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U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB
[ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES AND EXCHANGE ACT OF 1934
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ______________ TO ________________
COMMISSION FILE NUMBER: 1-11883
EMB CORPORATION
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(NAME OF SMALL BUSINESS ISSUER IN ITS CHARTER)
HAWAII 95-3811580
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(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER IDENTIFICATION NO.)
INCORPORATION OR ORGANIZATION)
575 ANTON BOULEVARD, SUITE 200, COSTA MESA, CALIFORNIA 92626
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(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
ISSUER'S TELEPHONE NUMBER: (714) 437-0715
SECURITIES REGISTERED UNDER SECTION 12(B) OF THE EXCHANGE ACT:
TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED
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N/A N/A
SECURITIES REGISTERED UNDER SECTION 12(G) OF THE EXCHANGE ACT:
COMMON STOCK, NO PAR VALUE
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days.
Yes X No
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Check if there is no disclosure of delinquent filers in response to Item
405 of Regulation S-B is not contained in this form, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB. [ ]
State issuer's revenues for its most recent fiscal year: $276,419
The aggregate market value of voting stock held by non-affiliates of the
registrant as of January 10, 1997:
Common stock, no par value: $8,230,429
The number of shares of the registrant's common stock outstanding as of
December 31, 1996: 5,732,801 shares.
Documents incorporated by reference: None
Transitional Small Business Disclosure Format:
Yes No X
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PART I
ITEM 1. DESCRIPTION OF BUSINESS.
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GENERAL. 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 assume certain liabilities of Sterling Alliance Group, Ltd. ("SAG") in
December 1995, including all of the issued and outstanding capital stock of EMB
Mortgage Corporation (formerly named Electronic Mortgage Banc, Ltd.)("EMB")
which is presently a wholly owned subsidiary of the Company. The Company
changed its corporate name from "Pacific International, Inc." to EMB Corporation
during 1996 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 are concentrated. First, EMB
acquired a license from Virtual Lending Technology, Inc. ("VLT"), an affiliate
of the Company, for EMB's proprietary version of its 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 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 mortgage
brokers. 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.
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 videoconferencing and interaction between the
prospective borrower/real estate agent and mortgage lenders. The software has
been modified and adapted to operate with the exclusive 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. The M.A.X. software was licensed to EMB, a wholly owned subsidiary of
the Company, by Virtual Lending Technology, Inc. which is owned and operated by
Rory P. Hughes who is also a director and officer of the Company.
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.
The computer system of EMB is installed with Intel's Pentium(R)
operating system 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
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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 109 licensees and
mortgage brokers who are served by 10 Company loan officers. Each licensee has
their own computer systems with M.A.X. and ProShare software with video
videoconferencing 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 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 and 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 $500 with a $100 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 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.
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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 10 employees as of
December 31, 1996. The Company also has regional marketing representatives
based in Florida, Pennsylvania, 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 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
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directed at 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.
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 application 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.
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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
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
of future products.
In addition, the Company relies on certain software that it licenses
from Virtual Lending Technology, Inc. and other third parties, including
software 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
GENERAL. EMB has been a retail mortgage broker for approximately
three years, and has recently commenced its business as a wholesale mortgage
banker, using the tradename "EMB Funding". EMB originates 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. EMB expects to negotiate
servicing fees for
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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.
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 that
do 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 made by 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
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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.
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. See "Certain Legal Aspects of the Mortgage Loans-Anti-
Deficiency Legislation and Other Limitations on Lenders". 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.
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 the 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.
CERTAIN LEGAL ASPECTS OF MORTGAGE LOANS
GENERAL. The mortgages originated by the Company and its licensed
affiliates will be either mortgages or deeds of trust, depending upon the
prevailing practice in the state in which the property subject to a mortgage
loan is located. A mortgage creates a lien upon the real property encumbered by
the mortgage. It is not generally prior to liens for real estate taxes and
assessments. Priority between mortgages depends on their terms and generally on
the order of filing with a state or county office. There are two parties to a
mortgage, the mortgagor, who is the borrower and homeowner (the "Mortgagor"),
and the mortgagee, who is the lender. Under the mortgage instrument, the
Mortgagor delivers to the mortgagee a note or bond and the
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mortgage. Although a deed of trust is similar to a mortgage, a deed of trust
formally has tree parties, the borrower-homeowners called the trustor (similar
to a Mortgagor), a lender (similar to a mortgagee) called the beneficiary, and a
third-party grantee called the Trustee. Under a deed of trust, the borrower
grants the property, irrevocably until the debt is paid, in trust, generally
with a power of sale, to the Trustee to secure payment of the obligation. The
Trustee's authority under a deed of trust and the mortgagee's authority under a
mortgage are governed by law, the express provisions of the deed of trust or
mortgage, and, in some cases, the directors of the beneficiary.
FORECLOSURE. Foreclosure of a deed of trust is generally accomplished
by a non-judicial Trustee's sale under a specific provision in the deed of trust
which authorizes the Trustee to sell the property to a third party upon any
default by the borrower under the terms of the note or deed of trust. In some
states, the Trustee must record a notice of default and send a copy to the
borrower-trustor and to any person who has recorded a requests for a copy of a
notice of default and notice of sale. In addition, the Trustee must provide
notice in some states to any other individual having an interest in the real
property, including any junior lienholders. The borrower, or any other person
having a junior encumbrance on the real estate, may, during a reinstatement
period, cure the default by paying the entire amount in arrears plus the costs
and expenses incurred in enforcing the obligation. Generally, state laws
require that a copy of the notice of sale be posted on the property and sent to
all parties having an interest in the real property.
Foreclosure of a mortgage is generally accomplished by judicial
action. The action is initiated by the service of legal pleadings upon all
parties having an interest in the real property. Delays in completion of the
foreclosure may occasionally result from difficulties in locating necessary
parties defendant. Judicial foreclosure proceedings are often not contested by
any of the parties defendant. However, even when the mortgagee's right to
foreclose is contested, the court generally issues a judgment of foreclosure and
appoints a referee or other court officer to conduct the sale of the property.
