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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
[X] ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES AND EXCHANGE ACT OF 1934 [Fee Required]
For the fiscal year ended September 30, 1996 Commission File Number: 0-17192
CYPRESS FINANCIAL SERVICES, INC.
(Name of Small Business Issuer in its Charter)
NEVADA 95-3137322
(State or other jurisdiction of (I.R.S Employer
incorporation or organization) Identification No.)
5400 ORANGE AVENUE, SUITE 200, CYPRESS, CALIFORNIA 90630
(Address of principal executive offices) (Zip Code)
Issuer's Telephone Number: (714) 995-0627
Securities registered under Section 12(b) of the Exchange Act:
(Title of each class) (Name of each exchange on
which registered)
NONE NONE
Securities registered under Section 12(g) of the Exchange Act:
(Title of each class)
COMMON STOCK
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
YES (X) NO ( )
Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B is not contained in this form, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB. (X)
State issuer's revenues for its most recent fiscal year: $5,371,942.
The aggregate value of the Registrant's Common Stock held by non-affiliates of
the Registrant is $2,315,000.
State the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practicable date: There were 4,500,271 shares of the
Registrant's Common Stock issued and outstanding as of November 30, 1996.
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ITEM 1 DESCRIPTION OF BUSINESS
GENERAL
Cypress Financial Services, Inc., a Nevada corporation (together with its
subsidiaries, the "Company"), provides accounts receivable management,
administration and debt collection services primarily to health care providers,
and consumer credit issuers. In addition to its third party collection business,
in January 1995, the Company started to acquire accounts receivable and other
consumer obligations for its own collection portfolio. The types of distressed
and discounted obligations the Company has or intends to acquire for its own
portfolio include performing and non-performing installment loans, secured and
unsecured consumer and commercial loans, credit card obligations and accounts
receivable. The Company's sources for these distressed and discounted
obligations are federal and state banking and savings and loan institutions,
hospitals, finance companies, insurance companies, credit unions, consumer
credit issuers, and other collection agencies.
The Company operates primarily through wholly-owned subsidiaries or
divisions that serve specific segments of the collection service industry. The
Company's subsidiaries or divisions include: (i) Medical Control Services, Inc.
("MCSI"), a collection agency servicing the health care industry; (ii) Merchants
Recovery Services, Inc. ("MRSI"), a company that primarily offers accounts
receivable collection services to banks, credits unions, public utilities and
retailers; (iii) Lien Solutions, Inc. ("LSI"), a company that specializes in the
recovery of unpaid worker's compensation claims primarily for healthcare service
providers, including hospitals and doctors; (iv) My Boss, Inc. dba Business
Office Support Services ("BOSS"), a company that provides pre-collection
consulting and credit monitoring services to medical providers and other
businesses that extend credit; and (v) Revenue Practice Enhancements ("RPE"), a
division of MCSI that offers complete electronic billing services for doctors'
offices.
HISTORY
The Company was originally incorporated under the name "Oxford Venture
Corporation" on February 7, 1987. On June 7, 1988, the Company acquired all of
the capital stock of The Christmas Group, Inc., a California corporation, which
remained a subsidiary of the Company. On June 24, 1988, the Company changed its
name to "The Christmas Guild, Inc."
From 1989 until September 12, 1995 the Company was operationally inactive
at which time it entered into a Definitive Securities Purchase Agreement and
Plan of Reorganization with Medical Control Services, Inc., a California
corporation. Pursuant to such agreement, the Company acquired all of the
outstanding capital stock of MCSI and its subsidiaries. MCSI has been in the
accounts receivable management administration and debt collection business since
1977. On December 7, 1995, the Company amended and restated its Articles of
Incorporation to change its name to "Cypress Financial Services, Inc."
OPERATING SUBSIDIARIES
The Company does business through the following operating subsidiaries
under trade names which serve the collection, billing and other office support
needs of the collection service industry:
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MEDICAL CONTROL SERVICES , INC.
MCSI was incorporated in California in 1977 as a collection agency
servicing the health care industry. MCSI has service contracts with over 1,000
clients that include, hospitals, medical groups, doctors, laboratories,
radiology centers, emergency rooms and convalescent homes. The volume of annual
collection assignments for MCSI reached in excess of $35 million in fiscal 1996.
MCSI also operates RPE, a division that offers medical providers out sourcing
services for their patient billing process. RPE utilizes state of the art
billing software that covers all national private insurance carriers, including
Medicaid and Medicare.
MERCHANTS RECOVERY SERVICES, INC.
MRSI was incorporated in California in 1982 to serve the accounts
receivable collection needs for commercial businesses. MRSI has service
contracts with over 1,000 clients that include banks, credit unions, public
utilities, and wholesale and retail establishments. The volume of annual account
assignments reached in excess of $86 million in fiscal 1996. In January 1995,
MRSI began to diversify from purely a debt collection service on a contingency
basis to include direct purchases of credit card debt from banks and other
sources of distressed or discounted consumer obligations for its own collection
and/or re-sale. Since commencing this program in January 1995, MRSI purchased
over $92 million of such obligations for its own portfolio, including $55
million during fiscal 1996. See "Portfolio Management."
LIEN SOLUTIONS, INC.
LSI was incorporated in California in 1984 to provide specialized
collection services to clients that have complex collection needs. LSI has
developed sophisticated systems and procedures for resolving its clients
contested workers compensation claims which, unlike typical collection matters,
are governed by the Workers' Compensation Appeals Board, which has exclusive
jurisdiction over such claims. In addition, LSI also extends its specialized
service to third-party payor disputes, such as personal injury liens, Medicare,
HMO denials and lien subrogation. In fiscal 1996, LSI received collection
assignments in excess of $16 million.
MY BOSS, INC. DBA BUSINESS OFFICE SUPPORT SERVICES
BOSS was incorporated in California in 1989 to provide its clients with
pre-collection management of their accounts receivable. BOSS acts as an
extension of its clients' accounts receivable department by utilizing its staff
of trained representatives and its sophisticated data processing support systems
to replace or supplement the traditional accounts receivable department. By
using its employees, computers and predictive dialing, BOSS is able to more
effectively receive payment from its clients' patients than the traditional
method of pre-collection demand letters. The pre-collection services offered by
BOSS are aimed at lowering the cost of collection for its clients and increasing
recovery rates of its clients receivables before the receivables become bad
debt. BOSS acts as the accounts receivable department allowing the client's
personnel to focus on other productive tasks. In fiscal 1996, BOSS received
collection assignments in excess of $25 million.
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CONTINGENT COLLECTION SERVICE AGREEMENTS
The Company is generally retained on a month-to-month-basis by its clients
to administer current receivables or to collect past due debts with fees payable
on a contingent basis based upon the amount collected. The Company negotiates
its commission rate with each client, depending upon the size, aging and general
collectibility of the accounts.
PORTFOLIO MANAGEMENT
Over the past several years there has been a substantial amount of
discounted consumer debt being sold by financial institutions as a result of
changes in the financial regulatory requirements of such entities. These changes
in the financial requirements have led to numerous mergers, as well as other
means of recapitalizing these institutions. One method some of these financial
institutions use to strengthen their current financial condition is to charge-
off non-performing loans or other delinquent credit facilities and sell these
accounts to third parties like the Company for immediate cash.
Typically loans or accounts sold by the originating creditors are sold in
large portfolios that range in size from tens of thousands to multi-million
dollars in outstanding balances. By utilizing the Company's data systems and
technology, the Company is able to quickly analyze the integrity of a given
portfolio of such assets and other debtor information provided by the
originating lenders. As a result of its credit and collection analysis, and
based on its extensive collection experience, the Company is able to approximate
the collection value of the portfolio and thereby determine the amount that
should be paid for the portfolio. Although only a small percent of the total
outstanding principal balances of most of the portfolio can ultimately be
collected, the Company is able to acquire the portfolio at such deep discounts
from the portfolio's total principal amount that the Company can generate a
significant cash flow on its investment by utilizing its existing collection
systems and technology.
Once a portfolio is purchased, the Company utilizes its general accounts
receivable management and debt collection services to generate cash flow on the
portfolio. Because the cost to acquire the portfolio is extremely low for each
individual account within the portfolio, the Company can offer more attractive
settlement and payment options to the individual debtors than those debtors have
been offered by the originating lender or that can be offered by the Company on
a contingent basis. The cash flow generated from the Company's portfolio
collections is then used to acquire additional portfolio assets. As of September
30, 1996, the Company's own portfolio of distressed and discounted obligations
had an outstanding face value of $59 million.
MANAGEMENT INFORMATION SYSTEMS
The Company maintains sophisticated data processing support and management
information systems. All departments have access to computer systems that
utilizes large data bases on CD-ROMs for skip tracing purposes that enable the
Company to obtain information about the debtors or their property from various
data sources, including, TRW, Trans Union, DataQuick, California situs, and
county records.
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The Company is currently upgrading its systems and believes that upon
completion, its processing support and management information systems will be
sufficient to substantially expand its business without significant additional
capital expenditure.
CUSTOMERS
The Company generally has a broad and well diversified client base that
includes hospitals, medical groups, laboratories, convalescent homes, banks,
credit unions, public utilities, and wholesale and retail establishments.
Although the Company has several large customers, and the loss of any one
of these customers could have a material adverse effect on the Company's
operations, no customer comprises more than 10% of the Company's consolidated
revenues. Moreover, as the Company continues to increase the amount of
obligations acquired for its own portfolio, the Company will become less
dependent on the revenue generated from its third party clients on a contingency
basis.
MARKETING
The Company maintains a full-time staff of sales representatives that
continuously solicit business by pursuing leads from existing clients, using
multiple business and commerce directories and utilizing promotional materials.
Recently, the Company began advertising its services on the Internet by
establishing a WEB page which describes the Company's services. In addition, the
Company has started to advertise its services through more traditional media,
including newspapers and magazines.
GOVERNMENT REGULATION
The Company is regulated by the Fair Debt Collection Practice Act and the
Telephone Consumer Protection Act which are enforced by the Federal Trade
Commission. In this regard, the Company devotes continuous efforts, through
training of personnel and monitoring of compliance in order to provide ethical,
innovative, high quality accounts receivable management and collection business
which meets the needs of its clients and that comply with the law.
Although the Company believes that it is currently in compliance with
applicable statutes and regulations, there can be no assurance that the Company
will always be able to maintain such compliance. The failure to comply with such
statutes and regulations could have a material adverse effect upon the Company.
Furthermore, the adoption of additional statutes and regulations, changes in the
interpretation and enforcement of current statutes and regulations or the
expansion of the Company's business into jurisdictions that have adopted more
stringent regulatory requirements than those in which the Company currently
conducts business could have a material adverse effect upon the Company.
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COMPETITION
The accounts receivable management and collection business is highly
competitive. The Company competes with a number of national, local and regional
companies with operations similar to those of the Company. Many of the Company's
competitors have far greater resources than the Company and have access to
capital markets which may be unavailable to the Company.
The Company believes that the principal competitive factors affecting the
Company's receivable management and collection business is increasingly based
upon collection performance, price and services provided. These competitive
factors have generally caused a downward adjustment to commission rates. The
Company believes that it can compete effectively by offering its clients
innovative receivable management solutions and by continually enhancing its
collection procedures.
There is substantial competition for the acquisition and management of
distressed and non-performing consumer obligations and accounts receivables.
Although the amount of non-performing and other distressed obligations available
for sale is quite large, there are numerous competitors for these assets that
have more resources than the Company.
EMPLOYEES
As of September 30, 1996, the Company had 84 full time employees and 23
part-time employees, of whom 4 are management personnel, 6 are sales and
marketing personnel, 4 are legal personnel, 15 are MCSI collectors, 17 are MRSI
collectors, 18 are LSI collectors, 26 are BOSS pre-collection representatives, 1
is an RPE billing clerk, 2 are accounting personnel and 14 are operations
support personnel. The Company believes that its relations with its employees
are good. The Company is a not a party to any collective bargaining agreement.
ITEM 2 DESCRIPTION OF PROPERTIES
The Company owns its office building and property located at 5400 Orange
Avenue, Cypress, California where it conducts its operations. The office
building, which was purchased in 1993, contains approximately 50,000 square feet
of office space. Currently, the Company occupies approximately 26,000 square
feet for its operations, and makes the remainder of the building available for
lease to third party tenants. Although the Company may establish remote offices
to better serve its clients, the Company believes that its current facility is
suitable and adequate for its current and anticipated operations.
ITEM 3 LEGAL PROCEEDINGS
As of September 30, 1996, the Company is not involved in any litigation in
which it is a defendant, although the Company is involved, from time to time, in
litigation that is incident to its collection business. The Company regularly
initiates legal proceedings as a plaintiff in connection with its routine
collection activities.
ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to a vote of security holders during the
fourth quarter of the fiscal year ended September 30, 1996.
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PART II
ITEM 5 MARKET FOR THE REGISTRANTS COMMON STOCK AND RELATED SECURITY HOLDERS
MATTERS
On September 30, 1996, the Company's Common Stock began trading in the
over-the-counter market and prices are quoted on NASDAQs Electronic Bulletin
Board under the symbol "CYFS". The opening bid price was $2.50 per share without
taking into account retail markups, markdowns or commissions and may not
represent actual transactions. In addition, because a significant amount of the
Company's securities are restricted securities pursuant to Rule 144, the
aggregate amount of shares held by non-affiliates that are not restricted is
limited. Therefore, any trading in the Company's Stock is expected to be limited
and sporadic.
Prior to such listing, there was no established public trading market for
the Company's Common Stock. As of December 15, 1996, there were approximately
1,500 Common Stock shareholders.
DIVIDEND POLICY
The Company has never paid a dividend and does not anticipate paying any
cash dividends in the foreseeable future. The Company intends to retain any
earnings to provide funds to finance future growth.
