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U.S. Securities and Exchange Commission
Washington, D.C. 20549
Amendment No. 1
to
Form 10-SB
GENERAL FORM FOR REGISTRATION OF SECURITIES OF
SMALL BUSINESS ISSUERS
Under Section 12(b) or (g) of the Securities Exchange Act of 1934
EMB Corporation
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(Name of Small Business Issuer in its charter)
Hawaii 95-3811580
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(I.R.S. Employer Identification No.)
(State or other jurisdiction of
incorporation or organization)
575 Anton Boulevard
Suite 200
Costa Mesa, California 92626
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(Address of principal (Zip Code)
executive offices)
Issuer's telephone number: (714) 437-0715
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Securities to be registered under Section 12(b) of the Act: Not Applicable
Securities to be registered under Section 12(g) of the Act: Common Stock, no
par value
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PART I
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Item 1. Description of Business.
General. EMB Corporation (the "Company"), a Hawaii corporation, was
incorporated in 1960, and was originally organized to acquire and manage
developed and undeveloped real estate. However, the Company had not conducted
any significant operations for a number of years until it agreed to acquire
substantially all of the assets and assumed certain liabilities of Sterling
Alliance Group, Ltd. ("SAG") in December, 1995, including all of the issued and
outstanding capital stock of Electronic Mortgage Banc, Ltd. ("EMB") which is
presently a wholly owned subsidiary of the Company. The Company recently
changed its corporate name from "Pacific International, Inc." to EMB Corporation
to reflect the change in the purposes and nature of its business.
The Company, through EMB, is primarily engaged in business activities
in the mortgage loan industry. There are two primary segments of the mortgage
business in which the activities of the Company will be concentrated. First, EMB
acquired an exclusive license from Virtual Lending Technology, Inc. ("VLT"), an
affiliate of the Company, for its MortgageShare proprietary software which is
part of the Company's software system designed for the origination and
processing of residential mortgage loans that it calls Mortgage Approval Xpress
("M.A.X."). M.A.X. is licensed by EMB to unaffiliated third parties for use in
their operations. Second, EMB is a residential mortgage lender on a retail basis
directly to consumers and through its licensees, and on a wholesale basis to
other mortgage lenders under the tradename "EMB Funding". Mortgages originated
by the Company may be held primarily for investment, or may be sold to third
parties, or may be securitized and issued as mortgage-backed securities.
A substantial part of the assets of the Company is comprised of
undeveloped land with its associated water rights located in California
($3,930,000 as of February 29, 1996) that was acquired from SAG, which
represents approximately 93.6% of its total assets. Although the Company is not
intended to be a real estate company, it will hold real estate for sale from
time to time, as a result of foreclosures or other events. See Item 3 -
Undeveloped Land, and Note A to Financial Statements.
In connection with the acquisition of assets from SAG, including the
acquisition of EMB and land and water rights, the Company issued 13,500,000
shares of its Common Stock to SAG which presently represents approximately 81.2%
of the issued and outstanding Common Stock of the Company.
Interactive Mortgage Software-M.A.X. The M.A.X. software of the
Company is an interactive video-based computer software system that is designed
to facilitate mortgage loan applications and their prompt approval directly with
mortgage lenders, to prepare and submit applications for title and property
insurance, credit review, title research and escrow ordering and review. The
system is linked to the ProShare(R) software system developed by Intel(R)
Corporation that provides direct teleconferencing and interaction between the
prospective borrower/real estate agent and mortgage lenders. ProShare software
has been modified and adapted to operate with the M.A.X. software applications
of the Company. The interactive mortgage software utilized by the Company
includes MortgageShare which is an integral part of the overall EMB system.
MortgageShare software was licensed on a non-exclusive basis to EMB, a wholly
owned subsidiary of the Company, by Virtual Lending Technology, Inc. ("VLT")
which is owned and operated by Rory P. Hughes and Frank D. Tuttle who have
become directors and officers of the Company. Under the terms of the Company's
license agreement for its M.A.X. software with VLT, the Company will pay $145 to
VLT for each mortgage loan funded through the use of the M.A.X. software system
by the Company and its sublicensees. See Item 7.
M.A.X. provides the opportunity to prospective borrowers to review and
evaluate a broad range of available mortgages of varying interest rates and
terms from various lenders, and to select those specifically suited to their
financial objective for further analysis. M.A.X. then enables the
borrower/agent to complete a loan application of the selected mortgage lender,
permits an immediate review of the borrower's credit history and qualifications,
and facilitates prompt approval of the loan application by EMB's staff
underwriters or through the automated underwriting systems employed by Fannie
Mae and Freddie Mac, the primary secondary-market purchasers of mortgages.
Thus, in approximately one hour, a borrower can receive loan approval, subject
only to verification of financial information and appraisal of the subject
property. M.A.X. also permits the contemporaneous ordering and review of
preliminary title reports and escrow instructions. A remote printer creates hard
copies of documents for signing by the borrower.
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The computer system of EMB is installed with Intel's Pentium(R)
processor utilizing Intel's ProShare video conferencing system which permits the
borrower to see and talk directly to the loan officer for a personal pre-
qualification interview from any remote location. The interview may conclude
with the complete loan application being submitted and approved.
The Company is continuing the development and refinement of its M.A.X.
software system and continuing evaluation of electronic information gathering
and communication equipment. The Company intends to continue to focus on its
technology and marketing relationship with Intel Corporation. This relationship
has accelerated the development of the Company's software and has enhanced its
marketing program through exhibitions, trade shows and seminars with real estate
brokers, credit unions, residential real estate developers, mortgage brokers,
and others. An objective of the Company is to become a leader in advanced
mortgage software and video communications to facilitate mortgage loans. To the
extent that the Company achieves its objective in this technological area, the
Company believes that it will complement and increase its mortgage lending
business.
Licenses of M.A.X. The Company licenses its M.A.X. mortgage software
system to real estate brokerage firms, credit unions, real estate developers,
mortgage brokers and others. EMB presently has approximately 22 licensees who
are served by nine Company loan officers. Each licensee has their own computer
systems with M.A.X. and ProShare software with video teleconferencing
capability.
The direct relationship with real estate brokers, credit unions, land
developers and other organizations enables the Company to establish point-of-
sale opportunities to originate and process mortgage loans. The business of the
licensee is improved because of the substantial savings of time and effort in
securing pre-qualification of their customers for mortgage financing and for
prompt loan approvals, and also provides an opportunity to enhance the quality
and timeliness of its services to its customers. Because the mortgage services
of EMB are available 24 hours a day, seven days a week, the licensees always
have on-line access to current interest rates and fees which can be downloaded
at any time to any computer utilized by a licensee. Similarly, the status of
loans, processing or underwriting can be determined at any time. The borrower
or his agent at any remote site can also utilize M.A.X. to connect with escrow,
title or credit reporting agencies with the Intel video conferencing system.
This one-stop electronic and video connection between and among all of the
important parties to a residential real estate transaction is a highly efficient
and convenient system for the licensee and provides prompt quality service for
the borrower.
Pricing. The Company's M.A.X. software is priced based on a number of
factors, including the application configuration, the modules licensed and the
number of licensed users. The list price for licenses of the M.A.X. software is
presently $1,250 with a $500 fee for additional office sites. The Company also
charges an additional continuing license fee calculated on each loan originated
by the licensee equal to 50% to 70% of the loan origination fee and yield spread
pricing of each loan, depending upon the loan production volume of the
licensee's office. The Company may offer discounts to customers based on the
scope of the customer's commitment and other commercial considerations.
Additionally, the Company may in the future offer new or different
configurations at significantly lower or higher prices.
Customer Service and Support. The Company's customer service and
support organization provides customers with technical support, training,
consulting and implementation services. All of the Company's current customers
have software maintenance agreements with the Company that provide for one or
both of the following services:
Customer Education and Training. The Company offers training courses
designed to meet the needs of end users, integration experts and system
administrators. The Company also trains customer personnel who in turn may
train end users in larger deployments. Training classes are provided at the
customers' offices. Fees for education and training services are in addition to
and separate from the fees for software products and are typically charged
either per student and per class, or on a per diem basis.
Software Maintenance and Support. The Company offers telephone,
electronic mail and facsimile customer support through its central technical
support staff at the Company's headquarters. The Company also provides
customers with product documentation and release notes that describe features in
new products, known problems and workarounds, and application notes. Software
product license fees do not cover maintenance. Each customer is entitled
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to receive certain software upgrades, maintenance releases and technical support
for an annual fee. The annual subscription service fee for the Company's
products covers all updates and maintenance on an ongoing basis for the term of
the subscription.
Sales and Marketing. The Company markets and sells its software and
services primarily through a direct sales force based in Costa Mesa, California.
The Company's sales and marketing organization consisted of eight employees as
of July 31, 1996. The Company also has regional marketing representatives based
in Texas and Connecticut. To support its sales force, the Company conducts a
number of marketing programs, which includes public relations, telemarketing,
seminars, trade shows and customer advisory board meetings.
The Company's strategy is to expand its marketing efforts to reach a
broad customer base in its targeted mortgage industry. The Company's field
sales force conducts multiple presentations and demonstrations of the Company's
software to users at the customer site as a part of the direct sales effort.
The Company believes that in order to increase sales opportunities and
profitability, it may expand into international sales. The Company intends to
continue to expand its direct and indirect sales and marketing activities, which
will require significant management attention and financial resources.
The Company may commit significant time and financial resources to
developing international sales and support channels. There will be a number of
risks inherent in the Company's international business activities, including
unexpected changes in regulatory requirements, tariffs and other trade barriers,
costs and risks of localizing products for foreign countries, longer accounts
receivable payment cycles, potentially adverse tax consequences, currency
fluctuations, repatriation of earnings and the burdens of complying with a wide
variety of foreign laws. In addition, revenues of the Company earned in various
countries where the Company does business may be subject to taxation by more
than one jurisdiction, thereby adversely affecting the Company's earnings.
There can be no assurance that such factors will not have an adverse effect on
the revenues from the Company's future international sales and, consequently,
the Company's business, financial condition or results of operations.
The Company licenses its M.A.X. software system to customers pursuant
to license agreements which are generally standard in form, although each
license is individually negotiated and may contain variations. The standard form
agreements allow the customer to use the Company's software solely on the
customer's computer equipment for the customer's internal purposes, and the
customer is generally prohibited from sublicensing or transferring the licensed
materials. The agreements generally provide that the Company's warranty of its
software is limited to correction or replacement of the affected software, and
in most cases the Company's warranty liability may not exceed the licensing fees
from the customer. The Company's form agreement also includes a confidentiality
clause protecting proprietary information relating to the Company's software
system.
The Company generally ships its software products within a short
period of time after execution of a license. As a result, the Company typically
does not have a material backlog of unfilled license orders at any given time,
and the Company does not consider backlog to be a meaningful indicator of future
performance.
Strategic Relationships. The Company believes that, in order to
provide comprehensive component and supplier management solutions, it will be
necessary to develop, maintain and enhance close associations with vendors of
hardware, software, database, and professional services. The Company has
established marketing and strategic relationships with Intel Corporation. The
Company's relationship with Intel Corporation has enabled it to integrate its
software with standard hardware platforms. The Company meets regularly with
Intel Corporation to enhance integration between their complementary products
and the Company's software. The Company believes this relationship can enhance
the Company's ability to deliver mortgage software that support customers'
existing management architecture and that is tailored to the specific
requirements of the mortgage industry. Although the Company seeks to maintain a
close relationship with Intel Corporation, if the Company is unable to develop
and retain effective, long-term relationships with other third parties, the
Company's competitive position could be adversely affected.
Research and Development. The Company has committed, and expects to
continue to commit in the future, substantial resources for its software product
development. Research and development efforts are directed at
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increasing software functionality, improving its performance and expanding the
capability of the software to interoperate with third party software. The
Company intends to release new software and enhancements to existing software.
Although the Company expects that certain of its new software will be developed
internally, the Company may, based on timing and cost considerations, acquire
technology and products from third parties or retain consultants.
The Company supplements its software development efforts by reviewing
customer feedback on existing software and working with customers and potential
customers to anticipate future functionality requirements. To assist this
effort, the Company intends to organize a customer advisory board made up of
representatives from its key customers which will meet periodically to provide
feedback regarding the Company's current and future product plans.
The Company's future success will depend in part upon its ability to
enhance its current software and to develop and introduce new software on a
timely basis that keep pace with technological developments, emerging industry
standards and the increasingly sophisticated needs of its customers. There can
be no assurance that the Company will be successful in developing or marketing
software enhancements or new software that respond to technological change or
evolving industry standards, that the Company will not experience difficulties
that could delay or prevent the successful development, introduction and
marketing of these products or that its new software or software enhancements
will adequately meet the requirements of the marketplace and achieve market
acceptance. If the Company is unable, for technological or other reasons, to
develop and introduce new software or enhancements, the Company's business,
financial condition or results of operations could be materially adversely
affected.
In addition, applications software products as complex as those
offered by the Company frequently contain undetected errors or failures when
first introduced or when new versions are released. The Company has in the past
discovered software errors in certain of its products and enhancements, both
before and after initial shipments, and has experienced delays or lost revenues
during the period required to correct these errors. There can be no assurance
that, despite testing by the Company and by current and potential customers,
errors will not occur in software or releases after commencement of commercial
shipments, resulting in loss of or delay in market acceptance, which could have
a material adverse effect upon the Company's business, financial condition or
results of operations.
Competition. The market for the Company's software is competitive,
subject to rapid change and significantly affected by new product introductions
and other market activities of industry participants. The Company's software
products are targeted at the emerging market for open, mortgage software, and
the Company's competitors offer a variety of products and services to address
this market. Further, the Company currently faces indirect competition from
third-party professional service organizations and internal management
information systems and computer design departments of potential customers that
develop custom internal software.
In the future, because there are relatively low barriers to entry in
the software industry, the Company could experience additional competition from
other established or emerging companies as the mortgage software market
continues to develop and expand. To the extent that the Company expands into
Internet-based or other forms of delivery of mortgage services, the Company may
encounter additional competition from its existing competitors and other
established or emerging companies. Many of these potential competitors may have
well-established relationships with the Company's current and potential
customers, may have extensive knowledge of the mortgage industry, better name
recognition and significantly greater financial, technical, sales, marketing and
other resources and are capable of offering single vendor solutions which span
multiple industries. It is also possible that new competitors or alliances
among competitors may emerge and rapidly acquire significant market share. The
Company also expects that competition will increase as a result of software
industry consolidations. The Company's competitors may be able to respond more
quickly to new or emerging technologies and changes in customer requirements, or
to devote greater resources to the development, promotion and sale of their
products.
Increased competition may result in price reductions, reduced gross
margins and loss of market share, any of which could materially adversely affect
the Company's business, financial condition or results of operations. There can
be no assurance that the Company will be able to compete successfully against
current or future competitors or that competitive pressure will not adversely
affect its business, financial condition or results of operations.
The Company believes that the principal competitive factors affecting
its market include features such as openness, scalability, ability to integrate
with third party products, functionality, adaptability, ease of use, product
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reputation, quality, performance, price, customer service and support,
effectiveness of sales and marketing efforts and company reputation. Although
the Company believes that it currently competes favorably with respect to such
factors, there can be no assurance that the Company can maintain its competitive
position against current and potential competitors, especially those with
greater financial, marketing, service, support, technical and other resources
than the Company.
Proprietary Rights and Licensing. The Company's success is heavily
dependent upon proprietary technology. The Company will rely primarily on a
combination of copyright and trademark laws, trade secrets, confidentiality
procedures and contractual provisions with its employees, consultants and
business partners and in its license agreements to protect its proprietary
rights. The Company seeks to protect its software, documentation and other
written materials under trade secret and copyright laws, which afford only
limited protection. Despite the Company's efforts to protect its proprietary
rights, unauthorized parties may attempt to copy aspects of the Company's
mortgage software or to obtain and use information that the Company regards as
proprietary. While the Company is not aware that any of its software infringes
upon the proprietary rights of third parties, there can be no assurance that
third parties will not claim infringement by the Company with resect to current
or future products.
In addition, the Company relies on certain software that it licenses
from Virtual Lending Technology, Inc. and other third parties, including
software that is used in the Company's products to perform certain functions.
There can be no assurance that such firms will remain in business, that they
will continue to support their products or that their products will otherwise
continue to be available to the Company on commercially reasonable terms. The
loss or inability to maintain any of these software or data licenses could
result in delays or cancellations in product shipments until equivalent software
can be identified and licensed or developed and integrated with the Company's
products. Any such delay or cancellation could materially adversely affect the
Company's business, financial condition or results of operations.
The Company's products are generally provided to customers in object
code (machine-readable) format only. From time to time, in limited
circumstances, the Company has licensed source code (human-readable) format
subject to customary protections such as use restrictions and confidentiality
agreements. In addition, certain customers may enter into source code escrow
arrangements with the Company, pursuant to which the Company's source code will
be released to the customer upon the occurrence of certain events, such as the
commencement of bankruptcy or insolvency proceedings by or against the Company,
or certain material breaches of the agreement. In the event of any release of
the source code from escrow, the customer's license is generally limited to use
of the source code to maintain, support and configure the Company's software
products.
Mortgage Lender
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General. EMB has been a retail mortgage broker for approximately two
and half years, and has recently commenced its business as a wholesale mortgage
banker. EMB will originate its own loans and those of its licensees on a retail
basis and provides wholesale lending services to approved mortgage brokers. It
has entered into a correspondent lending relationship with ICI Funding
Corporation, a division of Imperial Credit Industries, Inc. ("ICI"), a national
mortgage lender. Initially, EMB will underwrite and fund through a wholesale
line of credit from Imperial Warehouse Lending Group Inc., and then resell such
loans to ICI. In the future, the Company intends to develop associations with
other mortgage lenders to participate in the secondary marketing of mortgages.