In the case of foreclosure under either a mortgage or a deed of trust,
the sale by the referee or other designated officer or by the Trustee is a
public sale. However, because of the difficulty a potential buyer at the sale
would have in determining the exact status of title and because the physical
condition of the property may have deteriorated during the foreclosure
proceedings, it is uncommon for a third party to purchase the property at the
foreclosure sale. Rather, it is common for the lender to purchase the property
from the Trustee or referee for an amount equal to the principal amount of the
mortgage or deed of trust, accrued and unpaid interest and the expense of
foreclosure. Thereafter, the lender will assume the burdens of ownership,
including obtaining casualty insurance and making such repairs at its own
expense as are necessary to render the property suitable for sale. The lender
will commonly obtain the services of a real estate broker and pay the broker's
commission in connection with the sale of the property. Depending upon market
conditions, the ultimate proceeds of the property may not equal the lender's
investment in the property. Any loss may be reduced by the receipt of any
mortgage insurance proceeds.
RIGHTS OF REDEMPTION. In some states, after sale pursuant to a deed
of trust or foreclosure of a mortgage, the borrower and foreclosed junior
lienors are given a statutory period in which to redeem the property from the
foreclosure sale. In some states, redemption may occur only upon a payment of
the entire principal balance of the loan, accrued interest and expenses of
foreclosure. In other states, redemption may be authorized if the former
borrower pays only a portion of the sums due. The effect of a statutory right
of redemption is to diminish the ability of the lender to sell the foreclosed
property. The rights of redemption would defeat the title of any purchaser from
the lender subsequent to foreclosure or sale under a deed of trust.
Consequently, the practical effort of the redemption right is to force the
lender to retain the property and pay the expenses of ownership until the
redemption period has run.
ANTI-DEFICIENCY LEGISLATION AND OTHER LIMITATIONS ON LENDERS. Certain
states have imposed statutory prohibitions which limit the remedies of a
beneficiary under a deed of trust or a mortgage. In some states, statutes limit
the right of the beneficiary or mortgagee to obtain a deficiency judgment
against the borrower following foreclosure or sale under a deed of trust. A
deficiency judgment would be a personal judgment against the former borrower
equal in most cases to the difference between the net amount realized upon the
public sale of the real property and the amount due to the lender. Other
statutes require the beneficiary or mortgagee to exhaust the security afforded
under a deed of trust or mortgage by foreclosure in
9
<PAGE>
an attempt to satisfy the full debt before bringing a personal action against
the borrower. Finally, other statutory provisions limit any deficiency judgment
against the former borrower following a judicial sale to the excess of the
outstanding debt over the fair market value of the property at the time of the
public sale. The purpose of these statutes is generally to prevent a
beneficiary or a mortgagee from obtaining a large deficiency judgment against
the former borrower as a result of low or no bids at the judicial sale.
In addition to laws limiting or prohibiting deficiency judgments,
numerous other statutory provisions, including the federal bankruptcy laws and
state laws affording relief to debtors, may interfere with or affect the ability
of the secured mortgage lender to realize upon collateral and/or enforce a
deficiency judgment. For example, with respect to federal bankruptcy law, a
court with federal bankruptcy jurisdiction may permit a debtor through his or
her Chapter 11 or Chapter 13 rehabilitative plan to cure a monetary default in
respect of a mortgage loan on a debtor's residence by paying arrears within a
reasonable time period and reinstating the original Mortgage Loan payment
schedule even though the lender accelerated the mortgage loan and final judgment
of foreclosure had been entered in state court (provided no sale of the
residence had yet occurred) prior to the filing of a debtor's petition. Some
courts with federal bankruptcy jurisdiction have approved plans based on the
particular facts of the reorganization case, that effected the curing of a
mortgage loan default by paying arrearages over a number of years.
Courts with federal bankruptcy jurisdiction have also indicated that
the terms of a mortgage loan secured by property of the debtor may be modified.
These courts have suggested that such modification may include reducing the
amount of each monthly payment, changing the rate of interest, altering the
repayment schedule, and reducing the lender's security interest to the value of
the residence, thus leaving the lender a general unsecured creditor for the
difference between the value of the residence and the outstanding balance of the
loan.
The Internal Revenue Code of 1986, as amended, provides priority to
certain tax liens over the lien of a mortgage. In addition, substantive
requirements are imposed upon mortgage lenders in connection with the
origination and the servicing of mortgage loans by numerous federal and some
state consumer protection laws. These laws include the federal Truth-In-Lending
Act, Real Estate Settlement Procedures Act, Equal Credit Opportunity Act, Fair
Credit Billing Act, Fair Credit Reporting Act, and related statutes. These
federal laws impose specific statutory liabilities upon lenders who originate
mortgage loans and who fail to comply with the provisions of the law. In some
cases, this liability may affect assignees of the mortgage loans.
ENFORCEABILITY OF CERTAIN PROVISIONS. Certain of the mortgage loans
will contain due-on-sale clauses. These clauses permit the lender to accelerate
the maturity of the loan if the borrower sells, transfer or conveys the
property. The enforceability of these clauses has been the subject of
legislation and litigation in many states, and in some cases the clauses have
been upheld, while in other cases their enforceability has been limited or
denied.
Upon foreclosure, courts have imposed general equitable principles.
These equitable principles are generally designed to relieve the borrower form
the legal effect of his defaults under the loan documents. Examples of judicial
remedies that have been fashioned including judicial requirements that the
lender undertake affirmative and expensive actions to determine the causes for
the borrower's default and the likelihood that the borrower will be able to
reinstate the loan. In some cases, courts have substituted their judgment for
the lender's judgment and have required that lenders reinstate loans or recast
payment schedules in order to accommodate borrowers who are suffering from
temporary financial disability. In other cases, courts have limited the right
of the lender to foreclose if the default under the mortgage instrument is not
monetary, such as the borrower failing to adequately maintain the property or
the borrower executing a second mortgage or deed of trust affecting the
property. Finally, some courts have been faced with the issue of whether or not
federal or state constitutional provisions reflecting due process concerns for
adequate notice require that borrowers under deeds of trust or mortgages receive
notices in addition to the statutorily-prescribed minimum. For the most part,
these cases have upheld the notice provision as being reasonable or have found
that the sale by a Trustee under a deed of trust, or under a mortgage having a
power of sale, does not involve sufficient state action to afford constitutional
protections to the borrowers.
10
<PAGE>
APPLICABILITY OF USURY LAWS. Title V of the Depository Institutions
Deregulation and Monetary Control Act of 1980 ("Title V"), provides that state
usury limitations not apply to certain types of residential first mortgage loans
originated by certain lenders after March 31, 1980. The Federal Home Loan Bank
Board is authorized to issue rules and regulations and to publish
interpretations governing implementation of Title V, the statute authorizes any
state to reimpose interest rate limits by adopting a law or constitutional
provision which expressly rejects application of the federal law. In addition,
even where Title V is not so rejected, any state is authorized by the law to
adopt a provision limiting discount points or other charges on mortgage loans
covered by Title V. As of the date hereof, certain states have taken action to
reimpose interest rate limits and/or to limit discount points or other charges.
