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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, 1998
Commission File Number: 0-17192
CYPRESS FINANCIAL SERVICES, INC.
(Name of Small Business Issuer in its Charter)
Nevada 84-1061382
(State or other jurisdiction of (IRS 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 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: $7,148,016.
The aggregate market value of the Registrant's Common Stock held by non-
affiliates is $3,214,959.
State the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practicable date: There were 6,527,571 shares of the
Registrant's Common Stock issued and outstanding as of November 30, 1998.
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ITEM 1 DESCRIPTION OF BUSINESS
General
Cypress Financial Services, Inc. provides accounts receivable management
services to various health care providers, banks, financial institutions, and
retail firms. These services include, among other things, billing, delinquent
debt recovery, management of litigation and bankruptcy claims, and workers'
compensation lien claim resolution. Having been in the business since 1977, the
Company augments its 21 years of experience and vast knowledge base in
receivable management with the innovative use of advanced telecommunications and
operating systems technology to provide its clients with responsive and thorough
service. The most critical element for optimum client service, however, still
remains with the Company's human resources. Accordingly, the Company has
established experience-based selection criteria to guide its recruiting program.
The Company complements its recruiting process with a training program carefully
designed to equip its people with the essential knowledge and attitude to
perform as professional receivable management specialists.
The Company focuses its services on the three segments of the accounts
receivable management industry that it believes it knows best and deems most
significant - healthcare, banking and retail. The services are rendered through
wholly owned subsidiaries as identified and discussed below.
Services to Healthcare Providers
The Company began providing accounts receivable management services to the
healthcare industry in 1977 when Medical Control Services, Inc. (MCSI) was
founded. The Company's healthcare division (i.e. MCSI and its subsidiaries) has
service contracts with over 1,000 clients that include hospitals, medical
groups, doctors, laboratories, radiology centers, emergency rooms, and home
health organizations. This division has serviced over $400 million in receivable
placements since inception and received $50 million in new placements during
fiscal year 1998. No client accounted for more than 5% of the Company's revenue
in fiscal year 1998. Additionally, out of MCSI's top 10 revenue producing
clients, 6 have been utilizing the Company's services for at least 12 years and
accounted for approximately 22% of MCSI's service revenue in fiscal year 1998.
The following briefly describes the core services performed for healthcare
providers:
Pre-Collect Services
My Boss, Inc. d.b.a. 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 specialists and its advanced data processing support
systems to replace or supplement the traditional accounts receivable
department. By using its employees, computers and predictive dialing
technology, BOSS is able to more timely and effectively reach the customers
and receive payments 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
receivables by minimizing the probability of such receivables to become
delinquent. BOSS acts as the accounts receivable department allowing the
client's personnel to focus on revenue producing activities of their
business. In fiscal year 1988, BOSS received placements of approximately $6
million.
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Billing Services
The Company currently performs bill submission and follow-up services for
its healthcare clients. This service is integrated into the debt recovery
service that it currently provides to health care providers. The Company
intends to expand this service to include, among other services, actual
bill creation and coding services as the Company aims to provide a full
service receivable management menu to its healthcare provider clients.
Delinquent Debt Recovery
Managing and collecting delinquent receivable accounts currently comprises
a significant portion of the Company's receivable management service to
health care providers. The Company relies on its more than two decades of
experience in providing effective receivables management to its health care
provider clients. Its skilled and experienced staff facilitates the
transfer of debtor account information with little or no disturbance to the
medical business office. Once the data is in-house, the Company applies its
technology to access state and national files containing debtor information
and their assets. On an as needed basis, the Company's specialty recovery
department provides instant legal advice to recovery specialists to
facilitate any immediate action that may be necessary to increase the
probability of recovery of the clients' receivables. In fiscal year 1998,
MCSI received placements of approximately $27 million of delinquent
receivable accounts.
Insurance Claims Management
Lien Solutions, Inc. (LSI) began providing Workers' Compensation case
resolution services in 1985. LSI developed a system to resolve contested
Workers' Compensation claims and provide better solutions for the day to
day problems in the medical business office. Workers' Compensation claims
are more complex than other debt assigned to the Company. This type of
receivables claim is unique because the Workers' Compensation Appeals Board
(WCAB) has exclusive jurisdictions over all claims. The State legislature
mandates the WCAB and periodically enacts legislation controlling lien
claims, making it cumbersome for most healthcare business office personnel
to keep up with regulatory changes impacting certain claims. LSI has
established a unique lien service menu that allows for a complete follow
through on all claims assigned for resolution. In addition, LSI extends its
specialized service to third party payer disputes, such as personal injury
liens, Medicare, HMO denials and lien subrogation. LSI received placements
of approximately $17 million during fiscal year 1998.
Banking and Financial Institutions
Merchants' Recovery Services, Inc. (MRSI) was founded in 1982 to provide third
party accounts receivable recovery services to non-healthcare commercial
businesses. Historically, MRSI's recovery services have been provided to banks
and financial institutions solely on a contingency fee basis which ranged from
25% to 50% depending on the size, age and the Company's assessment of the
collectibility of the accounts placed for service. Account assignments are
generally covered by month to month contracts.
In the early nineties, certain banks and financial institutions, primarily
credit card issuers, changed their approach in the management of their charged
off consumer receivable portfolios. These financial institutions began to sell a
portion of their charged off consumer receivable portfolio to certain delinquent
debt recovery firms and investment groups in lieu of third party placements. The
practice gained general acceptance from the major credit card issuers such that
in 1997, approximately 62% of the $31.29 billion
<PAGE>
in charged off credit card receivables were sold to a growing buyer market. The
growth was largely fueled by the availability of funds to finance the purchases
of the charged off credit card portfolios. Sources of such funds primarily came
from investment banks, insurance companies and retirement fund managers who
began to accept the historical data and collection experience of certain
accounts receivable servicers as sufficient to establish the estimated
collectible value embedded in charged off credit card portfolios. Accordingly,
charged off credit card portfolios were regarded as acceptable collateral for
asset backed securities. In 1995, the first of many private securitizations of
charged off credit card receivables was consummated. Through September 1998,
over $1 billion of relatively high yielding investment grade and non-investment
grade bonds have been sold in private securitizations to fund purchases of
charged off credit card receivable portfolios.
In February 1994, the Company began purchasing charged off credit card for its
own account. However, the Company realized that the benefits associated with
purchasing and owning charged off credit card portfolios comes with significant
risk. Charged off credit card portfolios, by their nature, are exposed to a
significant amount of liquidation risk. Consumer factors as well as loan
underwriting and/or account data related factors generally cause such risk.
Consumer related risk factors include, among other things, the consumers'
deteriorating economic condition caused by an unprecedented life event (e.g.
divorce, illness, death, and job loss), the consumers' inability to manage
fiscal responsibilities, or the consumers' contemptuous attitude towards credit.
Underwriting risks could be inherent in, among other things, the credit issuer's
general underwriting policies as driven by certain market penetration
strategies. Data or account information risks are primarily caused by the
quality of the credit issuer's or its agents' servicing operations. In general,
the availability of current and historic account information could increase the
probability of economically liquidating a portfolio's estimated collectible
value (ECV).
The economic benefit of owning such portfolios therefore relies heavily on a
buyer's ability to properly quantify the remaining ECV in a charge off portfolio
and to profitably acquire such ECV. Having serviced delinquent credit card
portfolios since 1981, the Company has utilized its extensive experience, vast
knowledge base and access to pools of data on delinquent consumer debt, to
identify and segment the quantitative and qualitative attributes of an
account/debtor that are most relevant to a successful recovery of a delinquent
debt. These attributes are weighed according to their degree of significance and
converted into a pricing matrix. This matrix is used to estimate the price that
the Company would be willing to pay for a portfolio based on the ECV. Based on
historical data, the Company has been able to maintain an ECV to price ratio of
approximately 5.88 to 1 on its most seasoned portfolios (i.e. portfolios
purchased between February 1994 and January 1997).
The Company intends to pursue longer-term fee-for-service contracts with banks
and financial institutions. It realizes, however, that it has to adapt to the
significant changes that has occurred in this industry segment in order for the
Company to compete in this business segment. The traditional means of obtaining
business volume through building relationships and optimum client service was
giving way to the "commoditization" of charged off credit card receivables.
Accordingly, the Company will continue to purchase consumer receivables for its
own account.
Ownership of the accounts allows the Company to provide the consumers/debtors
additional options in settling their respective debt. As such, the recovery
processes and techniques used to settle purchased accounts can differ from
accounts worked on a fee for service basis.
The Company regards its pool of purchased portfolios as a database which could
include consumers who are in various stages of reestablishing their credit. The
Company's process basically allows the sorting of potentially good borrowers
from the pool of bad borrowers. The process then allows the conversion of the
accounts of potentially good borrowers, which have not been settled in cash, to
be transferred into a new installment contract that would be more conducive
towards the consumer's current financial position. The
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goal is to find the least burdensome way for the consumer to be able to make
consistent payments on its obligation until full settlement. The Company
believes that the pools of accounts created by this process will be the primary
source for the assets sold in future securitizations. The Company also realizes
the importance of the consumer data accumulated on the performing loans; such
data could prove beneficial if and when the Company decides to expand its
services to this select pool of paying customers.
Services to Retail Segment
MRSI has been providing accounts receivable management services to the retail
segment for over 20 years. The Company has developed a particular expertise in
the handling of accounts financed by automotive finance companies, which account
for a large portion of the Company's client base in this segment. In addition,
the Company receives accounts from a national furniture outlet chain, a major
Southern California utility service, a large financier of home appliances, and
many other independent operators, The Company has recently diversified its
operation to include the collection of commercial (business to business)
accounts, which could open an entirely new market to the Company.
Support Services
The Company realizes that to provide effective and thorough receivable
management services to its client, it needs to establish other services and
systems to support its core operations.
Litigation Management
The Company has in place a specialty recovery department with a full time
attorney to manage all aspects of litigation and bankruptcy related
activities. The attorney and support staff all have more than ten years of
full time employment with the Company. Litigation management includes
filing legal actions on collection accounts; enforcement of judgments
entered on the Company's collection accounts as well as client assigned
judgments; and the perfecting of Chapter 13 bankruptcy proofs of claim
nationwide.
All collection accounts with a verified asset and significant balances are
submitted to the legal department for evaluation. The legal department
processes those accounts within the state of California. Those accounts
outside the state of California are forwarded to a nationwide network or to
select attorney firms that have a working relationship with the legal
department.
The Company's first twenty years in the collection industry were enhanced
by its in house legal staff. It has accumulated California judgments with a
dollar value in excess of $32 million, which is continually replenished.
All California judgments accrue interest at the rate of 10% per annum. The
specialty recovery department employs experienced and knowledgeable skip
tracers and asset locators to tap this revenue source. Most of the
judgments are secured by California real property; a substantial portion of
which are bankruptcy proof. The specialty recovery is able to renew these
older judgments every ten years through a very low cost legal procedure.
Consumers continue to increase the rate at which they are filing Chapter 13
bankruptcy proceedings. The specialty recovery department aggressively
pursues collection of these accounts by timely filing the respective proof
of claim and monitoring these accounts for compliance with the repayment
plan. This revenue source is low cost yet provides a wealth of information
about the consumers if they fail to complete the plan.
Litigation management services are available to all of the Company's
clients.
<PAGE>
Management Information Systems
The Company recognizes the value of combining human resources with the
latest computer and telecommunications technology to manage its receivables
effectively. Accordingly, the Company maintains sophisticated data
processing support and management information systems that is most friendly
to use by its work force of recovery specialists.
The Company's management application software system is compiled under a
widely used high level programming language. It operates under a Microsoft
Windows environment distributed by a Novel network system. A central
computer file server connected to an array of disk drives maintains the
Company's management information database. The Company's recovery
specialists utilize individualized personal computers to access and record
customer information using Microsoft Windows point and click application
screens.
Locating customers who move without notice has always been one of the most
important activities in debt recovery. To address this problem the
Company's recovery specialists have on-line access to large databases of
consumer information. These databases are constantly updated and contain
the latest customer demographic information which, could include but are
not limited to, telephone numbers, property ownership records, fictitious
business name records, UCC listings, and other pertinent information that
facilitate locating customers. To complement these sources, the Company
utilizes the services of national credit reporting companies and other
national consumer information databases to add to its internal skip-tracing
tools.
The Company utilizes a combination of its new telephone technology with its
predictive dialing computer system to make customer-calling campaigns. The
computer dialer is given a large number of customers to dial. Upon
connection with a given telephone number the system attempts to recognize a
live voice by detecting busy signals, recorders, and disconnected numbers
before sending the call to a waiting recovery specialist. As the call is
being routed to an available specialist, the computer finds the customer in
the database and paints their work card on the PC screen and dialog begins
with the customer.
