<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 December 31, 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 January 31, 2000 the issuer
had 6,526,911 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
December 31, 1999........................................ 1
Condensed Consolidated Statements of
Operations for the three month periods ended
December 31, 1999 and 1998............................... 2
Condensed Consolidated Statements of
Cash Flows for the three month periods ended
December 31, 1999 and 1998............................... 3
Notes to Condensed Consolidated Financial
Statements............................................... 4 to 7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations...................... 8 to 12
PART II. OTHER INFORMATION
Item 1. Legal Proceedings........................................ 13
Item 2. Changes in Securities.................................... 13
Item 3. Defaults Upon Senior Securities.......................... 13
Item 4. Submission of Matters to a Vote of Security Holders...... 13
Item 5. Other Information........................................ 13
Item 6. Exhibits and Reports on Form 8-K......................... 13
<PAGE>
CYPRESS FINANCIAL SERVICES, INC.
--------------------------------
AND SUBSIDIARIES
----------------
CONDENSED (UNAUDITED) CONSOLIDATED BALANCE SHEET
------------------------------------------------
DECEMBER 31, 1999
-----------------
<TABLE>
ASSETS
------
<S> <C>
Cash $ 186,093
Restricted cash 372,225
Accounts receivable, net 91,683
Portfolio receivables, net 797,208
Property, net 3,073,542
Notes receivable from officers 150,000
Prepaid expenses and other 261,937
----------
Total assets $4,932,688
==========
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
Accounts payable $ 58,929
Trust payables 372,225
Accrued liabilities 269,727
Notes payable 1,818,100
Capital lease obligations 340,848
----------
Total liabilities 2,859,829
----------
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 3,622,403
Accumulated deficit (2,243,799)
----------
2,075,131
Less common stock in treasury at cost, 660 shares 2,272
----------
Total shareholders' equity 2,072,859
----------
4,932,688
==========
</TABLE>
The accompanying notes are an integral part of these condensed financial
statements.
1
<PAGE>
CYPRESS FINANCIAL SERVICES, INC.
--------------------------------
AND SUBSIDIARIES
----------------
CONDENSED (UNAUDITED) CONSOLIDATED STATEMENTS OF OPERATIONS
-----------------------------------------------------------
FOR THE THREE MONTH PERIODS ENDED DECEMBER 31, 1999 AND 1998
------------------------------------------------------------
<TABLE>
<CAPTION>
1999 1998
---------- ----------
<S> <C> <C>
REVENUES: $1,085,152 $1,119,370
OPERATING EXPENSES:
Salaries, wages and related benefits 993,877 913,698
Selling, general and administrative 289,119 332,336
Losses on portfolio receivables 92,737 97,013
Depreciation 56,301 43,522
---------- ----------
1,432,034 1,386,569
---------- ----------
LOSS FROM OPERATIONS (346,882) (267,199)
---------- ----------
OTHER INCOME (EXPENSE):
Interest expense, net (44,021) (14,410)
Rental operations, net 17,392 26,112
---------- ----------
(26,629) 11,702
---------- ----------
LOSS BEFORE BENEFIT FOR INCOME TAXES (373,511) (255,497)
BENEFIT FOR INCOME TAXES - (87,344)
---------- ----------
NET LOSS $ (373,511) $ (168,153)
========== ==========
Earnings per share:
Basic $ (0.06) $ (0.03)
Diluted $ (0.06) $ (0.03)
Number of shares used in computing earnings per share:
Basic 6,526,911 6,527,571
Diluted 6,526,911 6,527,571
</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 CASH FLOWS
-----------------------------------------------------------
FOR THE THREE MONTH PERIODS ENDED DECEMBER 31, 1999 AND 1998
------------------------------------------------------------
<TABLE>
<CAPTION>
1999 1998
---------- -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(373,511) $ (168,153)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Depreciation and amortization 60,738 45,532
Changes in operating assets and liabilities:
Decrease in restricted cash 39,589 80,793
(Increase) decrease in accounts receivable, net 89,194 (69,405)
(Increase) decrease in portfolio receivables 108,011 (420,059)
(Increase) decrease in prepaid expenses and other (114,263) 61,772
Increase in accounts payable 4,816 44,102
Decrease in trust payables (39,589) (80,793)
Decrease in accrued liabilities (60,603) (21,266)
Decrease in deferred income taxes - (89,424)
--------- ----------
Net cash used in operating activities (285,618) (616,901)
--------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property (4,400) (152,184)
--------- ----------
Net cash used in investing activities (4,400) (152,184)
--------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments on notes payable (5,411) (5,003)
Principal payments on capital lease obligations (20,035) (7,370)
--------- ----------
Net cash used in financing activities (25,446) (12,373)
--------- ----------
NET DECREASE IN CASH (315,464) (781,458)
CASH, at beginning of period 501,557 2,329,751
--------- ----------
CASH, at end of period $ 186,093 $1,548,293
========= ==========
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
3
<PAGE>
CYPRESS FINANCIAL SERVICES, INC.