TRADE NAMES AND SERVICE MARKS
The Company intends to register its service marks "EMB" and "M.A.X."
on the principal register of the United States Patent and Trademark Office. The
Company intends 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.
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.
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 lease 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.
EMPLOYEES
As of December 31, 1996, the Company employed 26 persons. Of the
total, 10 were engaged in sales and marketing, one was in product development
and technical support and 15 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
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.
11
<PAGE>
ITEM 2. 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.
UNDEVELOPED LAND AND WATER RIGHTS. As of September 30, 1996, the
Company owned 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 at an 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. 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 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 mountains.
Because this property was held for resale, the Company made no efforts nor
expended any material funds to commercially develop or market the water
resources of the property. Effective December 30, 1996, this property was sold
by the Company for $4,000,000, payable by a downpayment of $800,000, and a note
for $3,200,000, with annual payments amortized over 20 years, due and payable in
10 years.
The Company has an 4.89 acre undeveloped property in Riverside County,
California, that was appraised 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.
All real property owned by the Company is held for resale and not for
development purposes. 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 3. 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.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
---------------------------------------------------
No matters were submitted during the fourth quarter of the fiscal year
ended September 30, 1996, of the Company.
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
--------------------------------------------------------
Market for Common Equity. The Common Stock of the Company is
------------------------
currently quoted in the over-the-counter market on the Bulletin Board maintained
by the National Association of Securities Dealers, Inc. under the symbol "EMBU".
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.
12
<PAGE>
The following table sets forth the range of high and low closing bid
prices per share of the Common Stock as reported by National Quotation Bureau,
Inc. for the periods indicated.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1996: HIGH BID(1)(2) LOW BID(1)(2)
- ------------------------------- -------------- -------------
<S> <C> <C>
1st Quarter.................... $21.00 $ 1.00
2nd Quarter.................... $15.00 $ 7.50
3rd Quarter.................... $12.00 $ 3.25
4th Quarter.................... $5.125 $2.375
</TABLE>
(1) The Company is unaware of the factors which resulted in the significant
fluctuations in the bid prices per share during the periods being
presented, although it is aware that there is a very thin market for the
Common Stock, that there are very few shares being traded and that any
sales significantly impact the market.
(2) During September, 1996, the Company effectuated a one for four (1:4)
reverse stock split. The above prices have been revised to reflect this
split.
On January 10, 1997, the closing bid price of the Common Stock of the
Company was $3.50 per share. The foregoing prices represent inter-dealer
quotations without retail mark-up, mark-down or commission, and may not
necessarily represent actual transactions. On January 10, 1997, there were
approximately 11 broker-dealers publishing quotes for the Common Stock of the
Company.
As of December 31, 1996, there were 5,732,801 shares of Common Stock issued
and outstanding which were held by 660 holders of record.
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 be limited under future loan agreements of the Company which
restrict or prohibit the payment of dividends.
Sales of Unregistered Securities. In February 1996, the Company
--------------------------------
issued 3,375,000 shares (post-split 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 "Act"). In addition, the Company issued
821,825 shares of its Common Stock in exchange for cancellation of debt and for
services during fiscal 1996 in reliance upon Section 4(2) under the Act.
The Company offered up to $1,000,000 of its Common Stock and warrants
in a limited offering made in reliance upon Rule 504 of Regulation D under the
Act. The fiscal year ended September 30, 1996, sales in the amount of $460,000
covering 125,000 shares of Common Stock, and warrants to purchase 108,750 shares
of Common Stock from $2.00 to $3.00 per share during a period of 180 days have
been made by the Company.
The Company issued 502,000 shares of Common Stock in reliance upon
Rule 701 under the Act.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION.
---------------------------------------------------------
The following discussion is intended to assist in an understanding of
the Company's financial position as of September 30, 1996 and September 30, 1995
and the results of its operations for the periods then ended.
GENERAL
The Company, formerly called "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. ("SAG") in December,
13
<PAGE>
1995. Subsequently, 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 SAG, with the historical financial
information prior to merger being that of SAG.
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 Xpress,
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.
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.
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 regarding
the Company:
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED
SEPTEMBER 30, 1996 SEPTEMBER 30, 1995
------------------ -------------------
<S> <C> <C>
Revenues from processing
mortgages and product sales....... $ 276,419 $ 97,400
General and administrative expense.. $2,790,244 $ 531,818
Depreciation........................ $ 31,056 $ 2,662
Net Loss............................ $2,574,517 $(430,055)
</TABLE>
Year ended September 30, 1996 compared with the year ended September 30, 1995
- -----------------------------------------------------------------------------
REVENUES. Revenues increased 184% to $276,419 in 1996 from $97,400 in
1995. Revenues were generated from the loan process segment and product sales.
No income was generated from mortgages originated by the Company. No real
estate was sold during either year.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative
expenses increased 425% to $2,790,244 in 1996 from $531,818 in 1995. This
increase can be attributable to increased activity in the loan processing
segment of the business.
DEPRECIATION. Depreciation increased 1,067% to $31,056 in 1996 from
$2,662 in 1995 due to the acquisition of additional computer equipment.
NET LOSS FROM OPERATIONS. The net loss from operations increased 489%
to $2,574,517 in 1996 as compared with $437,080 in 1995 due primarily to the
increase in general and administrative expenses in 1996 over 1995.
14
<PAGE>
CAPITAL EXPENDITURES, CAPITAL RESOURCES AND LIQUIDITY
The following summary table presents comparative cash flows of the
Company for the years ended September 30, 1996 and 1995.
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED
SEPTEMBER 30, 1996 SEPTEMBER 30, 1995
------------------- -------------------
<S> <C> <C>
Net cash used in operating activities...... $(1,085,286) $(264,522)
Net cash used in investing activities...... $ (171,644) $ (59,812)
Net cash provided by financing activities.. $ 1,231,254 $ 355,776
</TABLE>
In addition to the above, during fiscal 1996, the Company acquired
land recorded at $800,000 in exchange for capital stock.
