantially all of the Company's portfolio receivables in the securitization
discussed above. As of June 30, 1999, the Company's direct purchases of
portfolio receivables had a remaining face value of $36.1 million as compared to
a remaining face value of $156.4 million as of June 30, 1998. During the nine
months ended June 30, 1999, the Company purchased and retained approximately $25
million of such obligations for its own account.
The balance of total revenue consists of gain on sale of portfolio receivables
and fee revenue from non-core operations. Gain on sale of portfolio receivables
decreased by $74,493, or 29.6%, from $251,581 for the nine months ended June 30,
1998 to $177,088 for the nine months ended June 30, 1999. Fee revenue from non-
core operations decreased by $231,207, or 90.2%, from $256,441 for the nine
months ended June 30, 1998 to $25,234 for the nine months ended June 30, 1999.
This decrease can be attributed to a decision made by the Company to discontinue
efforts regarding certain non-core operating units (principally Revenue Practice
Enhancements). These units were determined to be non-essential to the Company's
overall strategic growth plan, which was initiated in the first quarter of 1999.
Operating expenses increased by $1,509,255, or 40.3%, from $3,741,333 for the
nine months ended June 30, 1998 to $5,250,588 for the nine months ended June 30,
1999. The significant components of this increase can be attributed to the
Company's ongoing strategic growth plan and are discussed below.
Salaries, wages and related benefits increased by $746,515, or 29.0%, from
$2,576,990 for the nine months ended June 30, 1998 to $3,323,505 for the nine
months ended June 30, 1999. Due to growth in the Company's billing and
collecting staff, operating salaries paid increased by $580,941 from $1,591,160
for the nine months ended June 30, 1998 to $2,172,101 for the nine months ended
June 30, 1999. This growth in billers and collectors is directly attributable to
the growth of $2,694,724 in gross collections noted above. The remaining
increase of $165,574 resulted from increased benefit expenses associated with
these additional billers and collectors as well as specific additions to the
Company's management team.
10
<PAGE>
Selling, general and administrative expenses increased to $1,378,525 for the
nine months ended June 30, 1999 from $1,035,773 for the nine months ended June
30, 1998. This 33.1% increase is principally attributable to certain non-
recurring, non-operating expenses associated with the execution of the Company's
strategic growth plan, which include, among other things, fees paid for due
diligence work related to acquisition activities, attorney fees, and fees paid
to third party financial advisors. Although these costs are not capitalizable,
management believes significant future value will be obtained from these
expenditures.
The Company ratably allocates the cost of purchased loans receivable portfolios
on an account by account basis. Collections received from any one account are
applied first to the basis of the respective account before revenue is
recognized. Integral to the Company's collection operations is the timely
identification of accounts that are deemed uncollectible. The uncollectibility
of an account is primarily based on the current status of the account (i.e.
bankrupt, deceased, etc.) and the historical experience of the specific
portfolio as well as similar portfolios. The Company records an allowance for
loan losses reflecting the accumulated costs allocated to those accounts deemed
uncollectible to properly reflect management's estimate of the remaining net
proceeds to be realized from a given portfolio. Due to the nature of these
receivables at purchase date, it is not uncommon for the Company to immediately
identify certain accounts to be uncollectible at the time of acquisition.
Accordingly, for the nine months ended June 30, 1999, the Company increased its
allowance for loan losses on acquired portfolios by $406,886.
Depreciation expense increased 10.2% over the same period last year principally
due to certain technology upgrades as well as furniture purchases made by the
Company in the fourth quarter of 1998.
Interest expense decreased to $79,604 for the nine months ended June 30, 1999
from $220,292 for the nine months ended June 30, 1998. This 63.9% decrease
resulted from retiring the Company's credit facility and equipment loans in the
fourth quarter of 1998 using proceeds of a $3,000,000 private placement as well
as a $2,750,000 securitization (see discussion below).
Net income from rental operations decreased by $4,085, or 5.7%, from $71,792 for
the nine months ended June 30, 1998 to $67,707 for the nine months ended June
30, 1999. This decrease is directly attributable to the growth of the Company
into areas of its building which were leased to unrelated third parties in prior
years.
Liquidity and Capital Resources
The Company is funded primarily through cash flows from operations.
Historically, the Company has used its credit facility to acquire portfolio
receivables. However, in July 1998, the Company sold 2,000,000 shares of its
common stock to Pacific Life Insurance Company for $3,000,000, representing 28%
of the outstanding common stock of the Company on a fully diluted basis.
Additionally, in August 1998, the Company completed its first securitization of
portfolio receivables which generated net cash flows to the Company of
$2,552,000. The combined $5,552,000 was used to retire the Company's credit
facility and existing equipment loans leaving the balance available for
expansion as well as ongoing purchases of portfolio receivables.
11
<PAGE>
The Company currently has outstanding long-term debt with financial institutions
of $2,206,764 which is secured by a mortgage and certain equipment. The
Company's mortgage note has a remaining balance of $1,828,424, carries an
interest rate of 8% per annum and is due in December 2000. Management is
currently evaluating the feasibility of refinancing the mortgage note payable.