ITEM 6 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
GENERAL
The Company is engaged primarily in the collection of receivables owned by
entities in the commercial, retail and medical industries. Commencing in
January, 1995, the Company began purchasing a significant amount of portfolio
receivables for its own collection account. The Company anticipates that the
purchase of portfolio receivables for its own collection account will become a
significant portion of its future operations.
The following discussion of the financial condition and results of
operations of the Company should be read in conjunction with the consolidated
financial statements and notes thereto included elsewhere in this report. The
Company reported nine months of operating activity at September 30, 1995 as a
result of the recapitalization of MCSI and the acquisition of Company by MCSI on
September 12, 1995 and the change in its fiscal year from December 31 to
September 30. Accordingly, management has provided its analysis of the nine
months ended September 30, 1995 compared to the year ended September 30, 1996,
although inherent limitations exist in the comparability of such financial
information.
This discussion contains forward-looking statements that involve risks and
uncertainties. The Company's actual results may differ materially from those
anticipated in these forward-looking statements as a result of certain factors,
including, but not limited to, competition which has and will continue to put
price pressure on the Company's third party collection business, the cost and
availability of capital to finance its receivables portfolio and overall macro-
economic conditions.
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RESULTS OF OPERATIONS
Revenues for the twelve month months ended September 30, 1996, were
$5,372,000 as compared to revenues of $3,394,000 for the nine months ended
September 30, 1995. The increase in revenues, on an annualized basis, resulted
primarily from an increase in revenues attributable to collection of its own
portfolio of distressed and discounted obligations. For the twelve months ended
September 30, 1996, the Company recognized approximately $501,000 in revenues
from the collection of receivables from its own portfolio as compared with
$21,000 in such revenues recognized for the nine months ended September 30,
1995. Revenues from collection of its own portfolios are recognized only after
the cost of such portfolios has been recovered. As of September 30, 1996, the
Company had paid approximately $2,300,000 and recovered approximately $1,813,000
of such costs through the sale and collection of certain of its portfolio
receivables, leaving a portfolio carrying value of approximately $487,000 at
September 30, 1996. As of September 30, 1996, the Company's remaining
outstanding balance on its own portfolio was approximately $58 million as
compared to an outstanding balance of approximately $27 million at September 30,
1995.
In addition to the increase in revenues attributable to collection of its
own portfolio, the Company's third party collection revenues for the period
ended September 30, 1996 increased approximately 8%, on an annualized basis, as
compared to the nine months ended September 30, 1995. Despite continuing
reductions in the commission rates on its third party collection business, the
Company was able to increase its collection revenues as a result of upgrading
certain collection tools, prioritizing its debtors and a new contract with one
of its existing customers.
Although the Company believes that its third party collection business
will continue to experience downward pressure on commission rates, increased
revenues from its own portfolio of distressed and discounted obligations will
make the Company less sensitive to competitive contingent fee price pressure.
Management believes that the revenues generated from its own portfolios will
continue to increase as a percentage of the Company's total revenues.
Operating expenses for the twelve months ended September 30, 1996 were
$5,132,000 as compared to $3,369,000 for the nine months ended September 30,
1995. The increase in expenses, on an annualized basis, was directly
attributable to the Company's continued expansion into direct purchases of
discounted obligations for its own portfolio and the related costs to collect
such receivables. In addition, the Company hired nine new collection personnel
and incurred additional training and telecommunications expenses related to its
expanded collection efforts.
Income from operations for the twelve months ended September 30, 1996 was
approximately $240,000 as compared to $25,000 for the nine months ended
September 30, 1995. The increase in operating income is directly related to the
expansion into direct purchases of portfolio receivables.
Interest expense for the twelve months ended September 30, 1996 increased
to $315,000 from $156,000 for the nine months ended September 30, 1995 due to
the increase in borrowings to acquire its portfolio receivables. The Company
expects to continue to utilize its credit facility to finance future
acquisitions of portfolio receivables.
The Company owns the 50,000 square foot commercial building where its
headquarters are located. The Company occupies approximately 51% of the building
with the remaining 49% being occupied by tenants on short-term leases. Net
rental income for the twelve months ended September 30, 1996 was
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$143,000 as compared to $121,000 for the nine months ended September 30, 1995.
The decrease in net rental income for 1996 on an annualized basis was due to the
Company occupying more space within the building and to lower average monthly
rental rates for the remaining space over the prior period.
The Company reported net profit of $30,000 for the twelve months ended
September 30, 1996 as compared to a net loss of $24,000 for the nine months
ended September 30, 1995. The increase in net income resulted from the
expansion into purchases of portfolio receivables for its own account.
LIQUIDITY AND CAPITAL RESOURCES
At September 30, 1995, the Company had $750,000 of notes payable to the
shareholders of MCSI, which were incurred in connection with the acquisition.
During the twelve months ended September 30, 1996, $60,000 was repaid to one
shareholder. The remaining $690,000 of notes payable was converted Series A
Preferred Stock on September 30, 1996.
Historically, the Company has funded its operations through cash flows from
operations. Management intends to generate increased revenues through additional
purchases of discounted obligations for its own portfolio. The Company's credit
facility, which has been increased to $1,250,000 and carries an interest rate of
prime plus 2% on any outstanding balance or 10.25% at September 30, 1996, and
which expires on January 23, 1997, has been used primarily for the purchase of
portfolio receivables. The outstanding balance of the line of credit at
September 30, 1996 was approximately $992,000. Management intends to either
renew the obligation through its existing bank, or consider extinguishing the
indebtedness through a placement of alternative debt securities or equity
securities. There are no assurances that such refinancing will be obtained by
management. The Company has also financed certain of its equipment and fixtures
with a term note that carries an interest rate of 11% that is due in June, 2000.
As of September 30, 1996, the balance on this term note was approximately
$740,000.
ITEM 7 FINANCIAL STATEMENTS
See "Index to Consolidated Financial Statements" for a listing of the
consolidated financial statements filed with this report.
ITEM 8 CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
In October 1995, the Company's Board of Directors approved the engagement
of Corbin & Wertz to conduct an audit of the Company's financial statements for
the period ended September 30, 1995. The engagement of Corbin & Wertz as the
Company's independent auditors follows the replacement of Janet Loss, C.P.A.,
P.C. who had been engaged to audit The Christmas Guild, Inc's financial
statements for the fiscal years ended June 30, 1989 through 1994.
The audit reports provided by Janet Loss, C.P.A., P.C. did not contain an
adverse opinion or a disclaimer of opinion nor was the report qualified in any
respect.
Management of the Company knows of no past disagreements between The
Christmas Guild, Inc and Janet Loss, C.P.A., P.C. on any matter of accounting
principles or practices, financial statement disclosure or auditing, scope or
procedure.
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PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT.
Information required by this item will be contained in the Company's
Information Statement to be filed with the Securities and Exchange Commission
within 120 days after September 30, 1996 and is incorporated herein by
reference.
ITEM 10. EXECUTIVE COMPENSATION
The information required by this item will be contained in the Company's
Information Statement be filed with the Securities and Exchange Commission
within 120 days after September 30, 1996 and is incorporated herein by
reference.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this item will be contained in the Company's
Information Statement to be filed with the Securities and Exchange Commission
within 120 days after September 30, 1996 and is incorporated herein by
reference.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item will be contained in the Company's
Information Statement to be filed with the Securities and Exchange Commission
within 120 days after September 30, 1996 and is incorporated herein by
reference.
PART IV
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits: See "Exhibit Index".
(b) Reports on Form 8-K. No reports on Form 8-K were filed during the
last quarter of the fiscal year ended September 30, 1996.
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SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the registrant
caused this amended report to be signed on its behalf by the undersigned,
thereunto duly authorized.
CYPRESS FINANCIAL SERVICES, INC.
Date: December 20, 1996 By: /s/ Farrest Hayden
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Farrest Hayden
Chairman of the Board and
Chief Executive Officer
In accordance with the Exchange Act, this amended report has been signed
below by the following persons on behalf of the registrant and in the capacities
and on the date indicated.
<TABLE>
<CAPTION>
Signatures Title Date Signed
- ---------- ----- -----------
<S> <C> <C>
/s/ Farrest Hayden Chairman of the Board December 20, 1996
- -------------------
Farrest Hayden Chief Executive Officer
and President
/s/ Otto J. Lacayo Director, Chief Financial December 20, 1996
- --------------------
Otto J. Lacayo Officer and Vice President
(Principal Accounting Officer)
/s/ Daniel Najor Director December 20, 1996
- ------------------
Daniel Najor
/s/ Graham E. Gill Director December 20, 1996
- -------------------
Graham E. Gill
</TABLE>
<PAGE>
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
----
CYPRESS FINANCIAL SERVICES, INC. AND SUBSIDIARIES
Independent Auditors' Report . . . . . . . . . . . . . . . F-2
Consolidated Balance Sheet As Of September
30, 1996 . . . . . . . . . . . . . . . . . . . . . . . . F-3
Consolidated Statements Of Operations For The
Year Ended September 30, 1996 And For The
Period From January 1, 1995 To September
30, 1995 . . . . . . . . . . . . . . . . . . . . . . . . F-4
Consolidated Statements Of Shareholders'
Equity (Capital Deficiency) For The Year
Ended September 30, 1996 and For The Period
From January 1, 1995 To September 30, 1995 . . . . . . . F-5
Consolidated Statements Of Cash Flows For
The Year Ended September 30, 1996 And For
The Period From January 1, 1995 To
September 30, 1995 . . . . . . . . . . . . . . . . . . . F-6
Notes To Consolidated Financial Statements
For The Year Ended September 30, 1996 And
For The Period From January 1, 1995 To
September 30, 1995 . . . . . . . . . . . . . . . F-8 to F-21
F-1
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INDEPENDENT AUDITORS' REPORT
----------------------------
The Board of Directors
Cypress Financial Services, Inc. and Subsidiaries
We have audited the accompanying consolidated balance sheet of Cypress Financial
Services, Inc. and subsidiaries (the "Company") as of September 30, 1996, and
the related consolidated statements of operations, shareholders' equity (capital
deficiency) and cash flows for the year then ended and for the period from
January 1, 1995 to September 30, 1995. These consolidated financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these consolidated financial statements based on our
audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Cypress Financial
Services, Inc. and subsidiaries as of September 30, 1996, and the results of
their operations and their cash flows for the year ended September 30, 1996 and
for the period from January 1, 1995 to September 30, 1995 in conformity with
generally accepted accounting principles.
As more fully described in Note 1 to the consolidated financial statements, the
Company has restated its 1995 consolidated financial statements to reflect its
revised accounting for the reverse acquisition of The Christmas Guild, Inc. by
Medical Control Services, Inc.
