<PAGE>
================================================================================
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, 2000
[_] 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 July 31, 2000 the issuer had
21,493,904 shares of common stock outstanding.
Transitional Small Business Disclosure Format (Check one): Yes [_] No [X]
================================================================================
<PAGE>
CYPRESS FINANCIAL SERVICES, INC.
FORM 10-QSB
INDEX
<TABLE>
<CAPTION>
Page
----
<S> <C> <C>
PART I. FINANCIAL INFORMATION
Item 1. Condensed Consolidated Balance Sheet as of
June 30, 20001........................................... 1
Condensed Consolidated Statements of
Operations for the nine month periods ended
June 30, 2000 and 1999................................... 2
Condensed Consolidated Statements of
Operations for the three month periods ended
June 30, 2000 and 1999................................... 3
Condensed Consolidated Statements of
Cash Flows for the nine month periods ended
June 30, 2000 and 1999................................... 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 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
</TABLE>
<PAGE>
CYPRESS FINANCIAL SERVICES, INC.
--------------------------------
AND SUBSIDIARIES
----------------
CONDENSED (UNAUDITED) CONSOLIDATED BALANCE SHEET
------------------------------------------------
JUNE 30, 2000
-------------
ASSETS
------
<TABLE>
<S> <C>
Cash $ 7,319,708
Restricted cash 382,919
Accounts receivable, net 197,535
Portfolio receivables, net 591,614
Property, net 3,004,009
Note receivable from officer 100,000
Prepaid expenses and other 331,734
-----------
Total assets $11,927,519
===========
<CAPTION>
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
Accounts payable $ 37,942
Trust payables 382,919
Accrued liabilities 294,262
Notes payable 1,807,350
Capital lease obligations 300,194
-----------
Total liabilities 2,822,667
-----------
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;
21,493,904 shares issued and outstanding 21,494
Paid-in capital 10,649,689
Accumulated deficit (2,256,331)
-----------
Total shareholders' equity 9,104,852
-----------
$11,927,519
===========
</TABLE>
The accompanying notes are an integral part of these
condensed consolidated financial statements.
1
<PAGE>
CYPRESS FINANCIAL SERVICES, INC.
--------------------------------
AND SUBSIDIARIES
----------------
CONDENSED (UNAUDITED) CONSOLIDATED STATEMENTS OF OPERATIONS
-----------------------------------------------------------
FOR THE NINE MONTH PERIODS ENDED JUNE 30, 2000 AND 1999
-------------------------------------------------------
<TABLE>
<CAPTION>
<S> <C> <C>
2000 1999
---------- -----------
REVENUES: $3,524,517 $ 3,991,309
OPERATING EXPENSES:
Salaries, wages and related benefits 2,473,529 3,323,505
Selling, general and administrative 988,649 1,378,525
Losses on portfolio receivables 271,661 406,886
Depreciation 152,904 141,672
---------- -----------
3,886,743 5,250,588
---------- -----------
LOSS FROM OPERATIONS (362,226) (1,259,279)
---------- -----------
OTHER INCOME (EXPENSE):
Interest expense, net (135,698) (79,604)
Rental operations, net 111,881 67,707
---------- -----------
(23,817) (11,897)
---------- -----------
LOSS BEFORE BENEFIT FOR INCOME TAXES (386,043) (1,271,176)
BENEFIT FOR INCOME TAXES - (435,875)
---------- -----------
NET LOSS $ (386,043) $ (835,301)
========== ===========
Earnings per share:
Basic $ (0.05) $ (0.13)
Diluted $ (0.05) $ (0.13)
Number of shares used in computing earnings per share:
Basic 8,220,255 6,527,331
Diluted 8,220,255 6,527,331
</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, 2000 AND 1999
--------------------------------------------------------
<TABLE>
<CAPTION>
2000 1999
----------- ----------
<S> <C> <C>
REVENUES: $ 1,192,656 $1,544,178
OPERATING EXPENSES:
Salaries, wages and related benefits 715,550 1,270,094
Selling, general and administrative 370,872 488,149
Losses on portfolio receivables 93,985 145,239
Depreciation 36,604 54,629
----------- ----------
1,217,011 1,958,111
----------- ----------
INCOME (LOSS) FROM OPERATIONS (24,355) (413,933)
----------- ----------
OTHER INCOME (EXPENSE):
Interest expense, net (55,596) (38,513)
Rental operations, net 52,584 25,606
----------- ----------
(3,012) (12,907)
----------- ----------
INCOME (LOSS) BEFORE BENEFIT FOR INCOME TAXES (27,367) (426,840)
BENEFIT FOR INCOME TAXES - (149,394)
----------- ----------
NET INCOME (LOSS) $ (27,367) $ (277,446)
=========== ==========
Earnings per share:
Basic $ (0.00) $ (0.04)
Diluted $ (0.00) $ (0.04)
Number of shares used in computing earnings per share:
Basic 11,625,553 6,526,978
Diluted 11,625,553 6,526,978
</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, 2000 AND 1999
-------------------------------------------------------
<TABLE>
<CAPTION>
2000 1999
---------- -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (386,044) $ (835,301)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Depreciation and amortization 165,406 154,023