The impact of the absence of any lines of credit upon the mortgage brokerage
business of the Company would be to terminate this portion of its business or
otherwise severely and adversely limit the amount of its mortgage brokerage
business. The Company does not presently have any reason to believe that
correspondent lending relationships will not be available for its mortgage
lending business. However, there can be no assurance that mortgage funding will
be available in sufficient amounts to support the mortgage funding operations of
the Company or will be available on commercially reasonable terms and
conditions.
EMB expects to negotiate servicing fees for servicing its mortgage
loans, or to obtain service release fees upon the resale of mortgages. The
Company may also package and resell mortgage loans as asset-backed securities.
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Loan Standards. Mortgage loans made by EMB will be loans with fixed
or adjustable rates of interest secured by first mortgages, deeds of trust or
security deeds on residential properties with original principal balances which
did not exceed 95% of the value of the mortgaged properties, unless such loans
are FHA-insured or VA-guaranteed. Generally, each mortgage loan having a loan-
to-value ratio, as of the cut-off-date, in excess of 80%, or which is secured by
a second or vacation home, will be covered by a Mortgage Insurance Policy, FHA
Insurance Policy or VA Guaranty insuring against default all or a specified
portion of the principal amount thereof.
The mortgage loans will be "one to four-family" mortgage loans, which
means permanent loans (as opposed to construction or land development loans)
secured by mortgages on non-farm properties, including attached or detached
single-family or second/vacation homes, two to four-family primary residences
and condominiums or other attached dwelling units, including individual
condominiums, row houses, townhouses and other separate dwelling units even when
located in buildings containing five or more such units. Each mortgage loan
must be secured by an owner occupied primary residence or second/vacation home,
or by a nonowner occupied residence. The mortgaged property may not be a mobile
home.
No mortgage loan is expected to have an original principal balance
less than $30,000. While most loans may be less than $700,000, EMB may fund
loans of up to $2,000,000 through its own wholesale credit lines or by brokering
such loans to unaffiliated third-party mortgage lenders. Fixed rate mortgage
loans must be repayable in equal monthly installments which reduce the principal
balance of the loans to zero at the end of the term.
Credit, Appraisal and Underwriting Standards. Each mortgage loan must
(i) be an FHA-insured or VA-guaranteed loan meeting the credit and underwriting
requirements of such agency, or (ii) meet the credit, appraisal and underwriting
standards established by the Company. For certain mortgage loans which may be
subject to a mortgage pool insurance policy, the Company may delegate to the
issuer of the mortgage pool insurance policy the responsibility of underwriting
such mortgage loans, in accordance with the Company's credit appraisal and
underwriting standards. In addition, the Company may delegate to one or more
lenders the responsibility of underwriting mortgage loans offered to the Company
by such lenders, in accordance with the Company's credit, appraisal and
underwriting standards. In connection with any such delegation of underwriting
responsibility to a lender, the Company will require that the lender (i) make
certain representations and warranties to the Company which shall be the basis
for certain of the Company's representations and warranties to the trustee; (ii)
agree to repurchase any mortgage loan which is discovered at any time not to be
in conformance with such representations and warranties, if such defect cannot
be cured within 60 days of discovery of such breach; and (iii) agree to provide
the Company within 10 days of request the credit file for any mortgage loan the
Company desires to audit for compliance with the terms of the Company's loan
purchase program. It is anticipated that the Company will select for audit
certain of the credit files after purchase of the related mortgage loans.
The Company's underwriting standards are intended to evaluate the
prospective mortgagor's credit standing and repayment ability, and the value and
adequacy of the proposed mortgaged property as collateral. In the loan
application process, prospective mortgagors will be required to provide
information regarding such factors as their assets, liabilities, income, credit
history, employment history and other related items. Each prospective
mortgagor will also provide an authorization to apply for a credit report which
summarizes the mortgagor's credit history. With respect to establishing the
prospective mortgagor's ability to make timely payments, the Company will
require evidence regarding the mortgagor's employment and income, and of the
amount of deposits made to financial institutions where the mortgagor maintains
demand or savings accounts. In some instances, mortgage loans may be sold to
the Company under a Limited Documentation Origination Program. For a mortgage
loan to qualify for the Limited Documentation Origination Program, the
prospective mortgagor must have a good credit history and be financially capable
of making a larger cash down payment in a purchase, or be willing to finance
less of the appraised value, in a refinancing, than would otherwise be required
by the Company. Currently, only mortgage loans with certain loan-to-value
ratios will qualify for the Limited Documentation Origination Program. If the
mortgage loan qualifies, the Company waives some of its documentation
requirements and eliminates verification of income and employment for the
prospective mortgagor. The Limited Documentation Origination Program has been
implemented relatively recently and according its impact, if any, on the rates
of delinquencies and losses experienced on the mortgage loans so originated
cannot be determined at this time.
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The Company's underwriting standards generally follow guidelines
acceptable to FNMA and FHLMC. The Company's underwriting policies may be varied
in appropriate cases. In determining the adequacy of the property as
collateral, an independent appraisal is made of each property considered for
financing. The appraiser is required to inspect the property and verify that it
is in good condition and that construction, if new, has been completed. The
appraisal is based on the appraiser's judgment of values, giving appropriate
weight to both the market value of comparable homes and the cost of replacing
the property.
Certain states where the mortgaged properties may be located are
"anti-deficiency" states where, in general, lenders providing credit on one to
four-family properties must look solely to the property for repayment in the
event of foreclosure. The Company's underwriting standards in all states
(including anti-deficiency states) require that the underwriting officers be
satisfied that the value of the property being financed, as indicated by the
independent appraisal, currently supports and is anticipated to support in the
future the outstanding loan balance, and provides sufficient value to mitigate
the effects of adverse shifts in real estate values.
The Company may form mortgage pools in the future with loans having
remaining terms substantially less than the original terms.
Lender Warranties and Indemnification of the Company. With respect to
the mortgage loans sold by it, each lender will make representations and
warranties to the Company which the Company deems sufficient to permit it to
make its representations and warranties in respect of such mortgage loans to the
trustee and the certificateholders under a Pooling Agreement. Additional
representations and warranties will be made by each lender which has been
delegated the responsibility to underwrite mortgage loans on behalf of the
Company. See "-Credit, Appraisal and Underwriting Standards" above. Each
lender will also make certain other representations and warranties regarding
mortgage loans sold by it.
Each lender will agree to indemnify the Company against any loss or
liability incurred by the Company on account of any breach of any representation
or warranty made by the lender, any failure to disclose any matter that makes
any such representation and warranty misleading, or any inaccuracy in
information furnished by the lender to the Company.
Upon the breach of any misrepresentation or warranty made by a lender,
the Company may require the lender to repurchase the related mortgage loan.
Title Insurance Policies. The servicing agreement regarding the
mortgage loans originated by the Company will usually require that, at the time
of the origination of the mortgage loans and continuously thereafter, a title
insurance policy be in effect on each of the mortgaged properties and that such
title insurance policy contain no coverage exceptions, except those permitted
pursuant to the guidelines heretofore established by FNMA.
Ownership of Real Estate
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Although approximately 93.6% of the assets of the Company is comprised
of undeveloped real estate with its associated water rights located in the State
of California, the Company does not intend to be a real estate company. All
real property owned by the Company is held for resale and not for development
purposes. The financial statements of the Company presently reflect land held
for resale as an asset at $3,930,000 as of February 29, 1996. See Note A to
Financial Statements. See Item 3 - Undeveloped Land.
The Company may also hold real estate for sale from time to time as a
result of its foreclosure on mortgage loans that may become in default. See
Item 3 - Undeveloped Land.
Trade Names and Service Marks
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The Company intends to register its service marks "EMB", "M.A.X.", and
"EMB Funding" on the principal register of the United States Patent and
Trademark Office. The Company also has taken steps to begin to register its
service marks in such states as it deems necessary and desirable. These names
and marks are to be licensed to licensees under license agreement provisions
strictly regulating their use.
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The Company will devote substantial time, effort and expense toward
developing name recognition and goodwill for its tradenames for its operations.
The Company intends to maintain the integrity of its trade names, service marks
and other proprietary names against unauthorized use and to protect the
licensees' use against claims of infringement and unfair competition where
circumstances warrant. Failure to defend and protect such trade name and other
proprietary names and marks could adversely affect the Company's sales of
licenses under such trade name and other proprietary names and marks. The
Company knows of no current materially infringing uses.
The Company will devote substantial efforts to the development of an
Operations Manual which provides operation, management and marketing guidelines
for EMB systems. The Operations Manual is the sole property of the Company but
will be available for use by a licensee of the Company so long as the licensee
operates pursuant to the terms of the license agreement.
Employees
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As of July 31, 1996, the Company employed 15 persons. Of the total,
eight were engaged in sales and marketing, two were in product development and
technical support and five were in finance and administration. None of the
Company's employees is represented by a labor union with respect to his or her
employment by the Company. The Company has experienced no organized work
stoppages and believes its relationship with its employees is good. The Company
believes that its future success will also depend to a significant extent upon
its ability to attract, train and retain highly skilled technical, management,
sales, marketing and consulting personnel. Competition for such personnel in the
computer software and mortgage industry in the United States is intense. The
Company has from time to time experienced difficulty in locating candidates with
appropriate qualifications. There can be no assurance that the Company will be
successful in attracting or retaining such personnel, and the failure to attract
or retain such personnel could have a material adverse effect on the Company's
business or results of operations.
Banking Arrangements
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The Company is presently negotiating with several national banks to
obtain a line of credit for the purpose of assuring the availability of
financing in the event the Company determines bank financing to be necessary or
desirable in the future.
Item 2. Management's Discussion and Analysis
The following discussion is intended to assist in an understanding of
the Company's financial position as of July 31, 1996, September 30, 1995 and
September 30, 1994 and the results of its operations for the periods then ended.
General
- -------
Pacific International, Inc., a Hawaii corporation, was incorporated in
1960, and was originally organized to acquire and manage developed and
undeveloped real estate. However, the Company had not conducted significant
operations for a number of years until it agreed to acquire substantially all of
the assets and assume certain liabilities of Sterling Alliance Group, Ltd. in
December, 1995. At that time, the Company changed its name to EMB Corporation
to reflect the change in the purpose and nature of its business. For accounting
purposes, this was treated as a recapitalization of Sterling Alliance Group,
Ltd., with the historical financial information prior to merger being that of
Sterling Alliance Group, Ltd.
The Company is in the development stage of developing services for the
mortgage loan industry. There are two primary segments of the mortgage business
in which the activities of the Company will be concentrated, the processing of
residential mortgage loans using a service which the Company calls Mortgage
Approval Express, and earnings from mortgages to be originated by the Company.
Mortgages originated by the Company may be held for investment, sold to third
parties, or securitized and issued as mortgage backed securities.
9
<PAGE>
Historically, the Company has used capital contributions and loans
from various individuals to fund its operations. To this point, the Company has
not had adequate funds to actually originate mortgages on its own behalf.
Management believes its unique approach to originating and processing
residential mortgage loans through the use of its MortgageShare software
distinguishes it from other companies in the industry.
A substantial part of the assets of the Company is comprised of
undeveloped land located in California which was valued at $3,930,000 as of July
31, 1996. Although the Company is not intended to be a real estate company, it
will hold real estate for sale from time to time. The Company has no assurance
that it can sell the land held for resale. Furthermore, if the land is sold,
there are no assurances that the land can be sold for an amount sufficient to
recoup the Company's investment in this land.
There are no assurances that the Company will be able to obtain a
profitable level of operations.
Results of Operations
- ---------------------
The following table sets forth certain operating information on the
Company:
<TABLE>
<CAPTION>
Ten months ended Year ended Year ended
July 31, 1996 September 30, 1995 September 30, 1994
-------------- ------------------ ------------------
<S> <C> <C> <C>
Revenues from processing
mortgages ......................... $ 211,267 $ 97,400 $ 74,107
General and administrative expense... $ 1,064,664 $ 379,568 $ 147,875
Depreciation ........................ $ 24,120 $ 2,662 $ 1,419
Net Loss ............................ $ (914,215) $ (277,805) $ (85,538)
</TABLE>
Ten Months ended July 31, 1996
- ------------------------------
Revenues. Revenues totaled $211,267 during this period reflecting the
development of new markets for its loan processing services. The Company
generated no revenues from mortgages originated by the Company as the Company
did not have sufficient working capital to generate its own mortgages. No real
estate held for resale was sold during this period.
General and administrative expenses. General administrative expenses
increased during this period to $1,064,664 due to the development stage
activities involved with developing the software and markets for its services.
Depreciation. Depreciation expense increased substantially due to an
increase in equipment acquired during the period. This equipment consists
primarily of computer and video equipment to be used in its mortgage originated
and loan processing service.
Net loss from Operations. The net loss from operation increased to
$914,215. This loss can be attributable to the development stage activities
involved with developing the software and markets for its services.
Year ended September 30, 1995 compared with the year ended September 30, 1994
- -----------------------------------------------------------------------------
Revenues. Revenues increased 31% to $97,400 in 1995 from $74,107 in
1994. All revenues were generated from the loan process segment. No income was
generated from mortgages originated by the Company. No real estate was sold
during either year.
10
<PAGE>
General and Administrative Expenses. General and administrative
expenses increased 113% to $379,568 in 1995 from $147,875 in 1994. This increase
can be attributable to increased activity in the loan processing segment of the
business.
Depreciation. Depreciation increased 88% to $2,662 in 1995 from
$1,419 in 1994 due to the acquisition of additional computer equipment.
Net Loss from Operations. The net loss from operations increased 149%
to $277,805 in 1995 as compared with $85,738 in 1994 due primarily to the
increase in general and administrative expenses in 1995 over 1994.
Capital Expenditures, Capital Resources and Liquidity
- -----------------------------------------------------
The following summary table presents comparative cash flows of the
Company for the ten months ended July 31, 1996, and the years ended September
30, 1995 and 1994.
<TABLE>
<CAPTION>
Ten months ended Year ended Year ended
July 31, 1996 September 30, 1995 September 30, 1994
--------------- ------------------ ------------------
<S> <C> <C> <C>
Net cash used
in operating $ (766,485) $ (274,522) $ (79,634)
activities
Net cash used in $ (148,206) $ (49,812) $ (30,132)
investing activities
Net cash provided by $ 905,499 $ 355,776 $ 104,395
financing activities
</TABLE>
In addition to the above, during the ten months ended July 31, 1996
the Company acquired land and water rights valued at $3,760,000 in exchange for
capital stock. During the year ended September 30, 1995, the Company paid
$10,000 and exchanged stock and the assumption of a $65,000 liability for land
valued at $170,000.
At July 31, 1996 the Company had cash balances totaling $16,879 and a
working capital deficit of $(863,718). The working capital deficit at September
30, 1995 was $(34,683). The increase in the working capital deficit was due to
operating deficits during the ten months ended July 31, 1996 which were funded
by short term borrowing.
Capital expenditures. The Company has incurred capital expenditures
for equipment and office furniture used in its loan process service. Capital
expenditures during the ten months ended July 31, 1996 totaled $180,202.
Capital expenditures during the fiscal years ended September 30, 1995 and 1994
totaled $6,720 and $4,335 respectively.
The Company intends to finance any future capital expenditures by
utilizing capital lease arrangements with various leasing companies.
Capital resources. The Company's capital resources have been provided
by capital contributions and loans. The Company intends to raise $1,000,000
through a limited offering of its common stock and warrants which will be used
to purchase additional computers and related equipment, to further develop its
software, to expand its marketing activities, and to provide additional working
capital to fund future operations.
Liquidity. The ability of the Company to satisfy its obligations will
depend in part upon its ability to successfully complete a limited offering of
additional shares of its common stock and in part upon its ability to reach a
profitable level of operations.
11
<PAGE>
Plan of Operations
- ------------------
Because of the costs of development of its mortgage software system,
the expansion of its marketing activities, and the start-up costs of its
mortgage lending business, the Company expects that it will incur a loss during
its fiscal year ending September 30, 1996.
The Company believes that additional equity capital will be required
to accomplish its plan of operations during the next 12 months. As a result,
the Company intends to offer and sell its Common Stock and other securities in
exempt offerings under federal and state securities laws to further capitalize
the Company, and may also borrow from banks and other financial institutions to
the extent necessary to provide liquidity for its operations. In the event that
the Company sells its undeveloped real properties, it is expected that the
proceeds of the sales would decrease the amount of capitalization that the
Company may seek through securities offerings, and possible borrowings, although
there is no assurance that the properties held for sale will be successfully
sold in the near future.
The Company has reduced its research and development activities and
the associated costs consistent with its plan of operations because its M.A.X.
mortgage software system is currently in commercial operation. However, the
Company expects to continue the development of its software system to
incorporate technical changes and improvements. In addition, as the Company
expands its marketing activities and adds
12
<PAGE>
additional licensees and customers for its M.A.X. software system, the Company
will incur additional operating and equipments costs. When the Company enters
into a licensing agreement with a licensee, the Company must acquire or make
arrangements to lease one or more computers regarding such licensee which has
created liquidity problems for the Company and has had the effect of inhibiting
its marketing activities and has limited its growth. The Company believes that
the net proceeds of its securities offerings during fiscal 1996 will be
sufficient to meet its liquidity requirements for at least 12 months.