In the service business, one of the key differentiating factors is
knowledge. The Company's long experience in the receivable management
business has allowed the Company to accumulate a knowledge base that
allowed it to perform and, therefore, retain long-standing relationships
with its existing client base. Increasing client demand in a competitive
environment, however, requires the Company to continue to expand its
knowledge base in receivable management. The Company believes that a
distinctive organizational knowledge can only be acquired through the
proper management of the data it continuously gathers from its daily
consumer interaction. This data based knowledge will continue to drive the
continuous improvement in the Company's recovery strategies and consumer
management for its client's benefit and its own.
To accommodate the expected increase in consumer volume, the Company is in
the process of expanding its data management capability by migrating on to
a larger open database operating system. The new system will integrate with
the Company's current receivable management software and existing
telecommunication technology. The hardware will provide the latest computer
technology with more than enough speed to handle an increasing number of
users locally as well as expansion throughout the country utilizing the
Internet. The open database management system was selected as the choice to
maintain unlimited growth in the storage of the Company's ongoing and
historical consumer information.
<PAGE>
Recruiting and Training
Notwithstanding the factors discussed above, the most critical factor that
impacts the Company's ability to execute its operating mission is its
ability to manage the three R's of human resources Recruit, Retool, Retain.
An effective recruiting program mitigates the follow on issues that could
surround the retooling (training) and retention processes. Accordingly, the
Company has established an experience-based selection criteria to drive its
recruiting program. The criteria are based upon a careful study of the
skills common to its successful and long time employees. The selection
process is conducted through a standardized scoring matrix that effectively
sorts candidates according to their ability to demonstrate the success
traits that the Company looks for.
The Company's retooling (training) process is comprised of three major
programs. The Basic Training Course is a twelve-week training process. It
starts with a three-week classroom course that focuses on teaching the five
basic skill sets required to become an effective recovery specialist.
Graduates of this course are accepted to the training division, the purpose
of which is to allow the trainees to work on live accounts and fine tune
the skills taught during the preceding three week course under the close
supervision of training supervisors. This nine-week process allows both the
trainees and the Company to determine the real aptitude of trainees to
become recovery specialists.
The Advanced Training Course is designed for the recovery specialists to be
trained on selected specialty skills (e.g. healthcare billing, recovery,
specialty recovery, loan servicing, insurance processing etc.). It also
provides a continuous improvement training program that allows employees to
expand their skills on some of the more difficult or technical aspects of
the job (e.g. negotiation skills, customer service techniques, team
building concepts and recent regulatory pronouncements).
The Management Training Course is currently being designed to create a
program for employees who show management and leadership skills to fill the
Company's supervisor and division managerial needs. This course will
include management development courses such as coaching, oral and written
communications, budgeting, time management etc.).
The Company has a training center, which it believes is thoughtfully
designed to foster a learning environment. It is currently managed by a
Director of Recruiting and Training assisted by two recruiting and training
specialists. The Company regards training as a critical component of its
business and will continue to allocate the appropriate resources to keep
this process effective.
The Company is in the process of revising its compensation and benefit
programs to create a package that would economically maximize the
probability of retaining its good employees. While the Company believes
that the current pay structure is adequate and competitive, it intends to
develop creative short and long term incentive programs to induce
productivity from its employees and to promote loyalty and tenure.
<PAGE>
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 promoting 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 complies 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.
Competition
The accounts receivable management and collection business is highly
competitive. The Company competes with a number of national, regional, and local
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, 1998, the Company had 80 full time employees and 13 part-
time employees, of whom 5 are management personnel, 2 are sales and marketing
personnel, 6 are legal personnel, 26 are MRSI collectors, 13 are MCSI
collectors, 14 are LSI collectors, 14 are BOSS pre-collection representatives, 2
are finance personnel, 2 are computer technicians, 1 is a building
superintendent and 8 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.
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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 35,000 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, 1998, the Company is not involved in any material
litigation, 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, 1998.
PART II
ITEM 5 MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's Common stock, $.001 par value, is traded under the symbol "CYFS"
through the OTC Electronic Bulletin Board maintained by the National Association
Securities of Security Dealers, Inc. (the "NASDAQ"), which has no financial
eligibility standards and is totally separate from NASDAQ. The Electronic
Bulletin Board does not constitute an active trading market and trading in the
Company's Common Stock is limited and sporadic. The following table sets forth
the range of high bid and low bid quotations for the Common Stock for the
periods indicated. The quotations are inter-dealer prices in the over-the-
counter market without retail mark-ups, markdowns or commissions, and may not
represent actual transactions.
<TABLE>
<CAPTION>
1998 1997
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High Low High Low
---- ---- ---- ----
<S> <C> <C> <C> <C>
4th Quarter ending 9/30 2.00 0.94 1.75 1.19
3rd Quarter ending 6/30 2.59 0.94 3.25 0.94
2nd Quarter ending 3/31 1.63 1.00 3.75 2.00
1st Quarter ending 12/31 2.50 1.13 3.87 2.75
</TABLE>
As of September 30, 1998 there were 1,850 holders of record of the Company's
Common Stock.
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.
<PAGE>
ITEM 6 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
General
The Company provides accounts receivable management services to various health
care providers, banks, financial institutions, and retail firms. These services
include, among other things, billing, delinquent debt recovery, management of
litigation and bankruptcy claims, and workers' compensation lien claim
resolution. In the early nineties, financial institutions, primarily credit card
issuers, began changing their approach regarding the management of charged off
consumer receivables. These financial institutions started to sell portions of
their charged off portfolios to certain delinquent debt recovery firms and
investment groups in lieu of third party placements. Accordingly, in February
1994, the Company began to purchase portfolios of consumer receivables for its
own account, and has continued to do so through fiscal 1998.
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.
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 portfolio receivables, and overall macro-
economic conditions.
Results of Operations
The following table sets forth summary income statement data on a historical
basis.
<TABLE>
<CAPTION>
% Positive
1998 1997 (Negative)
---------- ---------- -----------
<S> <C> <C> <C>
Revenue $7,148,016 $4,970,356 43.8%
Operating expenses:
Salaries, wages and related benefits 3,379,049 3,438,660 1.7
Selling, general and administrative 1,967,584 1,636,711 (20.2)
Depreciation 162,882 196,499 17.1
---------- ---------- -------
Total operating expenses 5,509,515 5,271,870 4.5
---------- ---------- -------
Income (loss) from operations 1,638,501 (301,514) 643.4
Other income (expense) (133,072) (174,715) 23.8
---------- ---------- -------
Income (loss) before provision
(benefit) for income taxes 1,505,429 (476,229) 416.1
Provision (benefit) for income taxes 465,602 (21,702) 2,245.4
---------- ---------- -------
Net income (loss) $1,039,827 $ (454,527) 328.8%
========== ========== =======
</TABLE>
<PAGE>
Revenue increased $2.1 million or 43.8% to $7.1 million for 1998 from $5.0
million in 1997. $2.3 million of revenue was attributable to the net gain
recognized from the sale of certain Portfolio Receivables as asset-backed
securities through a private securitization. Revenue from Portfolio Receivables
purchased by the Company increased to $1.4 million in 1998 from $1.0 million in
1997. Service fees decreased to $3.4 million in 1998 from $4.0 million in 1997,
primarily due to the shift in Company resources from third party collections to
collecting Portfolio Receivables purchased for its own account. While the
Company will continue to identify Portfolio Receivables to sell through
securitizations, it believes the pools of accounts created through the
conversion of charged off receivables into new installment contracts will be the
primary source of assets sold in future securitizations. This source of revenue,
therefore, might be less significant in future periods as a percentage of total
revenue.
As of September 30, 1998, the Company's direct purchases of Portfolio
Receivables had a remaining face value of $16.8 million as compared to a
remaining face value of $165.0 million as of September 30, 1997. This decrease
was due to the sale of certain Portfolio Receivables totaling $149.5 million
through a private securitization in August, 1998. During fiscal 1998, the
Company purchased over $21 million of such obligations for its own account.
Salaries, wages and related benefits decreased by 1.7% to $3.38 million in 1998
from $3.44 million in 1997. Although the Company made specific personnel changes
throughout the year, total salaries, wages and related benefits remained
relatively unchanged.
Selling, general and administrative expenses increased to $1.97 million in 1998
from $1.64 million in 1997. Most of this increase can be attributed to
management's decision to reserve against receivables generated by an operating
division of the Company which was sold during the fourth quarter of 1998. The
Company is proceeding with collection efforts, including legal proceedings, in
an attempt to satisfy these receivables. However, management's assessment of
collectibility merited a fiscal 1998 charge. In addition, general and
administrative expenses increased as a result of the Company's ongoing expansion
efforts in anticipation of the strategic growth plan it will pursue during the
next three years. Specifically, the Company owns the 50,000 square foot building
where its headquarters are located. During the year, the Company relocated and
redesigned several of its operating divisions/subsidiaries to better facilitate
anticipated growth, including designating approximately 2,500 square feet of the
building to its training facility and increased it training staff by 200%. As
the Company continues to grow, tenants are displaced and their contributions to
certain general and administrative expenses are foregone.
Depreciation decreased 17.1% to $163,000 in 1998 from $196,000 in 1997. This
decrease was the result of certain Company assets reaching a fully depreciated
state. However, in late 1998, the Company made certain technology upgrades as
well as furniture purchases which had little impact on depreciation expense in
1998, but will obviously impact future periods.
Interest expense decreased to $265,000 for 1998 from $306,000 in 1997. This
13.3% decrease resulted from retiring the Company's credit facility and
equipment loans in the fourth quarter of 1998 using proceeds of a $3,000,000
private placement as well as a $2,750,000 securitization.
The Company's EBITDA (defined as earnings before interest, taxes, depreciation
and amortization and is a measure of the Company's free cash flow) increased to
$1.9 million in 1998 from $48,000 in 1997.
Liquidity and Capital Resources
The Company is funded primarily through cash flows from operations.
Historically, the Company has used its credit facility to acquire Portfolio
Receivables. However, in July 1998, the Company sold 2,000,000 shares of its
common stock to Pacific Life Insurance Company, representing 28% of the
<PAGE>
outstanding common stock of the Company on a fully diluted basis for $3,000,000.
Additionally, in August 1998, the Company completed its first securitization of
Portfolio Receivables which generated net cash flows to the Company of
$2,552,000. The combined $5,552,000 was used to retire the Company's credit
facility and existing equipment loans leaving the balance available for
expansion as well ongoing purchases of Portfolio Receivables under a forward
flow contract with a major financial institution.
The Company currently has outstanding long-term debt with financial institutions
of $1,986,000 which is secured by a mortgage and certain equipment. The
Company's mortgage note has a remaining balance of $1,844,000, carries an
interest rate of 8% per annum and is due in December 2000. Management is
currently evaluating the feasibility of refinancing the mortgage note payable.
The Company also finances certain capital leases for computer equipment that
have a remaining balance of approximately $142,000 at September 30, 1998.
Management expects to continue to service its outstanding long-term debt through
its cash flows from operations.
In addition to capital required for the Company's existing business and its
growth, the Company may require additional capital resources if it should choose
to expand its operations by acquisitions of other businesses. Although the
Company has no commitments to make any acquisition, it does regularly review
proposals to make acquisitions in the accounts receivable management field and
considers acquisitions a significant component of its strategic plan.
There can be no assurance that such additional financing, if required, will be
available to the Company, nor can there be any assurance as to the cost of any
such financing that may be available. The Company is exploring the possibility
of issuing additional debt and/or equity to provide additional capital, but has
no commitment to do so.
Year 2000
State of Readiness -- Since early 1997, the Company has been addressing the
impact of the Year 2000 to its data processing systems. Key financial
information and operational systems were addressed and detailed plans were
developed to ensure that Year 2000 system modifications were in place by
September 1998 for all critical systems. As most of the critical software is
purchased from vendors which have already made the necessary Year 2000 changes,
the Company is concentrating its efforts on testing of its "Year 2000 Compliant"
systems.
Costs to Address Year 2000 Issues -- In the process of identifying the Company's
critical systems and determining the extent to which they must be modified or
replaced, management has found no systems which need to be replaced or
extensively modified to ensure they will function as intended. Accordingly,
management does not anticipate a material adverse impact to the Company's
results of operations or financial position.
Risks for the Company -- The primary risk of failure to adequately address the
Year 2000 problem would be the inability to accurately process and track
financial records and transactions. Additionally, the Company is exposed to risk
if its customers, clients, and financial institutions are unable to adequately
address the Year 2000 dates in their own data processing systems. The Company
has contacted all of the major customers, clients and financial institutions
with whom it does business to ensure that they are addressing the issue for
themselves and their customers.