Changes in operating assets and liabilities:
(Increase) decrease in restricted cash 28,896 (20,850)
(Increase) decrease in accounts receivable, net (16,658) 92,339
(Increase) decrease in portfolio receivables 313,606 (306,719)
Increase in prepaid expenses and other (188,080) (22,566)
Increase (decrease) in accounts payable (16,170) 20,703
Increase (decrease) in trust payables (28,896) 20,850
Increase (decrease) in accrued liabilities (36,068) 15,048
Decrease in deferred income taxes - (444,911)
---------- -----------
Net cash used in operating activities (164,008) (1,327,384)
---------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property (35,516) (330,990)
Proceeds from sale of property - 26,483
---------- -----------
Net cash used in investing activities (35,516) (304,507)
---------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Issuance of common stock, net 7,094,560 -
Purchases of common stock (50,035) (2,267)
Net loans to officers 50,000 2,013
Principal payments on notes payable (16,161) (15,319)
Principal payments on capital lease obligations (60,689) (36,315)
---------- -----------
Net cash provided by (used in) financing activities 7,017,675 (51,888)
---------- -----------
NET INCREASE (DECREASE) IN CASH 6,818,151 (1,683,779)
CASH, at beginning of period 501,557 2,329,751
---------- -----------
CASH, at end of period $7,319,708 $ 645,972
========== ===========
</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, 2000
-------------
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 restructured 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.
5
<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 $382,919 are reflected as restricted cash
and trust payables in the accompanying condensed consolidated balance
sheet.
6
<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 June 30, 2000, and for the nine months then ended:
Portfolio receivables at September 30, 1999 $905,220
Increase in allowance for losses on portfolio receivables (271,661)
Collections applied to cost basis (41,945)
--------
Portfolio receivables at June 30, 2000 $591,614
========
For the nine months ended June 30, 2000 and 1999, the Company had gross
collections from the Receivables of $482,471 and $794,870, respectively. After
applying $41,945 and $92,368 to the cost basis for the nine months ended June
30, 2000 and 1999, respectively, $440,526 and $702,502 was recognized as
portfolio receivables revenue in the accompanying condensed consolidated
statements of operations.
For the nine months ended June 30, 2000 and 1999, the Company had proceeds from
sales of the Receivables of $0 and $472,000, respectively. After applying $0 and
$294,912 to the cost basis for the nine months ended June 30, 2000 and 1999,
respectively, $0 and $177,088 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, 2000 and 1999, the Company had gross
collections from these Receivables of $653,862 and $1,151,477, respectively, of
which $139,188 and $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>
6. Property
--------
Property consists of the following:
Land $ 866,575
Building 1,540,577
Equipment and furnishings 1,358,481
----------
3,765,633
Less--Accumulated depreciation 761,624
----------
$3,004,009
==========
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 is based on the estimated effective
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 May 30, 2000, the Company sold 15,000,000 shares of its common stock,
representing 62% of the outstanding common stock of the Company on a fully
diluted basis, to FBR Financial Fund II, L.P., an institutional investor, for
$7,500,000.
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 667 shares of common stock through
June 30, 2000 at an aggregate cost of $2,307.
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.
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 that involve
risks and uncertainties. Such forward-looking statements include, without
limitation, statements using words such as "may," "potential," "expects,"
"believes," "estimates," "plans," "intends," "anticipates," and similar
expressions. These forward-looking statements are subject to risks and
uncertainties that could cause actual results to vary materially from those
expressed, implied or projected by such statements. Certain factors that might
cause a difference as well as other risks are detailed in the Company's Annual
Report on Form 10-KSB for the fiscal year ended September 30, 1999 and later
filed SEC reports. These forward-looking statements speak only as of the date
hereof. The Company expressly disclaims any obligation or undertaking to release
publicly any updates or revisions to any forward-looking statements contained
herein to reflect any change in the Company's expectations with regard thereto
or any change in events, conditions or circumstances on which any such
statements are based.