The Company's plan of operations provides for a significant expansion
of its mortgage lending business. The scope of this expansion is dependent upon
the amount of additional capitalization to be realized by the Company in its
securities offerings and the amount of credit lines that become available to
finance such lending activities. To the extent that the mortgage lending
operations of the Company substantially increase, it will be necessary to make
significant changes in the number of additional employees of the Company.
The Company is not a real estate company, although a substantial
portion of its assets is comprised of undeveloped real estate with water rights
held for resale. In the event that the Company sells such properties for less
than their appraised value, it will reduce the future liquidity of the Company
and result in a financial loss for financial reporting purposes. The sale of
such properties may constitute a significant element of future income or loss
that would not arise from the Company's continuing operations in the mortgage
software and mortgage lending business.
Uncertainties
- -------------
Development Stage Company. The Company is in the development stage.
There is no assurance that the Company's activities will be profitable. The
likelihood of the success of the Company must also be considered in light of the
problems, expenses, difficulties, complications, delays and all of the inherent
risks frequently encountered in the formation and operation of a relatively new
business.
Costs of Conducting Business. The Company will be required to incur
substantial costs in the acquisition of computer and teleconferencing equipment,
computer software and hardware, terminals and related equipment. A substantial
portion of those costs must be paid whether or not any of its system proves to
be commercially successful on a broad scale. The ability to generate a profit
depends, among other factors, on the amount of equipment acquisition costs
incurred, the amount of revenues from the licensing of its software system and
mortgage services rendered by the Company, and its operating costs.
Software Competition. The mortgage software business is expected to
become highly competitive. Companies in the industry have substantially greater
financial, marketing, and technical resources than the Company. Further, the
entry into this industry does not necessarily require a large capital
expenditure and, accordingly, it can be expected that additional competitors may
enter the industry in the future. It may be particularly difficult for a
relatively small independent company to compete with larger companies which have
significantly greater resources. There can be no assurance that the Company will
be able to successfully compete if such an environment develops.
Technological Change and Lack of Patents. The Company expects that
many new technologies and products will be introduced in the computer software
and services markets over the next several years. The Company's success will
depend, among other things, on its ability to maintain a competitive position
technologically. The Company has not developed its own proprietary software and
hardware and is depending primarily upon others for development of such software
and hardware. There can be no assurance that the Company will have access to
subsequently developed software by other persons. Technological advances by a
competitor may result in the Company's present or future products becoming
noncompetitive or obsolete. The Company cannot be assured that competitors will
not develop functionally similar or superior systems, which event could have an
adverse effect on the Company's business.
Software Contracts. The Company has only entered into a limited number
of contracts for its mortgage software. There can be no assurance that the
Company will be able to obtain sufficient and suitable additional contracts for
its business plan.
Fluctuations in Operating Results. The Company's revenues and results
of operations have varied on a quarterly and an annual basis in the past and are
expected to vary significantly in the future. The Company's revenues and results
of operations are difficult to forecast and could be materially adversely
affected by many factors, some of which are outside the control of the Company,
including, among others, the expected relatively long sales and implementation
cycles for the Company's software products; the size and timing of individual
license transactions; seasonality of revenues; changes in the Company's
operating expenses; changes in the mix of products and services sold; timing of
introduction or enhancement of products by the Company or its competitors;
market acceptance of new products; technological changes in software technology;
personnel changes and difficulties in attracting and retaining qualified sales,
marketing, technical and consulting personnel; changes in customers' budgeting
cycles; foreign currency exchange rates; quality control of products sold; and
economic conditions generally and in specific industry segments.
Licenses of the Company's software products have historically
accounted for the substantial majority of the Company's revenues, and the
Company anticipates that this trend will continue for the foreseeable future.
The Company generally ships its products within a short period of time after
execution of a license. As a result, the Company typically does not have a
material backlog of unfilled license orders, and revenues in any quarter are
substantially dependent on license revenues recognized in that quarter. The
Company's expense levels are based, in part, on its expectations as to future
revenues and to a large extent are fixed in the short term. Accordingly, the
Company may be unable to adjust spending in a timely manner to compensate for
any unexpected shortfall in revenues, and any significant shortfall of demand in
relation to the Company's expectations or any material delay of Customer orders
would have an almost immediate material adverse effect on the Company's
business, financial condition or results of operations.
Lengthy Sales and Implementation Cycles of Software. The license of
the Company's software products generally requires the Company to engage in a
sales cycle lasting three to six months or longer, during which the Company
typically provides a significant level of education to prospective customers
regarding the use and benefits of the Company's products. In addition, the
implementation of the Company's standard products typically involves a
significant commitment of resources by its customers over an extended period of
time and is commonly associated with reengineering of business processes. For
these reasons, sales and customer implementation cycles are subject to a number
of significant delays over which the Company may have little or no control.
Accordingly, any delay in the sale or customer implementation of a larger
license or a number of smaller licenses would have a material adverse effect on
the Company's business, financial condition or results of operations and cause
the Company's operating results to vary significantly from quarter to quarter.
Dependence on Recently Introduced Software Products. The Company
currently derives substantially all of its revenues from the licensing of its
M.A.X. software and fees from related services. These products and services are
expected to continue to account for a substantial portion of the Company's
revenues for the foreseeable future. The Company first made its M.A.X. software
generally commercially available in the second quarter of 1995, and has issued
regular updates since then. As a result, the Company has only a limited number
of fully implemented, operational product installations at customer sites. There
can be no assurance that such products will not require modifications to satisfy
performance requirements of existing or potential customers or to fix previously
undetected errors. While the Company believes that to date its customers have
not experienced significant problems with such products, if the Company's
customers were to do so in the future or if they were dissatisfied with product
functionality or performance, the Company's business, financial condition or
results of operations could be materially adversely affected.
There can be no assurance that the Company's products will achieve
broader market acceptance or that the Company will be successful in marketing
its products or enhancements thereto. In the event that the Company's current or
future competitors release new products that have more advanced features, offer
better performance or are more price competitive than the Company's products,
demand for the Company's products would decline. A decline in demand for, or
market acceptance of, the M.A.X. software as a result of competition,
technological change, evolution of the Internet or other factors would have a
material adverse effect on the Company's business, financial condition or
results of operations.
Management of Expanding OperatIons. The Company's business has grown
rapidly in recent periods. In addition, the Company has experienced significant
growth in the number of its employees, the scope of its operating and financial
systems and the geographic area of its operations, which has placed a
significant Strain on the Company's management. The Company's future results of
operations will depend in part on the ability of its officers and other key
employees to continue to implement and expand its operational, customer support
and financial control systems and to expand, train and manage its employee base.
In order to successfully manage its future growth, if any, the Company will be
required to hire additional general and administrative personnel and to augment
its existing financial and management systems or to implement new such Systems.
There can be no assurance that the existing and new management will be able to
augment or to implement such systems efficiently or on a timely basis, and the
failure to do so could have a material adverse effect on the Company's business,
financial condition or results of operations. There can be no assurance that the
Company will be able to manage any future expansion successfully, and any
inability to do so would have a material adverse effect on the Company's
business, financial condition or results of operations. In addition, the Company
believes that its future success will also depend to a significant extent upon
its ability to attract, train and retain highly skilled technical, management,
sales, marketing and consulting personnel. Competition for such personnel is
intense, and the Company expects that such competition will continue for the
foreseeable future. The Company has from time to time experienced difficulty in
locating candidates with appropriate qualifications. There can be no assurance
that the Company will be successful in attracting or retaining such personnel,
and the failure to attract or retain such personnel could have a material
adverse effect on the Company's business, financial condition or results of
operations.
Software Customer Concentration. Historically, a relatively small
number of customers has accounted for a significant percentage of the Company's
total revenues, and the Company expects that it will continue to experienced
significant customer concentration for the foreseeable future. There can be no
assurance that such customers or any other customers will in the future continue
to license or purchase products or services from the Company at levels that
equal or exceed those of prior periods, or at all.
Reliance on Computer Industry; Need to Penetrate New Vertical
Markets. Currently, a substantial majority of the Company's revenues results
from licenses of the M.A.X. mortgage software to end user customers in the real
estate industry. The Company's future results of operations may depend, in part,
on its ability to penetrate new vertical markets, such as the financial
institution market. The Company may devote substantial resources to penetrate
these markets, and there can be no assurance that the revenues generated from
new markets, if any, will exceed the cost of such investment. To the extent that
the Company is unable to penetrate new markets, its future financial condition
will be dependent upon its ability to further penetrate the mortgage industry
and on the continued growth of that industry. If the Company expands its
software product lines to market segments other than the mortgage industry, it
could be required to create entirely software systems or to modify its existing
software products, and there can be no assurance that it will be able to create
such systems or modify such software products effectively or that such software
products, if successfully created or modified, will achieve market acceptance.
If the Company is unable to adapt its products or its sales and marketing
efforts to meet the needs of new industries, the Company's business, financial
condition or results of operations could be materially adversely affected.
International Software Sales. In fiscal 1995 and for the ten months
ended July 3l, 1996, the Company had no international sales. There can be no
assurance that the Company will achieve any significant degree of penetration in
any international market.
Risk of Software Product Defects. Software products as complex as
those offered by the Company frequently contain undetected errors or failures
when first introduced or when new versions are released. The Company has in the
past discovered software bugs and errors in certain of its products and
enhancements, both before and after initial shipment. There can be no assurance
that, despite testing by the Company and by current and potential customers,
errors will not occur in products, or releases after commencement of commercial
shipments, resulting in loss of or delay in market acceptance, which could have
a material adverse effect upon the Company's business, financial condition or
results of operations.
Risks Associated with Emerging Internet Market. A portion of the
Company's strategy is to utilize the Internet and the World Wide Web to provide
access to its mortgage services, as well as to additional value-added content.
The Company may devote resources to developing products designed for use with
the Internet and the World Wide Web, and there can be no assurance that the
revenues generated, if any, from the use of the World Wide Web will be greater
than the costs of deve1oping and modifying products for such use. Further, the
Company's solutions may be rendered obsolete by or become less valuable in
comparison to competitive solutions made possible by future development of the
World Wide Web. If this were to occur, the Company's business, financial
condition or results of operations would be materially adversely affected.
Dependence on Proprietary and Licensed Technology. While the Company
is not aware that any of its software infringes upon the proprietary rights of
third parties, there can be no assurance that third parties will not claim
infringement by the Company with respect to current or future products. The
Company expects that it may increasingly be subject to infringement claims as
the number of products and competitors in the Company's industry segment grows
and the functionality of products in different industry segments overlaps. Any
such claims, with or without merit, could be time-consuming, result in costly
litigation, cause product shipment delays or require the Company to enter into
royalty or license agreements. Such royalty or licenses agreements, if required,
may not be available on terms acceptable to the Company or at all, which could
have a material adverse effect upon the Company's business, financial condition
or results of operations.
In addition, the Company relies on certain software that it licenses
from third parties, including software that is used in the Company's products to
perform certain functions. There can be no assurance that such firms will remain
in business, that they will continue to support their products or that their
products will otherwise continue to be available to the Company on commercially
reasonable terms. The loss of or inability to maintain any of these software or
data licenses could result in delays or cancellations in product shipments until
equivalent software or data can be identified and licensed or developed and
integrated with the Company's products. Any such delay or cancellation could
have a materially adverse affect on the Company's business, financial condition
or results of operations.
Mortgage Market Risks. The results of the Company's operations will be
affected by various factors, many of which are beyond the control of the
Company. The results of the Company's operations will depend, among other
things, on the level of net cash flows generated by the Company's mortgage
assets and the supply of and demand for mortgage loans. The Company's net cash
flows will vary as a result of changes in interest rates, the behavior of which
involves various risks and uncertainties as set forth below. Prepayment rates
and interest rates depend upon the nature and terms of the mortgage assets, the
geographic location of the properties securing the mortgage loans, conditions in
financial markets, the fiscal and monetary policies of the United States
government and the Board of Governors of the Federal Reserve System,
international economic and financial conditions, competition and other factors,
none of which can be predicted with any certainty. Because interest rates will
significantly affect the Company's activities, the operating results of the
Company will depend, in large part, upon the ability of the Company to utilize
appropriate strategies to maximize returns to the Company while attempting to
minimize risks.
General Risks of Mortgage Loans. Mortgage loans are subject to
varying degrees of risk, including the risk of a default by the borrowers on a
mortgage loan, and the added responsibility on the part of the Company of
foreclosing in order to protect its investment. The ability of the borrowers to
make payments on non-single-family mortgage loans is highly dependent on the
borrowers' ability to manage and sell, refinance or otherwise dispose of the
properties and will be dependent upon all the risks generally associated with
real estate investments which are beyond the control of the Company. The Company
must rely on the experience and ability of the borrowers to manage, develop and
dispose of or refinance the properties. Investing in real estate is highly
competitive and is subject to numerous inherent risks, including, without
limitation, changes in general or local economic conditions, neighborhood values
and interest rates, limited availability of mortgage funds which may render the
sale or refinancing of the properties difficult, increases in real estate taxes,
other operating expenses, the supply and demand for properties of the type
involved, toxics, hazardous wastes, environmental considerations, zoning laws,
entitlements, rent control laws, other governmental rules and fiscal policies
and acts of God, such as floods, which may result in uninsured losses.
Ability to Acquire Mortgage Assets at Favorable Spreads Relative
to Borrowing Costs. The Company's net income from mortgage lending will depend
largely on the Company's ability to acquire mortgage assets at favorable spreads
over the Company's borrowing costs. The Company may purchase mortgage assets
from a variety of mortgage bankers, banks, savings and loans, investment banking
firms, home-builders and other firms involved in originating, packaging and
underwriting mortgage loans ("Mortgage Suppliers"). In acquiring mortgage loans,
the Company will compete with REITs, investment banking firms, savings and loan
associations, banks, mortgage bankers, insurance companies, mutual funds, other
lenders, GNMA, FNMA, FHLMC and other entities purchasing ~ mortgage loans, many
of which have greater financial resources than the Company. There are numerous
entities that invest in mortgage loans and others may be organized in the
future. The effect of the existence of additional entities that invest in
mortgage loans may be to increase competition for the available supply of
mortgage loans suitable for purchase by the Company. There can be no assurance
that the Company will be able to acquire sufficient mortgage loans from Mortgage
Suppliers at spreads above the Company's cost of borrowings. In addition, there
can be no assurance that Mortgage Suppliers will continue to originate suitable
types of mortgage loans or that changes in market conditions or applicable laws
will not affect the availability of suitable mortgage loans.
Uninsured losses. The Company will require as a condition to making an
investment in a mortgage loan, to the extent possible, comprehensive insurance,
including liability, fire, flood and extended coverage, which is customarily
obtained for or by a Mortgagee on properties. However, there are certain
types of losses (generally of a catastrophic nature, such as earthquakes, floods
and wars) which are either uninsurable or not economically insurable. Should
such a disaster occur to, or cause the destruction of, any of such real property
securing the mortgage loans, the Company could lose both its invested capital
and any anticipated profits from such investment. In addition, there can be no
assurance that, if a covered loss occurs, the proceeds will be sufficient to pay
all damages which the real property, the borrower and the Company may have
suffered. Should any such loss occur and the borrower may default on the
mortgage loan, the Company could suffer a partial or total loss of its
investment.
Default, Foreclosure and Difficulty In Sale of the Secured Properties.
If a mortgaged property is not sold by the maturity date of the underlying
mortgage loan, the borrower may have difficulty in paying the outstanding
balance of such mortgage loan and may have to refinance the property. The
borrower may also experience difficulty in refinancing the property if that
becomes necessary due to unfavorable interest rates or the unavailability of
credit.
If any amounts under a mortgage loan are not paid when due, the
Company may foreclose upon the property of the borrower. In the event of such a
default which requires the Company to foreclose upon a property or otherwise
pursue its remedies in order to protect the Company's investment, the Company
will seek to obtain a purchaser for the property upon such terms as the Company
deems reasonable. However, there can be no assurance that the amount realized
upon any such sale of the underlying property will result in financial profit or
prevent loss to the Company. In addition, because of potential adverse changes
in the real estate market, locally or nationally, the Company may be forced to
own and maintain the property for a period of time to protect the value of its
investment. In that event, the Company may not be able to receive any cash flow
from such mortgage loan and the Company would be required to pay such sums as
may be necessary to maintain and manage the property.
Bankruptcy or a Mortgage Borrower. If a borrower enters bankruptcy,
either voluntarily or involuntarily, an automatic stay of all proceedings
against the borrower's property will issue. This stay will prevent the Company
or any trustee from foreclosing on the property securing such borrower's loan
until relief from the stay can be sought from the bankruptcy court. No guaranty
can be given that the bankruptcy court will lift the stay, and significant legal
fees and costs may be incurred in attempting to obtain such relief.
Mortgage Competition. The Company will face intense competition in the
acquisition and liquidation of its mortgage loans. Such competition can be
expected from banks, savings and loan associations and other entities,
including REITs. Many of the Company's competitors have greater financial
resources than the Company.
Seasonality
- -----------
The Company does not expect to experience material seasonal variations
in revenues or operating costs, except that residential mortgage activity
normally increases in the spring and summer seasons which is expected to cause
the operations of the Company to increase during this period.
Item 3. Description of Property.
Executive Offices. The Company currently subleases its executive
offices located at 575 Anton Boulevard, Suite 200, Costa Mesa, California 92626.