--------------------------------
AND SUBSIDIARIES
----------------
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
----------------------------------------------------
DECEMBER 31, 1999
-----------------
1. Quarterly Information
---------------------
The accompanying unaudited, condensed and consolidated financial statements have
been prepared in accordance with Securities and Exchange Commission requirements
for interim financial statements. Therefore, they do not include all disclosures
that would be presented in the Annual Report on Form 10-KSB of Cypress Financial
Services, Inc., a Nevada corporation, (together with its subsidiaries, the
Company). These condensed consolidated financial statements should be read in
conjunction with the consolidated financial statements contained in the
Company's 1999 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, 2000.
2. 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. The Company also acquires 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.
3. Operating Losses
----------------
The Company incurred significant operating losses during the year ended
September 30, 1999, as well as the quarter ended December 31, 1999. Management
has subsequently implemented specific cost reduction measures, including, but
not limited to certain personnel reductions as well as general payroll
reductions. The Company has also begun restructuring its operating units to
minimize the amount of office space it occupies within its building, allowing
the Company to reduce occupancy costs and increase rental income. Management
expects these measures to restore the Company to profitability.
In order to further improve the liquidity and financial condition of the
Company, management is negotiating to sell principally all of its wholly owned
portfolio receivables, which have a book value of $797,208. These receivables
are expected to generate proceeds in excess of their book value. The Company
also has the ability to sell or refinance its building and, based on a recent
independent appraisal of the property, generate a further $2.5 million in cash
proceeds.
4
<PAGE>
4. Summary of Significant Accounting Policies
------------------------------------------
a. 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.
b. 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.
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 aggregate collections equal the original 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
--------
Furniture, fixtures and equipment 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 $372,225 are reflected as restricted cash
and trust payables in the accompanying condensed consolidated balance
sheet.
5
<PAGE>
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 now uses the average
share price for the reporting period to compute dilution from options under
the treasury stock method.
i. Income Taxes
------------
The Company accounts for income taxes using the asset and liability method.
j. Reclassification
----------------
Certain amounts in the accompanying 1999 financial statements have been
reclassified to conform to 2000 presentation.
5. Portfolio Receivables
---------------------
The cost basis of portfolio receivables (Receivables) activity consists of the
following as of December 31, 1999, and for the three months then ended:
<TABLE>
<S> <C>
Portfolio receivables at September 30, 1999 $905,220
Increase in allowance for losses on portfolio receivables (92,737)
Collections applied to cost basis (15,275)
--------
Portfolio receivables at December 31, 1999 $797,208
========
</TABLE>
For the three months ended December 31, 1999 and 1998, the Company had gross
collections from the Receivables of $166,216 and $194,426, respectively. After
applying $15,275 and $29,363 to the cost basis for the three months ended
December 31, 1999 and 1998, respectively, $150,941 and $165,063 was recognized
as portfolio receivables revenue in the accompanying condensed consolidated
statements of operations.
For the three months ended December 31, 1999 and 1998, the Company had proceeds
from sales of the Receivables of $0 and $355,001, respectively. After applying
$0 and $188,577 to the cost basis for the three months ended December 31, 1999
and 1998, respectively, $0 and $166,424 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 three months ended December 31, 1999 and 1998, the Company had gross
collections from these Receivables of $214,676 and $402,920, respectively, of
which $47,268 and $80,584 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.