Results of Operations
The following table summarizes the gross collection and revenue activities for
the nine months ended June 30, 2000 and 1999.
<TABLE>
<CAPTION>
% Positive
2000 % 1999 % (Negative)
----------- ---- ----------- ---- ------------
<S> <C> <C> <C> <C> <C>
Gross collections $12,044,774 100% $12,426,114 100% -3.1%
Less: Remittances to holders of
portfolio backed securities (512,225) -4% (897,907) -7% 43.0%
Less: Clients' share of collections (7,966,087) -66% (7,621,618) -61% -4.5%
----------- ----------- ------
Net fees 3,566,462 30% 3,906,589 31% -8.7%
Less: Fees applied to cost basis
of portfolio receivables (41,945) -0% (92,368) -1% 54.6%
----------- ----------- ------
Fee revenue $ 3,524,517 29% $ 3,814,221 31% -7.6%
Gain on sale of portfolio receivables - 0% 177,088 1% -100.0%
----------- ----------- ------
Total revenue $ 3,524,517 29% $ 3,991,309 32% -11.7%
=========== =========== ======
</TABLE>
9
<PAGE>
Total gross collections decreased by $381,340, or 3.1%, from $12,426,114 for the
nine months ended June 30, 1999 to $12,044,774 for the nine months ended June
30, 2000. The significant components of gross collections can be summarized into
three categories; contingency collections, portfolio receivables collections,
and securitization collections. Contingency collections increased by $428,674,
or 4.1%, from $10,479,767 for the nine months ended June 30, 1999 to $10,908,441
for the nine months ended June 30, 2000. Portfolio receivables collections
decreased by $312,399, or 39.3%, from $794,870 for the nine months ended June
30, 1999 to $482,471 for the nine months ended June 30, 2000. Securitization
collections decreased by $497,615, or 43.2%, from $1,151,477 for the nine months
ended June 30, 1999 to $653,862 for the nine months ended June 30, 2000. 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 decreased by $340,127, or 8.7%, from
$3,906,589 for the nine months ended June 30, 1999 to $3,566,462 for the nine
months ended June 30, 2000. 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 increased from 61% to 66%. This increase has been
caused by an increased demand for billing and pre-collect services offered by
the Company. As these services are pre-delinquency, the fee per dollar collected
is inherently lower. However, remittances to holders of portfolio backed
securities decreased by $385,682 from $897,907 for the nine months ended June
30, 1999 to $512,225 for the nine months ended June 30, 2000. As discussed
above, the static nature of the securitized receivables is the cause of this
decrease and is to be expected.
Fee revenue decreased by $289,704, or 7.6%, from $3,814,221 for the nine months
ended June 30, 1999 to $3,524,517 for the nine months ended June 30, 2000. 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 54.6% 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 nine months ended June 30,
2000. Therefore, gain on sale of portfolio receivables decreased by $177,088, or
100.0%, from $177,088 for the nine months ended June 30, 1999 to $0 for the nine
months ended June 30, 2000.
Operating expenses decreased by $1,363,845, or 26.0%, from $5,250,588 for the
nine months ended June 30, 1999 to $3,886,743 for the nine months ended June 30,
2000. The significant components of this decrease are discussed below. Please
refer to "Restructuring Program" within the "Liquidity and Capital Resources"
section for further discussion regarding the Company's restructuring and cost
reduction program designed to restore the Company to profitability at current
operating levels.
Salaries, wages and related benefits decreased by $849,976, or 25.6%, from
$3,323,505 for the nine months ended June 30, 1999 to $2,473,529 for the nine
months ended June 30, 2000. This decrease was caused by a reduction in the
Company's billing and collecting staff, benefit expenses associated with these
billers and collectors, as well as specific reductions to the Company's
management team.
Selling, general and administrative expenses decreased by $389,876, or 28.3%,
from $1,378,525 for the nine months ended June 30, 1999 to $988,649 for the nine
months ended June 30, 2000. 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.
10
<PAGE>
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. Accordingly, for the nine months
ended June 30, 2000, the Company increased its allowance for loan losses on
acquired portfolios by $271,661.