Contingency Plans -- Should the Company's vendor for its core processing
applications fail to provide the modifications necessary to correctly recognize
Year 2000 dates, as a contingency plan for core operations, the Company would
out source its mainframe computer applications. For non-core operations, the
Company will rely on manual processing until modifications or replacement
systems are in place.
<PAGE>
Recent Accounting Pronouncements
In June 1997, the Financial Accounting Standards Board (FASB) issued SFAS Nos.
130 and 131, "Reporting Comprehensive Income" and "Disclosures about Segments of
an Enterprise and Related Information," respectively. SFAS Nos. 130 and 131 are
effective for fiscal years beginning after December 15, 1997, with earlier
adoption permitted. The Company believes that adoption of these standards will
not have a material impact on the Company.
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." SFAS No. 133 is effective for fiscal
quarters beginning after June 15, 1999, with earlier adoption permitted. The
Company believes that adoption of this standard will not have a material impact
on the Company.
Forward Looking Statements
Certain statements included in this Management's Discussion and Analysis of
Financial Condition and Results of Operations, as well as elsewhere in this
Annual Report on Form 10-KSB are forward-looking statements, and the actual
results and developments may be materially different from those expressed in or
implied by such statements.
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
On April 28, 1997, the Company's Board of Directors approved the engagement of
Arthur Andersen LLP to serve as the Company's independent public accountants and
to conduct the audit of the Company's financial statements for the fiscal year
ending September 30, 1997, replacing the firm of Corbin & Wertz, CPAs, who had
been engaged to audit the Company's financial statement for the fiscal years
ended September 30, 1995 and 1996. The change in accountants was made with the
view that it was in the best interests of the Company and its shareholders to
engage a nationally recognized accounting firm to audit its financial
statements. The audit reports provided by Corbin & Wertz, CPAs for the fiscal
years ended September 30, 1995 and 1996 did not contain any adverse opinion or a
disclaimer of opinion nor any report qualified in any respect, and management of
the Company knows of no past disagreements between the Company and Corbin &
Wertz, CPAs on any matter of accounting principles of practice, financial
statement disclosure or auditing, scope or procedure.
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, 1998 and is incorporated herein by reference.
<PAGE>
ITEM 10 EXECUTIVE COMPENSATION
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, 1998 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, 1998 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, 1998 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, 1998.
<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
CYPRESS FINANCIAL SERVICES, INC.
Date: December 28, 1998 By: /s/ Manuel Occiano
----------------------------
Manuel Occiano
Director and
Chief Executive Officer
In accordance with the Exchange Act, this report has been signed below by the
following persons on behalf of the registrant and in the capacities and on the
date indicated.
Signatures Title Date Signed
- ------------------------------------------------------------------------------
/s/ Farrest Hayden Chairman of the Board December 28, 1998
- ---------------------------
Farrest Hayden
/s/ Manuel Occiano Director and Chief Executive December 28, 1998
- --------------------------- Officer
Manuel Occiano
/s/ Richard H. Keyes Director December 28, 1998
- ---------------------------
Richard H. Keyes
/s/ Otto J. Lacayo Director December 28, 1998
- ---------------------------
Otto J. Lacayo
/s/ John C. Hindman Chief Financial Officer and December 28, 1998
- --------------------------- Principal Accounting Officer
John C. Hindman
<PAGE>
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
Page
----
Report of Independent Public Accountants F-2
Consolidated Balance Sheets as of September 30, 1998 and 1997 F-3
Consolidated Statements of Operations for the years ended
September 30, 1998 and 1997 F-4
Consolidated Statements of Shareholders' Equity (Deficit)
for the years ended September 30, 1998 and 1997 F-5
Consolidated Statements of Cash Flows for the years ended
September 30, 1998 and 1997 F-6 to F-7
Notes to Consolidated Financial Statements F-8 to F-19
F-1
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
----------------------------------------
To the Shareholders of Cypress Financial Services, Inc.:
We have audited the accompanying consolidated balance sheets of Cypress
Financial Services, Inc. (a Nevada Corporation) and subsidiaries as of September
30, 1998 and 1997, and the related consolidated statements of operations,
shareholders' equity (deficit) and cash flows for the years then ended. 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, 1998 and 1997, and the
results of their operations and their cash flows for the years then ended in
conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Orange County, California
November 19, 1998
F-2
<PAGE>
CYPRESS FINANCIAL SERVICES, INC.
--------------------------------
AND SUBSIDIARIES
----------------
CONSOLIDATED BALANCE SHEETS
---------------------------
SEPTEMBER 30, 1998 and 1997
---------------------------
ASSETS
------
<TABLE>
<CAPTION>
1998 1997
---------- ----------
<S> <C> <C>
Cash $2,329,751 $ 271,455
Restricted cash 418,168 397,298
Accounts receivable, net of allowance for doubtful
accounts of $328,841 and $95,845, respectively 393,786 445,006
Portfolio receivables 765,033 470,561
Property, net 2,743,152 2,696,234
Notes receivable from officers 152,012 4,025
Prepaid expenses and other 125,394 99,725
---------- ----------
Total assets $6,927,296 $4,384,304
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
----------------------------------------------
<CAPTION>
<S> <C> <C>
Accounts payable $ 54,328 $ 50,206
Trust payables 418,168 397,298
Accrued liabilities 162,503 146,972
Line of credit - 1,150,000
Notes payable 1,843,743 2,671,131
Capital lease obligations 141,798 180,698
Deferred income taxes 465,000 -
---------- -----------
Total liabilities 3,085,540 4,596,305
---------- -----------
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY (DEFICIT):
Series A convertible, redeemable preferred stock,
$0.001 par value, stated at $2.00 liquidation
preference per share, 5,000,000 shares authorized;
345,000 shares issued and outstanding at
September 30, 1998 and 1997 690,000 690,000
Common stock, $0.001 par value; 30,000,000 shares
authorized; 6,527,571 and 4,520,271 shares issued
and outstanding at September 30, 1998 and 1997,
respectively 6,527 4,520
Paid-in capital 3,522,403 510,480
Accumulated deficit (377,174) (1,417,001)
---------- -----------
Total shareholders' equity (deficit) 3,841,756 (212,001)
---------- -----------
$6,927,296 $ 4,384,304
========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated balance
sheets.
F-3
<PAGE>
CYPRESS FINANCIAL SERVICES, INC.
--------------------------------
AND SUBSIDIARIES
----------------
CONSOLIDATED STATEMENTS OF OPERATIONS
-------------------------------------
FOR THE YEARS ENDED SEPTEMBER 30, 1998 AND 1997
-----------------------------------------------
<TABLE>
<CAPTION>
1998 1997
----------- -----------
<S> <C> <C>
REVENUES:
Service fees $3,366,831 $3,968,741
Portfolio receivables revenue 1,418,037 1,001,615
Net gain on sale of portfolio receivables 2,363,148 -
---------- ----------
7,148,016 4,970,356
---------- ----------
OPERATING EXPENSES:
Salaries, wages and related benefits 3,379,049 3,438,660
Selling, general and administrative 1,967,584 1,636,711
Depreciation 162,882 196,499
---------- ----------
5,509,515 5,271,870
---------- ----------
INCOME (LOSS) FROM OPERATIONS 1,638,501 (301,514)
---------- ----------
OTHER INCOME (EXPENSE):
Interest expense, net (265,072) (305,796)
Gain on sale of assets 8,700 -
Rental operations, net 123,300 131,081
---------- ----------
(133,072) (174,715)
---------- ----------
INCOME (LOSS) BEFORE PROVISION (BENEFIT)
FOR INCOME TAXES 1,505,429 (476,229)
PROVISION (BENEFIT) FOR INCOME TAXES 465,602 (21,702)
---------- ----------
NET INCOME (LOSS) $1,039,827 $ (454,527)
========== ==========
Earnings per share:
Basic $ 0.21 $ (0.10)
Diluted $ 0.19 $ (0.10)
Number of shares used in computing earnings
per share:
Basic 5,015,762 4,509,914
Diluted 5,425,832 4,509,914
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
<PAGE>
CYPRESS FINANCIAL SERVICES, INC.
--------------------------------
AND SUBSIDIARIES
----------------
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT)
---------------------------------------------------------
FOR THE YEARS ENDED SEPTEMBER 30, 1998 AND 1997
-----------------------------------------------
<TABLE>
<CAPTION>
Series A Convertible,
Redeemable
Preferred Stock Common Stock Total
----------------- ----------------------- Paid-in Accumulated Shareholders'
Shares Amount Shares Amount Capital Deficit Equity (Deficit)
------- -------- --------- ----------- ------------- -------------- ----------------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCES, at September 30, 1996 345,000 $690,000 4,500,271 $4,500 $ 495,500 $ (962,474) $ 227,526
Stock issued in exchange for
services provided - - 10,000 10 12,490 - 12,500
Warrants exercised - - 10,000 10 2,490 - 2,500
Net loss - - - - - (454,527) (454,527)
------- -------- --------- ------ ---------- ------------- ----------
BALANCES, at September 30, 1997 345,000 690,000 4,520,271 4,520 510,480 (1,417,001) (212,001)
Stock issued in exchange for
services provided - - 7,300 7 7,293 - 7,300
Options issued in exchange for
services provided - - - - 6,630 - 6,630
Stock issued - - 2,000,000 2,000 2,998,000 - 3,000,000
Net income - - - - - 1,039,827 1,039,827
------- -------- --------- ------ ---------- ------------- ----------
BALANCES, at September 30, 1998 345,000 $690,000 6,527,571 $6,527 $3,522,403 $ (377,174) $3,841,756
======= ======== ========= ====== ========== ============= ==========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
<PAGE>
CYPRESS FINANCIAL SERVICES, INC.
--------------------------------
AND SUBSIDIARIES
----------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
-------------------------------------
FOR THE YEARS ENDED SEPTEMBER 30, 1998 AND 1997
-----------------------------------------------
<TABLE>
<CAPTION>
1998 1997
------------ ----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 1,039,827 $(454,527)
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Depreciation and amortization 175,890 218,607
Stock issued in exchange for services provided 7,300 12,500
Stock options issued in exchange for services provided 6,630 -
Changes in operating assets and liabilities:
(Increase) decrease in restricted cash (20,870) 55,292
Decrease in accounts receivable, net 51,220 147,566
(Increase) decrease in portfolio receivables (294,473) 15,944
(Increase) in prepaid expenses and other (26,309) (76,288)
Decrease (increase) in accounts payable 4,122 (22,736)
Decrease (increase) in trust payables 20,870 (55,292)
Increase (decrease) in accrued liabilities 15,531 (186,098)
Increase in deferred income taxes 465,000 -
----------- ---------
Net cash provided by (used in) operating
activities 1,444,738 (345,032)
----------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property (222,167) (90,881)
----------- ---------
Net cash used in investing activities (222,167) (90,881)
----------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Issuance of common stock 3,000,000 -
Net (repayments on) borrowings from line of credit (1,150,000) 157,915
Net loans to officers (147,987) (1,250)
Proceeds from notes payable - 120,000
Principal payments on notes payable (827,388) (68,895)
Principal payments on capital lease obligations (38,900) (23,608)
Proceeds from warrants exercised - 2,500
----------- ---------
Net cash provided by financing activities 835,725 186,662
----------- ---------
NET INCREASE (DECREASE) IN CASH 2,058,296 (249,251)
CASH, at beginning of period 271,455 520,706
----------- ---------
CASH, at end of period $ 2,329,751 $ 271,455
=========== =========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-6
<PAGE>
CYPRESS FINANCIAL SERVICES, INC.
--------------------------------
AND SUBSIDIARIES
----------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
-------------------------------------
FOR THE YEARS ENDED SEPTEMBER 30, 1998 AND 1997 - Continued
-----------------------------------------------------------
<TABLE>
<CAPTION>
1998 1997
-------- --------
<S> <C> <C>
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION--
Cash paid during the period for:
Interest $330,090 $428,482
======== ========
Income taxes $ 800 $ 88,979
======== ========
</TABLE>
SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING, FINANCING AND OPERATING
ACTIVITIES--
During the year ended September 30, 1998, the Company issued 7,300 shares of
its common stock to employees in exchange for services provided. The
services were valued at the market value of the common stock on the date
issued, which totaled $7,300.
During the year ended September 30, 1998, the Company issued options to
purchase 8,000 shares of its common stock to a consultant in exchange for
services provided. The services were valued at the fair value of the options
on the grant date, which totaled $6,630.
During the year ended September 30, 1997, the Company issued 10,000 shares of
its common stock to a consultant in exchange for services provided. The
services were valued at the market value of the common stock on the date
issued, which totaled $12,500.