CORBIN & WERTZ
Irvine, California
November 1, 1996
F-2
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CYPRESS FINANCIAL SERVICES, INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
September 30, 1996
<TABLE>
ASSETS (Note 4)
<S> <C>
Cash $ 520,706
Restricted cash (Note 1) 452,590
Accounts receivable, net of allowance for
doubtful accounts of $15,000 (Note 1) 592,572
Portfolio receivables (Note 2) 486,505
Property, net of accumulated depreciation
of $1,245,286 (Notes 1 and 5) 2,619,014
Notes receivable from shareholders (Note 3) 60,500
Other 24,077
----------
$4,755,964
==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Accounts payable $ 72,942
Trust payables (Note 1) 452,590
Accrued liabilities 390,795
Line of credit (Note 4) 992,085
Long-term debt (Note 5) 2,620,026
----------
Total liabilities 4,528,438
----------
Commitments and contingencies (Notes 6 and 7)
Shareholders' equity (Notes 1 and 6):
Series A convertible, redeemable preferred
stock, $0.001 par value, $2.00 liquidation
preference per share, 5,000,000 shares
authorized; 345,000 shares issued and
outstanding 690,000
Common stock, $0.001 par value; 30,000,000
shares authorized; 4,500,271 shares issued
and outstanding 4,500
Paid-in capital 495,500
Accumulated deficit (962,474)
----------
Total shareholders' equity 227,526
----------
$4,755,964
==========
</TABLE>
See independent auditors' report and accompanying
notes to consolidated financial statements
F-3
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CYPRESS FINANCIAL SERVICES, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
For The
Period From
For The January 1,
Year Ended 1995 To
September 30, September 30,
1996 1995
-------------- --------------
<S> <C> <C>
Revenues (Note 1):
Service fees $4,870,062 $3,372,408
Income on portfolio receivables
(Note 2) 501,880 21,229
---------- ----------
5,371,942 3,393,637
---------- ----------
Operating expenses:
Salaries, wages and related benefits 3,401,800 2,063,596
Selling, general and administrative
(Notes 1 and 7) 1,595,105 1,195,962
Depreciation 134,736 109,318
---------- ----------
5,131,641 3,368,876
---------- ----------
Income from operations 240,301 24,761
---------- ----------
Other income (expense):
Interest expense, net (Notes 4,
5 and 6) (314,850) (155,967)
Rental operations (Notes 1 and 7) 143,475 121,399
Other --- (11,798)
---------- ----------
(171,375) (46,366)
---------- ----------
Income (loss) before provision for
income taxes 68,926 (21,605)
Provision for income taxes (Note 8) 39,000 3,200
---------- ----------
Net income (loss) $ 29,926 $ (24,805)
========== ==========
Net income (loss) per share (Note 1) $0.01 $(0.01)
========== ==========
Weighted average shares outstanding
(Note 1) 4,500,271 2,399,085
========== ==========
</TABLE>
See independent auditors' report and accompanying
notes to consolidated financial statements
F-4
<PAGE>
CYPRESS FINANCIAL SERVICES, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(CAPITAL DEFICIENCY)
For The Year Ended September 30, 1996 And
For The Period From January 1, 1995 To September 30, 1995
<TABLE>
<CAPTION>
Series A Convertible, Retained
Redeemable Earnings
Common Stock Preferred Stock Paid-in (Accumulated
------------------ ---------------------
Shares Amount Shares Amount Capital Deficit) Total
------ ------ ------ ------ -------- ------------ -----
<S> <C> <C> <C> <C> <C> <C> <C>
Balances at January 1, 1995 2,249,000 $2,249 --- $ --- $ 7,251 $ 272,905 $ 282,405
Common stock issued for
cash (Notes 1 and 6) 2,100,000 2,100 --- --- 497,900 --- 500,000
Common stock of TCG retained
in connection with reverse
acquisition (Notes 1 and 6) 151,271 151 --- --- (151) --- ---
Dividend to MCSI shareholders
(Notes 1 and 6) --- --- --- --- (9,500) (390,500) (400,000)
Accrued dividend to MCSI
shareholders (Notes 1 and 6) --- --- --- --- --- (850,000) (850,000)
Net loss --- --- --- --- --- (24,805) (24,805)
----------- ------- ------- ------------ --------- --------- ---------
Balances at September 30, 1995 4,500,271 4,500 --- --- 495,500 (992,400) (492,400)
Preferred stock issued in
satisfaction of related party
notes payable (Note 6) --- --- 345,000 690,000 --- --- 690,000
Net income --- --- --- --- --- 29,926 29,926
----------- ------- ------- ------------ --------- --------- ---------
Balances at September 30, 1996 4,500,271 $4,500 345,000 $690,000 $495,500 $(962,474) $ 227,526
=========== ======= ======= ============ ========= ========= =========
</TABLE>
See independent auditors' report and accompanying
notes to consolidated financial statements
F-5
<PAGE>
CYPRESS FINANCIAL SERVICES, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
For The
Period From
For The January 1,
Year Ended 1995 To
September 30, September 30,
1996 1995
-------------- --------------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $ 29,926 $ (24,805)
Adjustments to reconcile net income
(loss) to net cash provided by
(used in) operating activities:
Depreciation and amortization 153,151 123,129
Changes in operating assets and
liabilities:
Accounts receivable, net (294,382) (109,716)
Portfolio receivables (3,172) (483,333)
Accounts payable (26,661) (36,627)
Accrued liabilities 150,543 151,765
Other (3,200) 11,798
--------- ---------
Net cash provided by (used in)
operating activities 6,205 (367,789)
--------- ---------
Cash flows from investing activities:
Other assets --- (4,860)
Notes receivable from shareholders --- (6,250)
Purchases of equipment (44,145) (63,272)
--------- ---------
Net cash used in investing activities (44,145) (74,382)
--------- ---------
Cash flows from financing activities:
Net borrowings from line of credit 332,990 659,095
Proceeds received from long-term debt --- 182,012
Repayment on notes payable to related
parties (Notes 1 and 6) (60,000) (100,000)
Repayments on long-term debt (76,578) (51,582)
Dividends paid to former MCSI
shareholders (Notes 1 and 6) --- (400,000)
Proceeds from issuance of common stock
(Notes 1 and 6) --- 500,000
--------- ---------
Net cash provided by financing activities 196,412 789,525
--------- ---------
Net increase in cash 158,472 347,354
Cash, at beginning of period 362,234 14,880
--------- ---------
Cash, at end of period $ 520,706 $ 362,234
========= =========
</TABLE>
Continued
F-6
<PAGE>
CYPRESS FINANCIAL SERVICES, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS - CONTINUED
<TABLE>
<CAPTION>
For The
Period From
For The January 1,
Year Ended 1995 To
September 30, September 30,
1996 1995
-------------- --------------
<S> <C> <C>
Supplemental disclosure of cash flow
information -
Cash paid during the period for:
Interest $ 326,231 $ 201,244
========= =========
Income taxes $ 6,330 $ 7,973
========= =========
</TABLE>
Supplemental disclosure of noncash investing and financing activities:
During the year ended September 30, 1996, the Company issued
345,000 shares of its Series A convertible, redeemable preferred
stock in satisfaction of $690,000 in notes payable to the former
shareholders of MCSI, which are current shareholders and
officers of the Company (Note 6).
See independent auditors' report and accompanying
notes to consolidated financial statements
F-7
<PAGE>
CYPRESS FINANCIAL SERVICES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For The Year Ended September 30, 1996 And
For The Period From January 1, 1995 To September 30, 1995
NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
- --------------------------------------------------------------------
Organization and Basis of Presentation
- --------------------------------------
Cypress Financial Services, Inc. (formerly The Christmas Guild, Inc.), is a
Nevada Corporation organized in February 1987 under the name Oxford Venture
Corporation.
On June 7, 1988, Oxford Venture Corporation acquired all of the capital stock of
The Christmas Group, Inc., a California corporation organized in August 1980.
Concurrently, Oxford Venture Corporation changed its name to The Christmas
Guild, Inc. ("TCG").
On September 12, 1995, TCG acquired the issued and outstanding common stock of
Medical Control Services, Inc. and its wholly owned subsidiaries ("MCSI") for
2,249,000 shares of its common stock, $400,000 in cash and notes payable
totaling $850,000 (see Note 6). Concurrently, TCG issued 2,100,000 shares of
its common stock to new investors for $400,000 in cash and a 30-day note
receivable for $100,000 (which was paid prior to September 30, 1995). The
original shareholders of TCG retained 151,271 shares after the consummation of
the above transactions. Concurrent with the acquisition, TCG changed its name
to Cypress Financial Services, Inc. ("Cypress").
As TCG had no significant operations prior to the acquisition, the purchase was
accounted for as a reverse acquisition whereby MCSI has been identified as the
acquiring corporation. Accordingly, the accompanying consolidated financial
statements reflect the accounts of MCSI for all periods presented. The
accompanying consolidated financial statements include the accounts of TCG from
the date (September 12, 1995) of the stock-for-stock exchange.
The 2,249,000 shares issued to acquire the common stock of MCSI are reflected in
the accompanying consolidated financial statements as if the shares were issued
and outstanding for all periods presented. The 151,271 shares retained by the
original TCG shareholders are reflected in the accompanying consolidated
financial statements as consideration issued by MCSI to acquire the net assets
of TCG. Management determined that the fair value of the 151,271 shares was
nominal based on the fair value of the net assets received from TCG. The
2,100,000 shares issued to new investors is reflected as a recapitalization of
MCSI in the accompanying consolidated statements of shareholders' equity
(capital deficiency). The $400,000 of cash paid, and the $850,000
Continued
F-8
<PAGE>
CYPRESS FINANCIAL SERVICES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
For The Year Ended September 30, 1996 And
For The Period From January 1, 1995 To September 30, 1995
NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, continued
- -------------------------------------------------------------------------------
of notes issued, to the former shareholders of MCSI have been reflected as
dividends in the accompanying consolidated statements of shareholders' equity
(capital deficiency) (see Note 6). The former shareholders of MCSI are current
shareholders and officers of Cypress.
The proforma results of operations of Cypress as a result of the reverse
acquisition for the nine month period ended September 30, 1995 would not be
materially different from the historical information presented herein.
Restatement
- -----------
Cypress previously reported the reverse merger with TCG as an acquisition by TCG
of MCSI. The estimated fair value of the consideration given by TCG was
determined to be $6,872,500. The consideration was allocated to net assets
acquired, resulting in goodwill totaling $2,003,311 (after taking into effect a
$3,240,000 impairment adjustment recorded after the acquisition in September
1995). In July 1996, management of Cypress determined that generally accepted
accounting principles require the acquisition to be accounted for as a reverse
acquisition, with MCSI being the acquiring corporation. Accordingly, management
restated the consolidated financial statements for fiscal 1995 to properly
reflect the effects of the reverse acquisition.
The effect of the restatement on the previously reported consolidated balance
sheet of Cypress as of September 30, 1995 was as follows:
<TABLE>
<S> <C>
Decrease in property, net $(1,663,535)
Decrease in reimbursable collection
costs (604,482)
Decrease in goodwill (2,098,120)
Decrease in deferred income taxes 912,739
Other (17,578)
-----------
Net decrease in shareholders' equity $(3,470,976)
===========
</TABLE>
Continued
F-9
<PAGE>
CYPRESS FINANCIAL SERVICES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
For The Year Ended September 30, 1996 And
For The Period From January 1, 1995 To September 30, 1995
NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, continued
- -------------------------------------------------------------------------------
Business
- --------
Cypress Financial Services, Inc. and its wholly-owned subsidiaries (collectively
the "Company") are engaged in the collection of receivables owned by entities in
the commercial, retail and medical industries. The majority of the Company's
collection efforts are concentrated in California. In 1995, the Company began
purchasing liquidating portfolios of delinquent unsecured consumer receivables
for its own account.
Principles of Consolidation
- ---------------------------
The consolidated financial statements include the accounts of Cypress Financial
Services, Inc. and its subsidiaries. All significant intercompany accounts have
been eliminated in consolidation.
Use of Estimates
- ----------------
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make 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. Significant
estimates made by management include, but are not limited to, the provision for
losses on uncollectible accounts receivable and portfolio receivables.
Fair Value of Financial Instruments
- -----------------------------------
These historical consolidated financial statements contain financial instruments
whereby the fair market value of the financial instruments could be different
than that recorded on a historical basis in the accompanying historical
consolidated financial statements. The financial instruments consist of cash,
accounts receivable, portfolio receivables, notes receivable from shareholders,
accounts payable, line of credit and long-term debt. The carrying amounts of
the Company's financial instruments generally approximate their fair values at
September 30, 1996. In the case of the notes receivable from shareholders (see
Note 3), it was not practical to determine fair values due to the lack of a
market for such financial instruments.
Continued
F-10
<PAGE>
CYPRESS FINANCIAL SERVICES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
For The Year Ended September 30, 1996 And
For The Period From January 1, 1995 To September 30, 1995
NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, continued
- -------------------------------------------------------------------------------
Cash
- ----
The Company maintains cash balances in a financial institution in excess of
amounts insured by Federal agencies. The potential uninsured amount, before
taking into consideration issued but uncashed checks, aggregates $863,337 at
September 30, 1996.
Accounts Receivable
- -------------------
Accounts receivable represents accounts in which the Company provides collection
services for entities in the commercial, retail and medical industries for a
fee. Service fees are recorded as income when the clients' accounts receivable
are collected. The Company performs ongoing credit evaluations of its customers
and generally does not require collateral. The Company maintains allowances for
potential credit losses and such losses to date have been within management's
expectations.
As of September 30, 1996, the Company had one receivable totaling approximately
$331,000 or $56% of total accounts receivable from the Company's largest
customer. The customer has requested that a discount be offered by the Company
in the amount of approximately $60,000. Management does not intend to discount
this receivable and, accordingly, has not reduced the account receivable for the
requested discount in the accompanying consolidated balance sheet.
Portfolio Receivables
- ---------------------
Portfolio receivables represent liquidating portfolios of delinquent accounts
which have been purchased by the Company for collection and are stated on a
portfolio by portfolio basis at the lower of cost or net realizable value. Cost
is reduced by cash collections on a portfolio by portfolio basis until such
time collections equal cost. Net realizable value represents management's
estimate of the remaining net proceeds to be realized from a given portfolio,
based on an account by account evaluation of the remaining uncollected
delinquent receivables and on the historical collection experience of the
specific portfolio and similar portfolios (see Note 2).
Continued
F-11
<PAGE>
CYPRESS FINANCIAL SERVICES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
For The Year Ended September 30, 1996 And
For The Period From January 1, 1995 To September 30, 1995
NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, continued
- -------------------------------------------------------------------------------
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.
Property consists of the following at September 30, 1996:
<TABLE>
<S> <C>
Land $ 866,575
Building 1,540,577
Equipment and furnishings 1,324,733
Autos 132,415
-----------
3,864,300
Less accumulated depreciation (1,245,286)
-----------
Property, net $ 2,619,014
===========
</TABLE>
Depreciation expense for the periods ended September 30, 1996 and 1995, totaled
$152,511 and $122,649, respectively.
Trust Accounts
- --------------
The Company maintains trust accounts for the benefit of its clients. Related
funds are deposited in trust bank accounts and reflected as a trust liability
until such amounts held in trust are remitted to clients. The trust account
cash balance of $452,590 is reflected as restricted cash in the accompanying
consolidated balance sheet at September 30, 1996.
Continued
F-12
<PAGE>
CYPRESS FINANCIAL SERVICES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
For The Year Ended September 30, 1996 And
For The Period From January 1, 1995 To September 30, 1995
NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, continued
- -------------------------------------------------------------------------------
Income Taxes
- ------------
The Company accounts for its income taxes in accordance with Statement of
Financial Accounting Standards No. 109, "Accounting for Income Taxes"
("Statement 109"). Under Statement 109, an asset and liability method is used
whereby deferred tax assets and liabilities are determined based on temporary
differences between bases used for financial reporting and income tax reporting
purposes. Income taxes are provided based on the enacted tax rates in effect at
the time such temporary differences are expected to reverse. A valuation
allowance is provided for certain deferred tax assets if it is more likely than
not that the Company will not realize tax assets through future operations (see
Note 8).
Revenue Recognition
- -------------------
Fees related to the collection of receivables owned by the Company's customers
are recognized upon the collection of the receivables. As of September 30,
1996, the Company has obtained legal judgments for the collection of receivables
(and related interest) owned by the Company's customers amounting to
approximately $33,000,000 (unaudited). In addition, as of September 30, 1996,
the Company has incurred approximately $788,673 (unaudited) in legal and court
costs which have not been collected and have been charged to operations over
prior periods. No one customer accounted for more than 10% of total revenues
for the periods presented.