CAPITAL EXPENDITURES. The Company has incurred capital expenditures
for equipment and office furniture used in its loan process service. Capital
expenditures during the fiscal years ended September 30, 1996 and 1995 totaled
$96,846 and $6,720 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 capital
through an 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. Since October 1, 1995, the Company has increased its
liquidity through the sale of its Common Stock and warrants in its limited
offering made under Rule 504 of Regulation D under the Securities Act of 1933,
as amended. The Company has further extended its liquidity for its mortgage
lending operations by increasing its warehouse line of credit to $3,000,000 with
ICI Funding Corporation, a division of Imperial Credit Industries, Inc.
The Company has reduced the amount of its outstanding indebtedness
during fiscal 1996. An undeveloped property continues to be subject to a deed
of trust in the amount of $65,000. However, the notes to related parties
payable of $407,528 have been paid in full, and other notes have been reduced as
of September 30, 1996, by cash payments and by issuance of 465,000 shares of the
Common Stock of the Company to a noteholder.
As of September 30, 1996, the Company has notes payable to unrelated
parties in the total amount of approximately $358,793, including the $65,000
deed of trust amount on its undeveloped land. The Company believes that this
remaining indebtedness will be paid primarily from its cash flow from operations
and from the sale of additional shares of its Common Stock.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
---------------------------------------------------------------
FINANCIAL DISCLOSURE.
--------------------
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.
15
<PAGE>
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 previous 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.
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
-------------------------------------------------------------
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT.
--------------------------------------------------
DIRECTORS AND OFFICERS. The directors and officers of the Company 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)(4) 73 Director and Executive Vice
President
Ann L. Petersen 59 Director
James E. Shipley(4) 61 Director and President
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 1995, he was the 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.
16
<PAGE>
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 EMB Mortgage Corporation, 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.
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 EMB Mortgage Corporation, 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.
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 EMB Mortgage Corporation, 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. Wimer has been the Secretary and Treasurer of the Company since
April 29, 1996, and became a director of the Company on May 21, 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.
17
<PAGE>
COMPLIANCE WITH SECTION 16(A) OF EXCHANGE ACT. To the best of the
knowledge of the Company, its directors, officers and 10% beneficial owners have
filed all reports in compliance with the reporting requirements of Section 16(a)
of the Exchange Act, except that Form 3 filed by such persons were not timely
filed on or before August 28, 1996, the effective date of the Form 10-SB of the
Company.
ITEM 10. EXECUTIVE COMPENSATION.
----------------------
No executive officer or director of the Company received compensation
in excess of $100,000 during its fiscal year ended September 30, 1996. 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 William V.
Perry. 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.
1996 STOCK OPTION, SAR AND STOCK BONUS PLAN. The Company has reserved
a total of 250,000 shares of Common Stock for issuance under the Company's 1996
Stock Option, SAR and Stock Bonus Plan (the "Plan"). At September 30, 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 10 years. The members of the
Stock Option Committee that administer the Plan are Bruce J. Brosky, Rory P.
Hughes and William V. Perry.
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 11. 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 December 31, 1996, are as follows:
<TABLE>
<CAPTION>
SHARES PERCENT OF
MANAGEMENT BENEFICIALLY COMMON
SHAREHOLDERS(1) OWNED(1) STOCK
--------------- ------------ ----------
<S> <C> <C>
Bruce J. Brosky..................... 87,500(2) 1.5%
575 Anton Boulevard, Suite 200
Costa Mesa, California 92626
</TABLE>
18
<PAGE>
<TABLE>
<CAPTION>
SHARES PERCENT OF
MANAGEMENT BENEFICIALLY COMMON
SHAREHOLDERS(1) OWNED(1) STOCK
--------------- ------------ ----------
<S> <C> <C>
Rory P. Hughes...................... 499,973(2) 8.7%
575 Anton Boulevard, Suite 200
Costa Mesa, California 92626
William V. Perry.................... 290,470(2)(3) 5.1%
575 Anton Boulevard, Suite 200
Costa Mesa, California 92626
Ann L. Petersen..................... 6,250 .001%
Star Route 5080
Keaau, Hawaii 96749
James E. Shipley.................... 813,375(4) 14.2%
575 Anton Boulevard, Suite 200
Costa Mesa, California 92626
B. Joe Wimer........................ 6,250(2) .001%
575 Anton Boulevard, Suite 200
Costa Mesa, California 92626
Directors and officers as a group
(6 persons, including the above).. 1,703,630 29.7%
========= ====
</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, except as
otherwise specifically 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
warrants or options to purchase the Common Stock of the Company.
(2) Represents shares of the common stock of Sterling Alliance Group, Ltd.
which owns 3,375,000 shares of the Common Stock of the Company (58.9% of
its outstanding Common Stock).
(3) Represents shares of Sterling Alliance Group, Inc. owned by Win, Win,
Solver Group, Inc., a corporation owned by Mr. Perry. It also includes
13,688 shares held by a trust of which Mr. Perry is the trustee. He is not
a beneficiary of the trust, and disclaims any ownership of its securities.
(4) Represents shares of Sterling Alliance Group, Inc. owned by World Trends
Financial, Ltd., a corporation owned by Mr. Shipley.
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, Bruce J. Brosky, Rory P. Hughes and B. Joe
Wimer), such persons may be deemed to be the beneficial owners of the 3,375,000
shares of the Common Stock of the Company held in the name of SAG.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
----------------------------------------------
The Company entered into certain material transactions with SAG during
its fiscal year ended September 30, 1996, as described below. SAG is a Colorado
corporation that is beneficially owned 29.7% by James E. Shipley, a director and
the President of the Company, and owned 14.8% by Rory P. Hughes, a director
19
<PAGE>
and Vice President of the Company, and by certain other directors and officers
of the Company to a lesser extent.
In December 1995, the Company agreed to acquire substantially all of
the assets of SAG, including all of the issued capital stock of its subsidiary,
Electronic Mortgage Corporation ("EMB"), real property 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 issued 3,375,000 legended-restricted shares of its Common Stock to SAG
which presently represents approximately 58.9% 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 to be used in the mortgage lending business. Rory P. Hughes
and Frank D. Tuttle, present and former officers and directors of the Company,
are also the owners and principal officers of Virtual Lending Technology, Inc.
During the fiscal year ended September 30, 1996, the Company incurred
unreimbursed expenses regarding ERA Sterling, a company owned by the family of
James E. Shipley, a director and officer of the Company, in the amount of
$129,687.
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K.
--------------------------------
(a) Exhibits:
--------
3.1 Restated Articles of Incorporation of EMB Corporation are incorporated
by reference to Exhibit 3(i) to the Registrant's registration
statement on Form 10-SB (No. 1-11883), filed with the Commission on
June 28, 1996 (the "Form 10-SB").