During the year ended September 30, 1997, based upon agreement between the
parties, the Company offset interest payable to shareholders with notes
receivable from shareholders in the amount of $57,725.
The Company entered into four capital leases during the year ended September
30, 1997. The value of the property purchased totaled $204,306.
The accompanying notes are an integral part of these consolidated financial
statements.
F-7
<PAGE>
CYPRESS FINANCIAL SERVICES, INC.
--------------------------------
AND SUBSIDIARIES
----------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
SEPTEMBER 30, 1998
------------------
1. Organization and Summary of Significant Accounting Policies
-----------------------------------------------------------
a. Organization and Basis of Presentation
--------------------------------------
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 began acquiring accounts
receivable and other consumer obligations for its own collection portfolio.
The Company operates primarily through wholly-owned subsidiaries that serve
specific segments of the collections service industry. The Company's
subsidiaries include: (i) Merchants Recovery Services, Inc. (MRSI), a
company that primarily offers accounts receivable collection services to
banks, credit unions, public utilities, and retailers; (ii) Medical Control
Services, Inc. (MCSI), a collection agency servicing the health care
industry; (iii) Lien Solutions, Inc. (LSI), a company that specializes in
the recovery of unpaid worker's compensation claims primarily for
healthcare service providers, including hospitals and doctors; (iv) My
Boss, Inc. 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) Pacific
Process Serving, Inc. (PPS), a statewide legal document process service
company.
b. Principles of Consolidation
---------------------------
The consolidated financial statements include the accounts of Cypress
Financial Services, Inc. and its wholly-owned subsidiaries. All significant
intercompany accounts have been eliminated in consolidation.
c. Accounts Receivable
-------------------
Accounts receivable represent accounts in which the Company provides
collection services for entities in the commercial, retail and medical
industries for a fee. Service fees are reported as income when earned.
Servicing costs are charged to expense as incurred. No one customer
accounted for more than 10 percent of total revenues for the years
presented.
F-8
<PAGE>
d. Portfolio Receivables
---------------------
Portfolio receivables (Receivables) represent liquidating portfolios of
delinquent accounts which have been purchased by the Company for collection
and are stated at the lower of cost or net realizable value. Cost is
reduced by cash collections on an account by account basis until such time
collections equal cost. Net realizable value represents management's
estimate of the remaining net proceeds to be realized from a given
portfolio, based on an account by account evaluation of the remaining
uncollected delinquent receivables and on the historical collection
experience of the specific portfolio and similar portfolios. Revenues from
collections on purchased portfolios of receivables are recognized on an
account by account basis after the cost of each account has been recovered.
Gains and losses are recorded as appropriate when Receivables are sold. The
Company considers a transfer of Receivables where the Company surrenders
control over the Receivables a sale to the extent that consideration other
than beneficial interests in the transferred Receivables is received in
exchange for the Receivables.
On January 1, 1997, the Company adopted Statement of Financial Accounting
Standards (SFAS) No. 125, "Accounting for Transfers and Servicing of
Financial Assets and Extinguishments of Liabilities." The adoption of SFAS
No. 125 did not have a material effect on the operations of the Company.
e. Residual Interests in Securitizations and Gain on Sale of Portfolio
-------------------------------------------------------------------
Receivables
-----------
The Company purchases Receivables with the intention of reselling them to
investors as asset-backed securities through securitizations. During 1998,
the Company completed its first securitization. Management intends to
enter into additional securitizations in the future. The securitizations
will generally be structured as follows: First, the Company sells a
portfolio of Receivables to a wholly-owned subsidiary which has been
established for the limited purpose of buying and reselling the Company's
Receivables. This wholly-owned subsidiary in turn issues interest-bearing
asset-backed securities (the Certificates) which are purchased by one or
more investors. The proceeds from the sale of the Certificates are then
used to purchase the Receivables from the Company. In addition, the Company
provides a credit enhancement for the benefit of the investors in the form
of an initial cash deposit to a specific account held by the trust which is
required to be maintained at specific levels.
At the closing of a securitization, the Company removes from its
consolidated balance sheet the Receivables sold and adds to its
consolidated balance sheet (i) the cash received and (ii) the basis
associated with the portion of the Receivables retained from the
securitizations (Residuals), which relates to (a) the cash held on deposit
by the trust and (b) the discounted cash flows to be received by the trust
in the future. The excess of the cash received and the assets retained by
the Company over the carrying value of the Receivables sold, less
transaction costs, equals the net gain on sale of Receivables recorded by
the Company.
In future periods, the Company will recognize additional revenue from the
Residuals if the actual performance of the Receivables is higher than the
original estimate or the Company may increase the estimated fair value of
the Residuals. If the actual performance of the Receivables is lower than
the original estimate, then an adjustment to the carrying value of the
Residuals may be required if the estimated fair value of the Residuals is
less than the carrying value.
F-9
<PAGE>
The Company is responsible for the ongoing servicing of the Receivables.
At this time, no value has been attributed to the related servicing rights
on the basis that the cost to service is expected to equal the servicing
fees generated.
f. 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.
g. Trust Accounts and Restricted Cash
----------------------------------
The Company maintains trust accounts for the benefit of its customers.
Related funds are deposited in trust bank accounts and reflected as a trust
liability until such amounts held in trust are remitted to customers. The
trust account cash balances of $418,168 and $397,298 are reflected as
restricted cash and trust payables in the accompanying consolidated balance
sheets at September 30, 1998 and 1997, respectively.
h. Fair Value of Financial Instruments
-----------------------------------
Fair values of financial instruments are estimated using available market
information and other valuation methodologies. The fair values of the
Company's financial instruments are estimated to approximate the related
book value, unless otherwise indicated.
i. Earnings Per Share
------------------
During fiscal 1998, the Company adopted SFAS No. 128, "Earnings per Share
(EPS)." This standard is effective for both interim and annual reporting
periods ending after December 15, 1997. SFAS No. 128 replaces primary EPS
with basic EPS and fully diluted EPS with diluted EPS. Basic EPS is
computed by dividing reported earnings by weighted average shares
outstanding. Diluted EPS is computed in the same way as fully diluted EPS,
except that the calculation now uses the average share price for the
reporting period to compute dilution from options under the treasury stock
method. All earnings per share amounts have been restated to conform to the
SFAS No. 128 requirements.
F-10
<PAGE>
For the year ended September 30, 1998, the computations of basic and
diluted EPS were as follows:
<TABLE>
<CAPTION>
Basic EPS Diluted EPS
--------- -----------
<S> <C> <C>
September 30, 1998
Numerator -- net income $1,039,827 $1,039,827
Denominator -- weighted average shares outstanding 5,015,762 5,015,762
Plus -- net shares issued in assumed preferred
stock conversion 345,000
Plus -- net shares issued in assumed stock option
exercises 65,070
Diluted denominator 5,425,832
Earnings per share $ 0.21 $ 0.19
========== ==========
</TABLE>
For the year ended September 30, 1997, the denominator in the diluted EPS
computation was the same as the denominator for basic EPS due to the
antidilutive effects of preferred stock and stock options on the Company's
net loss. As of September 30, 1998 and 1997, the Company had outstanding
stock options of 57,300 and 118,650, respectively, that were antidilutive.
j. Income Taxes
------------
The Company accounts for income taxes using the liability method in
accordance with SFAS No. 109, "Accounting for Income Taxes," which requires
the asset and liability method of accounting for income taxes.
k. Stock Option Plan
-----------------
As permitted by SFAS No. 123, "Accounting for Stock-Based Compensation,"
the Company accounts for stock-based employee compensation plans in
accordance with APB Opinion No. 25, "Accounting for Stock Issued to
Employees," and related interpretations. The Company provides the pro forma
net earnings, pro forma earnings per share, and stock based compensation
plan disclosure requirements set forth in SFAS No. 123.
l. New Pronouncements
------------------
In June 1997, the Financial Accounting Standards Board (FASB) issued SFAS
Nos. 130 and 131, "Reporting Comprehensive Income" and "Disclosures about
Segments of an Enterprise and Related Information," respectively. SFAS Nos.
130 and 131 are effective for fiscal years beginning after December 15,
1997, with earlier adoption permitted. The Company believes that adoption
of these standards will not have a material impact on the Company.
F-11
<PAGE>
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." SFAS No. 133 is effective for fiscal
quarters beginning after June 15, 1999, with earlier adoption permitted.
The Company believes that adoption of this standard will not have a
material impact on the Company.
m. Rental Operations
-----------------
The Company leases a portion of its building to unrelated parties.
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 years ended September
30, 1998 and 1997 are as follows:
<TABLE>
<CAPTION>
1998 1997
--------- ---------
<S> <C> <C>
Rental income $254,233 $288,139
Interest expense (47,091) (63,303)
Depreciation and amortization (12,567) (16,468)
Utilities and other (71,275) (77,287)
-------- --------
$123,300 $131,081
======== ========
</TABLE>
n. Use of Estimates
----------------
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make certain
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date
of the financial statements, and the reported amounts of revenues and
expenses during the reported periods. Actual results could materially
differ from those estimates.
o. Reclassification
----------------
Certain amounts in the accompanying 1997 financial statements have been
reclassified to conform to 1998 presentation.
2. Portfolio Receivables
---------------------
The cost basis of portfolio receivables activity consists of the following as of
September 30, 1998 and 1997, and for the years then ended:
<TABLE>
<CAPTION>
<S> <C>
Portfolio receivables at September 30, 1996 $ 486,505
Purchases of portfolio receivables 735,862
Collections applied to cost basis (413,995)
Sales of portfolio receivables applied to cost basis (337,811)
---------
Portfolio receivables at September 30, 1997 470,561
Purchases of portfolio receivables 930,405
Collections applied to cost basis (276,874)
Sales of portfolio receivables applied to cost basis (359,059)
---------
Portfolio receivables at September 30, 1998 $ 765,033
=========
</TABLE>
F-12
<PAGE>
For the years ended September 30, 1998 and 1997, the Company had gross
collections from the portfolio receivables of $1,532,849 and $1,252,407,
respectively, of which $1,255,975 and $838,412 were recognized as revenue in the
accompanying consolidated statements of operations.
Due to the nature of these portfolio receivables, there is no assurance that
historical collection results will reflect the future collectibility of the face
value of the portfolio receivables.
3. Related Party Transactions
--------------------------
On August 14, 1998 the Company sold Receivables with a book value of $224,634 to
a wholly-owned subsidiary for $2,750,000, which issued interest-bearing asset-
backed securities to Pacific Life Insurance Company for the same amount. As
permitted by SFAS No. 125, the Company considers a transfer of Receivables where
the Company surrenders control over the Receivables a sale to the extent that
consideration other than beneficial interests in the transferred Receivables is
received in exchange for the Receivables. The sale resulted in a net gain of
$2,363,148 as reflected in the accompanying consolidated statements of
operations and a carried residual interest of $36,098. As discussed further in
Note 7, Pacific Life Insurance Company purchased 2,000,000 shares of common
stock from the Company during the year.
4. Property
--------
Property consists of the following:
<TABLE>
<CAPTION>
1998 1997
---------- ----------
<S> <C> <C>
Land $ 866,575 $ 866,575
Building 1,540,577 1,540,577
Equipment and furnishings 1,758,188 1,548,654
Autos 132,415 132,415
---------- ----------
4,297,755 4,088,221
Less--Accumulated depreciation 1,554,603 1,391,987
---------- ----------
$2,743,152 $2,696,234
========== ==========
</TABLE>
Depreciation expense for the years ended September 30, 1998 and 1997 totaled
$175,249 and $212,967, respectively. At September 30, 1998 and 1997, the net
book value of equipment under capital leases was $129,394 and $170,255,
respectively.
5. Line of Credit
--------------
Through August 1998, the Company had a line of credit agreement (the Agreement)
with a financial institution. Under the terms of the Agreement, the Company
could borrow up to $1,500,000. The Company was required to pay interest monthly
at the bank's reference rate plus 1.5 percent (10.0 percent at September 30,
1997). As of September 30, 1997, net borrowings amounted to $1,150,000 leaving
$350,000 available under the Agreement. The borrowings were secured by
substantially all of the Company's assets as defined under the Agreement. In
August 1998, the outstanding borrowings were paid in full and the Agreement was
cancelled.