The lease covers approximately 6,500 square feet at a monthly rental of
approximately $7,500 per month. The sublease expires in March 1997. The
Company believes that its current facilities are adequate for its needs through
March 1997, and that, should it be needed, suitable additional or alternative
space will be available in the future on commercially reasonable terms. See
Note H to Financial Statements.
Undeveloped Land and Water Rights. The Company owns approximately 61
acres of undeveloped real property with extensive water and electrical
improvements, and extensive water producing wells located on Paris Valley Road
in the San Ardo area of Monterey County, California. This property was appraised
by Stephen Rich, MAI, of National Appraisal Service, 1278 Glenneyre Street,
#142, Laguna Beach, California 92651. Their appraisal report dated April 22,
1996, appraised the estimated market value of the fee simple interest as of
April 20, 1996, at $3,860,000. The property is located close to Highway 101, a
major California highway. The area is rural in nature, used primarily for cattle
and sheep raising and agricultural purposes, including vineyards and wineries to
the north and to the south. The property is comprised of two parcels separated
by Paris Valley Road.
13
<PAGE>
The zoning for the property is for agriculture/grazing in the lower
half, and for heavy mineral extraction on the upper half. The water and
electrical improvements provide primarily for farming use. Because of the
producing water wells on the property, commercial water production for
agricultural use is available to provide adjacent farms with excess water. The
property formerly produced crude oil; but such wells have been shut-in and the
power plant substation, natural gas pipeline system, pumps, tanks and used pipe
on the property are considered obsolete. The value of nearby comparable
agricultural land without water rights ranges from $1,375 to $2,300 per acre.
The water producing wells, as described in the appraisal, are capable of
producing approximately 2,700,000 gallons per 24 hour production period. The
water is naturally replenished annually from the run-off of the surrounding
mountain. Because this property is held for resale, the Company has made no
efforts nor expended any material funds to commercially develop or market the
water resources of the property.
The Company has an additional 4.89 acre undeveloped property that
was appraised by Tyna M. Stopnik as of December 7, 1994, at a value of $170,000.
This property is held subject to a Trust Deed Note dated March 15, 1995, in the
principal amount of $65,000.
While the Company has obtained independent appraisals regarding its
undeveloped properties, it should be noted that appraisals are merely estimates
of their value, and should not be relied upon as measures of actual or true
worth, or realizable value. Assumptions used by an appraiser as to potential
development, or other possible commercial or non-agricultural use of a property,
will generally assume the highest and best use possible for such property.
Although such assumptions may be deemed reasonable, if the assumptions used by
the appraiser prove to be incorrect, it will materially reduce the value that
may be realized upon the sale of such properties.
All real property owned by the Company is held for resale and not for
development purposes. The financial statements of the Company presently reflect
land held for resale as an asset at $3,930,000 as of February 29, 1996. See
Note A to Financial Statements. The Company may also hold real estate for sale
from time to time as a result of its foreclosure on mortgage loans that may
become in default.
Item 4. Security Ownership of Certain Beneficial Owners and Management.
The total number of shares of Common Stock of the Company beneficially
owned by each of the officers and directors, and all of such directors and
officers as a group, and their percentage ownership of the outstanding Common
Stock of the Company as of July 31, 1996, are as follows:
<TABLE>
<CAPTION>
Shares Percent of
Management Beneficially Common
Shareholders(1) Owned(1) Stock
- --------------- ------------ ----------
<S> <C> <C>
Bruce J. Brosky........................ 350,000(2) 2.1%
575 Anton Boulevard, Suite 200
Costa Mesa, California 92626
Rory P. Hughes......................... 2,000,000(3) 12.0%
575 Anton Boulevard, Suite 200
Costa Mesa, California 92626
William V. Perry....................... 54,000(4) .003%
575 Anton Boulevard, Suite 200
Costa Mesa, California 92626
Ann L. Petersen........................ 25,000 .002%
Star Route 5080
Keaau, Hawaii 96749
</TABLE>
14
<PAGE>
<TABLE>
<CAPTION>
Shares Percent of
Management Beneficially Common
Shareholders(1) Owned(1) Stock
- --------------- ------------ ----------
<S> <C> <C>
James E. Shipley....................... 3,254,945(5) 19.6%
575 Anton Boulevard, Suite 200
Costa Mesa, California 92626
Frank D. Tuttle........................ 0 0
575 Anton Boulevard, Suite 200
Costa Mesa, California 92626
B. Joe Wimer........................... 25,667(6) .002%
575 Anton Boulevard, Suite 200
Costa Mesa, California 92626
Directors and officers as a group
(7 persons, including the above)(7).. 5,709,612 34.3%
========= ====
</TABLE>
(1) Except as otherwise noted, it is believed by the Company that all persons
have full voting and investment power with respect to the shares indicated.
Under the rules of the Securities and Exchange Commission, a person (or
group of persons) is deemed to be a "beneficial owner" of a security if he
or she, directly or indirectly, has or shares the power to vote or to
direct the voting of such security, or the power to dispose of or to direct
the disposition of such security. Accordingly, more than one person may be
deemed to be a beneficial owner of the same security. A person is also
deemed to be a beneficial owner of any security which that person has the
right to acquire within 60 days, such as the warrants to purchase the
Common Stock of the Company.
(2) Represents 350,000 shares of the common stock of Sterling Alliance Group,
Ltd. which owns 13,500,000 shares of the Common Stock of the Company.
(3) Represents 2,000,000 shares of the common stock of Sterling Alliance Group,
Ltd. which owns 13,500,000 shares of the Common Stock of the Company.
(4) Represents 540,000 shares of the common stock of Sterling Alliance Group,
Ltd. which owns 13,500,000 shares of the Common Stock of the Company. Such
shares are deemed to be beneficially owned by Mr. Perry because such shares
are held by a trust of which he is a trustee.
(5) Represents shares of Sterling Alliance Group, Inc. owned by World Trends
Financial, Ltd., a corporation owned by Mr. Shipley. SAG owns 13,500,000
shares of the Company's Common Stock (81.2% of its outstanding common
stock).
(6) Represents 25,667 shares of the common stock of Sterling Alliance Group,
Ltd. which owns 13,500,000 shares of the Common Stock of the Company.
Because certain directors and officers of the Company are controlling
persons or affiliates of Sterling Alliance Group, Ltd. ("SAG")(specifically,
William V. Perry, James E. Shipley, Rory P. Hughes and B. Joe Wimer), such
persons may be deemed to be the beneficial owners of the 13,500,000 shares of
the Common Stock of the Company held in the name of SAG.
The Company entered into certain material transactions with SAG
subsequent to its fiscal year ended September 30, 1995, as described below. SAG
is a Colorado corporation that is beneficially owned 5.5% by James E. Shipley, a
director and the President of the Company, and owned 14.8% by Rory P. Hughes, a
director and Vice President of the Company, and by certain other directors and
officers of the Company to a lesser extent.
On February 26, 1996, the Company acquired substantially all of the
assets of SAG, including all of the issued capital stock of its subsidiary,
Electronic Mortgage Banc, Ltd. ("EMB"), real property and associated water
rights and wells located in Monterey County and in Riverside County, California,
office equipment and furniture, and its interests in MortgageShare software as
licensed by Virtual Lending Technology, Inc., and assumed certain liabilities of
SAG. In exchange, the Company
15
<PAGE>
issued 13,500,000 legended-restricted shares of its Common Stock to SAG which
presently represents approximately 81.2% of the total issued and outstanding
Common Stock of the Company. After this acquisition, the directors, officers and
certain consultants of SAG became directors and officers of the Company. As a
result of the ownership of common stock of SAG owned by certain present
directors and officers of the Company and their families, they are deemed to be
beneficial owners of the Common Stock of the Company.
Prior to this acquisition, Virtual Lending Technology, Inc., a Nevada
corporation, licensed certain software to EMB under the terms of a Software
Provider Agreement dated September 1, 1995, to be used in the mortgage lending
business. Rory P. Hughes and Frank D. Tuttle, presently officers and directors
of the Company, are also the owners and principal officers of Virtual Lending
Technology, Inc. See Item 7.
Principal Stockholders
- ----------------------
The following table sets forth information with respect to the
beneficial ownership of the Company's Common Stock by each shareholder who
beneficially owns more than five percent (5%) of the Company's Common Stock, the
number of shares beneficially owned by each and the percent of outstanding
Common Stock so owned of record as of July 31, 1996. It is believed by the
Company that all persons listed have sole voting and investment power with
respect to their shares, except as otherwise indicated.
<TABLE>
<CAPTION>
Shares Percent of
Name and Address Beneficially Outstanding
of Beneficial Owner Title of Class Owned Common Stock
------------------- -------------- ------------ -------------
<S> <C> <C> <C>
Sterling Alliance Group, Ltd.(1) Common Stock 13,500,000 81.2%
575 Anton Boulevard, Suite 200
Costa Mesa, CA 92626
Rory P. Hughes(2) Common Stock 2,000,000 12.0%
575 Anton Boulevard, Suite 200
Costa Mesa, California 92626
World Trends Financial, Ltd.(2) Common Stock 3,254,945 19.6%
508 Easy Street
Las Vegas, Nevada 89707
Quadrille Corporation(2) Common Stock 1,108,329 6.7%
3078 South Pecos Road
Las Vegas, Nevada 89121
Win, Win, Solver Group, Inc.(2) Common Stock 1,107,130 6.7%
1055 E. Flamingo Road, #1009
Las Vegas, Nevada 89109
- -------------------------------
</TABLE>
(1) Sterling Alliance Group, Ltd. ("SAG") is a Colorado corporation. Certain
directors and officers of the Company are stockholders, directors, officers
and controlling persons of SAG. See "Transactions with Management" and
"Security Ownership of Management", above.
(2) Represents shares of the Common Stock of Sterling Alliance Group, Ltd.
which owns 13,500,000 shares of the Common Stock of the Company.
16
<PAGE>
Item 5. Directors, Executive Officers, Promoters and Control Persons.
Directors and Officers
- ----------------------
The directors and officers of the Company are as follows:
<TABLE>
<CAPTION>
Name(1)(2) Age Position
- ---------- --- --------
<S> <C> <C>
Bruce J. Brosky(3) 41 Director and Vice President-
Marketing and Public Relations
Rory P. Hughes(3) 37 Director and Vice President -
Research and Development
William V. Perry(3) 72 Director and Executive Vice
President
Ann L. Petersen 59 Director
James E. Shipley(4) 60 Director and President
Frank D. Tuttle(4) 38 Director and Vice President-
Operations
B. Joe Wimer(4) 40 Director, Secretary and
Treasurer
</TABLE>
- --------------------
(1) The Company presently has no executive committee, nominating committee or
audit committee of the Board of Directors.
(2) The officers of the Company hold office until their successors are elected
and qualified, or until their death, resignation or removal.
(3) Member of the Company's Stock Option Committee. See "1996 Stock Option,
SAR and Stock Bonus Plan", below.
(4) Member of the Company's Compensation Committee. See "Compensation
Committee", below.
The background and principal occupations of each director and
officer of the Company are as follows:
Mr. Brosky has been a director and Vice President-Marketing and Public
Relations of the Company since April 29, 1996, and became a director of the
Company on May 21, 1996. From 1993 to the present, he has been Director of
Marketing of ERA Sterling Real Estate. From 1993 to the present, Mr. Brosky has
been the Director of Marketing and Public Relations of Sterling Alliance Group,
Ltd. From 1984 to 1992, Mr. Brosky was employed by GTE of California as
operator services supervisor, CAG analyst and systems analyst. Mr. Brosky
received a B.A. degree from the University of Dubuque in 1978, and received a
MBA degree from Lucas College in 1979.
Mr. Hughes has been Vice President-Research and Development of the
Company since April 29, 1996, and became a director of the Company on May 21,
1996. He has been the President and a director of Electronic Mortgage Banc,
Ltd., a wholly owned subsidiary of the Company engaged in real estate mortgage
business, since September, 1995. From 1994 to the present, he has been a
director and President of Virtual Lending Technology, Inc. From 1993 to 1994,
he was the Marketing Director of Delphi Information Sciences Corp. From 1993 to
September 1995, Mr. Hughes was also employed by Members Capital Corporation, a
mortgage broker. From 1985 to 1993, he owned and operated Financial Computing
International, a software technology firm. Mr. Hughes attended California State
University-Fullerton majoring in corporate finance and real estate finance. See
Item 7.
Mr. Perry has been the Executive Vice President of the Company since
April 29, 1996, and became a director of the Company on May 21, 1996. He is
also the Chairman of the Board of Electronic Mortgage Banc, Ltd., a wholly owned
subsidiary of the Company. From 1994 to the present, he has been a director and
Vice President of Sterling Alliance Group, Ltd. From October 1993 to the
present, Mr. Perry has been associated with ERA Sterling Real Estate. From 1990
to October 1993, he was a director and Vice President of Ameri-West Funding,
Inc., engaged in residential, multi-family and commercial mortgages. From 1988
to 1990, Mr. Perry was the President of First Marine Mortgage Company. From
1985 to 1987, he was the Chief Financial Officer of Mobile Medical Group, Inc.;
and was the Chief Financial Officer and a director of Oceanic Opera, Inc. from
1984 to 1985. From 1970 to 1984, Mr. Perry was engaged in the real estate
brokerage business with several real estate brokerage companies. From 1962 to
1970, he was an electronics engineer with Lockheed Missle and Space Corporation.
Mr. Perry graduated from Pacific States University in 1948 with a degree in
electrical engineering.
17
<PAGE>
Mrs. Petersen became a director of the Company on November 25, 1992.
She is a resident of Hawaii and has been a housewife since being married in
1958. She attended Marquette University for two years. Mrs. Petersen is an
active volunteer in various charitable organizations, including the American
Cancer Association.
Mr. Shipley has been a director of the Company since January 15, 1996,
and became the President of the Company on April 29, 1996. From 1993 to the
present, he has been a director and the President of Sterling Alliance Group,
Ltd., an affiliate of the Company which recently sold substantially all of its
assets and operations to the Company in exchange for Common Stock. He was the
Managing Director of Electronic Mortgage Banc, Ltd., a wholly owned subsidiary
of the Company engaged in the real estate mortgage business, from October 1993
to April 1996. Mr. Shipley has served as the Managing Director of ERA Sterling
Real Estate, a real estate brokerage firm, from 1987 to the present. From 1968
to 1987, he was engaged in the real estate development business with several
companies. In 1988, Mr. Shipley became subject to two felony convictions for
forgery endorsement of a check and appropriation of property entrusted to him in
the Superior Court of the State of California. Mr. Shipley received a Bachelor
of Science degree from Eastern Illinois University in 1960.
Mr. Tuttle became the Vice President-Operations of the Company on
April 29, 1996, and became a director of the Company on May 21, 1996. From
December 1994 to February 1996, Mr. Tuttle was a Manager of MIS operations
regarding secondary mortgages of Pioneer Savings and Loan Association. From
July 1991 to December 1994, he held similar positions with Renet Financial
Corporation. From July 1979 to 1991, Mr. Tuttle was a program engineer with
Hughes Aircraft Company. Mr. Tuttle graduated from Vanderbilt University in
1979 with a degree in electrical engineering (BEEE), and graduated from
Pepperdine University with a MBA degree in 1983.
Mr. Wimer has been the Secretary and Treasurer of the Company since
April 29, 1996. From April 1993 to September 1995, he was the director of
business promotion of City Lights Escrow, Inc.; and from October 1992 to April
1993, was the owner and President of Better Service Escrow, Inc. From October
1990 to October 1992, Mr. Wimer was employed by Escrow Masters Inc. regarding
business promotion; and held a similar position with Melrose Escrow Inc. from
1988 to October 1990. In each of these positions, he was also responsible for
all banking and money management functions. From 1985 to 1988, he was the Chief
Financial Officer of Sierra Mortgage Corporation. Mr. Wimer attended California
State University-Fullerton and Clark College.
Item 6. Executive Compensation.
Compensation of Executive Officers
- ----------------------------------
No executive officer or director of the Company received compensation
in excess of $100,000 during its fiscal year ended September 30, 1995. Mr.
James E. Shipley, the President of the Company, presently receives a salary of
$7,500 per month ($90,000 per annum).
Compensation Committee
- ----------------------
The Compensation Committee of the Board of Directors is comprised of
Messrs. James E. Shipley, B. Joe Wimer, and Frank D. Tuttle. The Committee
makes decisions regarding the Company's employee stock plan and makes decisions
concerning salaries and incentive compensation for the executive officers,
employees and consultants of the Company.
The Board of Directors does not have an auditing committee or a
nominating committee as of the date of this Offering Memorandum.
1996 Stock Option, SAR and Stock Bonus Plan
- -------------------------------------------
The Company has reserved a total of 1,000,000 shares of Common Stock
for issuance under the Company's 1996 Stock Option, SAR and Stock Bonus Plan
(the "Plan"). At July 31, 1996, no options, SAR's or stock bonuses have been
granted or issued under the Plan. Options may be granted to employees
(including officers),
18
<PAGE>
consultants, advisors and directors, although only employees and directors and
officers who are also employees may receive "incentive stock options" intended
to qualify for certain tax treatment. The exercise price of non-qualified stock
options must equal at least 85% of the fair market value of the Common Stock on
the date of grant, and in the case of incentive stock options must be no less
than the fair market value. Options granted under the Plan are immediately
exercisable but generally vest over four years and must be exercised within 10
years. The members of the Stock Option Committee that administer the Plan are
Bruce J. Brosky, Rory P. Hughes and William V. Perry.