The Company also finances certain equipment and furnishings that have a
remaining balance of $378,340 at June 30, 1999. Management expects to continue
to service its outstanding long-term debt through its cash flows from
operations.
In addition to capital required for the Company's existing business and its
growth, the Company may require additional capital resources if it should choose
to expand its operations by acquisitions of other businesses. Although the
Company has no commitments to make any acquisitions, it does regularly review
proposals to make acquisitions in the accounts receivable management field and
considers acquisitions a significant component of its strategic plan.
There can be no assurance that such additional financing, if required, will be
available to the Company, nor can there be any assurance as to the cost of any
such financing that may be available. The Company is exploring the possibility
of issuing additional debt and/or equity to provide additional capital, but has
no commitment to do so.
Year 2000
State of Readiness -- Since early 1997, the Company has been addressing the
impact of the Year 2000 to its data processing systems. Key financial
information and operational systems were addressed and detailed plans were
developed to ensure that Year 2000 system modifications were in place by
September 1998 for all critical systems. As most of the critical software is
purchased from vendors which have already made the necessary Year 2000 changes,
the Company is concentrating its efforts on testing its "Year 2000 Compliant"
systems.
Costs to Address Year 2000 Issues -- In the process of identifying the Company's
critical systems and determining the extent to which they must be modified or
replaced, management has found no systems which need to be replaced or
extensively modified to ensure they will function as intended. Accordingly,
management does not anticipate a material adverse impact to the Company's
results of operations or financial position.
Risks for the Company -- The primary risk of failure to adequately address the
Year 2000 problem would be the inability to accurately process and track
financial records and transactions. Additionally, the Company is exposed to risk
if its customers, clients, and financial institutions are unable to adequately
address the Year 2000 dates in their own data processing systems. The Company
has contacted all of the major customers, clients and financial institutions
with whom it does business to ensure that they are addressing the issue for
themselves and their customers.
Contingency Plans -- Should the Company's vendor for its core processing
applications fail to provide the modifications necessary to correctly recognize
Year 2000 dates, as a contingency plan for core operations, the Company would
out source its mainframe computer applications. For non-core operations, the
Company will rely on manual processing until modifications or replacement
systems are in place.
12
<PAGE>
Recent Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board issued. SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities," In June 1999,
the effective date of SFAS No. 133 was extended for one year; consequently, the
statement will now be effective for all fiscal quarters of fiscal years
beginning after June 15, 2000, with earlier application encouraged. SFAS No. 133
requires that an entity recognize all derivative instruments as either assets or
liabilities on its balance sheet at their fair value. Changes in the fair value
of derivatives are recorded each period in current earnings or other
comprehensive income, depending on whether a derivative is designated as part of
a hedge transaction, and, if it is, the type of hedge transaction. The Company
believes that adoption of this standard will not have a material impact on the
Company.
13
<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
27 Financial Data Schedule
(b) Reports on Form 8-K
Not Applicable
14
<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: August 13, 1999 By: /s/ Manuel Occiano
-------------------------------------
Manuel Occiano
Director and Chief Executive Officer
Date: August 13, 1999 By: /s/ John C. Hindman
-------------------------------------
John C. Hindman
Chief Financial Officer and Treasurer
(Principal Accounting Officer)
15
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<PAGE>
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<S> <C> <C>
<PERIOD-TYPE> 9-MOS 3-MOS
<FISCAL-YEAR-END> SEP-30-1999 SEP-30-1999
<PERIOD-START> OCT-01-1998 APR-01-1999
<PERIOD-END> JUN-30-1999 JUN-30-1999
<CASH> 645,972 0
<SECURITIES> 0 0
<RECEIVABLES> 701,447 0
<ALLOWANCES> (400,000) 0
<INVENTORY> 0 0
<CURRENT-ASSETS> 2,458,189 0
<PP&E> 4,769,187 0
<DEPRECIATION> (1,598,279) 0
<TOTAL-ASSETS> 5,922,642 0
<CURRENT-LIABILITIES> 691,602 0
<BONDS> 2,206,764 0
0 0
690,000 0
<COMMON> 4,260 0
<OTHER-SE> 2,309,927 0
<TOTAL-LIABILITY-AND-EQUITY> 5,922,642 0
<SALES> 0 0
<TOTAL-REVENUES> 4,059,016 1,569,784
<CGS> 0 0
<TOTAL-COSTS> 0 0
<OTHER-EXPENSES> 5,250,588 1,958,111
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 79,604 38,513
<INCOME-PRETAX> (1,271,176) (426,840)
<INCOME-TAX> (435,875) (149,394)
<INCOME-CONTINUING> (835,301) (277,446)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (835,301) (277,446)
<EPS-BASIC> (0.13) (0.06)
<EPS-DILUTED> (0.13) (0.06)
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