F-13
<PAGE>
6. Notes Payable
-------------
<TABLE>
<CAPTION>
1998 1997
---------- ----------
<S> <C> <C>
Notes payable consists of the following:
Mortgage note payable to bank, collateralized by land
and building, due in monthly payments of $14,089,
including interest at 8 percent per annum, through
December 2000, at which time the entire principal
balance is due and payable. $1,843,743 $1,862,410
Note payable to bank, secured by certain equipment,
due in monthly payments of $10,969, including
interest at 11 percent per annum, through June 2000,
at which time the entire principal balance is due
and payable. - 688,721
Note payable to a financial institution, secured by
portfolio receivables, due in monthly payments
based on collections through August 1998, at which
time the entire principal balance is due and payable. - 120,000
---------- ----------
$1,843,743 $2,671,131
========== ==========
</TABLE>
Annual maturities of notes payable at September 30, 1998 are as follows:
<TABLE>
<CAPTION>
Years Ending
September 30,
-------------
<S> <C>
1999 $ 20,223
2000 21,504
2001 1,802,016
----------
$1,843,743
==========
</TABLE>
F-14
<PAGE>
7. Capital Transactions
--------------------
a. Series A Convertible, Redeemable Preferred Stock
------------------------------------------------
On September 30, 1996, the Company converted the balance of notes issued in
connection with the acquisition of MCSI 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 are entitled to the same
voting and dividend rights as the common shareholders. Such preferred
shares have a liquidation preference at $2.00 per share over common
shareholders.
b. Common Stock Issuances
----------------------
On July 2, 1998, the Company sold 2,000,000 shares of its common stock to
Pacific Life Insurance Company, representing 28% of the outstanding common
stock of the Company on a fully diluted basis for $3,000,000.
On June 5, 1998, the Company issued 7,300 shares of its common stock to
employees in exchange for services provided. The services were valued at
the market value of the common stock on the date issued, which totaled
$7,300.
On June 2, 1997, the Company issued 10,000 shares of its common stock as
payment for services provided by an outside consultant. The services were
valued at the market value of the common stock on the date issued, which
totaled $12,500.
On February 12, 1997, a former owner of The Christmas Guild (TCG) exercised
warrants to purchase 10,000 shares of the Company's common stock at $0.25
per share.
c. Stock Option Plan
-----------------
In 1995, the Company adopted, and the shareholders approved, the Cypress
Financial Services, Inc. 1995 Stock Option Plan (the Plan) which authorized
450,000 stock option grants to purchase the Company's common stock. In
August 1998, the Board of Directors and Shareholders approved a 500,000
share increase to the Plan increasing the total number of shares reserved
for issuance pursuant to the Plan to 950,000.
F-15
<PAGE>
The Plan provides for the grant by the Company of options to purchase
shares of the Company's common stock to its officers, directors, employees,
consultants and advisors. The Plan provides that it is to be administered
by a committee appointed by the Board of Directors (the Committee) all of
whom are "disinterested" under 16b-3 of the Securities Exchange Act of
1934, as amended. The Committee has discretion, subject to the terms of the
Plan, to select the persons entitled to receive options under the Plan, the
terms and conditions on which options are granted, the exercise price, the
time period for vesting such shares, the number of shares subject thereto,
and whether such options shall qualify as "incentive stock options" within
the meaning of Section 422 of the Internal Revenue code, or "non-qualified
stock options."
The Company has granted 869,400 options under the Plan of which 72,100 have
been forfeited. These options are issued at fair market value or at a 10
percent premium over fair market value if the individual is a 10 percent or
more shareholder. All options granted expire ten years from the date of
grant. At September 30, 1998, there were 152,700 additional shares
available for grant under the Plan.
A summary of the status of the Plan at September 30, 1998 and 1997 and
changes during the years then ended is presented in the table and narrative
below:
<TABLE>
<CAPTION>
September 30, 1998 September 30, 1997
------------------------------------- --------------------------------------
Weighted Weighted
Average Average
Exercise Exercise
Shares Price Shares Price
--------------- ---------------- --------------- -----------------
<S> <C> <C> <C> <C>
Outstanding at beg. of year 118,650 $2.75 - -
Granted 740,000 $1.17 129,400 $2.75
Exercised - - - -
Forfeited (61,350) $2.75 (10,750) $2.75
------- ----- ------- -----
Outstanding at end of year 797,300 $1.29 118,650 $2.75
======= ===== ======= =====
Exercisable at end of year 307,300 $1.33 118,650 $2.75
======= ===== ======= =====
Weighted average fair value of
options granted $1.07 $2.09
===== =====
Weighted average remaining
contractual life 9.6 9.0
===== =====
</TABLE>
The fair value of each option grant is estimated on the date of grant using
the Black Scholes pricing model with the following assumptions used for the
grants in fiscal years 1998 and 1997: weighted average risk-free interest
rate of 4.5 and 6.6 percent, respectively; a weighted average volatility of
90.6 and 77.1 percent, respectively; an expected life of 7 years; and no
expected dividend yield.
F-16
<PAGE>
As permitted by SFAS No. 123, the Company continues to account for the Plan
based on APB Opinion No. 25, under which no compensation cost has been
recognized. Pro forma disclosures, as if the Company had adopted the cost
recognition method, are shown below. This alternative method recognizes
the fair value of stock options granted in net income during the period
that the stock options vest. Had compensation cost for stock options
awarded under this plan been determined consistent with this methodology,
the Company's net income and earnings per share for the year ended
September 30, 1998 would have reflected the following pro forma amounts:
<TABLE>
<CAPTION>
1998 1997
---------- ----------
<S> <C> <C> <C>
Net Income (Loss): As Reported $1,039,827 $(454,527)
Pro Forma $ 817,410 $(702,066)
Basic EPS: As Reported $ 0.21 $ (0.10)
Pro Forma $ 0.16 $ (0.16)
Diluted EPS: As Reported $ 0.19 $ (0.10)
Pro Forma $ 0.15 $ (0.16)
</TABLE>
8. Commitments and Contingencies
-----------------------------
a. Lessee
------
The Company leases certain equipment under non-cancelable capital and
operating leases which expire at various times through fiscal 2002. Future
annual minimum lease payments, in the aggregate, under capital and
operating leases at September 30, 1998 are as follows:
<TABLE>
<CAPTION>
Years Ending
September 30, Capital Operating
- ------------- -------- ---------
<S> <C> <C>
1999 $ 57,915 $6,731
2000 63,182 -
2001 63,182 -
2002 10,532 -
-------- ------
Total minimum lease payments 194,811 $6,731
======
Less -- Amounts representing interest 53,013
--------
Present value of capital lease obligations $141,798
========
</TABLE>
Rent expense under all operating leases totaled $22,938 in 1998 and $48,795
in 1997.
F-17
<PAGE>
b. Lessor
------
As discussed in Note 1, the Company leases a portion of its building to
unrelated entities under operating leases which expire at various times
through September 1, 2003. The Company leases to several tenants on a
month-to-month basis. Future annual collections under non-cancelable
operating leases as of September 30, 1998 are scheduled as follows:
<TABLE>
<CAPTION>
Years Ending
September 30,
-------------
<S> <C>
1999 $137,601
2000 140,270
2001 92,747
2002 65,061
2003 61,819
--------
$497,498
========
</TABLE>
c. Employment Agreements
---------------------
In November 1996, the Company entered into a three-year agreement with one
of its employees. In September 1998, the Company entered into three-year
employment agreements with two 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.), will be approximately $380,000 in
fiscal 1999.
d. Litigation
----------
As of September 30, 1998, the Company is not involved in any litigation
that is material to its financial position or results of operations,
although the Company is involved, from time to time, in litigation that is
incidental to its collection business. The Company regularly initiates
legal proceedings as a plaintiff in connection with its routine collection
activities.
9. Income Taxes
------------
The provisions (benefits) for income taxes for the years ended September 30,
1998 and 1997 are shown in the table below:
<TABLE>
<CAPTION>
1998 1997
-------- --------
<S> <C> <C>
Federal:
Current $ - $(27,767)
Deferred 322,710 -
State:
Current 15,413 6,065
Deferred 127,479 -
-------- --------
Total tax provision (benefit) $465,602 $(21,702)
======== ========
</TABLE>
F-18
<PAGE>
Although not affecting the total provision, actual income tax payments may
differ from the amounts shown as current as a result of the final determination
as to the timing of certain deductions and credits.
The total tax provision (benefit) differs from the Federal statutory rate of 34
percent for the reasons shown in the table below:
<TABLE>
<CAPTION>
1998 1997
------ ------
<S> <C> <C>
Federal statutory tax rate 34.0% (34.0)%
State income taxes, net of Federal
income tax benefit 7.9 1.3
NOL Carryback - (5.8)
Other (2.4) 0.8
Valuation Allowance (13.4) 33.1
----- ------
Actual tax provision (benefit) 26.1% (4.6)%
===== ======
</TABLE>
Because certain items of income and expense are not recognized in the same year
in the financial statements of the Company as in its Federal and California tax
returns, deferred assets and liabilities are created. As of September 30, 1998
and 1997, the accompanying consolidated balance sheets reflect net deferred tax
liabilities of $465,000 and $0, respectively. The net deferred tax liabilities
as of September 30, 1998 and 1997 are disclosed in the table below:
<TABLE>
<CAPTION>
Components Components
1998 1997
----------- ----------
<S> <C> <C>
Deferred tax assets:
Allowance for doubtful accounts $ 142,388 $ 32,587
Vacation accrual 30,647 169,809
Net operating loss 314,328 -
Deferred state taxes 43,343 -
Other 3,231 -
--------- ---------
Total deferred tax assets 533,937 202,396
--------- ---------
Deferred tax liabilities:
Securitization (974,433) -
Other (9,693) -
--------- ---------
Total deferred tax liabilities 984,126 -
--------- ---------
Valuation allowance - (202,396)
--------- ---------
Net deferred tax liability $(450,189) $ -
========= =========
</TABLE>
F-19
<PAGE>
EXHIBIT INDEX
EXHIBIT DESCRIPTION
NUMBER
- --------------------------------------------------------------------------------
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 18, 1987, Exhibit 3.2.
3.3 Certificate of Determination re: Series A Preferred Stock,
incorporated by reference from Registrant's Form 10-k filed on
December 27, 1996.
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,
incorporated by reference from Registrant's Form 10-K filed on
December 27, 1996.
10.4 Executive Employment Agreements of Manuel Occiano dated September 16,
1998 1998 and John Hindman dated September 4, 1998
27 Financial Data Schedule
___________________
<PAGE>
EXHIBIT 10.4
EMPLOYMENT AGREEMENT
This Employment Agreement is made and entered into as of this 16th day of
September, 1998, by and between Cypress Financial Services, Inc., a Nevada
corporation (the "Company"), and Manuel Occiano, an individual ("Executive").
RECITALS
A The Company desires to engage the services of Executive for the
Company.
B. Executive is willing and desires to be employed by the Company, and the
Company desires to employ Executive, upon the terms, covenants and conditions
hereinafter set forth.
AGREEMENT
NOW, THEREFORE, in consideration of the mutual terms, covenants and
conditions hereinafter set forth, the parties hereto do hereby agree as
follows:
A. Employment. The Company hereby employs Executive as its chief executive
----------
officer, subject to the supervision and direction of the Company's Board of
Directors. Each year during the Term hereof, the Company shall use its best
efforts to cause Executive to be elected to serve on the Company's Board of
Directors.
B. Term. The term of this Agreement shall be for the period commencing on
----
the date set forth above and shall continue through August 31, 2001, unless
terminated earlier pursuant to Section F below; provided, however, that
Executive's obligations in Sections D and E below shall continue in effect after
such termination. This three-year period is hereinafter referred to as the
"Term".
C. Compensation; Reimbursement.
---------------------------
1. Base Salary. For all Services rendered by Executive under this
-----------
Agreement, the Company shall pay Executive a base salary of one hundred eighty
thousand dollars ($180,000) per annum, payable twice monthly in equal
installments (the "Base Salary"). Executive's base salary may be increased up to
twenty percent (20%) each year if Executive meets certain performance criteria,
as mutually agreed to by Executive and the Company and accepted by the
Compensation Committee of the Board of Directors.
2. Management Bonus. As additional compensation, Executive shall be
----------------
eligible to participate in the management bonus pool to be established by the
Board of Directors and administered by the Compensation Committee. The bonus
pool will consist of an amount equal to a percentage of the Company's net income
before income taxes, excluding extraordinary gains and any residual income from
securitizations. The bonus percentage will start once the Company has achieved a
minimum net income figure and will increase pursuant to a graduated schedule up
1
<PAGE>
to a ceiling of ten percent (10%). Participants in the management bonus pool may
earn an annual bonus of an amount up to their base salary. During the first year
of this Agreement, Executive shall be entitled to quarterly advances of $22,500
against his management bonus, which will be offset against his management bonus
when earned. In the event that Executive's advances during such year exceed his
actual earned management bonus, Executive shall be obligated to repay to the
Company such shortfall. Any such shortfall shall not be compensation for
accounting or personal income tax purposes.