Compensatory Benefit Plan
- -------------------------
The Company has established a Compensatory Benefit Plan (the "Plan")
that authorizes the issuance of up to $250,000 of the fair market value of the
Common Stock of the Company to its directors, officers, employees, consultants
and advisers for their bona fide services (and such services must not be in
connection with the offer and sale of securities in a capital raising
transaction or pursuant to a written contract relating to the compensation of
such persons), consistent with Rule 701 under the Securities Act of 1933. The
Plan is administered by the Compensation Committee of the Board of Directors. As
of July 31, 1996, there have been no grants of Common Stock under the Plan.
Other Benefit Plans
- -------------------
The Company does not have any pension plan, profit sharing plan or
similar plans for the benefit of its officers, directors or employees. However,
the Company reserves the right to establish any such plans in the future.
Board Compensation
- --------------------
Directors of the Company who do not serve as officers thereof are not
currently compensated by the Company for meeting attendance or otherwise, but
are entitled to reimbursement for their travel expenses. From time to time,
directors who are not employees of the Company will receive grants of options to
purchase the Company's Common Stock. The Company does not pay additional
amounts for committee participation or special assignments of the Board of
Directors.
Item 7. Certain Relationships and Related Transactions.
In February 1996, the Company completed its acquisition of
substantially all of the assets of Sterling Alliance Group, Ltd. ("SAG"),
including all of the outstanding capital stock of Electronic Mortgage Banc, Ltd.
("EMB"), certain undeveloped real property together with its water rights and
wells and other assets and the assumption of certain liabilities in exchange for
13,500,000 shares of the Common Stock of the Company. There was no affiliation
between the Company and SAG prior to this acquisition. Upon the acquisition, the
directors and officers of SAG subsequently became directors and officers of the
Company in addition to other persons.
Prior to the acquisition of certain assets by the Company from
Sterling Alliance Group, Ltd. ("SAG") which included all of the capital stock of
Electronic Mortgage Banc, Ltd. ("EMB"), EMB acquired a non-exclusive license to
its M.A.X. mortgage software from Virtual Lending Technology, Inc. ("VLT") under
the terms of a Software Provider Agreement dated September 1, 1995. See Item 4.
Rory P. Hughes and Frank D. Tuttle are the owners and principal officers of VLT,
and subsequently became officers of EMB. Following the acquisition of EMB by
the Company, Rory P. Hughes and Frank D. Tuttle became officers of the Company
in April 1996, and directors of the Company in May, 1996. See Item 4. -
Principal Stockholders, and Item 5.
Item 8. Description of Securities.
General
- -------
The Company amended its Articles of Incorporation in June 1996, and is
authorized to issue 30,000,000 shares of Common Stock, no par value per share,
and 5,000,000 shares of Preferred Stock. There are no shares of Preferred Stock
issued and outstanding. At July 31, 1996, there were 16,634,600 shares of Common
Stock issued and outstanding.
19
<PAGE>
Common Stock
- ------------
Holders of Common Stock are entitled to receive ratably such dividends
as may be declared by the Board of Directors, out of funds legally available,
without any preference. Holders of Common Stock are entitled to one vote per
share. Cumulative voting is not allowed for purposes of the election of
directors. Thus, the holders of more than 50% of the shares voting for
directors can elect all directors. The holders of the Common Stock of the
Company have no preemptive rights to purchase new issues of the securities of
the Company.
At the present time, the Company does not intend to pay any dividends
on its Common Stock.
Upon liquidation or dissolution of the Company, holders of Common
Stock are entitled to receive pro rata, either in cash or in kind, all of the
assets of the Company after payment of debts. There are no redemption,
conversion or preemptive rights attached to the Common Stock.
Preferred Stock
- ---------------
The Board of Directors has the authority, without action by the
stockholders, to designate and issue up to 5,000,000 shares of Preferred Stock
in one or more series and to designate the dividend rate, voting rights and
other rights, preferences and restrictions of each series any or all of which
may be greater than the rights of the Common Stock. The effect of the issuance
of any shares of Preferred Stock upon the rights of holders of the Common Stock
may not be determined until the Board of Directors specifies the rights of the
holders of such Preferred Stock. Such effects might include, among other
things, restricting dividends on the Common Stock, diluting the voting power of
the Common Stock, impairment of the liquidation rights of the Common Stock and
delaying or preventing a change in control of the Company without further action
by the stockholders. The Company has no present plans to issue any shares of
Preferred Stock. There are presently no shares of Preferred Stock of the
Company that are issued and outstanding.
Warrants and Options
- --------------------
There presently are outstanding warrants to purchase 100,000 shares of
the Common Stock at an exercise price of $2.00 per share for a term of 180 days.
See Item 4.
The Company has adopted a stock option plan which covers 1,000,000
shares of the Common Stock of the Company, but no options have been granted
under the plan as of the date hereof. See Item 6.
Hawaii Corporate Law and Certain Charter Provisions
- ---------------------------------------------------
The Company is a Hawaii corporation and subject to Chapter 417E of the
Hawaii Business Corporation Act (the "Hawaii Law"), an anti-takeover law. In
general, Chapter 417E of the Hawaii Law prevents take-over offers to acquire
equity securities of a Hawaii corporation if the offeror would become a
beneficial owner of more than 10% of any class of outstanding equity securities,
and other similar provisions, subject to certain exceptions such as the written
approval of the board of directors. The existence of this provisions would be
expected to have an anti-takeover effect, including attempts that might result
in a premium over the market price for the shares of Common Stock held by
stockholders.
The Hawaii Law further provides that all stockholder action must be
effected at a duly called meeting of stockholders. The Company's Restated
Articles of Incorporation and By-Laws provide that only the Company's President,
a majority of the members of the Company's Board of Directors or at the written
request of the holders of at least 50% of the outstanding voting power may call
a special meeting of stockholders. These provisions of the Restated Articles of
Incorporation and By-Laws could discourage potential acquisition proposals and
could delay or prevent a change in control of the Company. Such provisions also
may have the effect of preventing changes in the management of the Company.
20
<PAGE>
Transfer Agent and Registrar
- ----------------------------
The transfer agent and registrar for the Common Stock of the Company
is Securities Transfer Corporation in Dallas, Texas.
Reports to Stockholders
- -----------------------
The Company will furnish its shareholders with annual reports
containing the financial statements of the Company examined by independent
certified public accountants. The Company presently intends to issue unaudited
quarterly reports and may distribute other reports to the stockholders as it
deems appropriate.
PART II
-------
Item 1. Market Price of and Dividends on the Registrant's Common Equity and
Other Shareholder Matters.
Market Price
- ------------
The Common Stock of the Company is traded in the over-the-counter
market (pink-sheets) and is quoted by National Quotation Bureau under the symbol
EMBZ. There are approximately 650 stockholders of record as of the date hereof.
For several years prior to January 1, 1996, the market price of the
Common Stock of the Company was either nominal or non-existent because the
Company had no substantial assets and had little or no operations. However,
after the Company entered into an acquisition agreement regarding the purchase
of certain assets of Sterling Alliance Group, Ltd. in December 1995, the Common
Stock of the Company began actively trading.
During the quarter ended March 31, 1996, the Common Stock of the
Company traded at a low bid price of $.25 per share and a high bid price of
$5.75 per share. During the quarter ended June 30, 1996, the Common Stock of
the Company traded at a low bid price of $2.125 per share and a high bid price
of $3.875 per share. On August 28, 1996, the closing bid and asked prices of
the Common Stock of the Company was $2.062 and $2,187, respectively. The above
quotations reflect inter-dealer prices without adjustment for retail markups,
markdowns, or commissions and may not reflect actual transactions.
Dividends
- ---------
The Company has not paid any dividends on its Common Stock and does
not expect to do so in the foreseeable future. The Company intends to apply its
earnings, if any, in expanding its operations and related activities.
The payment of cash dividends in the future will be at the discretion
of the Board of Directors and will depend upon such factors as earnings levels,
capital requirements, the Company's financial condition and other factors deemed
relevant by the Board of Directors. In addition, the Company's ability to pay
dividends may become limited under future loan agreements of the Company which
may restrict or prohibit the payment of dividends.
Item 2. Legal Proceedings.
There are no known pending or threatened legal proceedings to which
the Company is, or is likely to be, a party or of which any of its assets are or
are likely to be subject.
21
<PAGE>
Item 3. Changes in and Disagreements with Accountants.
For fiscal 1995 and fiscal 1996, the principal independent accountant
of the Company is Harlan & Boettger, independent certified public accountants
located in San Diego, California. For fiscal 1994 and prior fiscal years, the
principal independent accountant of the Company was George F. Rombach, C.P.A. of
Newport Beach, California.
George F. Rombach, C.P.A., the former accountant of the Company, did
not resign or decline to stand for re-election, nor was such accountant
dismissed by the Company. The Company changed its principal independent
accountant effective in April, 1996, without any disagreement regarding
accounting matters. The decision to change accountants was recommended by the
Board of Directors and approved by the shareholders of the Company at its 1996
annual meeting held on May 21, 1996.
During the Company's two most recent fiscal years and the subsequent
interim period up to the date of the change of accountants, there were no
disagreements with the Company's former accountant on any matter of accounting
principles or practice, financial statement disclosure, or auditing scope or
procedure, which disagreement if not resolved to the satisfaction of George F.
Rombach, C.P.A., would have caused him to make reference to the matter of
disagreement in his report. The Company has previously authorized George F.
Rombach, C.P.A. to respond fully to the inquiries of Harlan & Boettger, the
current independent certified public accountants of the Company.
Item 4. Recent Sales of Unregistered Securities.
In February 1996, the Company issued 13,500,000 shares of its Common
Stock to Sterling Alliance Group, Ltd. in exchange for assets in reliance upon
Section 4(2) of the Securities Act of 1933, as amended.
The Company is presently offering up to $1,000,000 of its Common Stock
and warrants in a limited offering being made in reliance upon Rule 504 of
Regulation D under the Securities Act of 1933. As of August 29, 1996, sales in
the amount of $100,000 covering 100,000 shares of Common Stock, and warrants to
purchase 100,000 shares of Common Stock at $2.00 per share during a period of
180 days have been made by the Company.
Item 5. Indemnification of Directors and Officers.
As permitted by the provisions of the Hawaii Business Corporation Law,
the Restated Articles of Incorporation and By-Laws of the Company provide for
the indemnification of the directors and officers of the Company to the fullest
extent permitted by the Hawaii General Corporation Law. These provisions
generally permit indemnification of directors and officers against certain
costs, liabilities and expenses of any threatened, pending or completed action,
suit or proceeding that any such person may incur by reason of serving in such
positions unless (i) finally adjudication establishes that the act or omission
of the director or officer was material to the cause of action adjudicated in
the action, suit or proceeding and involved intentional misconduct, fraud or a
knowing violation of the law, or (ii) the director or officer did not act in
good faith and in a manner which such person reasonably believed to be in or not
opposed to the best interests of the Company, and in the case of criminal
proceedings, the director or officer had no reasonable cause to believe such act
or omission was unlawful. Any determination that indemnification of a director
or an officer is, unless ordered by a court, must be made (i) by the Company's
stockholders, (ii) by the Company's Board of Directors by a majority vote of a
quorum consisting of directors who were not parties to the act, suit or
proceeding, (iii) if a majority vote of quorum consisting of directors who were
not parties to the act, suit or proceeding so orders, by independent legal
counsel in a written opinion, or (iv) if a quorum consisting of directors who
where not parties to the act, suit or proceeding cannot be obtained, by
independent legal counsel in a written opinion. The Restated Articles of
Incorporation, By-Laws, and the Hawaii Business Corporation Law further provide
that such indemnification is not exclusive of any other rights to which such
directors, officers or persons controlling the Company pursuant to the foregoing
provisions.
As permitted by the provisions of the Hawaii Business Corporation Law,
the Restated Articles of Incorporation of the Company provides that the personal
liability of any director or officer of the Company to the
22
<PAGE>
Company or its shareholders is limited to the fullest extent allowed by the
statutory or decisional law of the State of Hawaii, as amended or interpreted.
These provisions authorize the elimination or limiting of the personal liability
of a director and an officer to a corporation and its shareholders for damages
for breach of fiduciary duty as a director or an officer, other than the
liability of a director or officer for (i) acts or omissions which involve
intentional misconduct, fraud or a knowing violation of the law, or (ii) the
payment of distributions to shareholders for a period three years after such
distribution (and with respect to a director that does not properly dissent to
distribution), which after giving effect to such distribution, (A) the
corporation would not be able to pay its debts as they become due in the usual
course of business, or (B) except as otherwise allowed by the Restated Articles
of Incorporation, the corporation's total assets would be less than the sum of
its liabilities plus the amount that would be needed, if the corporation were to
be dissolved at the time of the distribution, to satisfy the preferential rights
upon dissolution of shareholders whose preferential rights are superior or those
shareholders receiving the distribution. Hawaii law does not affect the
potential liability of directors and officers to third parties, such as
creditors of the Company. In addition, these provisions do not eliminate the
liability of a director for violations of federal securities laws, nor do they
limit the rights of the Company or the shareholders, in appropriate
circumstances, to seek equitable remedies such as injunctive or other forms of
non-monetary relief. However, such remedies may not be effective in all cases.
23
<PAGE>
PART III
--------
Index to Exhibits
Exhibit
- -------
3(i) The Restated Articles of Incorporation of the Registrant are
incorporated herein by reference to its Form 10-SB
of the Registrant.............................................
3(ii) The By-Laws of the Registrant are incorporated herein by
reference to its Form 10-SB of the Registrant.................
10 Material Contracts
10(a) The Asset Acquisition Agreement dated December 16,
1995, with Sterling Alliance Group, Ltd. incorporated
herein by reference to the Form 10-SB of the Registrant
10(b) The Appraisal Report dated April 22, 1996, of real
property (61 acres) in County of Monterey, California
by National Appraisal Service is incorporated herein by
reference to the Form 10-SB of the Registrant..........
10(c) The Appraisal Report as of December 7, 1994, of 4.89
acres in Counter of Riverside, California, by Tyna M.
Stopnik is incorporated herein by reference to the
Form 10-SB of the Registrant...........................
10(d) The License Agreement with Virtual Lending
Technology, Inc. is incorporated herein by reference to
the Form 10-SB of the Registrant.......................
10(e) The Seller Agreement between ICI Funding
Corporation and EMB Mortgage Banc, Ltd. is
incorporated herein by reference to the Form 10-SB of
the Registrant.........................................
10(f) The 1996 Stock Option, SAR and Stock Bonus Plan is
incorporated herein by reference to the Form 10-SB of
the Registrant.........................................
10(g) The Sublease covering the executive offices of the
Registrant expiring March, 1997 is incorporated herein
by reference to the Form 10-SB ofthe Registrant........
10(h) The form of license agreement with customers of the
Registrant is incorporated herein by reference to the
Form 10-SB of the Registrant...........................
10(i) Residential MortgageLoan Origination Agreement
dated July 31, 1996, with Orange County Federal
Credit Union...........................................
24
<PAGE>
11 Statement re: computation of
per share earnings................ -Reference is made to the Statements of
Operations of the Registrant for its fiscal
year ended September 30, 1995, for its five
month period ended February 29, 1996, and
for its ten month period (unaudited) ended
July 31, 1996, which are incorporated by
reference herein
16 Letter on changes in
certifying accountant............
21 A description of the
subsidiary of the Registrant is
incorporated herein by reference
to the Form 10-SB of the
Registrant.......................
27 Financial Data Schedule
25
<PAGE>
EMB CORPORATION
AUDITED FINANCIAL STATEMENTS
AS OF SEPTEMBER 30, 1995 AND
FEBRUARY 29, 1996
<PAGE>
C O N T E N T S
<TABLE>
<CAPTION>
PAGE
------
<S> <C>
INDEPENDENT AUDITORS' REPORT 1
FINANCIAL STATEMENTS:
BALANCE SHEETS AS OF SEPTEMBER 30, 1995 AND FEBRUARY 29, 1996 2
STATEMENTS OF OPERATIONS FOR THE YEARS ENDED SEPTEMBER 30, 1995, AND
1994 AND THE FIVE MONTHS ENDED FEBRUARY 29, 1996 AND FEBRUARY 28,
1995 (UNAUDITED) AND CUMULATIVE TOTALS FOR DEVELOPMENT STAGE OPERATIONS
FROM DECEMBER 16, 1995 (DATE OF RECOMMENCEMENT) THROUGH FEBRUARY
29, 1996 3
STATEMENTS OF SHAREHOLDERS' EQUITY FOR THE YEARS ENDED SEPTEMBER 30,
1995, AND 1994 AND THE FIVE MONTHS ENDED FEBRUARY 29, 1996 4
STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED SEPTEMBER 30, 1995 AND
1994, AND THE FIVE MONTHS ENDED FEBRUARY 29, 1996 AND FEBRUARY 28, 1995
(UNAUDITED) AND CUMULATIVE TOTALS FOR DEVELOPMENT STAGE OPERATIONS FROM
DECEMBER 16, 1995 (DATE OF RECOMMENCEMENT) THROUGH FEBRUARY 29, 1996 5
NOTES TO FINANCIAL STATEMENTS 6 - 12
</TABLE>
<PAGE>
INDEPENDENT AUDITORS' REPORT
TO THE BOARD OF DIRECTORS AND SHAREHOLDERS OF
EMB CORPORATION:
We have audited the accompanying balance sheet of EMB Corporation (a Hawaii
corporation) as of February 29, 1996, and the related statements of operations,
shareholders' equity, and cash flows for the five months ended February 29,
1996. We have also audited the balance sheet of EMB Corporation as of September
30, 1995, and the related statements of operations, shareholders' equity, and
cash flows for the years ended September 30, 1995 and 1994. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these 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 audits 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 financial statements for 1996 referred to above present
fairly, in all material respects, the financial position of EMB Corporation as
of February 29, 1996, and the results of their operations and their cash flows
for the five months ended February 29, 1996 in conformity with generally
accepted accounting principles. Also, in our opinion, the financial statements
for 1995 and 1994 referred to above present fairly, in all material respects,
the financial position of EMB Corporation as of September 30, 1995 and the
results of its operations and its cash flows for the years ended September 30,
1995 and 1994 in conformity with generally accepted accounting principles.