3.2 The Bylaws of the Registrant are incorporated by referenced to Exhibit
3(ii) of Form 10-SB of the Registrant.
10(a) The Asset Acquisition Agreement dated December 16, 1995, with
Sterling Alliance Group, Ltd. is incorporated herein by reference to
Exhibit 10(a) 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 Exhibit 10(b) 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 Exhibit 10(c) to the Form 10-SB of the
Registrant.
10(d) The License Agreement with Virtual Lending Technology, Inc. is
incorporated herein by reference to Exhibit 10(d) 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 Exhibit
10(e) 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 Exhibit 10(f) 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 Exhibit
10(g) to the Form 10-SB of the Registrant.
20
<PAGE>
10(h) The form of license agreement with customers of the Registrant is
incorporated herein by reference to Exhibit 10(h) to the Form 10-SB of
the Registrant.
10(i) Residential Mortgage Loan Origination Agreement dated July 31, 1996,
with Orange County Federal Credit Union is incorporated by reference
to Exhibit 10(i) of Amendment No. 1 to the Form 10-SB of the
Registrant.
10(j) The Long Form Security (Installment) Land Contract with Power of
Sale dated December 30, 1996, is incorporated herein by reference to
Exhibit 7(c)(1) to the Form 8-K report of the Registrant filed on
January 9, 1997.
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, 1996, which are incorporated by reference herein.
16 Letter on changes in certifying accountant is incorporated by
reference to Exhibit 16 of Amendment No. 1 to the Form 10-SB of the
Registrant.
21.1* A description of the subsidiary of the Registrant.
23.1* Consent of Harlan & Boettger
27.* Financial Data Schedule.
----------------------
*Filed herewith
(b) Reports on Form 8-K. The Registrant did not file any reports on Form
-------------------
8-K during the last quarter of the period covered by this report.
21
<PAGE>
INDEX TO EXHIBITS
-----------------
<TABLE>
<CAPTION>
==========================================================================================
SEQUENTIAL
NO. EXHIBIT PAGE NO.
==========================================================================================
<S> <C> <C>
3.1 Restated Articles of Incorporation of EMB Corporation are N/A
incorporated by reference to Exhibit 3(i) to the Registrant's
registration statement on Form 10-SB (No. 001-11883), filed with the
Commission on June 28, 1996 (the "Form 10-SB").
- ------------------------------------------------------------------------------------------
3.2 The Bylaws of the Registrant are incorporated by referenced to N/A
Exhibit 3(ii) of Form 10-SB of the Registrant.
- ------------------------------------------------------------------------------------------
10(a) The Asset Acquisition Agreement dated December 16, 1995, with N/A
Sterling Alliance Group, Ltd. is incorporated herein by reference to
Exhibit 10(a) to the Form 10-SB of the Registrant.
- ------------------------------------------------------------------------------------------
10(b) The Appraisal Report dated April 22, 1996, of real property (61 N/A
acres)
in County of Monterey, California by National Appraisal Service is
incorporated herein by reference to Exhibit 10(b) to the Form 10-SB
of the Registrant.
- ------------------------------------------------------------------------------------------
10(c) The Appraisal Report as of December 7, 1994, of 4.89 acres in N/A
Counter of Riverside, California, by Tyna M. Stopnik is incorporated
herein by reference to Exhibit 10(c) to the Form 10-SB of the
Registrant.
- ------------------------------------------------------------------------------------------
10(d) The former License Agreement with Virtual Lending Technology, Inc. N/A
is incorporated herein by reference to Exhibit 10(d) to the Form 10-
SB of the Registrant.
- ------------------------------------------------------------------------------------------
10(e) The Seller Agreement between ICI Funding Corporation and EMB N/A
Mortgage Banc, Ltd. is incorporated herein by reference to Exhibit
10(e) to the Form 10-SB of the Registrant.
- ------------------------------------------------------------------------------------------
10(f) The 1996 Stock Option, SAR and Stock Bonus Plan is incorporated N/A
herein by reference to Exhibit 10(f) to the Form 10-SB of the
Registrant.
- ------------------------------------------------------------------------------------------
10(g) The Sublease covering the executive offices of the Registrant N/A
expiring
March, 1997 is incorporated herein by reference to Exhibit 10(g) to
the Form 10-SB of the Registrant.
- ------------------------------------------------------------------------------------------
10(h) The form of license agreement with customers of the Registrant is N/A
incorporated herein by reference to Exhibit 10(h) to the Form 10-SB
of the Registrant.
- ------------------------------------------------------------------------------------------
10(i) Residential Mortgage Loan Origination Agreement dated July 31, N/A
1996, with Orange County Federal Credit Union is incorporated by
reference to Exhibit 10(i) of Amendment No. 1 to the Form 10-SB of
the Registrant.
- ------------------------------------------------------------------------------------------
10(j) The Long Form Security (Installment) Land Contract with Power of N/A
Sale dated December 30, 1996, is incorporated herein by reference to
Exhibit 7(c)(1) to the Form 8-K report of the Registrant filed on
January 9, 1997.
- ------------------------------------------------------------------------------------------
</TABLE>
22
<PAGE>
<TABLE>
<CAPTION>
==========================================================================================
SEQUENTIAL
NO. EXHIBIT PAGE NO.
==========================================================================================
<S> <C> <C>
11 Statement re: computation of per share earnings --Reference is made N/A
to the Statements of Operations of the Registrant for its fiscal year
ended September 30, 1996, which are incorporated by reference
herein.
- ------------------------------------------------------------------------------------------
16 Letter on changes in certifying accountant is incorporated by N/A
reference to Exhibit 16 of Amendment No. 1 to the Form 10-SB of the
Registrant.
- ------------------------------------------------------------------------------------------
21.1* A description of the subsidiary of the Registrant.
- ------------------------------------------------------------------------------------------
23.1* Consent of Harlan & Boettger.
- ------------------------------------------------------------------------------------------
27.* Financial Data Schedule.
===========================================================================================
</TABLE>
23
<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the
registrant has caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
Registrant: EMB CORPORATION
By: /s/ JAMES E. SHIPLEY
------------------------------
James E. Shipley, President
In connection with the Exchange Act, this report has been signed below
by the following persons on behalf of the registrant and in the capacities and
on the dates indicated.