3. Stock Options. The Company shall, pursuant to the Company's stock
-------------
option plan, grant to Executive an option to purchase 300,000 shares of the
Company's common stock at an exercise price of $1.3125 per share. The option
shall vest immediately upon grant as to 60,000 shares, with the balance of the
option vesting at the rate of 20,000 shares per quarter over the three year
period following the grant. Under the Company's stock option plan, no options
can be exercised during the first six (6) months following the date of the
grant.
4. Stock Purchase Loan. The Company agrees to loan to Executive up to
-------------------
one hundred thousand dollars ($100,000) to be used by Executive to purchase
shares of the Company's publicly traded common stock on the open market. The
loan shall be evidenced by a Recourse Secured Promissory Note, substantially in
the form of the attached Exhibit A. The loan shall be secured by a pledge of the
common stock so acquired pursuant to the terms of a Pledge Agreement and
Security Interest in the Proceeds of Sale, substantially in the form of the
attached Exhibit B.
5. Additional Benefits. In addition to the Base Salary and the
-------------------
Management Bonus, Executive shall be entitled to all other benefits of
employment provided to other officers and key employees of the Company,
including the Company's medical, dental and other insurance and health and
welfare plans.
6. Reimbursement. Executive shall be reimbursed for all reasonable
-------------
"out-of-pocket" business expenses and disbursements for business travel and
business entertainment incurred in connection with the performance of his duties
under this Agreement (1) so long as such expenses constitute business deductions
(in whole or in part) from taxable income for the Company and are excludable
from taxable income to the Executive under the governing laws and regulations of
the Internal Revenue Code (provided, however, that Executive shall be entitled
to full reimbursement in any case where the Internal Revenue Service may, under
Section 274(n) of the Internal Revenue Code, disallow to the Company 20% of
meals and entertainment expenses); and (2) to the extent such expenses do not
exceed the amounts allocable for such expenses in budgets that are approved from
time to time by the Company. The reimbursement of Executive's business expenses
shall be upon monthly presentation to and approval by the Company of valid
receipts and other appropriate documentation for such expenses.
7. Relocation. The Company shall pay to Executive a one-time non-
----------
accountable relocation allowance in the amount of twenty thousand dollars
($20,000); provided, however, Executive shall be obligated to repay the entire
allowance in the event that, within ninety (90) days
2
<PAGE>
from the date hereof, Executive voluntarily terminates, or the Company for cause
terminates, his employment.
8. Withholdings. All compensation paid to Executive &hall be subject
------------
to customary withholding tax and other employment taxes as are required with
respect to compensation paid by a corporation to an employee.
D. Duties and Responsibilities.
---------------------------
1. Full-time. Executive shall, during the Term of this Agreement,
---------
devote his full attention and expand his best efforts, energies, and skills, on
a full-time basis, to the business of the Company and any corporation controlled
by the Company. For purposes of this Agreement, the term the "Company" shall
mean the Company and all Subsidiaries. The Company agrees that the devotion of
reasonable amounts of time to business activities separate from and outside the
scope of the business of the Company will not violate the terms of this
Agreement, on the conditions that (i) such activities are not corporate
opportunities of the Company; and (ii) such activities do not interfere with the
performance of Executive's duties hereunder.
2. Duties set by Board. During the Term of this Agreement, Executive
-------------------
shall serve as the Chief Executive Officer of the Company or in such other
capacity as determined by the Board of Directors or an Executive Committee, if
any. In the performance of all of his responsibilities hereunder, Executive
shall be subject to all of the Company's policies, rules, and regulations
applicable to its executives of comparable status and shall report directly to,
and shall be subject to, the direction and control of the Board of Directors of
the Company and shall perform such duties as shall be assigned to him by the
Board of Directors or its Executive Committee, if any. In performing such
duties, Executive will be subject to and abide by, and will use his best efforts
to cause other employees of the Company to be subject to and abide by, all
policies and procedures developed by the Board of Directors or its Executive
Committee, if any.
3. Conflicting Activities.
----------------------
a. Executive shall not, during the term of this Agreement, be
engaged in any other business activity without the prior consent of the Board of
Directors of the Company; provided, however, that this restriction shall not be
construed as preventing Executive from investing his personal assets in passive
investments in business entities which are not in competition with the Company
or its affiliates.
b. Executive hereby agrees to promote and develop all business
opportunities that come to his attention relating to current or anticipated
future business of the Company, in a manner consistent with the best interests
of the Company and with his duties under this Agreement. Should Executive
discover a business opportunity that does not relate to the current or
anticipated future business of the Company, he shall first offer such
opportunity to the Company. Should the Board of Directors of the Company not
exercise its right to pursue this business opportunity within a reasonable
period of time, not to exceed sixty (60) days, then Executive may develop the
business opportunity for himself; provided, however, that such
3
<PAGE>
development may in no way conflict or interfere with the duties owed by
Executive to the Company under this Agreement. Further, Executive may develop
such business opportunities only on his own time, and may not use any service,
personnel, equipment, supplies, facility, or trade secrets of the Company in
their development. As used herein, the term "business opportunity" shall not
include business opportunities involving investment in publicly traded stocks,
bonds or other securities, or other investments of a personal nature.
4. Full Authority of Executive. To induce the Company to enter into
---------------------------
this Agreement, Executive represents and warrants to the Company that (a)
Executive is not a party or subject to any employment agreement or arrangement
with any other person, firm, company, corporation or other business entity, (b)
Executive is subject to no restraint, limitation or restriction by virtue of any
agreement or arrangement, or by virtue of any law or rule of law or otherwise
which would impair the Executive's right or ability (i) to enter the employ of
the Company, or (ii) to perform fully his duties and obligations pursuant to
this Agreement, and (c) to the best of Executive's knowledge no material
litigation is pending or threatened against any business or business entity
owned or controlled or formerly owned or controlled by Executive.
E. Restrictive Covenants.
---------------------
1. Executive acknowledges that (i) he has a major responsibility for
the operation, administration, development and growth of the Company's business,
(ii) his work for the Company has brought him and will continue to bring him
into close contact with confidential information of the Company and its
customers, and (iii) the agreements and covenants contained in this Section E.1
are essential to protect the business interest of the Company and that the
Company will not enter into this Agreement but for such agreements and
covenants. Accordingly, the Executive covenants and agrees as follows:
a. Except as otherwise provided for in this Agreement, during the
Term of this Agreement and, if this Agreement is terminated under Section F.3
or F.5 during the Term, for two (2) years following such date of termination
(the "Termination Period"), the Executive shall not, directly or indirectly,
compete with respect to any services or products of the Company which are either
offered or are being developed by the Company as of the date of termination; or,
without limiting the generality of the foregoing, be or become. or agree to be
or become, interested in or associated with, in any capacity (whether as a
partner, shareholder, owner, officer, director, Executive, principal, agent,
creditor, trustee, consultant, co-venturer or otherwise) any individual,
corporation, firm, association, partnership, joint venture or other business
entity, which competes with respect to any services or products of the Company
which are either offered or are being developed by the Company as of the date of
termination; provided, however, that the Executive may own, solely as an
investment, not more than two percent (2%) of any class of securities of any
publicly held corporation in competition with the Company whose securities are
traded on any national securities exchange in the United States of America.
4
<PAGE>
b. During the term of this Agreement and, if applicable, during the
Termination Period, the Executive shall not, directly or indirectly, (i) induce
or attempt to influence any executive of the Company to leave its employ, or
(ii) induce or attempt to influence any person or business entity who was a
customer or supplier of the Company during any portion of said period to
transact business with a competitor of the Company in Company's business.
c. During the Term of this Agreement, the Termination Period, if
applicable, and thereafter, the Executive shall not disclose to anyone any
information about the affairs of the Company, including, without limitation,
trade secrets, trade "know-how", inventions, customer lists, business plans,
operational methods, pricing policies, marketing plans, sales plans, identity of
suppliers or customers, sales, profits or other financial information, which is
confidential to the Company or is not generally known in the relevant trade, nor
shall the Executive make use of any such information for his own benefit.
2. If the Executive breaches, or threatens to commit a breach of
Section E.1 (the Restrictive Covenants), the Company shall have the following
rights and remedies, each of which shall be enforceable, and each of which is in
addition to, and not in lieu of, any other rights and remedies available to the
Company at law or in equity.
a. The Executive shall account for and pay over to the Company all
compensation, profits, and other benefits, after taxes, which inure to
Executive's benefit which are derived or received by the Executive or any person
or business entity controlled by the Executive resulting from any action or
transactions constituting a breach of any of the Restrictive Covenants.
b. Notwithstanding the provisions of subsection a. above, the
Executive acknowledges and agrees that in the event of a violation or threatened
violation of any of the provisions of Section E.1, the Company shall have no
adequate remedy at law and shall therefore be entitled to enforce each such
provision by temporary or permanent injunctive or mandatory relief obtained in
any court of competent jurisdiction without the necessity of proving damages,
posting any bond or other security, and without prejudice to any other rights
and remedies which may be available at law or in equity.
3. If any of the Restrictive Covenants, or any part thereof, is held to be
invalid or unenforceable, the same shall not affect the remainder of the
covenant or covenants, which shall be given full effect, without regard to the
invalid or unenforceable portions. Without limiting the generality of the
foregoing, if any of the Restrictive Covenants, or any part thereof, is held to
be unenforceable because of the duration of such provision or the area covered
thereby, the parties hereto agree that the court making such termination shall
have the power to reduce the duration and/or area of such provision and, in its
reduced form, such provision shall then be enforceable.
4. The parties hereto intend to and hereby confer jurisdiction to enforce
the Restrictive Covenants upon the courts of any jurisdiction within the
geographical scope of such
5
<PAGE>
Restrictive Covenants. In the event that the courts of any one or more of such
jurisdictions shall hold such Restrictive Covenants wholly unenforceable by
reason of the breadth of such scope or otherwise, it is the intention of the
parties hereto that such determination not bar or in any way affect the
Company's right to the relief provided above in the courts of any other
jurisdictions within the geographical scope of such Restrictive Covenants, as to
breaches of such covenants in such other respective jurisdictions, the above
covenants as they relate to each jurisdiction being, for this purpose, severable
into diverse and independent covenants.
F. Termination; Bases for Termination.
----------------------------------
1. Executive's employment hereunder may be terminated at any time by
mutual agreement of the parties.
2. This Agreement shall automatically terminate on the last day of the
month in which Executive dies or becomes permanently incapacitated. "Permanent
incapacity" as used herein shall mean mental or physical incapacity, or both,
reasonably determined by the Company's Board of Directors based upon a
certification of such incapacity by, in the discretion of the Company's Board of
Directors, either Executive's regularly attending physician or a duly licensed
physician selected by the Company's Board of Directors, rendering Executive
unable to perform substantially all of his duties hereunder and which appears
reasonably certain to continue for at least six (6) consecutive months without
substantial improvement. Executive shall be deemed conclusively to have become
permanently incapacitated on the date the Company's Board of Directors has
determined that Executive is permanently incapacitated and so notifies
Executive.
3. Executive's employment may he terminated by the Company "with
cause," effective upon delivery of written notice to Executive given at any time
(without any necessity for prior notice) if any of the following shall occur:
a. any action by Executive which would be grounds for termination
because of any willful breach of duty, habitual neglect of duty, or continued
incapacity;
b. any material breach of Executive's obligations in Sections D
and E above; or
c. any material acts or events which inhibit Executive from fully
performing his responsibilities to the Company in good faith, such as (i) a
felony criminal conviction; (ii) any other criminal conviction involving
Executive's lack of honesty or Executive's moral turpitude; (iii) drug or
alcohol abuse; or (iv) acts of dishonesty, gross carelessness or gross
misconduct.
4. Executive's employment may be terminated by the Company "without
cause" (for any reason or no reason at all) at any time by giving Executive 60
days prior written notice of termination, which termination shall be effective
on the 60th day following such notice. If
6
<PAGE>
Executive's employment under this Agreement is so terminated, the Company shall
make a lump sum cash payment to Executive within 10 days after termination of an
amount equal to (i) Executive's Base Salary for the balance of the term of the
Agreement, plus (ii) any unreimbursed expenses accruing to the date of
termination. For purposes of this provision, Executive's annual Base Salary and
the remaining portion of the term of the Agreement shall be calculated as of the
termination date. After the Company's termination of Executive under this
provision, the Company shall not be obligated to provide the benefits to
Executive (except as may be required by law).
5. Executive may terminate his employment hereunder by giving the
Company 60 days prior written notice, which termination shall be effective on
the 60th day following such notice.
G. Miscellaneous.
-------------
1. Transfer and Assignment. This Agreement is personal as to Executive
-----------------------
and shall not be assigned or transferred by Executive without the prior written
consent of the Company. This Agreement shall be binding upon and inure to the
benefit of all of the parties hereto and their respective permitted heirs,
personal representatives, successors and assigns.