San Diego, California
April 30, 1996
<PAGE>
EMB CORPORATION
(A DEVELOPMENT STAGE COMPANY)
BALANCE SHEETS
<TABLE>
<CAPTION>
ASSETS
September 30, February 29,
CURRENT ASSETS 1995 1996
------------- ------------
<S> <C> <C>
Cash $ 26,071 $ 17,723
Accounts receivable - 21,613
Inventories, net - 40,809
Note receivable 14,000 14,000
--------- -----------
TOTAL CURRENT ASSETS 40,071 94,145
PROPERTY AND EQUIPMENT, net (Note D) 25,692 149,411
RELATED PARTY RECEIVABLE 54,889 22,635
LAND HELD FOR SALE (Notes A and E) - 3,930,000
OTHER ASSETS 1,177 1,435
--------- -----------
$ 121,829 $ 4,197,626
========= ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 4,684 $ 128,118
Accrued expenses 2,249 4,866
Notes payable - current portion (Note F) 60,000 94,200
Capital lease obligations - current portion (Note I) 7,821 43,513
--------- -----------
TOTAL CURRENT LIABILITIES 74,754 270,697
RELATED PARTY PAYABLE (Note G) 235,171 249,527
NOTES PAYABLE, net of current portion (Note F) 65,000 309,475
CAPITAL LEASE OBLIGATIONS, net of current portion (Note I) 10,247 53,737
--------- -----------
TOTAL LIABILITIES 385,172 883,436
COMMITMENTS (Note I)
SHAREHOLDERS' EQUITY (DEFICIT)
Common stock, no par value, 20,000,000 shares
authorized; 13,500,000 and 16,634,600 shares issued
and outstanding, respectively 100,000 6,459,190
Retained deficit ($182,502 deficit accumulated during development
stage begun December 16, 1995) (363,343) (3,145,000)
--------- -----------
TOTAL SHAREHOLDERS' EQUITY (DEFICIT) (263,343) 3,314,190
--------- -----------
$ 121,829 $ 4,197,626
========= ===========
The accompanying notes are an integral part of these financial statements.
</TABLE>
F-2
<PAGE>
EMB CORPORATION
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Five Months Ended Development
Years ended September 30, --------------------------- Stage ended
------------------------------ February 29, February 28, February 29,
1995 1994 1996 1995 1996
--------------- ------------- ------------- ------------- ------------
(Unaudited) (Note B)
<S> <C> <C> <C> <C> <C>
REVENUES $ 97,400 $ 74,107 $ 92,932 $ 54,337 $ 65,104
COST OF SALES - - 3,294 - 3,294
----------- ----------- ----------- ----------- -----------
Gross profit 97,400 74,107 89,638 54,337 61,810
OPERATING EXPENSES
General and administrative 379,568 147,875 410,688 134,530 231,884
Depreciation and amortization 2,662 1,419 13,300 1,109 5,320
----------- ----------- ----------- ----------- -----------
TOTAL OPERATING EXPENSES 382,230 149,294 423,988 135,639 237,204
----------- ----------- ----------- ----------- -----------
LOSS FROM OPERATIONS (284,830) (75,187) (334,350) (81,302) (175,394)
OTHER INCOME (EXPENSES)
Interest expense (2,164) - (17,770) - (7,108)
Other 9,989 (9,551) (347) (324) -
----------- ----------- ----------- ----------- -----------
TOTAL OTHER INCOME (EXPENSE) 7,825 (9,551) (18,117) (324) (7,108)
----------- ----------- ----------- ----------- -----------
LOSS BEFORE INCOME TAXES (277,005) (84,738) (352,467) (81,626) (182,502)
Income taxes (benefit) (Note G) 800 800 - - -
----------- ----------- ----------- ----------- -----------
NET LOSS $ (277,805) $ (85,538) $ (352,467) $ (81,626) $ (182,502)
=========== =========== =========== =========== ===========
NET LOSS PER COMMON SHARE $(.02) $(.006) $(.02) $(.006) $(.01)
=========== =========== =========== =========== ===========
WEIGHTED AVERAGE NUMBER OF SHARES
OUTSTANDING 13,500,000 13,500,000 15,380,760 13,500,000 15,380,760
=========== =========== =========== =========== ===========
The accompanying notes are an integral part of these financial statements.
</TABLE>
F-3
<PAGE>
EMB CORPORATION
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
Common Stock Total
------------------------ Retained Shareholders'
Shares Amounts Deficit Equity
------------ ---------- -------------- -----------
<S> <C> <C> <C> <C>
BALANCE, SEPTEMBER 30, 1994 13,500,000 $ 100,000 $ (85,538) $ 14,462
Net loss incurred prior to
development stage operations - - (277,805) (277,805)
------------ ---------- ----------- ----------
BALANCE, SEPTEMBER 30, 1995 13,500,000 100,000 (363,343) (263,343)
Net loss incurred prior to
development stage operations - - (169,965) (169,965)
------------ ---------- ----------- ----------
BALANCE, DECEMBER 16, 1995 13,500,000 100,000 (533,308) (433,308)
Shares issued for net assets of
Pacific International, Inc. 3,134,600 6,359,190 (2,429,190) 3,930,000
Net loss incurred during
development stage operations - - (182,502) (182,502)
------------ ---------- ----------- ----------
BALANCE, FEBRUARY 29, 1996 16,634,600 $6,459,190 $(3,145,000) $3,314,190
============ ========== =========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-4
<PAGE>
EMB CORPORATION
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Five Months Ended Development
September 30, ---------------------------- Stage Ended
--------------------------------- February 29, February 28, February 29,
1995 1994 1996 1995 1996
------------- ------------ ------------ ------------- ------------
<S> <C> <C> <C> <C> <C>
(Unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $(277,805) $(85,538) $(352,467) $(81,626) $(182,502)
Adjustments to reconcile net income to net cash
provided by (used in) operating
activities:
Depreciation and amortization 2,662 769 13,300 - 6,163
Deferred income tax provision -
Changes in operating assets and
liabilities:
Accounts receivable - - (21,613) - (21,613)
Inventories - - (40,809) - (40,809)
Prepaid expenses and other assets (1,177) - (259) - (259)
Accounts payable 349 4,335 123,434 6,841 117,022
Accrued expenses 1,449 800 2,617 - 2,226
--------- -------- --------- -------- ---------
NET CASH USED IN OPERATING ACTIVITIES (274,522) (79,634) (275,797) (74,785) (119,772)
--------- -------- --------- -------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of property and equipment (6,720) (4,335) ( 53,118) (4,346) (45,518)
Proceeds from notes receivable (14,000) - - (14,000) -
Proceeds from related party receivable (29,092) (25,797) 32,255 (64,231) 32,255
--------- -------- --------- -------- ---------
NET CASH USED IN INVESTING ACTIVITIES (49,812) (30,132) (20,863) (82,577) (13,263)
--------- -------- --------- -------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from issuance of notes payable 355,776 4,395 293,031 57,862 43,509
Payments under capital lease obligations - - (4,719) - (2,520)
Sale of common stock - 100,000 - 100,000 -
--------- -------- --------- -------- ---------
NET CASH PROVIDED BY FINANCING ACTIVITIES 355,776 104,395 288,312 157,862 40,989
--------- -------- --------- -------- ---------
NET INCREASE (DECREASE) IN CASH 31,442 (5,371) (8,348) 500 (92,046)
CASH, BEGINNING OF PERIOD (5,371) - 26,071 - 109,769
--------- -------- --------- -------- ---------
CASH, END OF PERIOD $ 26,071 $ (5,371) $ 17,723 $ 500 $ 17,723
========= ======== ========= ======== =========
The accompanying notes are an integral part of these financial statements.
</TABLE>
F-5
<PAGE>
EMB CORPORATION
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
A. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Organization and Nature of Operations
EMB Corporation (formerly called Pacific International, Inc.) (the "Company")
was incorporated under the laws of the State of Hawaii on May 5, 1960.
Effective December 16, 1995, the Company acquired the net assets of Sterling
Alliance Group, Ltd ("SAG") which included 100% ownership in Electronic Mortgage
Banc, Ltd. ("EMB") and land held for sale. For financial statement purposes the
transaction has been recorded as a recapitalization of SAG and the issuance of
shares for the net assets of the Company due to the fact that SAG provides
substantially all of the historic and on-going operations (See Note C). The
historical and on-going financial statements primarily represent the assets,
liabilities and operations which were acquired from SAG.
The Company principally provides mortgage brokerage services under the trade
name EMB using state of the art electronic interactive display terminals which
connect the Company's representatives to its customers.
Basis of Accounting
The Company's policy is to use the accrual method of accounting and to prepare
and present financial statements which conform to generally accepted accounting
principles. The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and reported amounts of revenues and expenses during the reporting
periods. Actual results could differ from those estimates.
Property and Equipment
Property and equipment is stated at cost, and depreciated using the straight-
line method over the estimated useful lives of the assets, which range from five
to ten years. Assets under capital leases are depreciated by the straight-line
method over the shorter of the lease term or the useful lives of the assets.
Maintenance, repairs and minor renewals are charged to operations as incurred.
Major replacements or betterments are capitalized. When properties are retired
or otherwise disposed, the related cost and accumulated depreciation are
eliminated from the respective accounts and any gain or loss on disposition is
reflected as income or expense.
Revenue Recognition - Mortgage Brokerage
Revenue from mortgage brokerage transactions are recognized when the loan is
funded and escrow on the related real estate transaction is closed.
Revenue and Cost Recognition - Land Held for Sale
The Company expects that it will from time to time hold real estate for sale.
Revenue from such sales will be recognized upon closing of the sale. Land
acquisition costs have been capitalized and they will be charged to earnings
when the related revenue is recognized. Other costs incurred in connection with
the land are charged to earnings when incurred.
F-6
<PAGE>
EMB CORPORATION
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
(CONTINUED)
A. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):
Income Taxes
Income taxes, are provided for using the liability method of accounting in
accordance with Statement of Financial Accounting Standards No. 109 (SFAS 109),
"Accounting for Income Taxes." A deferred tax asset or liability is recorded
for all temporary differences between financial and tax reporting. Deferred tax
expense (benefit) results from the net change during the year of deferred tax
assets and liabilities.
B. DEVELOPMENT STAGE BUSINESS:
The Company is a development stage business primarily engaged in the development
of on-line electronic mortgage brokerage services using interactive visual
displays connecting the Company to its customers. The financial statements
reflect activity primarily related to formation of the business and commencement
of operations in the mortgage brokerage industry since December 16, 1995, the
date of recapitalization.
Development stage operations for the Company began on December 16, 1995. Prior
to this date, the Company was inactive and had no material operations. The
following information details the deficit accumulated during the development
stage and the related losses:
Retained deficit at February 29,1996 consists of the following:
Deficit accumulated during
the development stage $ (182,502)
Deficit accumulated prior to
the development stage (2,962,498)
----------
$(3,145,000)
===========
C. RECAPITALIZATION:
Effective December 16, 1995, the Company acquired the net assets of Sterling
Alliance Group, Ltd. for 13,500,000 shares of the Company's common stock.
The Company previously did not have an operating business and, accordingly, has
treated the transaction as a recapitalization of SAG and recorded the
transaction at historical cost. Accordingly, the net assets acquired were
accounted for in a manner similar to a pooling of interest.
F-7
<PAGE>
EMB CORPORATION
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
(CONTINUED)
D. PROPERTY AND EQUIPMENT:
Property and equipment are summarized as follows:
<TABLE>
<CAPTION>
September 30, February 29, February 28,
1995 1996 1995
------------- ------------ ------------
<S> <C> <C> <C>
Machinery and equipment $ 30,160 $ 87,862 $4,130
Furniture & fixtures - 78,280 216
-------- -------- ------
30,160 166,142 4,346
Less accumulated depreciation and
amortization 4,468 16,731 -
-------- -------- ------
Property and equipment, net $ 25,692 $149,411 $4,346
======== ======== ======
</TABLE>
E. LAND HELD FOR SALE:
SAG acquired approximately five acres of undeveloped land in Riverside County,
California on February 24, 1995 from Rancho Brisa Corp., an unrelated third
party. SAG paid $10,000 cash, and issued 33,000 shares of their common stock as
consideration. Based upon an independent third party appraisal, the land was
valued at $170,000.
SAG also acquired approximately 61 acres of undeveloped land with water
producing rights and three wells in Monterey County, California on December 11,
1995 from Golden River Corp., an unrelated third party. Each well can produce
approximately 900,000 gallons of water per 24 hour period and the water supply
is replenished annually from the run-off of the surrounding mountains. SAG
issued 800,000 shares of their common stock as consideration. Based upon an
independent third party appraisal, the land was valued at $3,760,000.
F-8
<PAGE>
EMB CORPORATION
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
(CONTINUED)
F. NOTES PAYABLE:
Notes payable are summarized as follows:
<TABLE>
<CAPTION>
September 30, February 29,
1995 1996
------------- ------------
<S> <C> <C>
Note payable due to Frederic R. Weeth, maturing October,
1995, with no established payment schedule plus interest
at 10.5%. Note reissued on November 1, 1995, maturing
January 9, 1996 $ 30,000 $ 30,000
Note payable due to Thomas J. Donahue, maturing October,
1995, with no established payment schedule plus interest at
10.5%. Note reissued on November 1, 1995, maturing
January 9, 1996 30,000 30,000
Note payable due to Frederic R. Weeth, maturing January 9,
1996, with no established payment schedule plus interest at
10.5% - 10,600
Note payable to Thomas J. Donahue, maturing January 9,
1996, with no established payment schedule plus interest at
10.5% - 10,600
Note payable to Howard C. Kuhle, interest at 12%, interest
payable monthly. Principal and any unpaid interest due
March 1998 65,000 65,000
Various notes payable to unrelated parties with no established
terms, interest ranging from 8% to 11% - 257,475
-------- --------
125,000 403,675
Less current portion 60,000 94,200
-------- --------
$ 65,000 $309,475
======== ========
G. RELATED PARTY PAYABLE:
The Company had a balance due to a related party at February 29, 1996, and September 30, 1995 of $235,171, and $249,527,
respectively. The balance arose from certain operating expenses that were paid on behalf of the Company by a related corporation.
</TABLE>
F-9
<PAGE>
EMB CORPORATION
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
(CONTINUED)
H. INCOME TAXES:
The provision for income taxes for the years ended September 30, 1995 and 1994
and the five months ended February 29, 1996 consists solely of the $800 minimum
California franchise tax . Cumulative totals for the development stage
operations from December 16, 1995 through December 31, 1995 are shown for
comparative purposes.
Provisions for income taxes are summarized as follows:
<TABLE>
<CAPTION>
Year ended
-------------------------------
September 30 September 30
1995 1994
------------- -------------
<S> <C> <C>
Current income taxes $ 800 $ 800
Deferred income taxes - -
------ ------
Provision for income taxes $ 800 $ 800
====== =====
The Company's total deferred tax assets as of February 29, 1996 is as follows:
Deferred tax assets $ 73,000
Valuation allowance (73,000)
--------
Net deferred tax assets $ -
========
I. COMMITMENTS AND CONTINGENCIES:
Operating Leases
The Company subleases its facilities under an operating lease from an unrelated
third party which expires in March, 1997. Rental expense for the year ended
February 29, 1996 was $50,167.
Minimum annual rent payable and sublease income under the sublease for September
30, 1996 and 1997 is $31,200 and $44,382 and thereafter are as follows:
Rent Payable
------------
1996 $ 81,367
1997 44,382
--------
Total $125,749
========
The noncancelable operating lease provides that the Company pays for property taxes, insurance and certain other operating expenses
applicable to the leased premises.
</TABLE>
F-10
<PAGE>
EMP CORPORATION
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
(CONTINUED)
I. COMMITMENTS AND CONTINGENCIES: (CONTINUED)
Capital Leases
The Company acquired part of its equipment and furniture under capital lease
obligations. The economic substance of the capital lease agreements is that the
Company finances the acquisition by making monthly payments over a sixty month
period. The assets are reflected as part of property and equipment. The
following is an analysis of the book value of the leased assets included in
property and equipment as of September 30, 1995.
1995
---------
Cost $18,068
Accumulated depreciation 1,506
--------
$16,562
=======
The future minimum lease payments under capitalized leases and the present value
of the net minimum lease payments as of September 30, 1995 are as follows:
1996 $8,016
1997 8,016
1998 5,344
1999 -
------
21,376
Less amount representing interest 3,308
------
18,068
Less current portion of capital lease 7,821
------
$10,247
=======
F-11
<PAGE>
EMP CORPORATION
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
(CONTINUED)
J. SUPPLEMENTAL CASH FLOW INFORMATION:
Supplemental disclosures of cash flow information for the years ended September
30, 1995 and 1994 and the five months ended February 29, 1996 are summarized as
follows:
<TABLE>
<CAPTION>
1995 1994 1996
-------- -------- --------
<S> <C> <C> <C>
Cash paid for interest and
income taxes:
Interest $ 2,164 $ - $ 17,770
Income taxes $ - $ - $ -
Noncash investing and
financing activities:
Capital lease obligations
incurred $ 18,068 $ - $ 83,901
</TABLE>
F-12
<PAGE>
EMB CORPORATION
FINANCIAL STATEMENTS
JULY 31, 1996
F-13
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
<S> <C>
Page No.