Revenues from collections on purchased portfolios of receivables are recognized
after the cost of each portfolio has been recovered.
Net Income (Loss) Per Share
- ---------------------------
Net income (loss) per share is computed using the weighted average shares
outstanding. The Company's common stock equivalents consist of Series A
convertible, redeemable preferred stock and employee stock options (see Note 6).
The impact of common stock equivalents outstanding during the year ended
September 30, 1996 was not significant. There were no common stock equivalents
outstanding for the period from January 1, 1995 to September 30, 1995.
Continued
F-13
<PAGE>
CYPRESS FINANCIAL SERVICES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
For The Year Ended September 30, 1996 And
For The Period From January 1, 1995 To September 30, 1995
NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, continued
- -------------------------------------------------------------------------------
Rental Operations
- -----------------
The Company leases a portion of its building to unrelated parties (see Note 7).
Management allocates certain costs incurred to rental operations based on a
ratio of square footage to the total square footage of the respective building.
The results of rental operations for the year ended September 30, 1996 and for
the nine-month period ended September 30, 1995 are as follows:
<TABLE>
<CAPTION>
1996 1995
---------- ----------
<S> <C> <C>
Rental income $318,634 $243,950
Interest expense (69,106) (50,839)
Utilities (88,278) (58,381)
Depreciation (17,775) (13,331)
-------- --------
$143,475 $121,399
======== ========
</TABLE>
New Disclosure Standard
- -----------------------
The Financial Accounting Standards Board has issued Statement of Financial
Accounting Standards No. 123 "Accounting for Stock Based Compensation"
("Statement No. 123"). Statement No. 123 is primarily a disclosure standard for
the Company because it will continue to account for employee stock options under
Accounting Principal Board Opinion No. 25. The disclosure requirements for the
Company required by Statement No. 123 are effective for financial statements
issued after fiscal year 1996.
NOTE 2 - PORTFOLIO RECEIVABLES
- ------------------------------
Portfolio receivables activity consists of the following as of September 30,
1996 and 1995, and for the year and nine months then ended:
<TABLE>
<CAPTION>
Face Value Cost Basis
------------ -----------
<S> <C> <C>
Portfolio receivables at
January 1, 1995 $ --- $ ---
Purchases of portfolio
receivables 37,158,755 951,913
Collections (136,618) (115,389)
</TABLE>
Continued
F-14
<PAGE>
CYPRESS FINANCIAL SERVICES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
For The Year Ended September 30, 1996 And
For The Period From January 1, 1995 To September 30, 1995
NOTE 2 - PORTFOLIO RECEIVABLES, continued
- -----------------------------------------
<TABLE>
<CAPTION>
Face Value Cost Basis
------------- -----------
<S> <C> <C>
Sales of portfolio receivables
applied to carrying value (10,213,770) (353,191)
------------ ----------
Portfolio receivables at
September 30, 1995 26,808,367 483,333
Purchases of portfolio
receivables 54,870,470 1,350,637
Collections (891,052) (389,172)
Sales of portfolio receivables
applied to carrying value (22,129,027) (958,293)
------------ ----------
Portfolio receivables at
September 30, 1996 $ 58,658,758 $ 486,505
============ ==========
</TABLE>
NOTE 3 - NOTES RECEIVABLE FROM SHAREHOLDERS
- -------------------------------------------
The notes receivable from shareholders bear an interest rate of 6% per annum and
are due on various dates from March 16, 1997 to December 12, 1997. No payments
for principal or interest were made to the Company during the periods presented,
and no interest income has been recorded in the accompanying consolidated
statements of operations.
NOTE 4 - LINE OF CREDIT
- -----------------------
The Company has a line of credit agreement (the "Agreement") with a financial
institution which expires on January 23, 1997. Under the terms of the
Agreement, the Company may borrow up to $1,250,000. The Company is required to
pay interest monthly at the bank's reference rate plus 2.0% (10.25% at September
30, 1996). As of September 30, 1996, net borrowings amounted to $992,085. At
September 30, 1996, the Company has $257,915 available under this line of
credit. The borrowings are secured by substantially all of the Company's assets
as defined under a security agreement. The Company is required to comply with
certain covenants which are more thoroughly described under the agreement.
Continued
F-15
<PAGE>
CYPRESS FINANCIAL SERVICES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
For The Year Ended September 30, 1996 And
For The Period From January 1, 1995 To September 30, 1995
NOTE 5 - LONG-TERM DEBT
- -----------------------
Long-term debt consists of the following at September 30, 1996:
Note payable to bank, secured by certain
equipment, due in monthly payments of
$10,969, including interest at 11% per
annum, through June 2000 at which time
the entire principal balance is due and
payable. $ 740,390
Mortgage note payable to bank,
collateralized by land and building, due
in monthly payments of $14,089,
including interest at 8% per annum,
through December 2000 at which time the
entire principal balance is due and payable. 1,879,636
----------
Total long-term debt $ 2,620,026
==========
Annual maturities of long-term debt at September 30, 1996 are as follows:
<TABLE>
<CAPTION>
Years Ending
September 30,
-------------
<S> <C>
1997 $ 74,612
1998 80,943
1999 89,599
2000 586,282
2001 1,788,590
----------
$2,620,026
==========
</TABLE>
The Company must comply with certain covenants as defined under the agreements.
Continued
F-16
<PAGE>
CYPRESS FINANCIAL SERVICES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
For The Year Ended September 30, 1996 And
For The Period From January 1, 1995 To September 30, 1995
NOTE 6 - CAPITAL TRANSACTIONS
- -----------------------------
Series A Convertible, Redeemable Preferred Stock
- ------------------------------------------------
In connection with the acquisition of MCSI (Note 1), the Company issued notes
aggregating $850,000 payable to the former MCSI shareholders, $100,000 and
$60,000 of which were paid in September 1995 and April 1996, respectively. In
1995, the Company reflected the issuance of the notes payable as an accrued
dividend and, accordingly, such amounts were deducted in the accompanying
consolidated statement of shareholders' equity (capital deficiency). The
remaining principal balance was originally due on or about June 12, 1996,
together with interest at 8%, per annum.
As of September 30, 1996, unpaid interest totaling $57,725 has been reflected as
an accrued liability in the accompanying consolidated balance sheet. Interest
expense totaling $57,725 and $3,300 was incurred on these notes for the year
ended September 30, 1996 and the nine-month period ended September 30, 1995,
respectively.
On September 30, 1996, the Company converted the balance of such notes totaling
$690,000 into 345,000 shares of the Company's Series A convertible, redeemable
preferred stock. The preferred stock is convertible into shares of common stock
at $2.00 per share at the option of the holders through September 29, 1999, at
which time the shares may be converted at a rate of $1.50 per share of common
stock, subject to antidilution provisions. The underlying common stock reserved
for conversion are subject to registration rights under the Securities Act of
1933, at which time such shares will be automatically converted into common
stock. The Company has the right to redeem these preferred shares at $2.00 per
share. If such shares have not been redeemed or converted by September 29,
1999, the redemption price increases to $2.50 per share, subject to antidilution
provisions. The holders of the Company's Series A convertible, redeemable
preferred shares enjoy the same voting and dividend rights as do the common
shareholders. Such preferred shares have a liquidation preference at $2.00 per
share over common shareholders.
Common Stock Issuances
- ----------------------
On September 12, 1995, the Company issued 2,100,000 shares of its common stock
for $400,000 and a $100,000 non-interest bearing note which was paid in
September 1995. On the same date, the Company reflected 151,271 shares of its
common stock retained in connection with the reverse acquisition of TCG (see
Note 1). Management determined such shares to be of no value as TCG had no
operations nor underlying assets.
Continued
F-17
<PAGE>
CYPRESS FINANCIAL SERVICES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
For The Year Ended September 30, 1996 And
For The Period From January 1, 1995 To September 30, 1995
NOTE 6 - CAPITAL TRANSACTIONS, continued
- ----------------------------------------
Stock Option Plan
- -----------------
In October 1995, the Board of Directors and shareholders approved the 1995 Stock
Option Plan and reserved a total of 450,000 shares of the Company's stock
available for non-qualified and qualified stock options under the plan through
October 2005. All options under the plan must be granted with exercise prices
which are greater than or equal to fair value of the underlying common stock at
the date of grant. Under the terms of the plan, non-qualified options granted
expire upon termination of the plan and vest 100% on the date of grant. The
Company intends to grant options which are non-qualified in nature. If options
to purchase common stock are granted which intend to qualify for Internal
Revenue Code Section 422, such options will contain provisions which comply with
such code section. In September 1996, non-qualified options to purchase 129,400
shares were granted with an exercise price of $2.75 per share. No options were
canceled or forfeited in 1996. All options were exercisable at September 30,
1996.
NOTE 7 - COMMITMENTS AND CONTINGENCIES
- --------------------------------------
Lessee
- ------
The Company leases certain equipment under non-cancelable operating leases which
expire at various times through fiscal 1999. Future annual minimum lease
payments, in the aggregate, under operating leases at September 30, 1996 are as
follows:
<TABLE>
<CAPTION>
Years Ending
September 30,
-------------
<S> <C>
1997 $54,695
1998 27,893
1999 5,982
-------
$88,570
=======
</TABLE>
Rent expense under all operating leases totaled $61,270 in 1996 and $46,942 for
the period from January 1, 1995 to September 30, 1995.
Continued
F-18
<PAGE>
CYPRESS FINANCIAL SERVICES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
For The Year Ended September 30, 1996 And
For The Period From January 1, 1995 To September 30, 1995
NOTE 7 - COMMITMENTS AND CONTINGENCIES, continued
- -------------------------------------------------
Lessor
- ------
The Company leases a portion of its building to unrelated entities under
operating leases which expire at various times through December 1, 2000. The
Company leases to several tenants on a month-to-month basis. Future annual
collections under non-cancelable operating leases as of September 30, 1996 are
scheduled as follows:
<TABLE>
<CAPTION>
Years Ending
September 30,
-------------
<S> <C>
1997 $164,992
1998 102,824
1999 41,268
2000 10,317
--------
$319,401
========
</TABLE>
Rental income activity is further discussed in Note 1.
Employment Agreements
- ---------------------
In August 1995, the Company entered into three-year employment agreements with
four of its officers. The agreements provide for annual salaries, paid
vacations and other related benefits. The minimum annual compensation pursuant
to such agreements, excluding provisions for fringe benefits (e.g., vacations,
etc.), is approximately $546,000 and $500,000 in fiscal 1997 and 1998,
respectively.
NOTE 8 - INCOME TAXES
- ---------------------
The provision for income taxes for the year ended September 30, 1996 consists
of:
<TABLE>
<CAPTION>
Current Deferred Total
------- -------- -----
<S> <C> <C> <C>
U.S. Federal $26,000 $ --- $26,000
State and local 13,000 --- 13,000
------- -------- -------
$39,000 $ --- $39,000
======= ======== =======
</TABLE>
Continued
F-19
<PAGE>
CYPRESS FINANCIAL SERVICES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
For The Year Ended September 30, 1996 And
For The Period From January 1, 1995 To September 30, 1995
NOTE 8 - INCOME TAXES, continued
- --------------------------------
The provision for incomes taxes for the nine-month period ended September 30,
1995 consists of:
<TABLE>
<CAPTION>
Current Deferred Total
------- -------- -----
<S> <C> <C> <C>
U.S. Federal $ --- $ --- $ ---
State and local 3,200 --- 3,200
------- -------- -------
$ 3,200 $ --- $ 3,200
======= ======== =======
</TABLE>
The tax effect of temporary differences that give rise to significant portions
of the deferred tax assets and liabilities at September 30, 1996 are presented
below:
<TABLE>
<S> <C>
Deferred tax assets:
Accounts receivable, principally due to
allowance for doubtful accounts $ 6,021
Compensated absences principally due to
accrual for financial reporting 38,937
Less valuation allowance (44,958)
--------
Net deferred tax assets $ ---
========
</TABLE>
The valuation allowance increased $16,297 and $4,455 during the year ended
September 30, 1996 and nine-month period ended September 30, 1995, respectively.
Income tax expense for the year ended September 30, 1996 differs from the
amounts computed by applying the U.S. Federal income tax rate of 34% to income
before income taxes as a result of the following:
<TABLE>
<CAPTION>
$ %
------- ----
<S> <C> <C>
Computed "expected" tax expense $23,435 34.0%
Increase (reduction) in income taxes
resulting from:
Non-deductible meals and entertainment
expense 1,357 2.0
Change in valuation allowance 16,297 23.6
State and local income taxes 4,259 6.2
Other (6,348) (9.2)
------- ----
$39,000 56.6%
======= ====
</TABLE>
Continued
F-20
<PAGE>
CYPRESS FINANCIAL SERVICES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
For The Year Ended September 30, 1996 And
For The Period From January 1, 1995 To September 30, 1995
NOTE 8 - INCOME TAXES, continued
- --------------------------------
Income tax expense for the nine-month period ended September 30, 1995 differs
from the amounts computed by applying the U.S. Federal income tax rate of 34% to
income before income taxes as a result of the following:
<TABLE>
<CAPTION>
$ %
------- -----
<S> <C> <C>
Computed "expected" tax benefit $(7,346) (34.0%)
Increase (reduction) in income taxes
resulting from:
Non-deductible meals and entertainment
expense 3,000 13.9
Change in valuation allowance 4,455 20.6
State and local income taxes (1,340) (6.2)
Other 4,431 20.5
------- -----
$ 3,200 14.8%
======= =====
</TABLE>
NOTE 9 - FOURTH QUARTER ADJUSTMENTS
- -----------------------------------
During the fourth quarter of 1996, the Company recorded the following
significant charges to the accompanying consolidated statement of operations:
<TABLE>
<S> <C>
Accrued salaries and related benefits $118,415
Accrued interest on notes payable to
related parties converted into Series
A convertible, redeemable preferred
stock (Note 6) 57,725
Depreciation expense 58,711
--------
$234,851
========
</TABLE>
The adjustments referred to above equally impact the net income (loss) and the
net income (loss) per share of each of the quarters in fiscal 1996.