6
<PAGE>
6. Property
--------
Property consists of the following:
<TABLE>
<S> <C>
Land $ 866,575
Building 1,540,577
Equipment and furnishings 2,382,849
----------
4,790,001
Less--Accumulated depreciation 1,716,459
----------
$3,073,542
==========
</TABLE>
7. 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.
8. 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. Due to a valuation allowance, the accompanying
condensed consolidated balance sheet reflects a net deferred tax asset of $0.
9. 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 prices ranging from $1.75
to $4.75 with a weighted average exercise price of $3.06. Additionally, this
warrant is subject to vesting provisions whereas 100,000 shares vested
immediately and the balance vests if and when certain defined targets are
achieved. The warrant is 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 660 shares of common stock through
December 31, 1999 at an aggregate cost of $2,272.
7
<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.
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
The following table summarizes the gross collection and revenue activities for
the three months ended December 31, 1999 and 1998.
<TABLE>
<CAPTION>
% . Positive
1999 % 1998 % (Negative)
------------ --- ------------ --- -------------
<S> <C> <C> <C> <C> <C>
Gross collections $ 3,617,870 100% $3,680,639 100% -1.7%
Less: Remittances to holders of
portfolio backed securities (166,598) -5% (323,197) -9% 48.5%
Less: Clients' share of collections (2,350,845) -65% (2,375,133) -65% 1.0%
----------- ---------- ------
Net fees 1,100,427 30% 982,309 27% 12.0%
Less: Fees applied to cost basis
of portfolio receivables (15,275) -0% (29,363) -1% 48.0%
----------- ---------- ------
Fee revenue $ 1,085,152 30% $ 952,946 26% 13.9%
Gain on sale of portfolio receivables - 166,424 -100.0%
----------- ---------- -------
Total revenue $ 1,085,152 $1,119,370 -3.1%
=========== ========== =======
</TABLE>
8
<PAGE>
Total gross collections decreased by $62,769, or 1.7%, from $3,680,639 for the
three months ended December 31, 1998 to $3,617,870 for the three months ended
December 31, 1999. The significant components of gross collections can be
summarized into three categories; contingency collections, portfolio receivables
collections, and securitization collections. Contingency collections increased
by $153,685, or 5.0%, from $3,083,293 for the three months ended December 31,
1998 to $3,236,978 for the three months ended December 31, 1999. Portfolio
receivables collections decreased by $28,210, or 14.5%, from $194,426 for the
three months ended December 31, 1998 to $166,216 for the three months ended
December 31, 1999. Securitization collections decreased by $188,244, or 46.7%,
from $402,920 for the three months ended December 31, 1998 to $214,676 for the
three months ended December 31, 1999. The decreases noted in portfolio
receivables collections as well as securitization collections are to be expected
given the fact that both pools are static, i.e. no new receivables are being
added to these pools. Assuming the Company does not purchase additional
receivables or perform additional securitizations, these categories should
continue to decrease. The Company's current growth strategy is focused on
contingency collections. By actively pursuing additional business in all three
of its business segments, health care, banking and retail, the Company
anticipates continued growth in contingency collections.
Net fees recognized from gross collections increased by $118,118, or 12.0%, from
$982,309 for the three months ended December 31, 1998 to $1,100,427 for the
three months ended December 31, 1999. Net fees recognized from gross collections
is calculated by reducing gross collections by remittances to clients' for their
share of collections and by remittances to holders of portfolio backed
securities. As a percentage of gross collections, remittances to clients' for
their share of collections remained flat at approximately 65%. However,
remittances to holders of portfolio backed securities decreased by $156,599 from
$323,197 for the three months ended December 31, 1998 to $166,598 for the three
months ended December 31, 1999. As discussed above, the static nature of the
securitized receivables is the cause of this decrease and is to be expected.
Fee revenue increased by $132,206, or 13.9%, from $952,946 for the three months
ended December 31, 1998 to $1,085,152 for the three months ended December 31,
1999. Fee revenue is calculated by reducing net fees recognized from gross
collections by fees applied to cost basis of portfolio receivables. These
applied fees decreased by 48.0% due to the static nature of this pool of
receivables as discussed above.
The balance of total revenue consists of gain on sale of portfolio receivables.