Depreciation expense increased 7.9% 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 $56,094 for the nine months ended June 30, 2000
from $79,604 for the nine months ended June 30, 1999. This 70.5% increase is the
result of the Company entering into four capital leases during the third quarter
of fiscal 1999. The value of the property acquired through the capital leases
totaled $272,857.
Net income from rental operations increased by $44,174, or 65.2%, from $67,707
for the nine months ended June 30, 1999 to $111,881 for the nine months ended
June 30, 2000. This increase is directly attributable to the addition of two
significant tenants during the second and third quarter of the current fiscal
year.
Liquidity and Capital Resources
The Company currently has outstanding long-term debt with financial institutions
totaling $2,107,544. The Company's mortgage note has a remaining balance of
$1,807,350, 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 $300,194 at June 30, 2000.
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.
On May 30, 2000, the Company sold 15,000,000 shares of its common stock,
representing 62% of the outstanding common stock of the Company on a fully
diluted basis, to FBR Financial Fund II, L.P., an institutional investor, for
$7,500,000. Net of transaction expenses, the Company received proceeds of
$7,094,560 from the sale, of which the Company intends to use approximately
$6,300,000 to acquire (i) all of the outstanding stock of Orange County
Professional Services, Inc. and its affiliated companies, and (ii) substantially
all of the net assets of Insource Medical Solutions, Inc., RBA Rem-Care, Inc.
and Hospital Employee Labor Pool. The Company will use the remainder of the
proceeds for working capital purposes and the pursuit of its growth strategy.
Cash at June 30, 2000 increased by $6,818,151 from September 30, 1999, which was
the result of $164,008 used in operating activities, $35,516 used in investing
activities, and $7,017,675 provided by financing activities. Excluding the
$7,094,560 net cash generated through the issuance of stock discussed above,
cash decreased by $276,409 from September 30, 1999. This represents an 83.6%
improvement over the same period in the prior year.
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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. 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 expected to be realized from
consolidation of executive level positions.
The Company has also restructured 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 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.
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.
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.
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PART II. OTHER INFORMATION
Item 1. Legal Proceedings
Not Applicable
Item 2. Changes in Securities
On May 30, 2000, the Company sold 15,000,000 shares of its common
stock, representing 62% of the outstanding common stock of the Company
on a fully diluted basis, to FBR Financial Fund II, L.P., an
institutional investor, for $7,500,000.
Item 3. Defaults Upon Senior Securities
Not Applicable
Item 4. Submission of Matters to a Vote of Security Holders
Registrant's Information Statement dated July 14, 2000 as previously
filed, includes a description of matters approved by written consent
of a majority of outstanding shares in lieu of an annual meeting of
stockholders, and is incorporated by reference herein.
On May 19, 2000, the holders of a majority of the outstanding shares
of the Company's common stock and Series A Preferred Stock executed
written consents approving amendments to the Company's Articles of
Incorporation (i) increasing the Company's capital stock to 55,000,000
shares, consisting of 50,000,000 shares of common stock and 5,000,000
shares of preferred stock; and (ii) changing the Company's name to
RevCare, Inc., as well as amendments to the 1995 Stock Option Plan (x)
increasing the number of authorized shares of common stock reserved
under the Plan from 2,450,000 to 3,250,000 shares; and (y) amending
the definition of "Fair Market Value" to allow the Board of Directors
to more accurately determine the exercise price of options granted
when the common stock is not listed on a national securities exchange
or the NASDAQ National Market Reporting System.
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
On June 14, 2000, the Company filed a report on Form 8-K to disclose a
change in control resulting from the sale of 15,000,000 shares of
common stock to FBR Financial Fund II, L.P. ("FBR") for $7,500,000
pursuant to a Common Stock Purchase Agreement by and between the
Company and FBR, dated May 30, 2000. Additionally, the Company
disclosed that on May 30, 2000 it had entered into agreements to
purchase (i) all of the outstanding stock of Orange County
Professional Services, Inc. and its affiliated companies, and (ii)
substantially all of the net assets of Insource Medical Solutions,
Inc., RBA Rem-Care, Inc. and Hospital Employee Labor Pool, which are
accounts receivable management services or staffing outsourcing
businesses.
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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 11, 2000 By: /s/ Manuel Occiano
--------------------------------------
Manuel Occiano
President and Chief Executive Officer
Date: August 11, 2000 By: /s/ Kenneth Leighton
--------------------------------------
Kenneth Leighton
Interim Chief Financial Officer
(Principal Accounting Officer)
14