F-21
<PAGE>
EXHIBIT INDEX
EXHIBIT DESCRIPTION SEQUENTIALLY
-----------
NUMBER NUMBERED
- ------ --------
2.1 Definitive Purchase Agreement and Plan of Reorganization dated
September 12, 1995 incorporated by reference from Registrant's
Form 8-K dated September 12, 1995, Exhibit 7(b)(i).
3.1 Amended and Restated Articles of Incorporation as filed with the
Secretary of State of Nevada on December 7, 1995, incorporated by
reference from Registrant's Form 8-K filed on December 20, 1995,
Exhibit 3.1.
3.2 Bylaws of the registrant, incorporated by reference from Registrant's
Registration Statement on Form S-18 (SEC No. 33-12361-LA) filed
on March, 1987, Exhibit 3.2.
3.3 Certificate of Determination re: Series A Preferred Stock.**
4.1 Specimen of Common Stock of Registrant, incorporated by reference
from Registrant's Form 8-K filed on December 20, 1995, Exhibit 4.2.
10.2 1995 Stock Option Plan of Registrant, incorporated by reference
from Registrant's Form 8-K filed on December 20, 1995, Exhibit 10.2.
10.3 Preferred Stock Purchase Agreement dated September 30, 1996. **
___________________
** Being filed and incorporated herein
22
<PAGE>
Exhibit 3.3
CERTIFICATE OF DETERMINATION
OF
CYPRESS FINANCIAL SERVICES, INC.
Providing for the Powers, Designations, Preferences and
Relative, Participating, Optional and Other Special Rights,
and the Qualifications, Limitations or Restrictions Thereof
of Series A Preferred Stock
The undersigned Farrest Hayden and Otto Lacayo hereby certify that:
ONE: They are the duly elected and acting President and Secretary,
respectively, of said Corporation.
TWO: The Board of Directors of the Corporation, pursuant to the provisions
of its Articles of Incorporation, duly adopted the following resolutions:
RESOLVED, that there is hereby established a series of the
Corporation's Preferred Stock, par value $0.001 per share (the "Preferred
Stock"), and to the extent that the powers, designation, preferences and
relative, participating, optional and other special rights, and the
qualifications, limitations and restrictions thereof, of such series, are
not fixed by the amended Articles of Incorporation, they are hereby fixed
as set forth as Exhibit 1 below.
THREE: The undersigned certify that the authorized number of Preferred
Stock of the Corporation is 5,000,000 and that none of such shares are currently
outstanding.
IN WITNESS WHEREOF, the undersigned have executed this certificate on this
30th day of September,1996.
Cypress Financial Services, Inc.
By: /s/ Farrest Hayden
----------------------
Farrest Hayden, President
By: /s/ Otto Lacayo
-----------------
Otto Lacayo, Secretary
THE UNDERSIGNED, being the President and Secretary of CYPRESS FINANCIAL
SERVICES, INC. hereby declare and certify that the facts herein stated are true
and correct, and, accordingly, have each set their hand this 30th, day of
September, 1996.
Cypress Financial Services, Inc.
By: /s/ Farrest Hayden
------------------
Farrest Hayden, President
By: /s/ Otto Lacayo
---------------
Otto Lacayo, Secretary
1
<PAGE>
EXHIBIT 1
TERMS AND CONDITIONS OF
SERIES A PREFERRED STOCK
I. Designation and Amount.
----------------------
1. The distinctive serial designation of this series of Preferred
Stock shall be "Series A Convertible Redeemable Preferred Stock" (hereinafter
called "Series A Preferred Stock"). Each share of Series A Preferred Stock shall
be identical in all respects with the other shares of Series A Preferred Stock.
2. The number of shares in Series A Preferred Stock shall initially
be 345,000 Shares in Series A Preferred Stock
II. Dividend Provisions. Subject to the prior rights of any of
-------------------
those present or future class or series of preferred stock at the time
outstanding having prior rights to dividends, the holders of each share of
Series A Preferred Stock shall be entitled to receive, when and as declared by
the Board of Directors, out of the assets of the Corporation legally available
therefor, such dividends as each share of Common Stock into which such Series A
Preferred Stock could then be converted is entitled, and as may be declared from
time to time by the Board of Directors.
III. Liquidation Preference.
----------------------
(a) In the event of any liquidation, dissolution or winding up of
this Corporation, either voluntary or involuntary, the holders of Series A
Preferred Stock shall be entitled to receive, out of the assets of the
Corporation available for distribution to its shareholders, prior and in
preference to any distribution of any of the assets of this Corporation to the
holders of Common Stock by reason of their ownership thereof, an amount per
share equal to the sum of (i) $2.00 for each outstanding share of Series A
Preferred Stock (the "Original Series A Issue Price"). If upon the occurrence of
such event, the assets and funds thus distributed among the holders of the
Series A Preferred Stock shall be insufficient to permit the payment to such
holders of the full aforesaid preferential amounts, then, the entire assets and
funds of the Corporation legally available for distribution shall be distributed
ratably among the holders of the Series A Preferred Stock in proportion to the
amount of such stock owned by each such holder.
(b) After the distributions to the holders of Series A Preferred
Stock required in subparagraph (a) of this Section III above have been paid, the
remaining assets of the Corporation available for distribution to shareholders
shall be distributed ratably among the holders of Common Stock based on the
number of shares of Common Stock held by each such holder.
(c) (i) For purposes of this Section III, a liquidation, dissolution
or winding up of this Corporation shall be deemed to be occasioned by, or to
include, (A) the acquisition of the Corporation by another entity by means of
any transaction or series of related transactions (including, without
limitation, any reorganization, merger or consolidation but, excluding any
merger effected exclusively for the purpose of changing the domicile of the
Corporation); or (B) a sale of all or substantially all of the assets of the
Corporation (with the transaction set forth in (A) and (B) collectively referred
to herein as a "Corporate Transaction"), unless the Corporation's shareholders
of record as constituted immediately prior to such Corporate Transaction,
immediately after such
2
<PAGE>
Corporate Transaction (by virtue of securities issued as consideration for the
Corporate Transaction or otherwise hold at least 50% of the voting power of the
surviving or acquiring entity.
(ii) In any of such events, if the consideration received by the
Corporation in a Corporate Transaction is other than cash, its value will be
deemed its fair market value. Any securities shall be valued as follows:
(A) Securities not subject to investment letter or other similar
restrictions on free marketability covered by (B) below:
(1) If traded on a securities exchange or through NASDAQ
National Market System, the value shall be deemed to be the average of the
closing prices of the securities on such exchange over the thirty (30) day
period ending three (3) days prior to the closing;
(2) If actively traded over-the-counter, the value shall be
deemed to be the average of the closing bid or sale prices (whichever is
applicable) over the thirty (30) day period ending three (3) days prior to the
closing; and
(3) If there is no active public market, the value shall be
the fair market value thereof, as mutually determined by the Corporation (acting
by its Board of Directors, but excluding any member of the Board of Directors
elected by the holders of Series A Preferred Stock) and the holders of at least
a majority of the voting power of all then outstanding shares of Series A
Preferred Stock.
(B) The method of valuation of securities subject to investment
letter or other restrictions on free marketability (other than restrictions
arising solely by virtue of a shareholder's status as an affiliate or former
affiliate) shall be to make an appropriate discount (as mutually determined by
the Corporation and the holders of at least a majority of the voting power of
all then outstanding shares of Series A Preferred Stock or which shall be based
upon the opinion of an independent investment banking firm retained by the
Corporation) from the market value determined as above in (A)(1), (2) or (3) to
reflect the approximate fair market value thereof, as mutually determined by the
Corporation and the holders of at least a majority of the voting power of all
then outstanding shares of Series A Preferred Stock.
(iii) The Corporation shall give each holder of record of Series A
Preferred Stock written notice of such impending transaction not later than
twenty (20) days prior to the shareholders' meeting called to approve such
transaction, or twenty (20) days prior to the closing of such transaction,
whichever is earlier, and shall also notify such holders in writing of the final
approval of such transaction. The first of such notices shall describe the
material terms and conditions of the impending transaction and the provisions of
this Section 2, and the Corporation shall thereafter give such holders prompt
notice of any material changes. The transaction shall in no event take place
sooner than twenty (20) days after the Corporation has given the first notice
provided for herein or sooner than ten (10) days after the Corporation has given
notice of any material changes provided for herein; provided, however, that such
periods may be shortened upon the written consent of the holders of Series A
Preferred Stock that are entitled to such notice rights or similar notice rights
and that represent at least a majority of the voting power of all then
outstanding shares of such Series A Preferred Stock.
3
<PAGE>
IV. Redemption.
----------
(a) The Corporation may at its option, (subject to all of the
provision of this Article IV) redeem all or any portion of the Series A
Preferred Stock then outstanding, at the following redemption prices, payable in
cash:
(i) at any time prior to September 29, 1999, the redemption
price shall be two dollars ($2.00) per share, plus any accrued and unpaid
dividends as of the date set for such redemption;
(ii) at any time on or after September 29, 1999, the redemption
price shall be Two Dollars and Fifty Cents ($2.50) per share, plus any accrued
and unpaid dividends as of the date set for such redemption;
(b) At least 30 but not more than 60 days prior to the date fixed by
the Corporation's Board of Directors for redemption of any of the Series A
Preferred Stock ( the "Redemption Date"), written notice shall be hand delivered
or mailed, first class postage prepaid, to each holder of record of the Series A
Preferred Stock to be redeemed at the address last shown on the records of the
Corporation for such holder or given by the holder to the Corporation for the
purpose of notice, notifying such holder of the redemption to be effected and
specifying (a) the Redemption Date, (b) the redemption price, (c) the place or
places at which payment may be obtained, (d) the method used or to be used in
determining what shares are to be redeemed in the event that less than all share
are to be redeemed, (e) that on and after the Redemption Date dividends will
cease to accrue on such shares, (f) the then effective conversion rate of the
shares to be redeemed, (g) the date on which such holder's conversion rights as
to such shares terminate, and (h) calling upon such holder to surrender to the
Corporation, in the manner and at the place designated, his certificate or
certificates represent the shares to be redeemed (the "Redemption Notice").
(c) Any Redemption Notice that is mailed as herein provided shall be
conclusively presumed to have been duly given, whether or not the holder
receives it; and failure to give a Redemption Notice by mail to the holders of
any shares designated for redemption, or any defect in such Redemption Notice,
shall not effect the validity of the proceeding for the redemption of any other
share os Series A Preferred Stock.
(d) Any holder of a share of Series A Preferred Stock shall have the
right, following the mailing of any Redemption Notice, to convert such shares of
Series A Preferred Stock into shares of Common Stock of the Corporation as
provided in Article V below provided only that such holder shall have given the
Corporation written notice of intent to so convert prior to the close of
business on the business day prior to the Redemption Date relating to such
share.
(e) On or after the date fixed for redemption as stated in such
notice, each holder of the shares called for redemption shall surrender the
certitude or certificates evidencing such shares to the Corporation at the place
designated in such notice and shall thereupon be entitled to receive payment of
the redemption price. If less than all the shares represented by any such
surrendered certificate or certificates are redeemed, a new certificate shall be
issued representing the unredeemed shares.
(f) From and after the Redemption Date, all rights of the holders of
the Series A Preferred Stock so redeemed (except the right to receive the
redemption price without interest upon
4
<PAGE>
(a) The Corporation may at its option, (subject to all of the
provision of this Article IV) redeem all or any portion of the Series A
Preferred Stock then outstanding, at the following redemption prices, payable in
cash:
(i) at any time prior to September 29, 1999, the redemption price
shall be two dollars ($2.00) per share, plus any accrued and unpaid dividends as
of the date set for such redemption;
(ii) at any time on or after September 29, 1999, the redemption
price shall be Two Dollars and Fifty Cents ($2.50) per share, plus any accrued
and unpaid dividends as of the date set for such redemption;
(b) At least 30 but not more than 60 than days prior to the date fixed
the Corporation's Board of Directors for redemption of any of the Series A
Preferred Stock (the "Redemption Date"), written notice shall be hand delivered
or mailed, first class postage prepaid, to each holder of record of the Series A
Preferred Stock to be redeemed at the address last shown on the records of the
Corporation for such holder or given by the holder to the Corporation for the
purpose of notice, notifying such holder of the redemption to be effected and
specifying (a) the Redemption Date, (b) the redemption price, (c) the place or
places at which payment may be obtained, (d) the method used or to be used in
determining what shares are to be redeemed in the event that less than all share
are to be redeemed, (e) that on and after the Redemption Date dividends will
cease to accrue on such shares, (f) the then effective conversion rate of the
shares to be redeemed, (g) the date on which such holder's conversion rights as
to such shares terminate, and (h) calling upon such holder to surrender to the
Corporation, in the manner and at the place designated, his certificate or
certificates represent the shares to be redeemed (the "Redemption Notice").
(c) Any Redemption Notice that is mailed as herein provided shall be
conclusively presumed to have been duly given, whether or not the holder
receives it; and failure to give a Redemption Notice by mail to the holders of
any shares designated for redemption, or any defect in such Redemption Notice,
shall not effect the validity of the proceeding for the redemption of any other
share os Series A Preferred Stock.
(d) Any holder of a share of Series A Preferred Stock shall have the
right, following the mailing of any Redemption Notice, to convert such shares of
Series A Preferred Stock into shares of Common Stock of the Corporation as
provided in Article V below provided only that such holder shall have given the
Corporation written notice of intent to so convert prior to the close of
business on the business day prior to the Redemption Date relating to such
share.