2. Severability. Nothing contained herein shall be construed to
------------
require the commission of any act contrary to law. Should there be any conflict
between any provisions hereof and any present or future statute, law, ordinance,
regulation, or other pronouncement having the force of law, the latter shall
prevail, but the provision of this Agreement affected thereby shall be curtailed
and limited only to the extent necessary to bring it within the requirements of
the law, and the remaining provisions of this Agreement shall remain in full
force and effect.
3. Governing Law. This Agreement is made under and shall he construed
-------------
pursuant to the laws of the State of California.
4. Counterparts. This Agreement may be executed in several
------------
counterparts, including electronically transmitted counterparts, and all
documents so executed shall constitute one agreement, binding on all of the
parties hereto, notwithstanding that all of the parties did not sign the
original or the same counterparts.
5. Entire Agreement. This Agreement constitutes the entire agreement
----------------
and understanding of the parties with respect to the subject matter hereof and
supersedes all prior oral or written agreements, arrangements, and
understandings with respect thereto. No representation, promise, inducement,
statement or intention has been made by any party hereto that is not embodied
herein, and no party shall be bound by or liable for any alleged representation,
promise, inducement, or statement not so set forth herein.
7
<PAGE>
6. Modification. This Agreement may be modified, amended, superseded,
------------
or canceled, and any of the terms, covenants, representations, warranties or
conditions hereof may be waived, only by a written instrument executed by the
party or parties to be bound by any such modification, amendment, supersession,
cancellation, or waiver.
7. Attorneys' Fees and Costs. In the event of any dispute arising out
-------------------------
of the subject matter of this Agreement, the prevailing party shall recover, in
addition to any other damages assessed, its reasonable attorneys' fees and court
costs incurred in litigating or otherwise settling or resolving such dispute
whether or not an action is brought or prosecuted to judgment.
8. Construction. In construing this Agreement, none of the parties
------------
hereto shall have any term or provision construed against such party solely by
reason of such party having drafted the same.
9. Waiver. The waiver by either of the parties, express or implied,
------
of any right under this Agreement or any failure to perform under this Agreement
by the other party, shall not constitute or be deemed as a waiver of any other
right under this Agreement or of any other failure to perform under this
Agreement by the other party, whether of a similar or dissimilar nature.
10. Cumulative Remedies. Each and all of the several rights and
-------------------
remedies provided in this Agreement, or by law or in equity, shall be
cumulative, and no one of them shall be exclusive of any other right or remedy,
and the exercise of any one or such rights or remedies shall not be deemed a
waiver of, or an election to exercise, any other such right or remedy.
11. Headings. The section and other headings contained in this
--------
Agreement are for reference purposes only and shall not in any way affect the
meaning and interpretation of this Agreement.
12. Notices. Any notice under this Agreement must be in writing, may
-------
be telecopied, sent by express 24-hour guaranteed courier, or hand-delivered, or
may be served by depositing the same in the United States mail, addressed to the
party to be notified, postage-prepaid and registered or certified with a return
receipt requested. The addresses of the parties for the receipt of notice shall
be as follows:
If to the Company:
Cypress Financial Services, Inc.
5400 Orange Avenue, Suite 200
Cypress, California 90630
Attn: Mr. Farrest Hayden
8
<PAGE>
If to Executive:
Manuel Occiano
- ---------------------
- ---------------------
- ---------------------
Each notice given by registered or certified mail shall be deemed delivered and
effective on the date of delivery as shown on the return receipt, and each
notice delivered in any other manner shall be deemed to be effective as of the
time of actual delivery thereof. Each party may change its address for notice by
giving notice thereof in the manner provided above.
13. Survival. Any provision of this Agreement which imposes an
--------
obligation after termination or expiration of this Agreement shall survive the
termination or expiration of this Agreement and be binding on Executive and the
Company.
14. Right of Set-Off. Upon termination or expiration of this
----------------
Agreement, the Company shall have the right to set-off against the amounts due
Executive hereunder the amount of any outstanding loan or advance from the
Company to Executive.
15. Effective Date. This Agreement shall become effective as of the
--------------
date set forth on page 1 when signed by Executive and the Company.
IN WITNESS WHEREOF, the parties hereto have caused this Employment
Agreement to be executed as of the date first set forth above.
"COMPANY" "EXECUTIVE"
Cypress Financial Services, Inc.,
a Nevada corporation
By: /s/ RICHARD W. KEYES /s/ MANUEL OCCIANO
----------------------- ---------------------
Name:
-----------------------
Title:
-----------------------
<PAGE>
EMPLOYMENT AGREEMENT
This Employment Agreement is made and entered into as of this 4th day of
September, 1998, by and between Cypress Financial Services, Inc., a Nevada
corporation (the "Company"), and John Hindman, an individual ("Executive").
RECITALS
A. The Company desires to engage the services of Executive for the
Company.
B. Executive is willing and desires to be employed by the Company, and the
Company desires to employ Executive, upon the terms, covenants and conditions
hereinafter set forth.
AGREEMENT
NOW, THEREFORE, in consideration of the mutual terms, covenants and
conditions hereinafter set forth, the parties hereto do hereby agree as follows:
A. Employment. The Company hereby employs Executive as its Chief
----------
Financial Officer, subject to the supervision and direction of the Company's
Chief Executive Officer.
B. Term. The term of this Agreement shall be for the period commencing on
----
the date set forth above and shall continue through August 31, 2001, unless
terminated earlier pursuant to Section F below; provided, however, that
Executive's obligations in Sections D and E below shall continue in effect after
such termination. This three-year period is hereinafter referred to as the
"Term".
C. Compensation; Reimbursement.
---------------------------
1. Base Salary. For all services rendered by Executive under this
------
Agreement, the Company shall pay Executive a base salary of one hundred twenty
five thousand dollars ($125,000) per annum, payable twice monthly in equal
installments (the "Base Salary").
2. Management Bonus. As additional compensation, Executive shall be
----------------
eligible to participate in the management bonus pool to be established by the
Board of Directors and administered by the Compensation Committee. The bonus
pool will consist of an amount equal to a percentage of the Company's net income
before income taxes, excluding extraordinary gains and any residual income from
securitizations. The bonus percentage will start once the Company has achieved a
minimum net income figure and will increase pursuant to a graduated schedule up
to a ceiling of ten percent (10%). Executive may earn an annual bonus of an
amount up to 60% of his base salary.
3. Stock Options. The Company shall, pursuant to the Company's stock
-------------
option plan, grant to Executive an option to purchase 100,000 shares of the
Company's common stock
1
<PAGE>
at an exercise price of $1.3125 per share. The option shall vest immediately
upon grant as to 10,000 shares, with the balance of the option vesting at the
rate of 7,500 shares per quarter over the three year period following the grant.
Under the Company's stock option plan, no options can be exercised during the
first six (6) months following the date of the grant.
4. Stock Purchase Loan. The Company agrees to loan to Executive up to
-------------------
Fifty thousand dollars ($50,000) to be used by Executive to purchase shares of
the Company's publicly traded common stock on the open market. The loan shall be
evidenced by a Recourse Secured Promissory Note, substantially in the form of
the attached Exhibit A. The loan shall be secured by a pledge of the common
stock so acquired pursuant to the terms of a Pledge Agreement and Security
Interest in the Proceeds of Sale, substantially in the form of the attached
Exhibit B.
5. Additional Benefits. In addition to the Base Salary and the
-------------------
Management Bonus, Executive shall be entitled to all other benefits of
employment provided to other officers and key employees of the Company,
including the Company's medical, dental and other insurance and health and
welfare plans.
6. Reimbursement. Executive shall be reimbursed for all reasonable
-------------
"out-of-pocket" business expenses and disbursements for business travel and
business entertainment incurred in connection with the performance of his duties
under this Agreement (1) so long as such expenses constitute business deductions
(in whole or in part) from taxable income for the Company and are excludable
from taxable income to the Executive under the governing laws and regulations of
the Internal Revenue Code (provided, however, that Executive shall be entitled
to full reimbursement in any case where the Internal Revenue Service may, under
Section 274(n) of the Internal Revenue Code, disallow to the Company 20% of
meals and entertainment expenses); and (2) to the extent such expenses do not
exceed the amounts allocable for such expenses in budgets that are approved from
time to time by the Company. The reimbursement of Executive's business expenses
shall be upon monthly presentation to and approval by the Company of valid
receipts and other appropriate documentation for such expenses.
7. Relocation. The Company shall pay to Executive a one-time non-
----------
accountable relocation allowance in the amount of ten thousand dollars
($10,000); provided, however, Executive shall be obligated to repay the entire
allowance in the event that, within ninety (90) days from the date hereof,
Executive voluntarily terminates, or the Company for cause terminates, his
employment.
8. Withholdings. All compensation paid to Executive shall be subject
------------
to customary withholding tax and other employment taxes as are required with
respect to compensation paid by a corporation to an employee.
D. Duties and Responsibilities.
---------------------------
1. Full-time. Executive shall, during the Term of this Agreement,
---------
devote his full attention and expand his best efforts, energies, and skills, on
a full-time basis, to the business of the Company and any corporation controlled
by the Company. For purposes of this Agreement,
2
<PAGE>
the term the "Company" shall mean the Company and all Subsidiaries. The Company
agrees that the devotion of reasonable amounts of time to business activities
separate from and outside the scope of the business of the Company will not
violate the terms of this Agreement, on the conditions that (i) such activities
are not corporate opportunities of the Company; and (ii) such activities do not
interfere with the performance of Executive's duties hereunder.
2. Duties set by Board. During the Term of this Agreement, Executive
-------------------
shall serve as the Chief Financial Officer of the Company or in such other
capacity as determined by the Board of Directors or an Executive Committee, if
any. In the performance of all of his responsibilities hereunder, Executive
shall be subject to all of the Company's policies, rules, and regulations
applicable to its executives of comparable status and shall report directly to,
and shall be subject to the direction and control of the Board of Directors of
the Company and shall perform such duties as shall be assigned to him by the
Board of Directors or its Executive Committee, if any. In performing such
duties, Executive will be subject to and abide by, and will use his best efforts
to cause other employees of the Company to be subject to and abide by, all
policies and procedures developed by the Board of Directors or its Executive
Committee, if any.
3. Conflicting Activities.
----------------------
a. Executive shall not, during the term of this Agreement, be
engaged in any other business activity without the prior consent of the Board of
Directors of the Company; provided, however, that this restriction shall not be
construed as preventing Executive from investing his personal assets in passive
investments in business entities which are not in competition with the Company
or its affiliates.
b. Executive hereby agrees to promote and develop all business
opportunities that come to his attention relating to current or anticipated
future business of the Company, in a manner consistent with the best interests
of the Company and with his duties under this Agreement. Should Executive
discover a business opportunity that does not relate to the current or
anticipated future business of the Company, he shall first offer such
opportunity to the Company. Should the Board of Directors of the Company not
exercise its right to pursue this business opportunity within a reasonable
period of time, not to exceed sixty (60) days, then Executive may develop the
business opportunity for himself, provided, however, that such development may
in no way conflict or interfere with the duties owed by Executive to the Company
under this Agreement. Further, Executive may develop such business opportunities
only on his own time, and may not use any service, personnel, equipment,
supplies, facility, or trade secrets of the Company in their development. As
used herein, the term "business opportunity" shall not include business
opportunities involving investment in publicly traded stocks, bonds or other
securities, or other investments of a personal nature.
4. Full Authority of Executive. To induce the Company to enter into
---------------------------
this Agreement, Executive represents and warrants to the Company that (a)
Executive is not a party or subject to any employment agreement or arrangement
with any other person, firm, company, corporation or other business entity, (b)
Executive is subject to no restraint, limitation or restriction by virtue of any
agreement or arrangement, or by virtue of any law or rule of law or
3
<PAGE>
otherwise which would impair the Executive's right or ability (i) to enter the
employ of the Company, or (ii) to perform fully his duties and obligations
pursuant to this Agreement, and (c) to the best of Executive's knowledge no
material litigation is pending or threatened against any business or business
entity owned or controlled or formerly owned or controlled by Executive.