Date: January 13, 1997
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 President-Marketing
Chief Financial Officer and Public Relations
and Principal Accounting Officer
/s/ RORY P. HUGHES
----------------------------------
Rory P. Hughes
Director and Vice President-Research
and Development
24
<PAGE>
EMB CORPORATION AND SUBSIDIARY
AUDITED FINANCIAL STATEMENTS
AS OF SEPTEMBER 30, 1996 AND 1995
<PAGE>
C O N T E N T S
<TABLE>
<CAPTION>
PAGE
----------
<S> <C>
INDEPENDENT AUDITORS' REPORT F-1
CONSOLIDATED FINANCIAL STATEMENTS:
CONSOLIDATED BALANCE SHEETS AS OF SEPTEMBER 30, 1996 AND 1995 F-2
CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE YEARS ENDED SEPTEMBER 30, 1996
AND 1995 F-3
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT) FOR THE YEARS ENDED
SEPTEMBER 30, 1996 AND 1995 F-4
CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED SEPTEMBER 30, 1996
AND 1995 F-5
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS F-6 - F-13
</TABLE>
<PAGE>
INDEPENDENT AUDITORS' REPORT
TO THE BOARD OF DIRECTORS AND SHAREHOLDERS OF
EMB CORPORATION AND SUBSIDIARY:
We have audited the accompanying consolidated balance sheets of EMB Corporation
(a Hawaii corporation) and subsidiary as of September 30, 1996 and 1995, and the
related consolidated statements of operations, shareholders' equity (deficit),
and cash flows for the years ended September 30, 1996 and 1995. 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 consolidated financial statements referred to above present
fairly, in all material respects, the financial position of EMB Corporation and
subsidiary as of September 30, 1996 and 1995, and the results of their
operations and their cash flows for the years then ended in conformity with
generally accepted accounting principles.
Harlan & Boettger
San Diego, California
January 8, 1997
F-1
<PAGE>
EMB CORPORATION AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
ASSETS
September 30, September 30,
CURRENT ASSETS 1996 1995
-------------- -------------
<S> <C> <C>
Cash $ 395 $ 26,071
Accounts receivable (no allowance deemed necessary) 14,582 -
Inventory, net 35,324 -
Note receivable 14,000 14,000
----------- ---------
TOTAL CURRENT ASSETS 64,301 40,071
PROPERTY AND EQUIPMENT, net (Note D) 149,363 25,692
RELATED PARTY RECEIVABLE (Note G) 129,687 54,889
LAND HELD FOR SALE (Notes A and E) 843,000 43,000
OTHER ASSETS 4,128 1,177
----------- ---------
$ 1,190,479 $ 164,829
=========== =========
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES
Accounts payable $ 195,374 $ 4,684
Bank overdrafts 27,177 -
Accrued expenses 48,886 2,249
Notes payable - current portion (Note F) 293,793 60,000
Capital lease obligations - current portion (Note I) 28,553 7,821
----------- ---------
TOTAL CURRENT LIABILITIES 593,783 74,754
RELATED PARTY PAYABLE (Note G) - 235,171
NOTES PAYABLE, net of current portion (Note F) 65,000 65,000
CAPITAL LEASE OBLIGATIONS, net of current portion (Note I) 30,096 10,247
----------- ---------
TOTAL LIABILITIES 688,879 385,172
COMMITMENTS (Note I)
SHAREHOLDERS' EQUITY (DEFICIT)
Common stock, no par value, 30,000,000 shares
authorized; 5,311,817 and 1,644,350 shares issued
and outstanding, respectively 3,910,391 345,250
Preferred stock, no par value, 5,000,000 shares authorized, no shares
issued or outstanding - -
Common stock subscribed (200,000) -
Retained deficit (3,208,791) (565,593)
----------- ---------
TOTAL SHAREHOLDERS' EQUITY (DEFICIT) 501,600 (220,343)
----------- ---------
$ 1,190,479 $ 164,829
=========== =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-2
<PAGE>
EMB CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Years ended September 30,
--------------------------
1996 1995
------------- ----------
<S> <C> <C>
REVENUES
Mortgage loan revenue $ 244,874 $ 97,400
Product sales 31,545 -
----------- ----------
TOTAL REVENUES 276,419 97,400
COST OF SALES 29,636 -
----------- ----------
Gross profit 246,783 97,400
OPERATING EXPENSES
General and administrative 2,790,244 531,818
Depreciation 31,056 2,662
----------- ----------
TOTAL OPERATING EXPENSES 2,821,300 534,480
----------- ----------
LOSS FROM OPERATIONS (2,574,517) (437,080)
OTHER INCOME (EXPENSES)
Interest expense (64,393) (2,164)
Other (2,688) 9,989
----------- ----------
TOTAL OTHER INCOME (EXPENSE) (67,081) 7,825
----------- ----------
LOSS BEFORE INCOME TAXES (2,641,598) (429,255)
Income taxes (Note G) 1,600 800
----------- ----------
NET LOSS $(2,643,198) $ (430,055)
=========== ==========
NET LOSS PER COMMON SHARE $(.73) $(.29)
=========== ==========
WEIGHTED AVERAGE NUMBER OF SHARES
OUTSTANDING 3,641,421 1,469,225
=========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-3
<PAGE>
EMB CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT)
<TABLE>
<CAPTION>
Stock Total
Common Stock Preferred Stock Subscription Retained Shareholders'
--------------------- ---------------
Shares Amounts Shares Amount Receivable Deficit Equity (Deficit)
---------- ---------- ------ ------- ---------- ----------- ----------------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE, SEPTEMBER 30, 1994 1,288,600 $ 150,000 - -$ $ - $ (135,538) $ 14,462
Shares issued for Riverside land 8,250 33,000 - - - - 33,000
Shares issued for services 172,500 155,250 - - - - 155,250
Shares issued to founders for services 175,000 7,000 - - - - 7,000
Net loss - - - - - (430,055) (430,055)
--------- --------- ----- ------ ----------- ----------- -----------
BALANCE, SEPTEMBER 30, 1995 1,644,350 345,250 - - - (565,593) (220,343)
Proceeds from sale of shares 412,707 1,017,914 - - - - 1,017,914
Shares issued for services 836,389 1,279,460 - - - - 1,279,460
Shares issued to founders for services 893,712 35,749 - - - - 35,749
Shares issued for Monterey land 200,000 800,000 - - - - 800,000
Shares issued for note receivable 50,000 200,000 - - (200,000) - -
Shares issued for debt 116,009 232,018 - - - - 232,018
Shares issued for net assets of
Pacific International, Inc. 1,158,650 - - - - - -
Net loss - - - - - (2,643,198) (2,643,198)
--------- ---------- ------ ------ ---------- ----------- -----------
BALANCE, SEPTEMBER 30, 1996 5,311,817 $3,910,391 - -$ $(200,000) $(3,208,791) $ 501,600
========= ========== ====== ====== ========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-4
<PAGE>
EMB CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Years ended September 30,
-------------------------
1996 1995
---------- ---------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $(2,643,198) $(430,055)
Adjustments to reconcile net income to net cash
used in operating activities:
Common stock issued for services 1,315,209 162,250
Depreciation 31,056 2,662
Changes in operating assets and liabilities:
Increase in:
Accounts receivable (14,582) -
Inventory (35,324) -
Prepaid expenses and other assets (2,951) (1,177)
Accounts payable 217,867 349
Accrued expenses 46,637 1,449
----------- ---------
NET CASH USED IN OPERATING ACTIVITIES (1,085,286) (264,522)
----------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of property and equipment (96,846) (6,720)
Payment for land purchase - (10,000)
Loans made on notes receivable - (14,000)
Loans made on related party receivable (74,798) (29,092)
----------- ---------
NET CASH USED IN INVESTING ACTIVITIES (171,644) (59,812)
----------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from issuance of notes payable 268,893 355,776
Payments under capital lease obligations (17,300) -
Payments on borrowings (38,253) -
Sale of common stock 1,017,914 -
----------- ---------
NET CASH PROVIDED BY FINANCING ACTIVITIES 1,231,254 355,776
----------- ---------
NET INCREASE (DECREASE) IN CASH (25,676) 31,442
CASH, BEGINNING OF PERIOD 26,071 (5,371)
----------- ---------
CASH, END OF PERIOD $ 395 $ 26,071
=========== =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-5
<PAGE>
EMB CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED 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. All significant intercompany
accounts and transactions have been eliminated.