(e) On or after the date fixed for redemption as stated in such
notice, each holder of the shares called for redemption shall surrender the
certitude or certificates evidencing such shares to the Corporation at the place
designated in such notice and shall thereupon be entitled to receive payment of
the redemption price. If less than all the shares represented by any such
surrendered certificate or certificates are redeemed, a new certificate shall be
issued representing the unredeemed shares.
(f) From and after the Redemption Date, all rights of the holders of
the Series A Preferred Stock so redeemed (expect the right to receive the
redemption price without interest upon surrender of their certificate or
certificates) shall terminate with respect to such shares, and such shares shall
not thereafter be transferred on the books of the Corporation or be deemed to be
outstanding for any purpose whatsoever, unless, (a) a given holder shall have
given notice of intention to convert as
<PAGE>
provided in Article V, below or (b) there shall have been a default in payment
of the redemption price. Any shares of Series A Preferred Stock not redeemed,
shall remain outstanding and entitled to all the rights and preferences provided
herein.
(g) If fewer than all of the outstanding shares of Series A Preferred
Stock are to be redeemed, the Corporation shall designates those shares to be
redeemed pro rata or by lot or in such other manner as the Board of Directors
may determine. There shall be no mandatory redemption, retirement or sinking
fund obligation of the Corporation with respect to the Series A Preferred Stock.
In the event that the Corporation is in arrears on the payment of accrued and
unpaid dividends on the Series A Preferred Stock, it may not redeem any of the
then outstanding shares of the Series A Preferred Stock until all such accrued
and unpaid dividends have been paid in full on all outstanding shares of Series
A Preferred Stock, unless the holders of a majority of the then outstanding
shares of Series A Preferred Stock shall otherwise consent, in writing.
V. Conversion. The holders of the Series A Preferred Stock shall
----------
have conversion rights as follows (the "Conversion Rights"):
(a) Right to Convert. Each share of Series A Preferred Stock shall be
----------------
convertible, at the option of the holder thereof, at any time after the date of
issuance of such share, at the office of this Corporation or any transfer agent
for such stock, into such number of fully paid and nonassessable shares of
Common Stock as is determined by dividing the Original Series A Issue Price by
the Conversion Price applicable to such share, determined as hereafter provided,
in effect on the date the certificate is surrendered for conversion. The initial
Conversion Price per share for shares of Series A Preferred Stock will be the
Original Series A Issue Price; provided, however, that the Conversion Price for
the Series A Preferred Stock shall be subject to adjustment as set forth in
subsections V(d) and V(e).
(b) Automatic Conversion. Each share of Series A Preferred Stock
--------------------
shall automatically be converted into shares of Common Stock at the Conversion
Price at the time in effect for such Series A Preferred Stock immediately upon
the closing of a sale of the Corporation's Common Stock in a firm commitment,
underwritten public offering pursuant to an effective registration statement
under the Securities Act of 1933, as amended.
(c) Mechanics of Conversion. Before any holder of Series A Preferred
-----------------------
Stock shall be entitled to convert the same into shares of Common Stock, he
shall surrender the certificate or certificates therefor, duly endorsed, at the
offices of this Corporation or of any transfer agent for the Series A Preferred
Stock, and shall give written notice to this Corporation at its principal
corporate office, of the election to convert the same and shall state therein
the number of shares of Preferred Stock to be converted and the name or names in
which the certificate or certificates for shares of Common Stock are to be
issued. This Corporation shall, as soon as practicable thereafter, issue and
deliver at such office to such holder of Series A Preferred Stock, or to the
nominee or nominees of such holder, a certificate or certificates for the number
of shares of Common Stock to which such holder shall be entitled as aforesaid.
Such conversion shall be deemed to have been made immediately prior to the close
of business on the date of such surrender of the shares of Series A Preferred
Stock to be converted, and the person or persons entitled to receive the shares
of Common Stock issuable upon such conversion shall be treated for all purposes
as the record holder or holders of such shares of Common Stock as of such date.
If the conversion is in connection with an underwritten offering of securities
registered pursuant to the Securities Act of 1933 as provided for in paragraph
V(b) above, the conversion may, at the option of any holder tendering Series A
Preferred Stock for conversion, be
5
<PAGE>
conditioned upon the closing with the underwriters of the sale of securities
pursuant to such offering, in which event the person(s) entitled to receive the
Common Stock upon conversion of the Series A Preferred Stock shall not be deemed
to have converted such Series A Preferred Stock until immediately prior to the
closing of such sale of securities.
(d) Conversion Price Adjustments of Series A Preferred Stock for
------------------------------------------------------------
Certain Dilutive Issuances, Splits and Combinations. The Conversion Price of
- ---------------------------------------------------
the Series A Preferred Stock shall be subject to adjustment from time to time as
follows:
(i) (A) If the Corporation shall issue, after the date upon
which any shares of Series A Preferred Stock were first issued (the "Purchase
Date" with respect to such series), any Additional Stock (as defined below)
without consideration or for a consideration per share less than the Conversion
Price for such series in effect immediately prior to the issuance of such
Additional Stock, the Conversion Price for such series in effect immediately
prior to each such issuance shall forthwith (except as otherwise provided in
this clause (i)) be adjusted to a price equal to the price paid per share
determined by multiplying the Conversion price by a fraction (x) the numerator
of which shall be the number of shares of Common Stock outstanding immediately
prior to the issuance of such Additional Stock plus the number of shares of
Common Stock which the aggregate consideration received by the Corporation for
the total number of shares of Additional Stock so issued would purchase at the
Conversion Price in effect immediately prior to such issuance, and (y) the
denominator of which shall be the number of shares of Common Stock outstanding
immediately prior to such issuance of Additional Stock plus the number of shares
of such Additional Stock so issued. For purposes of the above determination, the
number of shares of Common Stock outstanding immediately prior to such issuance
shall be calculated as if all shares of Series A preferred Stock had been fully
converted into shares of Common Stock immediately prior to such issuance at the
Conversion price then in effect.
(B) No adjustment of the Conversion Price for the Series A
Preferred Stock shall be made in an amount less than one cent ($0.01) per share,
provided that any adjustments which are not required to be made by reason of
this sentence shall be carried forward and shall be either taken into account in
any subsequent adjustment made prior to three (3) years from the date of the
event giving rise to the adjustment being carried forward, or shall be made at
the end of three (3) years from the date of the event giving rise to the
adjustment being carried forward, and upon such adjustment the Conversion Price
shall be rounded up or down to the nearest cent. Except to the limited extent
provided for in subsections (E)(3) and (E)(4), no adjustment of such Conversion
Price pursuant to this subsection V(d)(i) shall have the effect of increasing
the Conversion Price above the Conversion Price in effect immediately prior to
such adjustment.
(C) In the case of the issuance of Common Stock for cash,
the consideration shall be deemed to be the amount of cash paid therefor before
deducting any reasonable discounts, commissions or other expenses allowed, paid
or incurred by this Corporation for any underwriting or otherwise in connection
with the issuance and sale thereof.
(D) In the case of the issuance of the Common Stock for a
consideration in whole or in part other than cash, the consideration other than
cash shall be deemed to be the fair value thereof as determined by the Board of
Directors irrespective of any accounting treatment.
(E) In the case of the issuance of options (whether before
on or after the applicable Purchase Date) of options to purchase or rights to
subscribe for Common Stock,
6
<PAGE>
securities by their terms convertible into or exchangeable for Common Stock or
options to purchase or rights to subscribe for such convertible or exchangeable
securities, the following provisions shall apply for all purposes of this
subsection V(d)(i) and subsection V(d)(ii):
(1) The aggregate maximum number of shares of Common Stock
deliverable upon exercise (assuming the satisfaction of any conditions to
exercisability, including without limitation, the passage of time, but without
taking into account potential antidilution adjustments) of such options to
purchase or rights to subscribe for Common Stock shall be deemed to have been
issued at the time such options or rights were issued and for a consideration
equal to the consideration (determined in the manner provided in subsections
V(d)(i)(C) and (d)(i)(D)), if any, received by the Corporation upon the issuance
of such options or rights plus the minimum exercise price provided in such
options or rights (without taking into account potential antidilution
adjustments) for the Common Stock covered thereby.
(2) The aggregate maximum number of shares of Common Stock
deliverable upon conversion of or in exchange (assuming the satisfaction of any
conditions to convertibility or exchangeability, including, without limitation,
the passage of time, but without taking into account potential antidilution
adjustments) for any such convertible or exchangeable securities or upon the
exercise of options to purchase or rights to subscribe for such convertible or
exchangeable securities and subsequent conversion or exchange thereof shall be
deemed to have been issued at the time such securities were issued or such
options or rights were issued and for a consideration equal to the
consideration, if any, received by the Corporation for any such securities and
related options or rights (excluding any cash received on account of accrued
interest or accrued dividends), plus the minimum additional consideration, if
any, to be received by the Corporation (without taking into account potential
antidilution adjustments) upon the conversion or exchange of such securities or
the exercise of any related options or rights (the consideration in each case to
be determined in the manner provided in subsections V(d)(i)(C) and (d)(i)(D)).
(3) In the event of any change in the number of shares of
Common Stock deliverable or in the consideration payable to this Corporation
upon exercise of such options or rights or upon conversion of or in exchange for
such convertible or exchangeable securities, including, but not limited to, a
change resulting from the antidilution provisions thereof, the Conversion Price
of the Series A Preferred Stock, to the extent in any way affected by or
computed using such options, rights or securities, shall be recomputed to
reflect such change, but no further adjustment shall be made for the actual
issuance of Common Stock or any payment of such consideration upon the exercise
of any such options or rights or the conversion or exchange of such securities.
(4) Upon the expiration of any such options or rights, the
termination of any such rights to convert or exchange or the expiration of any
options or rights related to such convertible or exchangeable securities, the
Conversion Price of the Series A Preferred Stock, to the extent in any way
affected by or computed using such options, rights or securities or options or
rights related to such securities, shall be recomputed to reflect the issuance
of only the number of shares of Common Stock (and convertible or exchangeable
securities which remain in effect) actually issued upon the exercise of such
options or rights, upon the conversion or exchange of such securities or upon
the exercise of the options or rights related to such securities.
(5) The number of shares of Common Stock deemed issued and
the consideration deemed paid therefor pursuant to subsections V(d)(i)(E)(1) and
(2) shall be
7
<PAGE>
appropriately adjusted to reflect any change, termination or expiration of the
type described in either subsection V(d)(i)(E)(3) or (4).
(ii) "Additional Stock" shall mean any shares of Common Stock issued
(or deemed to have been issued pursuant to subsection V(d)(i)(E)) by this
Corporation after the Purchase Date other than:
(A) Upon conversion of the Series A Preferred Stock or as a
dividend or distribution thereon;
(B) Common Stock issued pursuant to a transaction described in
subsection V(d)(iii) hereof;
(C) shares of Common Stock issuable to or issued to employees,
consultants, directors or vendors (if in transactions with primarily non-
financing purposes) of this Corporation directly or pursuant to a stock option
plan or restricted stock plan approved by the Board of Directors of this
Corporation at any time when the total number of shares of Common Stock so
issuable or issued (and not repurchased at cost by the Corporation in connection
with the termination of employment) does not exceed Four Hundred and Fifty
Thousand (450,000) shares, in the aggregate.
(D) shares of Common Stock issued or issuable in a firm
commitment public offering in connection with which all outstanding shares of
Series A preferred Stock will be converted to Common Stock as provided in
Section V(b) above.
(iii) In the event the Corporation should at any time or from time to
time after the Purchase Date fix a record date for the effectuation of a split
or subdivision of the outstanding shares of Common Stock, receive a dividend or
other distribution payable in additional shares of Common Stock or other
securities or rights convertible into, or entitling the holder thereof to
receive directly or indirectly, additional shares of Common Stock (hereinafter
referred to as "Common Stock Equivalents") without payment of any consideration
by such holder for the additional shares of Common Stock or the Common Stock
Equivalents (including the additional shares of Common Stock issuable upon
conversion or exercise thereof), then, as of such record date (or the date of
such dividend distribution, split or subdivision if no record date is fixed),
the Conversion Price of the Series A Preferred Stock shall be appropriately
decreased so that the number of shares of Common Stock issuable on conversion of
each share of such series shall be increased in proportion to such increase of
the aggregate of shares of Common Stock outstanding and those issuable with
respect to such Common Stock Equivalents with the number of shares issuable with
respect to Common Stock Equivalents determined from time to time in the manner
provided for deemed issuances in subsection V(d)(i)(E).
(iv) If the number of shares of Common Stock outstanding at any time
after the Purchase Date is decreased by a combination of the outstanding shares
of Common Stock, then, following the record date of such combination, the
Conversion Price for the Series A Preferred Stock shall be appropriately
increased so that the number of shares of Common Stock issuable on conversion of
each share of such series shall be decreased in proportion to such decrease in
outstanding shares.
(e) Automatic Conversion Price Adjustment. Notwithstanding any
--------------------------------------
adjustment provided for in subsection V(d), on or after September 29, 1999, the
conversion Price per share or shares of Series A Preferred Stock shall
automatically be reduced by 25% per share.
8
<PAGE>
(f) Other Distributions. In the event this Corporation shall
-------------------
declare a distribution payable in securities of other persons, evidences of
indebtedness issued by this Corporation or other persons, assets (excluding cash
dividends) or options or rights not referred to in subsection 4(d)(iii), then,
in each such case for the purpose of this subsection 4(e), the holders of the
Series A Preferred Stock shall be entitled to a proportionate share of any such
distribution as though they were the holders of the number of shares of Common
Stock of the Corporation into which their shares of Series A Preferred Stock are
convertible as of the record date fixed for the determination of the holders of
Common Stock of the Corporation entitled to receive such distribution.