FINANCIAL STATEMENTS
Balance Sheet................................ F-15
Statement of Operations...................... F-17
Statement of Cash Flows...................... F-18
Statement of Shareholders' Equity............ F-19
Notes to Financial Statements................ F-20
</TABLE>
F-14
<PAGE>
EMB CORPORATION
(A DEVELOPMENTAL STAGE COMPANY)
BALANCE SHEET
JULY 31, 1996
UNAUDITED
- --------------------------------------------------------------------------------
ASSETS
<TABLE>
<CAPTION>
<S> <C>
CURRENT ASSETS:
Cash $ 16,879
Accounts receivable 21,613
Inventories, net 67,844
Note receivable 14,000
-----------
Total current assets 120,336
-----------
PROPERTY AND EQUIPMENT:
Office equipment 117,715
Office furniture 91,610
-----------
209,325
Accumulated depreciation (27,551)
-----------
181,774
-----------
RELATED PARTY RECEIVABLE 22,634
-----------
LAND HELD FOR RESALE 3,930,000
-----------
OTHER ASSETS 1,436
-----------
$ 4,256,180
===========
</TABLE>
The accompanying notes are an integral part of this financial statement.
F-15
<PAGE>
EMB CORPORATION
(A DEVELOPMENTAL STAGE COMPANY)
BALANCE SHEET
JULY 31, 1996
UNAUDITED
(CONTINUED)
- --------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
<S> <C>
CURRENT LIABILITIES:
Accounts payable $ 183,036
Accrued expenses 36,964
Notes payable 727,150
Capital lease obligations 36,905
Related party payable 407,528
------------
Total current liabilities 1,391,583
------------
LONG-TERM DEBT 65,000
------------
CAPITAL LEASE OBLIGATIONS, NET OF CURRENT PORTION 47,155
------------
STOCKHOLDERS' EQUITY (DEFICIT):
Common stock, no par value, 30,000,000 shares
authorized; 16,634,600 shares issued
and outstanding 6,459,190
Preferred stock, 5,000,000 shares
authorized, no shares issued --
Retained deficit ($744,250 deficit accumulated during
development stage begun December 16, 1995) (3,706,748)
------------
2,752,442
------------
$ 4,256,180
============
</TABLE>
The accompanying notes are an integral part of this financial statement.
F-16
<PAGE>
EMB CORPORATION
(A DEVELOPMENTAL STAGE COMPANY)
STATEMENT OF OPERATIONS
FOR THE TEN MONTHS ENDED JULY 31, 1996
UNAUDITED
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
<S> <C>
REVENUES $ 211,267
COST OF SALES (3,294)
-------------
GROSS PROFIT 207,973
-------------
EXPENSES:
General and administrative 1,064,664
Depreciation and amortization 24,120
-------------
1,088,784
-------------
LOSS FROM OPERATIONS (880,811)
OTHER INCOME (EXPENSE):
Interest expense (33,404)
-------------
LOSS BEFORE INCOME TAXES (914,215)
INCOME TAXES (BENEFIT) --
-------------
NET LOSS $ (914,215)
=============
NET LOSS PER COMMON SHARE $ (0.06)
=============
WEIGHTED AVERAGE NUMBER OF SHARES
OUTSTANDING 15,380,760
=============
</TABLE>
The accompanying notes are an integral part of this financial statement.
F-17
<PAGE>
EMB CORPORATION
(A DEVELOPMENTAL STAGE COMPANY)
STATEMENT OF CASH FLOWS
FOR THE TEN MONTHS ENDED JULY 31, 1996
UNAUDITED
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
<S> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Cash received from customers $ 189,654
Cash paid to suppliers and employees (922,735)
Interest paid (33,404)
------------
Net cash used in operating activities (766,485)
------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (180,202)
Proceeds from related party receivable 32,255
Purchase of other assets (259)
------------
Net cash used in investing activities (148,206)
------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of notes payable 667,150
Proceeds from issuance of capital leases 83,901
Payment under capital lease obligations (17,909)
Proceeds from related party payable 172,357
------------
Net cash provided by financing activities 905,499
------------
NET INCREASE (DECREASE) IN CASH (9,192)
CASH, BEGINNING OF PERIOD 26,071
------------
CASH, END OF PERIOD $ 16,879
============
RECONCILIATION OF NET INCOME TO NET CASH
(USED IN) OPERATING ACTIVITIES:
Net Loss $ (914,215)
Adjustments to reconcile net loss to
net cash provided by operating activities-
Depreciation 24,120
(Increase) in accounts receivable (21,812)
(Increase) in inventory (67,844)
Increase in accounts payable 178,352
Increase in accrued liabilities 34,914
----------
$ (766,485)
==========
</TABLE>
The accompanying notes are an integral part of this financial statement.
F-18
<PAGE>
EMB CORPORATION
(A DEVELOPMENTAL STAGE COMPANY)
STATEMENT OF SHAREHOLDERS' EQUITY
FOR THE TEN MONTHS ENDED JULY 31, 1996
UNAUDITED
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------------
PREFERRED STOCK COMMON STOCK TOTAL
------------------- ------------------------- RETAINED SHAREHOLDERS'
SHARES AMOUNT SHARES AMOUNT DEFICIT EQUITY
------ ------ ----------- ---------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C>
BALANCE, SEPTEMBER 30, 1995 - - 13,500,000 $ 100,000 $ (363,343) $ (263,343)
Net loss incurred prior to
development stage operations - - (169,965) (169,965)
------ ------ ----------- ---------- ----------- -----------
BALANCE, DECEMBER 16, 1995 - - 13,500,000 100,000 (533,308) (433,308)
Shares issued for net assets of
Pacific International, Inc. 3,134,600 6,359,190 (2,429,190) 3,930,000
Net loss incurred during
development stage operations - - (744,250) (744,250)
------ ------ ----------- ---------- ----------- -----------
BALANCE, JULY 31, 1996 - - 16,634,600 $6,459,190 $(3,706,748) $2,752,442
====== ====== =========== ========== =========== ==========
</TABLE>
The accompanying notes are an integral part of this financial statement.
F-19
<PAGE>
EMB CORPORATION
NOTES UNAUDITED FINANCIAL STATEMENTS
JULY 31, 1996
- --------------------------------------------------------------------------------
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization and Nature of Operations - EMB Corporation (formerly called Pacific
International, Inc.) (the "Company") was incorporated under the laws of the
State of Hawaii on May 5, 1960. Effective December 16, 1995, the Company
acquired the net assets of Sterling Alliance Group, Ltd ("SAG") which included
100% ownership in Electronic Mortgage Banc, Ltd. ("EMB") and land held for sale.
For financial statement purposes the transaction has been recorded as a
recapitalization of SAG and the issuance of shares for the net assets of the
Company due to the fact that SAG provides substantially all of the historic and
on-going operations (See Note 3). The historical and on-going financial
statements primarily represent the assets, liabilities and operations which were
acquired from SAG.
Basis of Accounting - The Company's policy is to use the accrual method of
accounting and to prepare and present financial statements which conform to
generally accepted accounting principles. The preparation of financial
statements in conformity with generally accepted accounting principles requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and reported amounts of revenues and
expenses during the reporting periods. Actual results could differ from those
estimates.
Property and Equipment - Property and equipment is stated at cost, and
depreciated using the straight-line method over the estimated useful lives of
the assets, which range from five to ten years. Assets under capital leases are
depreciated by the straight-line method over the shorter of the lease term or
the useful lives of the assets. Maintenance, repairs and minor renewals are
charged to operations as incurred. Major replacements or betterments are
capitalized. When properties are retired or otherwise disposed of, the related
cost and accumulated depreciation are eliminated from the respective accounts
and any gain or loss on deposition is reflected as income or expense.
Revenue Recognition - Mortgage Brokerage - Revenue from mortgage brokerage
transactions is recognized when the loan is funded and escrow on the related
real estate transaction is closed.
Revenue and Cost Recognition - Land Held for Sale - The Company expects that it
will from time to time hold real estate for sale. Revenue from such sales will
be recognized upon closing of the sale. Land acquisition costs have been
capitalized and they will be
F-20
<PAGE>
EMB CORPORATION
NOTES TO UNAUDITED FINANCIAL STATEMENTS
JULY 31, 1996
(CONTINUED)
- --------------------------------------------------------------------------------
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED
charged to earnings when the related revenue is recognized. Other costs
incurred in connection with the land are charged to earnings when incurred.
Income taxes - Income taxes, are provided for using the liability method of
accounting in accordance with Statement of Financial Accounting Standards No.
109 (SFAS 109), "Accounting for Income Taxes." A deferred tax asset or
liability is recorded for all temporary differences between financial and tax
reporting. Deferred tax expense (benefit) results from the net change during
the year of deferred tax assets and liabilities.
(2) DEVELOPMENT STAGE BUSINESS
The Company is a development stage business primarily engaged in the development
of on-line electronic mortgage brokerage services using interactive visual
displays connecting the Company to its customers. The financial statements
reflect activity primarily related to formation of the business and commencement
of operations in the mortgage brokerage industry since December 16, 1995, the
date of recapitalization.
Development stage operations for the Company began on December 16, 1995. Prior
to this date, the Company was inactive and had no material operations. The
following information details the deficit accumulated during the development
stage and the related losses:
Retained deficit at July 31, 1996 consists of the following:
Deficit accumulated during
the development stage $(744,250)
Deficit accumulated prior to
the developement stag (2,962,498)
------------
$(3,706,748)
F-21
<PAGE>
EMB CORPORATION
NOTES TO UNAUDITED FINANCIAL STATEMENTS
JULY 31, 1996
(CONTINUED)
- --------------------------------------------------------------------------------
(3) RECAPITALIZATION
Effective December 16, 1995, the Company acquired the net assets of Sterling
Alliance Group, Ltd. for 13,500.000 share of the Company's common stock.
The Company previously did not have an operating business and, accordingly, has
treated the transaction as a recapitalization of SAG and recorded the
transaction at historical cost. Accordingly, the net assets acquired were
accounted for in a manner similar to a pooling of interest.
(4) LAND HELD FOR SALE
SAG acquired approximately five acres of undeveloped land in Riverside County,
California on February 25, 1995 from Rancho Brisa Corp., an unrelated third
party. SAG paid $10,000 cash and issued 33,000 shares of its common stock as
consideration. Based upon an independent third party appraisal, the land was
valued at $170,000.
SAG also acquired approxiamately 61 acres of undeveloped land with water
producing rights and three wells in Monterey County, California on December 11,
1995 from Golden River Corp., an unrelated third pary. Each well can produce
approximately 900,000 gallons of water per 24 hour period and the water supply
is replenished annually from the run-off of the surrounding mountains. SAG
issued 800,000 shares of their common stock as consideration. Based upon an
independent third pary appraisal, the land was valued at $3,760,000.
(5) LONG TERM DEBT
As of July 31, 1996, the Company had a long term note payable to an individual
in the amount of $65,000. This note bears interest at 12% per annum with
interest paid monthly. The note is secured by land held for resale and matures
in March of 1998.
F-22
<PAGE>
EMB CORPORATION
NOTES TO UNAUDITED FINANCIAL STATEMENTS
JULY 31, 1996
(CONTINUED)
- --------------------------------------------------------------------------------
(5) RELATED PARTY NOTES PAYABLE
As of July 31, 1996, the Company had notes payable to related parties totaling
$407,528. The notes are unsecured and due on demand.
(6) INCOME TAXES
As of July 31, 1996, the Company had no utilizable net operating loss
carryforwards. It has a current loss from operations in the amount of $745,249
which creates a deferred tax asset in the amount of $298,000. This deferred
asset is offset by a valuation allowance of $298,000.
(7) CAPITAL STOCK, AND 1996 STOCK OPTION, SAR AND STOCK BONUS PLAN
The Company amended its Articles of Incorporation on June 16, 1996, which
authorized an additional 10,000,000 shares of common stock, no par value, and
authorized 5,000,000 shares of preferred stock.
The Company has reserved a total of 1,000,000 shares of Common Stock for
issuance under the Company's 1996 Stock Option, SAR and Stock Bonus Plan (the
"Plan"). At July 31, 1996, no options, SAR's or stock bonuses have been granted
or issued under the Plan. Options may be granted to employees (including
officers), consultants, advisors and directors, although only employees and
directors and officers who are also employees may receive "incentive stock
options" intended to qualify for certain tax treatment. The exercise price of
non-qualified stock options must equal at least 85% of the fair market value of
the Common Stock on the date of grant, and in the case of incentive stock
options must be no less than the fair market value. Options granted under the
plan are immediately exercisable but generally vest over four years and must be
exercised within ten years.
(8) COMMITMENTS AND CONTINGENCIES
Operating Leases - The Company subleases its facilities under an operating lease
from an unrelated third party which expires in March, 1997. Rental expense for
the ten months ended July 31, 1996 totaled $96,773.
Minimum future payments under this lease total approximately $77,518 all of
which will be due within the next twelve months.
The noncancellable operating lease provides that the Company pays for property
taxes, insurance and certain other operating expenses applicable to the leased
premises.
The Company has entered into a non-exclusive software licensing agreement with
Lending Technology, Inc (VLT) whereby VLT is to provide the Company with M.A.X.
software, an interactive video-based computer software system that is designed
to faciltate mortgage loan applications. Under the terms of this agreement, the
Company will pay $145 to VLT for each mortgage loan funded through the use of
the M.A.X. software system.
On July 31, 1996, the Company entered into an agreement with the Orange County
Federal Credit Union to originate, process, underwrite and purchase residential
mortgage loans credit union members. The Credit Union is to issue commitments
and to fund its members loans which the Company will then arrange to purchase
and sell. The Credit Union will be charged fees ranging from 50 to 75 basis
points on each loan generated and will also earn interest on funds advanced.
F-23
<PAGE>
EMB CORPORATION
NOTES TO UNAUDITED FINANCIAL STATEMENTS
JULY 31, 1996
(CONTINUED)
- --------------------------------------------------------------------------------
(8) COMMITMENTS AND CONTINGENCIES, CONTINUED
Capital Leases - The Company acquired part of its equipment and furniture under
capital lease obligations. The economic substance of the capital lease
agreements in that the Company finances the acquisition by making monthly
payments over a sixty month period. The assets are reflected as part of property
and equipment. The following is an analysis of the book value of the leased
assets included in property and equipment as of July 31, 1996:
<TABLE>
<CAPTION>
<S> <C>
Cost $ 101,969
Accumulated depreciation (14,611)
---------
$ 87,358
=========
</TABLE>
The future minimum lease payments under capitalized leases as of July 31, 1996
for each of the next five years and in the aggregate are:
<TABLE>
<CAPTION>
<S> <C>
Fiscal year ended September 30, Amount
- ------------------------------- ------
1996 $ 7,540
1997 45,240
1998 41,960
1999 5,398
2000 -
---------
100,138
Less amount representing interest (16,078)
---------
84,060
Less current portion of capital lease 36,905
---------
Long term portion of capital lease $ 47,155
=========
</TABLE>
F-24
<PAGE>
EMB CORPORATION
NOTES TO UNAUDITED FINANCIAL STATEMENTS
JULY 31, 1996
(CONTINUED)
- --------------------------------------------------------------------------------
(8) COMMITMENTS AND CONTINGENCIES, Continued
Commitments - The Company has a nonexclusive license with a software provider
whereby it has the right to license the licensed Programs for its own use and to
sublicense the licensed Programs to third parties. The software specialized in
processing and creating closing documents as service to its customer loans. For
each loan closed, the Company will pay a fee to the provider of $145. During
the ten months ended July 31, 1996, the Company paid $600 in fees under this
licensing agreement. The term of this agreement shall be for five years.
F-25
<PAGE>
SIGNATURES
In accordance with Section 12 of the Securities Exchange Act of 1934,
the registrant caused this amendment to its registration statement to be signed
on its behalf by the undersigned, thereunto duly authorized.
EMB Corporation
Date: September 5,
1996
By: /s/ James E. Shipley /s/ William V. Perry
------------------------------ ------------------------------------
James E. Shipley William V. Perry
Director and President Director and Executive Vice President
/s/ B. Joe Wimer /s/ Bruce J. Brosky
------------------------------ -----------------------------------------
B. Joe Wimer Bruce J. Brosky
Director, Secretary, Treasurer, Director and Vice
Chief Financial Officer and President-Marketing and
Principal Accounting Officer Public Relations
<PAGE>
EXHIBIT 10(i)
RESIDENTIAL MORTGAGE LOAN
ORIGINATION AGREEMENT
THIS AGREEMENT is made this 31st day of July, 1996, by and between ELECTRONIC
MORTGAGE BANC, LTD., a California corporation, and ORANGE COUNTY FEDERAL CREDIT
UNION, a federally chartered credit union.
RECITALS:
Electronic Mortgage Banc, Ltd. ("EMB") is a mortgage company licensed under the
laws of the State of California and various other states. EMB has an
established retail mortgage loan origination operation and proposed by the terms
of this Agreement to originate, process, underwrite and purchase residential
mortgage loans for members of the Orange County Federal Credit Union ("Credit
Union").
Credit Union proposed, by the terms of this Agreement, to issue commitments and
to fund its members' loans, which EMB will then arrange to purchase and sell.