The Company did not sell any receivables during the three months ended December
31, 1999. Therefore, gain on sale of portfolio receivables decreased by
$166,424, or 100.0%, from $166,424 for the three months ended December 31, 1998
to $0 for the three months ended December 31, 1999.
In the first quarter of fiscal 1999, the Company adopted an acquisition strategy
designed to expand its knowledge base and servicing capacity through selective
acquisitions of established accounts receivable management organizations as well
as continued internal expansion of its existing core businesses. Throughout
fiscal 1999 and into the first quarter of fiscal 2000, the Company dedicated
significant attention as well as resources to the identification of acceptable
acquisition targets. Although several targets were identified, and many were
thoroughly due diligenced, the Company has been unable to consummate a
transaction. Additionally, throughout the year, the Company maintained an
infrastructure designed to immediately accommodate the growth associated with an
acquisition strategy. As discussed below, most of the operating expense
increases can be attributed to the execution of this strategic plan. Please
refer to "Recent Events" within the "Liquidity and Capital Resources" section
below for further discussion regarding the Company's restructuring and cost-
reduction program designed to restore the Company to profitability at current
operating levels in the near term.
Operating expenses increased by $45,465, or 3.3%, from $1,386,569 for the three
months ended December 31, 1998 to $1,432,034 for the three months ended December
31, 1999. The significant components of this increase are discussed below.
9
<PAGE>
Salaries, wages and related benefits increased by $80,179, or 8.8%, from
$913,698 for the three months ended December 31, 1998 to $993,877 for the three
months ended December 31, 1999. This increase was caused by growth in the
Company's billing and collecting staff, benefit expenses associated with these
additional billers and collectors as well as specific additions to the Company's
management team.
Selling, general and administrative expenses decreased by 43,217, or 13.0%, from
$332,336 for the three months ended December 31, 1998 to $289,119 for the three
months ended December 31, 1999. This decrease is principally attributable to the
absence of certain non-recurring, non-operating expenses associated with the
execution of the Company's fiscal 1999 strategic growth plan, which included,
among other things, fees paid for due diligence work related to acquisition
activities, attorney fees, and fees paid to third party financial advisors.
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 three months ended December 31, 1999, the Company increased
its allowance for loan losses on acquired portfolios by $92,737.
Depreciation expense increased 29.4% 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 fiscal 1998 as well as the first quarter of
fiscal 1999.
Interest expense increased to $44,021 for the three months ended December 31,
1999 from $14,410 for the three months ended December 31, 1998. This 205.5%
increase is the result of the Company entering into four capital leases during
fiscal 1999. The value of the property acquired through the capital leases
totaled $272,857.
Net income from rental operations decreased by $8,720, or 33.4%, from $26,112
for the three months ended December 31, 1998 to $17,392 for the three months
ended December 31, 1999. This decrease is directly attributable to the growth of
the Company into areas of its building which were leased to unrelated third
parties in prior years.
Liquidity and Capital Resources
The Company currently has outstanding long-term debt with financial institutions
totaling $2,158,948. The Company's mortgage note has a remaining balance of
$1,818,100, carries an interest rate of 8% per annum and is due in December
2000. Additionally, the Company leases certain equipment under non-cancelable
capital leases which expire at various times through fiscal 2004, which have a
remaining balance of $340,848 at December 31, 1999.
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
$2,551,684. The combined $5,551,684 was used to retire the Company's credit
facility and existing equipment loans leaving the balance available for
operations.
10
<PAGE>
Cash at December 31, 1999 decreased by $315,464 from September 30, 1999, which
was the result of $285,618 used in operating activities, $4,400 used in
investing activities, and $25,446 used in financing activities. This represents
a 59.6% improvement over the same period in the prior year.
Recent Events
Restructuring Program
As a result of these cash decreases, management has implemented the
Company's restructuring and cost-reduction program approved by the Board on
December 14, 1999. The program is designed to achieve a $1 million
reduction in operating costs, increase revenues and restore the Company to
profitability at current operating levels in the near term. The program
includes significant personnel and general payroll reductions and
consolidations of positions throughout the Company at all levels, with over
$400,000 of annualized cost savings to be realized from consolidation of
executive level positions.