(g) Recapitalization. If at any time or from time to time there
-----------------
shall be a recapitalization of the Common Stock (other than a subdivision,
combination or merger or sale of assets transaction provided for elsewhere in
this Section 4 or Section 2) provision shall be made so that the holders of the
Series A Preferred Stock shall thereafter be entitled to receive upon conversion
of the Series A Preferred Stock the number of shares of stock or other
securities or property of the Corporation or otherwise, to which a holder of
Common Stock deliverable upon conversion would have been entitled on such
recapitalization. In any such case, appropriate adjustment shall be made in the
application of the provisions of this Section 4 with respect to the rights of
the holders of the Series A Preferred Stock after the recapitalization to the
end that the provisions of this Section 4 (including adjustment of the
Conversion Price then in effect and the number of shares purchasable upon
conversion of the Series A Preferred Stock) shall be applicable after that event
as nearly equivalent as may be practicable.
(h) No Impairment. This Corporation will not, by amendment of its
-------------
Articles of Incorporation or through any reorganization, recapitalization,
transfer or assets, consolidation, merger, dissolution, issue or sale of
securities or any other voluntary action, avoid or seek to avoid the observance
or performance of any of the terms to be observed or performed hereunder by this
Corporation, but will at all times in good faith assist in the carrying out of
all the provisions of this Section 4 and in the taking of all such action as may
be necessary or appropriate in order to protect the conversion rights of the
holders of the Series A Preferred Stock against impairment.
(i) No Fractional Shares and Certificate as to Adjustments.
------------------------------------------------------
(i) No fractional shares shall be issued upon the
conversion of any share or shares of the Series A Preferred Stock, and the
number of shares of Common Stock to be issued shall be rounded to the nearest
whole share. Whether or not fractional shares are issuable upon such conversion
shall be determined on the basis of the total number of shares of Series A
Preferred Stock the holder is at the time converting into Common Stock and the
number of shares of Common Stock issuable upon such aggregate conversion.
(ii) Upon the occurrence of each adjustment or readjustment
of the Conversion Price of Series A Preferred Stock pursuant to this Section 4,
this Corporation, at its expense, shall promptly compute such adjustment or
readjustment in accordance with the terms hereof and prepare and furnish to each
holder of Series A Preferred Stock a certificate setting forth such adjustment
or readjustment and showing in detail the facts upon which such adjustment or
readjustment is based. This Corporation shall, upon the written request at any
time of any holder of Series A Preferred Stock, furnish or cause to be furnished
to such holder a like certificate setting forth (A) such adjustment and
readjustment, (B) the Conversion Price for such series of Preferred Stock at the
time in effect, and (C) the number of shares of Common Stock and the amount, if
any, of other property which at the time would be received upon the conversion
of a share of Series A Preferred Stock.
9
<PAGE>
(j) Notices of Record Date. In the event of any taking by this
----------------------
Corporation of a record of the holder of any class of securities for the purpose
of determining the holders thereof who are entitled to receive any dividend
(other than a cash dividend) or other distribution, any right to subscribe for,
purchase or otherwise acquire any shares of stock of any class or any other
securities or property, or to receive any other right, this Corporation shall
mail to each holder of Series A Preferred Stock, at least twenty (20) days prior
to the date specified therein, a notice specifying the date on which any such
record is to be taken for the purpose of such dividend, distribution or right,
and the amount and character of such dividend, distribution or right.
(k) Reservation of Stock Issuable Upon Conversion. This
---------------------------------------------
Corporation shall at all times reserve and keep available out of its authorized
but unissued shares of Common Stock, solely for the purpose of effecting the
conversion of the shares of the Series A Preferred Stock, such number of its
share of Common Stock as shall from time to time be sufficient to effect the
conversion of all outstanding shares of the Series A Preferred Stock; and if at
any time the number of authorized but unissued shares of Common Stock shall not
be sufficient to effect the conversion of all then outstanding shares of the
Series A Preferred Stock, in addition to such other remedies as shall be
available to the holder of such Series A Preferred Stock, this Corporation will
take such corporate action as may, in the opinion of its counsel, be necessary
to increase its authorized but unissued shares of Common Stock to such number of
shares as shall be sufficient for such purposes, including without limitation,
engaging in best efforts to obtain the requisite shareholder approval of any
necessary amendment to these articles.
(l) Notices. Any notice required by the provisions of this
-------
Section 4 to be given to the holders of shares of Series A Preferred Stock shall
be deemed given if deposited in the United States mail, postage prepaid, and
addressed to each holder of record at his address appearing on the books of this
Corporation.
VI. Voting Rights. The holder of each share of Series A Preferred
-------------
Stock shall have the right to one vote for each share of Common Stock into which
such Series A Preferred Stock could then be converted and with respect to such
vote, such holder shall have full voting rights and powers equal to the voting
rights and powers of the holders of Common Stock, and shall be entitled,
notwithstanding any provision hereof, to notice of any shareholders' meeting in
accordance with the bylaws of this Corporation, and shall be entitled to vote,
together with holders of Common Stock, with respect to any question upon which
holders of Common Stock have the right to vote. Fractional votes shall not,
however, be permitted and any fractional voting rights available on an as-
converted basis (after aggregating all shares into which shares of Series A
Preferred Stock held by each holder could be converted) shall be rounded to the
nearest whole number (with one-half being rounded upward).
VII. Status of Converted or Redeemed Stock. In the event any shares
-------------------------------------
of Series A Preferred Stock redeemed, purchased or otherwise acquired by the
Corporation (including shares surrendered for conversion) shall be cancelled and
thereupon restored to the status of authorized but unissued shares of Preferred
Stock undesignated as to series. The Articles of Incorporation of this
Corporation shall be appropriately amended to effect the corresponding reduction
in the Corporation's authorized capital stock.
VIII. Repurchase of Shares. In connection with repurchases by this
--------------------
Corporation of its Common Stock pursuant to its agreements with certain of the
holders thereof, Sections 502 and 503 of the California Corporations Code shall
not apply in whole or in part with respect to such repurchases.
10
<PAGE>
VIIII. No Denial of Rights. Notwithstanding any provision contained in
-------------------
this Article III to the contrary, no denial or limitation of voting rights shall
be effective unless at the time one or more classes or series of outstanding
shares or debt securities, singly or in the aggregate, are entitled to full
voting rights, and no denial or limitation of dividend or liquidation rights
shall be effective unless at the time one or more classes or series of
outstanding shares, singly or in the aggregate, are entitled to unlimited
dividend and liquidation rights.
11
<PAGE>
ACKNOWLEDGMENT
STATE OF CALIFORNIA )
) ss.
COUNTY OF ORANGE )
On this 6th day of December, 1996, before me, Kelly J. Woodward, a Notary
Public, personally appeared Farrest Hayden, personally known to me, and who
acknowledged to me that he is the President of Cypress Financial Services, Inc.
and that he executed the above instrument.
/s/ Kelly J. Woodward
---------------------------------
Kelly J. Woodward, Notary Public
STATE OF CALIFORNIA )
) ss.
COUNTY OF ORANGE )
On this 6th day of December, 1996, before me, Kelly J. Woodward, a Notary
Public, personally appeared Otto Lacayo, personally known to me, and who
acknowledged to me that he is the Secretary of Cypress Financial Services, Inc.
and that he executed the above instrument.
/s/ Kelly J. Woodward
---------------------------------
Kelly J. Woodward, Notary Public
12
<PAGE>
EXHIBIT 10.3
CYPRESS FINANCIAL SERVICES, INC.
SERIES A PREFERRED STOCK PURCHASE AGREEMENT
-------------------------------------------
THIS SERIES A PREFERRED STOCK PURCHASE AGREEMENT ("Agreement") is made as
of the 30th day of September 1996, by and between Cypress Financial Services,
Inc., a Nevada corporation (the "Company"), and each of the persons listed on
Schedule 1.1 hereto, each of which is herein referred to as an "Investor" and
collectively are herein referred to as the "Investors."
THE PARTIES HEREBY AGREE AS FOLLOWS:
1. Purchase and Sale of Stock.
--------------------------
1.1. Sale and Issuance of Series A Preferred Stock.
---------------------------------------------
(a) The Company shall adopt and file with the Secretary of
State of California on or before the Closing (as defined below) the Certificate
of Determination in the form attached hereto as EXHIBIT A (the "Certificate").
(b) Subject to the terms and conditions of this Agreement, the
Investors agree to purchase at the Closing, or pursuant to Section 1.3 below,
and the Company agrees to sell and issue to the Investors at the Closing, or
pursuant to Section 1.3 below, 345,000 shares of the Company's Series A
Preferred Stock (the "Series A Preferred Stock"). Each Investor agrees,
severally, to purchase at the Closing the number of shares set forth opposite
each Investor's name on Schedule 1.1 for the aggregate purchase price of
-------------
$690,000 or $2.00 per share.
1.2. Closing. The purchase and sale of the Series A Preferred Stock
-------
shall take place at the Company's office located at 5400 Orange Avenue, Suite
200, Cypress, California 90630, at 10:00 a.m. on September 30, 1996, or at such
other time and place as the Company and the Investor mutually agree upon orally
or in writing (which time and place are designated as the "Closing"). At the
Closing the Company shall deliver to the Investor certificates representing the
Series A Preferred Stock which the Investor is purchasing against delivery to
the Company by the Investor of the purchase price therefor as described above by
delivery of the Investor's original outstanding promissory note from the
company marked "Cancelled".
2. Representations and Warranties of the Company. The Company hereby
---------------------------------------------
represents and warrants to the Investors that, except as set forth on a Schedule
of Exceptions specifically identifying the relevant subparagraph hereof and
attached hereto as EXHIBIT C
2.1 Organization, Good Standing and Qualification. The Company is a
---------------------------------------------
corporation duly organized, validly existing and in good standing under the laws
of the State of California and has all requisite corporate power and authority
to carry on its business as now conducted and as proposed to be conducted. The
Company is duly qualified to transact business
<PAGE>
and is in good standing in each jurisdiction in which the failure so to qualify
would have a material adverse effect on its business or properties. The Company
has furnished Investors with true and complete copies of its Articles of
Incorporation and bylaws or amended through the date hereof.
2.2 Capitalization and Voting Rights. The authorized capital of the
--------------------------------
Company, as set forth in EXHIBIT C, consists, immediately prior to the Closing,
of:
(i) Preferred Stock. 5,000,000 shares of Preferred Stock (the
---------------
"Preferred Stock"), of which 345,000 shares have been designated Series A
Preferred Stock, none of which are issued and outstanding, and up to all of
which will be sold pursuant to this Agreement. The rights, privileges and
preferences of the Series A Preferred Stock will be as stated in the Company's
Certificate of Determination.
(ii) Common Stock. 30,000,000 shares of common stock ("Common
------------
Stock"), of which 4,500,271 shares are issued and outstanding as of September 9,
1996.
(iii) Except for the conversion privileges of the Series A
Preferred Stock to be issued under this Agreement and the stock or stock options
to be issued to officers, directors, employees or consultants of the Company to
be exercisable for a maximum of 450,000 shares of the Company's Common Stock,
in the aggregate (of which 129,400 stock options are outstanding), and except as
set forth on Schedule 2.2 hereto, there are no outstanding any rights of first
refusal, options, warrants, rights (including conversion or preemptive rights)
or agreements for the purchase or acquisition from the Company of any shares of
its capital stock. The Company is not a party or subject to any agreement or
understanding, and, there is no agreement or understanding between any persons
and/or entities, which affects or relates to the voting or giving of written
consents with respect to any security or by a director of the Company.
2.3 Authorization. All corporate, stockholder and other actions on
-------------
the part of the Company, its officers, directors and stockholders, affiliates or
agents necessary for the authorization, execution and delivery of this Agreement
and the Rights Agreement, the continuing performance of all obligations of the
Company hereunder and the authorization, issuance (or reservation for issuance)
and delivery of the Series A Preferred Stock being sold hereunder and the Common
Stock issuable upon conversion of the Series A Preferred Stock has been taken or
will be taken prior to the Closing, and this Agreement constitutes a valid and
legally binding obligation of the Company, enforceable in accordance with its
terms.
2.4 Valid Issuance of Preferred and Common Stock.
--------------------------------------------
(a) The Series A Preferred Stock being purchased by the Investor
hereunder, when issued, sold and delivered in accordance with the terms hereof
for the consideration expressed herein, will be duly and validly issued, fully
paid and nonassessable and
-2-
<PAGE>
will be issued in compliance with all applicable federal and state securities
laws. The Common Stock issuable upon conversion of the Series A Preferred Stock
purchased under this Agreement has been duly and validly reserved for issuance
and, upon issuance in accordance with the terms of the Certificate, shall be
duly and validly issued, fully paid and nonassessable, and issued in compliance
with all applicable federal and state securities laws, as presently in effect.
(b) The outstanding shares of Common Stock are all duly and
validly authorized and issued, fully paid and nonassessable, and were issued in
compliance with all applicable federal and state securities laws.
2.5 Governmental Consents. No consent, approval, order or
---------------------
authorization of, or registration, qualification, designation, declaration or
filing with, any federal, state, local or provincial governmental authority on
the part of the Company is required in connection with the consummation of the
transactions contemplated by this Agreement, except for the filing of a Notice
of Transaction Pursuant to California Corporations Code Section 25102(f) which
filings will be effected within fifteen (15) days of the sale of the Series A
Preferred Stock hereunder and notice of sale pursuant to Regulation D under the
1933 Act.
2.6 Litigation. There is no private or governmental action, suit,
----------
proceeding or investigation pending or currently threatened against the Company
which questions the validity of this Agreement or the right of the Company to
enter into it, or to consummate the transactions contemplated hereby.