Nothing herein shall prohibit Credit Union from utilizing other providers to
originate, process, underwrite or service residential mortgage loans.
NOW, THEREFORE IT IS AGREED AS FOLLOWS:
1. Services of EMB
(a) EMB agrees to appoint Credit Union as its lending agent for the purpose
of allowing Credit Union to issue commitments to and fund loans for Credit Union
members.
(b) EMB agrees to originate, process, and underwrite in accordance with
EMB's written procedures (the "Procedures") which are incorporated herein as if
set forth in full. EMB agrees t provide (and keep updated) a copy of the
Procedures to the Credit Union throughout the term of this Agreement. EMB
further agrees to arrange to purchase and sell mortgage loans for the members of
Credit Union. In furtherance thereof, EMB shall:
(1) Provide loan application packages for distribution by Credit Union
to its members.
(2) Publish from time to time, by means of hard copy rate sheets and
electronically utilizing the EMB Mortgage Approval Xpress ("M.A.X.") system, for
use by Credit Union in promoting EMB's mortgage loan products, a schedule of
available loan products and terms.
<PAGE>
(3) Establish and maintain a toll-free telephone assistance
service to answer inquires by members with respect to available mortgage loan
programs and mortgage loan application.
(4) Provide and maintain the interactive video conferencing
M.A.X. system at such Credit Union locations as determined by mutual agreement
of the parties, such systems to be provided the Credit Union by EMB at no cost
to Credit Union, except that Credit Union shall pay for all expenses relating
to the ISDN telephone service.
(5) Provide a fully-licensed loan originator at the Branch
office specified by the Credit Union during the regular office hours of said
office.
(6) Receive mortgage loan applications from members, received
by EMB by means of the M.A.X. system, at the staffed credit union office, by
personal interview or by other means, and forward to members all disclosures or
notices when and as required by applicable law or regulation, including, but not
limited to, all disclosures and notices required under RESPA in a timely manner.
All such disclosures and notices, including and Adverse Action Notice, shall be
sent in the Credit Union's name as applicable.
(7) Complete all processing, underwriting and documentation of
mortgage loans when and as required by applicable law and regulation.
(8) Advise members of its credit decision, close and purchase
approved loans, (at the Credit Union's sole option) and send notices as required
by law or regulation on disapproved loans.
(9) Maintain records concerning all application as required by
applicable law and regulations.
(10) Furnish to Credit Union weekly reports showing the action
taken on all member loan applications and the status of pending member loan
applications.
(11) Upon the request of Credit Union, make available the
interface requirements for the M.A.X. system should the Credit Union decide that
it will perform any of the following: originating, processing, underwriting or
closing mortgage loans. In such event that Credit Union performs any of these
services and EMB is the wholesale funder on such loans, EMB will charge the
borrower those fees reflected in Exhibit "A" for the specific services rendered
by EMB.
(12) Carry at all times, adequate errors and omissions coverage
in an amount acceptable to Credit Union, in addition to Workers Compensation
Insurance, a General Liability Policy with a minimum coverage of $1,000,000, and
Errors and Omissions Insurance with a minimum coverage of $1,000,000, and such
other insurance as may be required by state and federal laws and regulations.
2
<PAGE>
(c) For services rendered pursuant to the terms of this Agreement which
are paid by a borrower, the charges of EMB for such services are set forth in
Exhibit "A" hereto, which will be applicable in the event that Credit Union
wishes to keep a loan for its own portfolio and to other loans originated by EMB
for Credit Union members. Such charges may be changed by EMB with thirty (30)
days written notice to Credit Union.
2. Participation by Credit Union
-----------------------------
(a) Credit Union agrees to have EMB originate, process, underwrite and
arrange to purchase (at the Credit Union's option) and sell residential mortgage
loans. In furtherance thereof, Credit Union shall:
(1) Issue commitment letters upon the request of EMB at the
Credit Union's sole discretion and approval. Should EMB request a commitment, it
is expressly agreed that such request is subject to all representations and
warranties referred to in Paragraph 4 of this Agreement.
(2) Fund such loans of Credit Union's member as EMB requests, at
the Credit Union's sole discretion and approval.
(3) Distribute to its members mortgage loan application
packages and/or facilitate the use of the M.A.X. system by its members for
pre-qualification, application, and/or loan approval. All loan application
packages, marketing material and other information made available to members
must be approved in advance by the Credit Union. Distribution of the loan
application packages shall be pursuant to a schedule mutually agreed upon by
Credit Union and EMB.
3. Fees Paid to Credit Union.
-------------------------
(a) EMB will pay to Credit Union, and, if required, properly disclose
in accordance with RESPA and Regulation "Z", as compensation for its services
rendered this Agreement those fees as determined as follows, based upon the
service modules set forth, for all loans funded by the Credit Union.
(i) A retail professional with physical branch presence
- - 65 basis points on the loan amount.
(ii) A retail professional with remote "off-site"
presence at a member's home or office, etc. - 50 basis points on the loan
amount.
(iii) A retail professional with virtual branch
presence, via Proshare/MortgageShare/M.A.X., - 75 basis points on the loan
amount.
(iv) A retail professional with virtual "Off-site"
presence, via Proshare/MortgageShare/M.A.X., at work location, service centers,
special events, trade shows, seminars, etc.. - 75 basis points on the loan
amount.
(v) A retail 800-toll-free phone pre-qualification and
applications services (descriptively being the OCFCU MortgageShare department) -
75 basis points on the loan amount.
3
<PAGE>
(vi) Retail "virtual expert" member direct software
delivery (may be packaged to look and feel like it was customized for OCFCU with
an investment of approximately $5,000) - 85 basis points on the loan amount.
(b) EMB will cause, through the closing agent,, to be paid to Credit
Union per diem interest on the loan amount wired by the Credit Union for the
funding of its member's loan. The rate of interest paid to Credit Union will
be at the same rate as the loan being funded. A 365 calendar year will be used
to calculate the per diem rate of interest. The interest shall be paid by EMB
for every day, or portion thereof, the Credit Union's funds are outstanding.
(c) Fees paid by EMB to Credit Union will be due and payable in timely
manner, no more that sever (7) calendar days from the date of funding. Credit
Union will receive the principal forwarded for funding, the funding/wire fee of
$100.00, and earned interest at the time EMB completes the purchase and sale of
the loans as set forth hereinabove. The parties agree to enter into a Bailee
Agreement with a title insurance company acceptable to both parties to ensure
the complete and timely transfer of funds and documents relating to the various
loan transactions completed in accordance with this Agreement.
(d) Credit Union has the right to portfolio any loan originated by EMB
for Credit Union's members. The intention to portfolio a loan shall be made by
Credit Union within 48 hours, excluding weekends and holidays, following
receipt by Credit Union of underwriting approval of the loan application. EMB
shall receive the origination fee charged the member borrower, normally one and
one-half percent (1-1/2%), less the basis points paid to Credit Union pursuant
to subparagraph (a) hereinabove. In addition, EMB shall receive the normal
closing costs paid by the member for origination, processing, underwriting and
closing of such loan, as set forth in Exhibit "A" hereto.
4. Representations and Warranties.
------------------------------
(a) EMB represents and warrants with respect to each loan it
originates, processed, underwrites, closes or purchases, that each such
application or loan has bee originated, processed, underwritten, closed, and
purchased in conformance with all applicable federal and state laws and
regulations, including, but not limited to , RESPA, Regulation "B", Regulation
"Z" and Regulation "X" and in accordance with the Procedures. Such
representations and warranties include, but are not limited to, the following:
(1) That EMB has the authority to originate, sell, and assign
such loan and its interest in any deed of trust or similar security instrument,
and that such loans have not otherwise been sold or assigned.
(2) That each note and deed of trust or similar security
instrument, all supporting and related documents are genuine and are genuine and
are what they purport to be, that each
4
<PAGE>
document has been duly executed and acknowledged by the borrower where and as
required, and that each document required to be recorded has been so recorded.
(3) That EMB is not aware of any fraud, misrepresentation, fact
or circumstance on the part of the borrower, the appraiser, or other parties
associated with the loan transaction which would render the borrower ineligible
for the subject mortgage loan.
(4) That the full original principal amount of each mortgage
loan was advanced to the borrower or on his/her behalf and pursuant to his/her
instructions, reduced only by any fees reflected in the loan documentation.
(5) That each application was handled or loan was made and
originated in compliance with all applicable Credit Union policy as well as all
applicable federal and state statutes and regulations relating to the mortgage
loan process, including, but not limited to, the Federal Consumer Credit
Protection Act, the Real Estate Settlement Procedures Act, the Federal Fair
Housing Act, the Flood Disaster Protection Act, the California Housing Financial
Discrimination Act, and without limitation, laws and regulations relating to
adjustable or variable rate mortgage loans, as applicable.
(6) That each loan is covered by and appraisal made by an
appraiser who meets and qualifies for all applicable federal laws and
regulations and state laws and regulations.
(7) That EMB is not aware of any defects or conditions which
affect or diminish the legal right to enforce any loan contract according to its
terms or any defect or condition which impairs the collectability of the loan.
(8) That EMB knows of nothing that would affect the priority of
the mortgage, deed of trust, or similar security instrument as described and set
forth in any policy of title insurance issued in connection with the mortgage
loan origination.
(9) That EMB is not aware of any denial of coverage,
non-payment, or notice of cancellation which would affect any insurance policy
required to be written in connection with the mortgage loan, and that to the
best of EMB's knowledge and information all such insurance required is in full
force as of the time of any loan sale. This includes title insurance, hazard
insurance, flood insurance, and private mortgage insurance, all as applicable to
the loan transaction.
(10) As to loans originated for the Credit Union's portfolio,
each mortgage loan was, at the time of closing, a current mortgage loan
obligation of the named borrower and was not in default, and that the terms of
the mortgage loan have not been modified or changed from those terms recited in
the loan documentarian.
(11) As to loans sold and assigned to the Credit Union, that an
assignment in recordable form accompanying each loan document package was duly
executed by an
5
<PAGE>
authorized representative of EMB and recorded as necessary and appropriate to
the transaction.
(12) That to the best knowledge of EMB the real property
security for each loan is free of damage and waste (including, but not limited
to , toxic or hazardous and asbestos contamination) and that to the best
knowledge of EMB there is no proceeding for the total or partial condemnation
thereof.
(13) That each loan is not and will not be subject to any
security interest (other than Credit Union's security interest) and will not be
assigned, hypothecated, transferred, pledged or otherwise conveyed to any other
party and there shall not be an assignment of mortgage or deed of trust relating
to such loan.
(b) EMB agrees, with respect to all loans made to Credit Union members,
to act with the utmost honesty and good faith and with the best interests of
Credit Union's members in mind.
5. Indemnification. EMB shall defend, indemnify and hold harmless Credit
Union from and against all losses, claims, damages, liability, actions, costs or
expenses (including attorney's fees) where such matters arise out of or are
based in whole or part upon any act or omission by EMB, its employees, agents,
or representatives (other than Credit Union). Credit Union shall defend,
indemnify and hold harmless EMB from and against all losses, claims, damages,
liability, actions, costs or expenses (including attorney's fees) where such
matters arise of or are based in whole or part upon any act or omission by
Credit Union, its employees, agents or representatives (other than EMB).
6. Term and Termination. This Agreement will continue at the will of the parties
for an indefinite term, cancellable by either party with, or without, cause upon
thirty (30) days written notice. Termination of this Agreement shall result in
the cessation of the origination of residential mortgage loans from and after
the effective date of termination, but this Agreement shall continue to govern
the rights of the parties, after the effective date of termination, until each
loan originated under this Agreement has been paid in full. Notwithstanding
anything to the contrary, this Agreement may be immediately terminated by either
party to this Agreement upon the material breach of the other party to this
Agreement.
7. Confidentiality and Records
(a) EMB agrees to keep any and all information pertaining to the Credit
Union, including, but not limited to, membership information of Credit Union's
members, strictly confidential, and EMB agrees not to use such roster or list of
members for any business purpose and will not release such information to third
parties except as essential to performance of its obligations under this
Agreement. Credit Union agrees to keep and maintain confidential all business
practices may be revealed to Credit Union in furtherance of this Agreement.
6
<PAGE>
(b) At all reasonable times during business hours and upon advance
notice, Credit Union shall have access to all mortgage loan files and records
related to mortgage loans extended to Credit Union's members as reasonably
necessary or convenient to confirm compliance with the terms of this Agreement
or as necessary or convenient to meet the requirements of regulators, auditors
or other third parties having a valid business need for access to such
information.
8. Cooperation of Parties. The parties to this Agreement agree to cooperate with
each other in doing all things reasonably necessary to originate mortgage loans
for Credit Union members as contemplated by this Agreement.
9. Assignment. This Agreement shall not be assigned in whole or in part by
either party.
10. Waiver. If either party shall waive any requirement of this Agreement
or any breach of this Agreement, such waiver shall apply only to the specific
requirement or breach waived and the Agreement thereafter shall be enforced as
though no waiver shall have occurred.
Waiver of any requirement or any breach in any one instance shall not be
construed to be a waiver or strict adherence to the terms of this Agreement.
11. Notices. Any notice required or permitted by this Agreement shall be
deemed given when sent by first-class mail, postage prepaid, or by overnight or
other delivery service, and addressed to the party at its address set forth on
the signature page. Either party may change its address in like manner.
12. Governing Law/Attorney's Fees. This Agreement shall be interpreted,
enforced, and construed according to the laws of the State of California. If
any provision of this Agreement is found to be unenforceable, the remainder of
this Agreement shall be enforced, so far as possible, as though the invalid ;or
unenforceable provision had not been included herein. If any legal action to
enforce or interpret the terms of this Agreement shall be commenced, the
prevailing party shall be entitled to recover reasonable attorney's fees and
costs.
13. Entire Agreement. This Agreement constitutes the entire agreement
concerning its subject matter between the parties. No statements or
representations other that as set forth in this Agreement shall be binding on
the parties. This Agreement may be modified only in writing, signed by the
parties hereto. This Agreement supersedes any previous agreement between the
parties.
14. Arbitration. Any controversy regarding any provision of this Agreement,
any Exhibit, or Addendum hereto, shall be submitted to binding arbitration in
accordance with the then existing rules of the American Association. Any award
made by the American Arbitration Association may be enforced as a final
judgement in any court of competent jurisdiction. The site for said arbitration
shall be Orange County, California.
7
<PAGE>
IN WITNESS WHEREOF the parties hereto have executed this Agreement effective the
date and year first above written.
ELECTRONIC MORTGAGE BANC, LTD.
575 Anton Boulevard, Suite 200
Costa Mesa, CA 92626
by:________________________________
William V. Perry, Chairman
ORANGE COUNTY FEDERAL CREDIT UNION
1211 East Dyer Road
Santa Ana, CA 92705
by__________________________________
8
<PAGE>
EXHIBIT "A"
EMB will charge Credit Union's members the following amounts for services
rendered and costs incurred:
Processing $350.00
Underwriting 375.00
Documentation Preparation 125.00
Administration Fee 150.00
Funding (if EMB funds) 125.00
Funding (if Credit Union funds) 125.00
$25.00 to EMB
$100.00 to Credit Union
Wire Transfer (if EMB funds) 75.00
Flood Certificate 27.00
Tax Service 57.00
9
<PAGE>
EXHIBIT 16
GEORGE F. ROMBACH
CERTIFIED PUBLIC ACCOUNTANT
------ 2009 Cenbia Place
Newport Beach, California 92660
(714) 642-0727
September 5, 1996
U.S. Securities and Exchange Commission
Division of Corporate Finance
450 Fifth Street, N.W.
Washington, D.C. 20549
The undersigned, George F. Rombach, a certified public accountant duly licensed
to practice in the State of California, was the independent certified public
account for Pacific International, Inc., presently called the EMB Corporation
(the "Company"), for its fiscal year ended September 30, 1994, and the seven
years then ended.
The Company has changed its independent public accountant for its fiscal year
ended September 30, 1995. Please be advised that such change did not occur as
a consequence of any disagreement regarding accounting matters or principles. I
did not resign or decline to stand for re-election as the independent public
accountant for the Company, nor was I dismissed by the Company, for any such
reason.
Please be advised the undersigned was provided with a copy of the disclosures
made in Response to item 304 of Regulation SB in the Company's amendment to its
Form 10-SB, and agrees with the statements made by the Company therein.
I hereby consent to the use of this letter to the amendment to the Form 10-SB of
the Company.
Very truly yours,
/s/ George F. Rombach
George F. Rombach, PhD, C.P.A.
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<PAGE>
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<PERIOD-TYPE> 10-MOS
<FISCAL-YEAR-END> SEP-30-1996
<PERIOD-START> OCT-01-1995
<PERIOD-END> JUL-31-1996
<CASH> 16,879
<SECURITIES> 0
<RECEIVABLES> 35,613
<ALLOWANCES> 0
<INVENTORY> 67,844
<CURRENT-ASSETS> 120,336
<PP&E> 209,325
<DEPRECIATION> 27,551
<TOTAL-ASSETS> 4,256,180
<CURRENT-LIABILITIES> 1,391,583
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0
0
<COMMON> 6,459,190
<OTHER-SE> (3,706,748)
<TOTAL-LIABILITY-AND-EQUITY> 4,256,180
<SALES> 211,267
<TOTAL-REVENUES> 211,267
<CGS> 3,294
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<INTEREST-EXPENSE> 33,404
<INCOME-PRETAX> (914,215)
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<INCOME-CONTINUING> (914,215)
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