The Company has also begun restructuring its operating units to minimize
the amount of office space it occupies within its building, allowing the
Company to reduce occupancy costs, increase rental income, and potentially
extract in excess of $2.5 million cash out of the building by either
refinancing the mortgage note payable or selling the building sometime
during fiscal 2000. This estimate is based on a recent independent
appraisal of the property. Additionally, the Company is negotiating to sell
principally all of its wholly owned portfolio receivables, which have a
book value of $797,208 as of December 31, 1999. As these portfolio
receivables were purchased with Company cash, all of the proceeds from this
sale will be immediately available for operations. Management expects the
proceeds from this sale to exceed the December 31, 1999 book value of these
assets. Finally, the Company is actively exploring possible financing
sources as well as the possibility of issuing additional debt and/or equity
to provide additional capital, but has no commitment to do so.
Due to these cost reduction measures, and assuming revenues are maintained
at or above the level of fiscal 1999, management believes that its existing
cash balances, combined with anticipated cash flow from operations, will be
sufficient to meet its cash requirements through the end of fiscal 2000. In
the event that cash flow from operations is less than that anticipated and
the Company is unable to obtain cash from any of the above potential
sources, in order to preserve cash, the Company would be required to
further reduce expenditures as well as its corporate infrastructure, either
of which could have a material adverse affect on the Company's future
operations.
Management Changes
On December 22, 1999, the Board of Directors appointed John Hindman to
Chief Executive Officer and elected Mr. Hindman to the Board of Directors.
Mr. Hindman will assume management responsibility for the daily operations
and report directly to the Board. Mr. Hindman succeeds Manuel Occiano, who
served as the Chief Executive Officer since September 1998. Mr. Hindman
joined the Company as Chief Financial Officer in September 1998, and also
will continue to hold that position.
Farrest Hayden and Otto Lacayo, the co-founders of the Company, will remain
active as Directors, with Mr. Hayden continuing to serve as Chairman of the
Board, although they are relinquishing their daily operational
responsibilities.
11
<PAGE>
Year 2000
In early 1997 the Company began 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 used by the Company is purchased from vendors which had
already made the necessary Year 2000 changes, the Company concentrated its
efforts on testing its "Year 2000 Compliant" systems.
The Company did not encounter any significant system issues related to the Year
2000. Based on its operations since January 1, 2000, the Company does not expect
any significant impact to its on-going business as a result of the Year 2000.
However, it is possible that the full impact of the date change has not been
fully recognized. The Company believes that any such problems are likely to be
minor and correctable. In addition, the Company could still be negatively
impacted if the Year 2000 or similar issues adversely affect one of its major
clients or suppliers. The Company currently is not aware of any significant Year
2000 or similar problems that have arisen for one of its clients or suppliers.
The Company did not incur any material expenditures in connection with Year 2000
compliance.
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.
12
<PAGE>
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
In December 1998, Federal Asset Factoring Corporation (Federal) filed a
claim against the Company for negligent misrepresentation. The Company
sold certain portfolio receivables (Receivables) to Track, Inc.
(Track), which Track then sold to Federal. Federal alleges that it was
unable to obtain media on the Receivables which resulted in lower than
anticipated returns for Federal's investors. Federal sued Track and
obtained a judgment, but was unable to collect on the judgment.
Consequently, Federal sued the Company on the basis that Track was
acting as a broker for the Company when the Receivables were sold to
Federal. The Company believes the allegations are without merit and
intends to vigorously pursue its defense. The lawsuit is set for trial
in February 2000.
In March 1999, DDT Medical Credit (DDT) filed a claim against the
Company for breach of contract. DDT contends it purchased certain
Receivables from Towne Medical Center (Towne) in May 1998 and
simultaneously entered into an agreement with the Company to bill and
collect these Receivables. Although the Company had been performing
such services for Towne prior to May 1998, the agreement between Towne
and the Company was mutually terminated on May 15, 1998 and no
agreement was reached between DDT and the Company to continue such
services. The Company believes the allegations are without merit and
intends to vigorously pursue its defense. A trial has been set for
February 2000.
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
13
<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: February 14, 2000 By: /s/ John C. Hindman
---------------------------
John C. Hindman
Chief Executive Officer and
Chief Financial Officer
14
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<PERIOD-END> DEC-31-1999
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