2.7 Compliance with Other Instruments. The Company is not in
---------------------------------
violation or default of any provisions of its existing Articles of
Incorporation, the Certificate of Determination, its Bylaws or of any
instrument, judgment, order, writ, decree or contract to which it is a party or
by which it is bound or of any provision of federal or state statute, rule or
regulation applicable to the Company. The execution, delivery and performance
of this Agreement and the consummation of the transactions contemplated hereby
will not result in any such violation or be in conflict with or constitute, with
or without the passage of time and giving of notice or both, either a default
under any such provision, instrument, judgment, order, writ, decree or contract
or an event which results in the creation of any lien, charge or encumbrance of
any kind upon any assets of the Company.
2.8 Registration Rights. Except as provided in the Rights Agreement,
-------------------
the Company has not granted or agreed to grant any registration rights,
including piggyback rights, to any person or entity.
2.9 Private Sale. Subject in part to the truth and accuracy of the
------------
Investors' representations and warranties set forth in Section 3 below, the
offer and sale of the shares of Series A Preferred Stock are exempt from the
registration requirements of Section 5 of the Securities Act of 1993, as amended
(the "Act"), and neither the Company nor any authorized agent acting on its
behalf will take any action hereinafter that would cause the loss of such
exemption.
-3-
<PAGE>
3. Representations and Warranties of the Investor. Each Investor hereby,
----------------------------------------------
severally, represents and warrants that:
3.1 Authorization. This Agreement constitutes its valid and legally
-------------
binding obligation, enforceable in accordance with its terms.
3.2 Purchase Entirely for Own Account. The Investor understands that
---------------------------------
the Company is making this Agreement with the Investor in reliance upon the
Investor's representation to the Company, which by the Investor's execution of
this Agreement the Investor hereby confirms, that the Series A Preferred Stock
to be received by the Investor and the Common Stock issuable upon conversion
thereof (collectively, the "Securities") will be acquired for investment for the
Investor's own account, not as a nominee or agent, and not with a view to the
resale or distribution of any part thereof, and that the Investor has no present
intention of selling, granting any participation in, or otherwise distributing
the same. By executing this Agreement, the Investor further represents that the
Investor does not have any contract, undertaking, agreement or arrangement with
any person to sell, transfer or grant participations to such person or to any
third person, with respect to any of the Securities. The Investor represents
that it has full power and authority to enter into this Agreement.
3.3 Disclosure of Information. Subject in part to the truth and
-------------------------
accuracy of the representatives and warranties of the Company, the Investor
acknowledges that it has had access to all the information it considers
necessary or appropriate for deciding whether to purchase the Series A Preferred
Stock. The Investor further represents that it has had an opportunity to ask
questions and receive answers from the Company regarding the terms and
conditions of the offering of the Series A Preferred Stock. The foregoing,
however, does not limit or modify the representations and warranties of the
Company in Section 2 of this Agreement or the right of the Investors to rely
thereon.
3.4 Investment Experience. The Investor acknowledges that it is able
---------------------
to fend for itself, can bear the economic risk of its investment and has such
knowledge and experience in financial or business matters that it is capable of
evaluating the merits and risks of the investment in the Series A Preferred
Stock.
3.5 Accredited Investors Pre-Existing Relationship. The Investor is
----------------------------------------------
an "accredited investor" within the meaning of SEC Rule 501 of Regulation D, as
now in effect or has a pre-existing substantive relationship with the Company
(or its affiliates) such that the Company has knowledge of the Investor's
employment history, business experience, business or professional education,
investment experience, income and net worth as well as the Investor's ability to
evaluate the merits and risks of the Investment in the Series A Preferred Stock.
3.6 Restricted Securities. The Investor understands that the shares
---------------------
of Series A Preferred Stock it is purchasing are, and the shares of Common Stock
into which they may be converted will be, characterized as "restricted
securities" under the federal securities laws inasmuch as they are being
acquired from the Company in a transaction not involving a public
-4-
<PAGE>
offering and that under such laws and applicable regulations such securities may
be resold without registration under the Act, only in certain limited
circumstances. In this connection, the Investor represents that it is familiar
with SEC Rule 144, as now in effect, and understands the resale limitations
imposed thereby and by the Act.
3.7 Legends. It is understood that the certificates evidencing the
-------
Series A Preferred Stock (and the Common Stock issuable upon conversion thereof)
may bear one or both of the following legends:
(a) THE SECURITIES EVIDENCED BY THIS CERTIFICATE HAVE NOT BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, (THE "ACT") OR THE
SECURITIES LAWS OF ANY STATE OF THE UNITED STATES ("STATE ACT"). THE
SECURITIES EVIDENCED BY THIS CERTIFICATE MAY NOT BE OFFERED, SOLD OR
TRANSFERRED FOR VALUE DIRECTLY OR INDIRECTLY, IN THE ABSENCE OF SUCH
REGISTRATION UNDER THE ACT AND QUALIFICATION UNDER APPLICABLE STATE ACTS,
OR PURSUANT TO AN EXEMPTION FROM REGISTRATION UNDER THE ACT AND
QUALIFICATION UNDER APPLICABLE STATE ACTS, THE AVAILABILITY OF WHICH IS TO
BE ESTABLISHED TO THE REASONABLE SATISFACTION OF THE COMPANY; and
(b) ANY LEGEND REQUIRED BY THE LAWS OF ANY STATE, INCLUDING ANY
LEGEND REQUIRED BY THE CALIFORNIA DEPARTMENT OF CORPORATIONS AND SECTIONS
417 AND 418 OF THE CALIFORNIA CORPORATIONS CODE
4. Conditions of Investor's Obligations at Closing. The obligations of
-----------------------------------------------
the Investor under Section 1.1(b) of this Agreement are subject to the
fulfillment on or before the Closing of each of the following conditions, the
waiver of which shall not be effective against any Investor who does not consent
in writing thereto:
4.1 Representations and Warranties. The representations and
------------------------------
warranties contained in Section 2 shall be true on and as of the Closing with
the same effect as though such representations and warranties had been made on
and as of the date of such Closing.
4.2 Performance. The Company shall have performed and complied with
-----------
all agreements, obligations and conditions contained in this Agreement that are
required to be performed or complied with by it on or before the Closing,
including, without limitation, the filing of the Certificate of Determination
with the Secretary of State of the State of Nevada.
4.3 No Adverse Events. Between the date hereof and the Closing,
-----------------
neither the business, assets or condition, financial or otherwise, of the
Company taken as a whole shall have been adversely affected in any manner,
including, without limitation, as a result of any fire, flood, explosion,
accident, drought, strike, walkout, riot, sabotage, confiscation, condemnation
or purchase of property by governmental authority, legislative act by any
governmental authority, activities of Armed Forces or acts of God or the public
enemy.
-5-
<PAGE>
4.4 Compliance Certificate. The President of the Company shall
----------------------
deliver to the Investor at the Closing a certificate certifying that the
conditions specified in Sections 4.1 and 4.2 have been fulfilled.
4.5 Qualifications. The offer and sale of the Series A Preferred
--------------
Stock and the underlying Common Stock to the Investor pursuant to this Agreement
shall be exempt from such qualification under applicable federal and state
securities laws.
4.6. Rights Agreement. The Company and each Investor shall have
----------------
entered into the Rights Agreement in the form attached hereto as EXHIBIT D.
5. Conditions of the Company's Obligations at Closing. The obligations of
--------------------------------------------------
the Company to the Investor under this Agreement are subject to the fulfillment
on or before the Closing of each of the following conditions by the Investor:
5.1 Representations and Warranties. The representations and
------------------------------
warranties of the Investor contained in Section 3 shall be true on and as of the
Closing with the same effect as though such representations and warranties had
been made on and as of the Closing.
5.2 Payment of Purchase Price. The Investor shall have delivered the
-------------------------
purchase price specified on Schedule 1.1 hereto by delivering the original
promissory Note from the Company marked "Cancelled".
5.3 Compliance with State Securities Laws. The Company shall have
-------------------------------------
obtained all permits and qualifications required by any state for the offer and
sale of the Shares and the Conversion Stock, or shall have the availability of
exemptions therefrom.
6. Miscellaneous.
-------------
6.1. Survival of Warranties. The warranties, representations and
----------------------
covenants of the Company and the Investor contained in or made pursuant to this
Agreement shall survive the execution and delivery of this Agreement and the
Closing and shall in no way be affected by any investigation of the subject
matter thereof made by or on behalf of the Investor or the Company.
6.2. Successors and Assigns. Except as otherwise provided herein,
----------------------
the terms and conditions of this Agreement shall inure to the benefit of and be
binding upon the respective successors and assigns of the parties (including
transferees of any shares of Series A Preferred Stock sold hereunder or any
Common Stock issued upon conversion thereof). Nothing in this Agreement,
express or implied, is intended to confer upon any party other than the parties
hereto or their respective successors and assigns any rights, remedies,
obligations, or liabilities under or by reason of this Agreement, except as
expressly provided in this Agreement.
-6-
<PAGE>
6.3. Governing Law. This Agreement shall be governed by and
-------------
construed under the internal laws of the State of California.
6.4. Counterparts. This Agreement may be executed in two or more
------------
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.
6.5. Titles and Subtitles. The titles and subtitles used in this
--------------------
Agreement are used for convenience only and are not to be considered in
construing or interpreting this Agreement.
6.6. Notices. Unless otherwise provided, any notice required or
-------
permitted under this Agreement shall be given in writing and shall be deemed
effectively given upon personal delivery to the party to be notified or on three
(3) days after the date of deposit with the United States Post Office, by
registered or certified mail, postage prepaid and addressed to the party to be
notified at the address indicated for such party on the Schedule 1.1 hereof, or
at such other address as such party may designate by ten (10) days' advance
written notice to the other parties.
6.7. Expenses. Upon Closing, the Company shall pay all costs and
--------
expenses that it has incurred with respect to the negotiation, execution,
delivery and performance of this Agreement. If any action at law or in equity
is necessary to enforce or interpret the terms of this Agreement or the
Certificate of Determination, the prevailing party shall be entitled to
reasonable attorney's fees, costs and necessary disbursements in addition to any
other relief to which such party may be entitled.
6.8. Amendments and Waivers. Any term of this Agreement may be
----------------------
amended and the observance of any term of this Agreement may be waived (either
generally or in a particular instance and either retroactively or
prospectively), only with the written consent of a majority of the holders of
Series A Preferred Stock (or the Common Stock issuable upon conversion thereof).
Any amendment or waiver effected in accordance with this paragraph shall be
binding upon each holder of any securities purchased under this Agreement at the
time outstanding (including securities into which such securities are
convertible), each future holder or all such securities, and the Company.
6.9. Severability. If one or more provisions of this Agreement are
------------
held to be unenforceable under applicable law, such provision shall be excluded
from this Agreement and the balance of the Agreement shall be interpreted as if
such provision were so excluded and shall be enforceable in accordance with its
terms.
6.10. Complete Agreement. This Agreement, together with the
------------------
agreements and documents referred to herein, constitute the entire agreement
between the parties hereto with respect to the subject matter hereof and
supersedes all prior agreements and understandings by and between the Investor
and the Company.
-7-
<PAGE>
7. Counterparts. This Agreement may be executed in any number of
------------
counterparts, each of which may be executed by less than all of the Investors,
each of which shall be enforceable against the parties actually executing such
counterparts, and all of which together shall constitute one instrument.
IN WITNESS WHEREOF, the parties have executed this Series A Preferred Stock
Purchase Agreement dated September 30, 1996.
Cypress Financial Services, Inc.,
a Nevada corporation
By: /s/ Farrest Hayden
------------------
Farrest Hayden, President
Address:
5400 Orange Avenue, Suite 200
Cypress, California 90630
"INVESTORS"
/s/ Farrest Hayden
- -----------------------
Farrest Hayden
/s/ Otto Lacayo
- -----------------------
Otto Lacayo
/s/ Thomas Ziegler
- -----------------------
Thomas Ziegler
-8-
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE AUDITED
BALANCE SHEET AS OF SEPTEMBER 30, 1996 AND THE RELATED STATEMENTS OF OPERATIONS
FOR THE YEAR ENDED SEPTEMBER 30, 1996 AND THE NINE MONTHS ENDED SEPTEMBER 30,
1995 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C> <C>
<PERIOD-TYPE> 9-MOS 9-MOS
<FISCAL-YEAR-END> SEP-30-1996 SEP-30-1995
<PERIOD-START> OCT-01-1995 JAN-01-1995
<PERIOD-END> SEP-30-1996 SEP-30-1995
<CASH> 520,706 0
<SECURITIES> 0 0
<RECEIVABLES> 592,572 0
<ALLOWANCES> 0 0
<INVENTORY> 0 0
<CURRENT-ASSETS> 2,052,373 0
<PP&E> 2,619,014 0
<DEPRECIATION> 134,736 109,318
<TOTAL-ASSETS> 4,755,964 0
<CURRENT-LIABILITIES> 1,908,412 0
<BONDS> 0 0
0 0
690,000 0
<COMMON> 500,000 0
<OTHER-SE> (962,474) 0
<TOTAL-LIABILITY-AND-EQUITY> 4,755,964 0
<SALES> 5,371,942 0
<TOTAL-REVENUES> 5,515,417 3,503,238
<CGS> 0 0
<TOTAL-COSTS> 4,996,905 3,259,558
<OTHER-EXPENSES> 0 0
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 314,850 155,967
<INCOME-PRETAX> 68,926 (21,605)
<INCOME-TAX> 39,000 3,200
<INCOME-CONTINUING> 0 0
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 29,926 (24,805)
<EPS-PRIMARY> .0 (.01)
<EPS-DILUTED> 0 0
</TABLE>