The Company has an interactive software system for the origination and
processing of mortgage loans which it calls Mortgage Approval Xpress
("M.A.X."). This system has been linked to the ProShare software developed
by Intel Corporation that provides direct teleconferencing and interaction
between prospective mortgage borrowers and mortgage lenders. The Company
licenses its mortgage software system to real estate brokers, builders,
credit unions, mortgage brokers and others. The Company also independently
originates and processes mortgage loans, and intends to engage in the
secondary placement of real estate mortgages.
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.
Cash
Cash includes cash on hand and cash in checking and savings accounts.
Inventory
Inventory is stated at the lower of cost or market, cost being determined
on the first-in, first-out (FIFO) method. Inventory consists of mortgage
loan processing and teleconferencing software and equipment.
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. Maintenance and repairs are charged to
operations as incurred, and major improvements are capitalized. Upon
retirement, sale, or other disposition, the related cost and accumulated
depreciation are eliminated from the respective accounts and any gain or
loss on disposition is reflected in operations.
F-6
<PAGE>
EMB CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
A. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):
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. The basis
of the land held for sale has been determined based on cash paid of $10,000
and 208,250 shares of common stock given as consideration. A $4.00 per
share value was determined by management to be a more clearly evident value
in determining the basis for the land held for sale.
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.
Per Share Information
Net loss per common share amounts are computed by dividing net loss by the
weighted average number of common and common equivalent shares outstanding
in the period. Common stock equivalents consist of warrants granted. For
the net loss per common share calculation there were no dilutive common
stock equivalents.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
B. DEVELOPMENT STAGE BUSINESS:
During the Company's fiscal year ended September 30, 1995, its operations
were not significant; therefore, the Company was considered in the
development stage. During its fiscal 1996 year, the Company's operations
were sufficient to now be considered an operating Company. The Company's
efforts are concentrated in two areas in the mortgage loan industry. First,
the development of the Company's M.A.X. software system. Second, the
development of residential mortgage lending on a retail basis directly to
consumers and on a wholesale basis to other mortgage brokers.
F-7
<PAGE>
EMB CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
C. RECAPITALIZATION:
Effective December 16, 1995, the Company acquired the net assets of
Sterling Alliance Group, Ltd. for 3,375,000 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.
D. PROPERTY AND EQUIPMENT:
Property and equipment are summarized as follows:
<TABLE>
<CAPTION>
September 30, September 30,
1996 1995
------------- -------------
<S> <C> <C>
Machinery and equipment $112,532 $30,160
Furniture & fixtures 71,317 -
-------- -------
183,849 30,160
Less accumulated depreciation 34,486 4,468
-------- -------
Property and equipment, net $149,363 $25,692
======== =======
</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 8,250 shares of their common
stock as consideration. The land was subsequently collateralized against the
$65,000 note payable to Howard C. Kuhle (See Note F).
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 200,000 shares of their common stock as consideration.
F-8
<PAGE>
EMB CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
NOTES PAYABLE:
Notes payable are summarized as follows:
<TABLE>
<CAPTION>
September 30, September 30,
1996 1995
------------- -------------
<S> <C> <C>
Note payable due to Frederic R. Weeth, interest at 10%,
no established repayment schedule, note past due, principal
and any unpaid interest due on demand $ 26,250 $ 30,000
Note payable due to Thomas J. Donahue, interest at 10%
no established repayment schedule, note past due, principal
and any unpaid interest due on demand 26,250 30,000
Note payable to Howard C. Kuhle, interest at 12%, interest
only payable monthly, principal and any unpaid interest due
March 1998, secured by deed of trust on Riverside County
land 65,000 65,000
Note payable to Baronin Enterprises, Inc., interest at 8%,
note past due, principal and any unpaid interest due on demand 50,000 -
Various notes payable to unrelated parties, no established
repayment schedule, interest ranging from 8% to 11% 191,293 -
-------- --------
358,793 125,000
Less current portion 293,793 60,000
-------- --------
$ 65,000 $ 65,000
========= ========
</TABLE>
G. RELATED PARTY TRANSACTIONS:
Related party receivable at September 30, 1996 and 1995 consists of amounts
due from a related corporation of $129,687 and $54,889, respectively.
Related party payable consists of certain operating expenses that were paid
on behalf of the Company by a related corporation. During the year ended
September 30, 1996 the Company issued common stock in lieu of payment.
F-9
<PAGE>
EMB CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
H. INCOME TAXES:
As discussed in Note A, the Company accounts for income taxes in accordance
with SFAS 109. The provision for income taxes for the years ended September
30, 1996 and 1995 consists solely of the $800 minimum California franchise
tax.