E. Restrictive Covenants.
---------------------
1. Executive acknowledges that (i) he has a major responsibility for
portfolio management and strategies, empirical modeling, control of accounting
systems and procedures, and preparation of financial statements for the
Company's business, (ii) his work for the Company has brought him and will
continue to bring him into close contact with confidential information of the
Company and its customers, and (iii) the agreements and covenants contained in
this Section E.1 are essential to protect the business interest of the Company
and that the Company will not enter into this Agreement but for such agreements
and covenants. Accordingly, the Executive covenants and agrees as follows:
a. Except as otherwise provided for in this Agreement, during the
Term of this Agreement and, if this Agreement is terminated under Section F.3 or
F.5 during the Term, for two (2) years following such date of termination (the
"Termination Period"), the Executive shall not, directly or indirectly, compete
with respect to any services or products of the Company which are either offered
or are being developed by the Company as of the date of termination; or, without
limiting the generality of the foregoing, be or become, or agree to be or
become, interested in or associated with, in any capacity (whether as a partner,
shareholder, owner, officer, director, Executive, principal, agent, creditor,
trustee, consultant, co-venturer or otherwise) any individual, corporation,
firm, association, partnership, joint venture or other business entity, which
competes with respect to any services or products of the Company which are
either offered or are being developed by the Company as of the date of
termination; provided, however, that the Executive may own, solely as an
investment, not more than two percent (2%) of any class of securities of any
publicly held corporation in competition with the Company whose securities are
traded on any national securities exchange in the United States of America.
b. During the term of this Agreement and, if applicable, during the
Termination Period, the Executive shall not, directly or indirectly, (i) induce
or attempt to influence any executive of the Company to leave its employ, or
(ii) induce or attempt to influence any person or business entity who was a
customer or supplier of the Company during any portion of said period to
transact business with a competitor of the Company in Company's business.
c. During the Term of this Agreement, the Termination Period, if
applicable, and thereafter, the Executive shall not disclose to anyone any
information about the affairs of the Company, including, without limitation,
trade secrets, trade "know-how", inventions, customer lists, business plans,
operational methods, pricing policies, marketing plans, sales plans, identity of
suppliers or customers, sales, profits or other financial information, which is
confidential to the Company or is not generally known in the relevant trade, nor
shall the Executive make use of any such information for his own benefit.
4
<PAGE>
2. If the Executive breaches, or threatens to commit a breach of
Section E.1 (the Restrictive Covenants), the Company shall have the following
rights and remedies, each of which shall be enforceable, and each of which is in
addition to, and not in lieu of, any other rights and remedies available to the
Company at law or in equity.
a. The Executive shall account for and pay over to the Company
all compensation, profits, and other benefits, after taxes, which inure to
Executive's benefit which are derived or received by the Executive or any person
or business entity controlled by the Executive resulting from any action or
transactions constituting a breach of any of the Restrictive Covenants,
b. Notwithstanding the provisions of subsection a. above, the
Executive acknowledges and agrees that in the event of a violation or threatened
violation of any of the provisions of Section E.1, the Company shall have no
adequate remedy at law and shall therefore be entitled to enforce each such
provision by temporary or permanent injunctive or mandatory relief obtained in
any court of competent jurisdiction without the necessity of proving damages,
posting any bond or other security, and without prejudice to any other rights
and remedies which may be available at law or in equity.
3. If any of the Restrictive Covenants, or any part thereof, is held
to be invalid or unenforceable, the same shall not affect the remainder of the
covenant or covenants, which shall be given full effect, without regard to the
invalid or unenforceable portions. Without limiting the generality of the
foregoing, if any of the Restrictive Covenants, or any part thereof, is held to
be unenforceable because of the duration of such provision or the area covered
thereby, the parties hereto agree that the court making such termination shall
have the power to reduce the duration and/or area of such provision and, in its
reduced form, such provision shall then be enforceable.
4. The parties hereto intend to and hereby confer jurisdiction to
enforce the Restrictive Covenants upon the courts of any jurisdiction within the
geographical scope of such Restrictive Covenants. In the event that the courts
of any one or more of such jurisdictions shall hold such Restrictive Covenants
wholly unenforceable by reason of the breadth of such scope or otherwise, it is
the intention of the parties hereto that such determination not bar or in any
way affect the Company's right to the relief provided above in the courts of any
other jurisdictions within the geographical scope of such Restrictive Covenants,
as to breaches of such covenants in such other respective jurisdictions, the
above covenants as they relate to each jurisdiction being, for this purpose,
severable into diverse and independent covenants.
F. Termination; Bases for Termination.
-----------------------------------
1. Executive's employment hereunder may be terminated at any time by
Mutual agreement of the parties.
2. This Agreement shall automatically terminate on the last day of the
month in which Executive dies or becomes permanently incapacitated. "Permanent
incapacity" as used herein shall mean mental or physical incapacity, or both,
reasonably determined by the Company's
5
<PAGE>
Board of Directors based upon a certification of such incapacity by, in the
discretion of the Company's Board of Directors, either Executive's regularly
attending physician or a duly licensed physician selected by the Company's Board
of Directors, rendering Executive unable to perform substantially all of his
duties hereunder and which appears reasonably certain to continue for at least
six (6) consecutive months without substantial improvement. Executive shall be
deemed conclusively to have become permanently incapacitated on the date the
Company's Board of Directors has determined that Executive is permanently
incapacitated and so notifies Executive.
3. Executive's employment may be terminated by the Company "with
cause," effective upon delivery of written notice to Executive given at any
time (without any necessity for prior notice) if any of the following shall
occur:
a. any action by Executive which would be grounds for termination
because of any willful breach of duty, habitual neglect of duty, or
continued incapacity;
b. any material breach of Executive's obligations in Sections D
and E above; or
c. any material acts or events which inhibit Executive from fully
performing his responsibilities to the Company in good faith, such as (i) a
felony criminal conviction; (ii) any other criminal conviction involving
Executive's lack of honesty or Executive's moral turpitude; (iii) drug or
alcohol abuse; or (iv) acts of dishonesty, gross carelessness or gross
misconduct.
4. Executive's employment may be terminated by the Company "without
cause" (for any reason or no reason at all) at any time by giving Executive 60
days prior written notice of termination, which termination shall be effective
on the 60th day following such notice. If Executive's, employment under this
Agreement is so terminated, the Company shall make a lump sum cash payment to
Executive within 10 days after termination of an amount equal to (i) Executive's
Base Salary for the balance of the term of the Agreement, plus (ii) any
unreimbursed expenses accruing to the date of termination. For purposes of this
provision, Executive's annual Base Salary and the remaining portion of the term
of the Agreement shall he calculated as of the termination date. After the
Company's termination of Executive under this provision, the Company shall not
be obligated to provide the benefits to Executive (except as may be required by
law).
5. Executive may terminate his employment hereunder by giving the
Company 60 days prior written notice, which termination shall be effective on
the 60th day following such notice.
G. Miscellaneous.
1. Transfer and Assignment. This Agreement is personal as to
-----------------------
Executive and shall not be assigned or transferred by Executive without the
prior written consent of the Company.
6
<PAGE>
This Agreement shall be binding upon and inure to the benefit of all of the
parties hereto and their respective permitted heirs, personal representatives,
successors and assigns.
2. Severability. Nothing contained herein shall be construed to
------------
require the commission of any act contrary to law. Should there be any conflict
between any provisions hereof and any present or future statute, law, ordinance,
regulation, or other pronouncement having the force of law, the latter shall
prevail, but the provision of this Agreement affected thereby shall be curtailed
and limited only to the extent necessary to bring it within the requirements of
the law, and the remaining provisions of this Agreement shall remain in full
force and effect.
3. Governing Law. This Agreement is made under and shall be construed
-------------
pursuant to the laws of the State of California.
4. Counterparts. This Agreement may be executed in several
------------
counterparts, including electronically transmitted counterparts, and all
documents so executed shall constitute one agreement, binding on all of the
parties hereto, notwithstanding that all of the parties did not sign the
original or the same counterparts.
5. Entire Agreement. This Agreement constitutes the entire agreement
----------------
and understanding of the parties with respect to the subject matter hereof and
supersedes all prior oral or written agreements, arrangements, and
understandings with respect thereto. No representation, promise, inducement,
statement or intention has been made by any party hereto that is not embodied
herein, and no party shall be bound by or liable for any alleged representation,
promise, inducement, or statement not so set forth herein.
6. Modification. This Agreement may he modified, amended, superseded,
------------
or canceled, and any of the terms, covenants, representations, warranties or
conditions hereof may be waived, only by a written instrument executed by the
party or parties to be bound by any such modification, amendment, supersession,
cancellation, or waiver.
7. Attorneys' Fees and Costs. In the event of any dispute arising out
-------------------------
of the subject matter of this Agreement, the prevailing party shall recover, in
addition to any other damages assessed, its reasonable attorneys' fees and court
costs incurred in litigating or otherwise settling or resolving such dispute
whether or not an action is brought or prosecuted to judgment.
8. Construction. In construing this Agreement, none of the parties
------------
hereto shall have any term or provision construed against such party solely by
reason of such party having drafted the same.
9. Waiver. The waiver by either of the parties, express or implied, of
------
any right under this Agreement or any failure to perform under this Agreement by
the other party, shall not constitute or be deemed as a waiver of any other
right under this Agreement or of any other failure to perform under this
Agreement by the other party, whether of a similar or dissimilar nature.
7
<PAGE>
10. Cumulative Remedies. Each and all of the several rights and
-------------------
remedies provided in this Agreement, or by law or in equity, shall he
cumulative, and no one of them shall he exclusive of any other right or remedy,
and the exercise of any one or such rights or remedies shall not be deemed a
waiver of, or an election to exercise, any other such right or remedy.
11. Headings. The section and other headings contained in this
--------
Agreement are for reference purposes only and shall not in any way affect the
meaning and interpretation of this Agreement.
12. Notices. Any notice under this Agreement must be in writing, may
-------
be telecopied, sent by express 24-hour guaranteed courier, or hand-delivered, or
may be served by depositing the same in the United States mail, addressed to the
party to be notified, postage-prepaid and registered or certified with a return
receipt requested. The addresses of the parties for the receipt of notice shall
be as follows:
If to the Company:
Cypress Financial Services, Inc.
5400 Orange Avenue, Suite 200
Cypress, California 90630
Attn: Mr. Farrest Hayden
8
<PAGE>
If to Executive:
John Hindman
5047 Narragansett Avenue
San Diego, CA 92107
Each notice given by registered or certified mail shall be deemed delivered and
effective on the date of delivery as shown on the return receipt, and each
notice delivered in any other manner shall be deemed to be effective as of the
time of actual delivery thereof. Each party may change its address for notice by
giving notice thereof in the manner provided above.
13. Survival. Any provision of this Agreement which imposes an
--------
obligation after termination or expiration of this Agreement shall survive the
termination or expiration of this Agreement and be binding on Executive and the
Company.
14. Right of Set-Off. Upon termination or expiration of this
----------------
Agreement, the Company shall have the right to set-off against the amounts due
Executive hereunder the amount of any outstanding loan or advance from the
Company to Executive,
15. Effective Date. This Agreement shall become effective as of the
--------------
date set forth on page 1 when signed by Executive and the Company.
IN WITNESS WHEREOF, the parties hereto have caused this Employment
Agreement to be executed as of the date first set forth above.
"COMPANY" "EXECUTIVE"
Cypress Financial Services, Inc.,
a Nevada corporation
By: /s/ RICHARD H. KEYES /s/ JOHN HINDMAN
--------------------------------- ---------------------------------
Name: John Hindman
-----------------
Title:
--------------------------
9
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<PAGE>
<ARTICLE> 5
<S> <C> <C>
<PERIOD-TYPE> 12-MOS 3-MOS
<FISCAL-YEAR-END> SEP-30-1998 SEP-30-1998
<PERIOD-START> OCT-01-1997 JUL-01-1998
<PERIOD-END> SEP-30-1998 SEP-30-1998
<CASH> 2,747,919 0
<SECURITIES> 0 0
<RECEIVABLES> 722,627 0
<ALLOWANCES> (328,841) 0
<INVENTORY> 0 0
<CURRENT-ASSETS> 3,906,738 0
<PP&E> 4,297,755 0
<DEPRECIATION> (1,554,603) 0
<TOTAL-ASSETS> 6,927,296 0
<CURRENT-LIABILITIES> 634,999 0
<BONDS> 1,985,541 0
0 0
0 0
<COMMON> 6,527 0
<OTHER-SE> 3,835,229 0
<TOTAL-LIABILITY-AND-EQUITY> 6,927,296 0
<SALES> 4,784,868 957,096
<TOTAL-REVENUES> 7,280,016 3,378,627
<CGS> 0 0
<TOTAL-COSTS> 0 0
<OTHER-EXPENSES> 5,509,515 1,768,182
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 265,072 44,780
<INCOME-PRETAX> 1,505,429 1,565,665
<INCOME-TAX> 465,602 465,602
<INCOME-CONTINUING> 1,039,827 1,100,063
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 1,039,827 1,100,063
<EPS-PRIMARY> 0.21 0.22
<EPS-DILUTED> 0.19 0.20
</TABLE>