Provisions for income taxes are summarized as follows:
<TABLE>
<CAPTION>
Year ended
--------------------------
September 30 September 30
1996 1995
------------ ------------
<S> <C> <C>
Current income taxes $1,600 $ 800
Deferred income taxes - -
------ -----
Provision for income taxes $1,600 $ 800
====== =====
</TABLE>
As a result of adopting SFAS 109, the Company has recognized deferred tax
assets for the tax effects of temporary differences for the years ended
September 30, 1996 and 1995 as follows:
<TABLE>
<CAPTION>
1996 1995
------------ ----------
<S> <C> <C>
Deferred tax assets:
Net operating losses $ 1,120,000 $ 120,000
----------- ---------
Gross deferred tax assets 1,120,000 120,000
Valuation adjustment (1,120,000) (120,000)
----------- ---------
Net deferred tax assets $ - $ -
=========== =========
</TABLE>
The Company has net operating loss carryforwards remaining of approximately
$2,800,000. The regular net operating loss carryforwards, which are
approximately the same as the alternative net operating loss carryforwards,
if not utilized, will expire as follows:
<TABLE>
<S> <C>
2009 $ 100,000
2010 200,000
2011 2,500,000
----------
$2,800,000
==========
</TABLE>
F-10
<PAGE>
EMB CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
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 September 30, 1996 was $90,132.
Minimum future rental payments under the sublease total approximately
$45,064.
The noncancelable operating lease provides that the Company pays for
property taxes, insurance and certain other operating expenses applicable
to the leased premises.
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 thirty-six 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:
<TABLE>
<CAPTION>
September 30, September 30,
1996 1995
-------------- --------------
<S> <C> <C>
Cost $ 75,949 $18,068
Accumulated depreciation (23,450) (1,506)
-------- -------
Net Book Value $ 52,499 $16,562
======== =======
</TABLE>
The future minimum lease payments under capitalized leases and the present
value of the net minimum lease payments are as follows:
<TABLE>
<CAPTION>
Year ending September 30,
-------------------------
<S> <C>
1997 $39,927
1998 30,356
1999 3,469
73,752
Less amount representing interest 15,103
-------
58,649
Less current portion of capital lease 28,553
-------
$30,096
=======
</TABLE>
F-11
<PAGE>
EMB CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
J. SUPPLEMENTAL CASH FLOW INFORMATION:
Supplemental disclosures of cash flow information are summarized as
follows:
<TABLE>
<CAPTION>
Years ended September 30,
-------------------------
1996 1995
------------ -----------
<S> <C> <C>
Cash paid for interest and income taxes:
Interest $ 52,232 $ 2,164
Income taxes $ - $ -
Noncash investing and financing activities:
Capital lease obligations incurred $ 57,881 $18,068
Common stock issued for land $800,000 $33,000
Common stock issued for related party
payable $232,018 $ -
</TABLE>
K. CAPITAL STOCK:
The Company amended its Articles of Incorporation on May 21, 1996, which
authorized the issuance of 35,000,000 shares of capital stock; 30,000,000
shares are no par value common stock and 5,000,000 shares are preferred
stock. The preferred stock may be divided into and issued in one or more
series. As of September 30, 1996 there were no shares of preferred stock
issued or outstanding.
On September 27, 1996 the Company effectuated a one for four (1:4) reverse
stock split. The effect of this event has been retroactively applied for
financial statement presentation on the statement of stockholders' equity
(deficit).
L. STOCK OPTION, SAR AND STOCK BONUS PLAN:
On April 29, 1996 the Board of Directors approved the "EMB Corporation 1996
Stock Option, SAR and Stock Bonus Plan." Options and SAR's may be granted
to employees and independent consultants. No options and SAR's shall be
exercisable within six months from date of grant or more than ten years
after date of grant. The option price of stock options shall in no event be
less than 85%, and for incentive stock options shall in no event be less
than 100% of the "fair market value" of the stock on the date of grant.
The Company has reserved a total of 250,000 shares of common stock for
issuances under the plan. As of September 30, 1996 no shares have been
granted under the plan.
F-12
<PAGE>
EMB CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
M. WARRANTS:
As of September 30, 1996 there are 108,750 outstanding warrants to purchase
108,750 shares of no par value common stock at $2.00- $3.00 per share. No
warrants have been exercised as of September 30, 1996.
N. MAJOR CUSTOMER:
A major source of revenue for the Company is derived from the resale of
retail mortgage loans to a single national mortgage lender. The loss of
this business would have a material effect on the Company.
O. SUBSEQUENT EVENT:
On December 30, 1996 the Company sold the Monterey land (which has been
held for sale) to an unrelated third-party for $4,000,000. The Company
received $800,000 cash and a note receivable for $3,200,000. The note
receivable is secured by the property, bears interest at 12% per annum, and
calls for ten equal annual installments of principal and interest of
$422,867 commencing December 30, 1997, with the balance due on December 30,
2006.
F-13
<PAGE>
EXHIBIT 21.1
DESCRIPTION OF SUBSIDIARY
EMB Mortgage Corporation ("EMC")(formerly named Electronic Mortgage Banc,
Ltd.) is the only subsidiary of the Registrant.
EMC is a California corporation that is owned by the Registrant. EMC
utilizes the tradename "EMB Funding" in its mortgage lending business.
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use in the Form 10-KSB of our report dated January 8,
1997, relating to the financial statements of EMB Corporation (formerly called
Pacific International, Inc.), which is contained therein.
San Diego, California
January 13, 1997
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> SEP-30-1996
<PERIOD-START> OCT-01-1995
<PERIOD-END> SEP-30-1996
<EXCHANGE-RATE> 1
<CASH> 395
<SECURITIES> 0
<RECEIVABLES> 14,000
<ALLOWANCES> 0
<INVENTORY> 35,324
<CURRENT-ASSETS> 64,301
<PP&E> 183,849
<DEPRECIATION> 34,486
<TOTAL-ASSETS> 1,190,479
<CURRENT-LIABILITIES> 593,783
<BONDS> 0
0
0
<COMMON> 3,910,391
<OTHER-SE> (200,000)
<TOTAL-LIABILITY-AND-EQUITY> 1,190,479
<SALES> 276,419
<TOTAL-REVENUES> 276,419
<CGS> 29,636
<TOTAL-COSTS> 29,636
<OTHER-EXPENSES> 2,821,300
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 64,393
<INCOME-PRETAX> (2,641,598)
<INCOME-TAX> 1,600
<INCOME-CONTINUING> (2,643,198)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,643,198)
<EPS-PRIMARY> (.73)
<EPS-DILUTED> (.73)
</TABLE>
