<PAGE>
As filed with the Securities and Exchange Commission on August 27, 1997
333-21719
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
-----------------------
Amendment No. 2
to
FORM SB-2
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
EMB CORPORATION
(Name of small business issuer in its charter)
HAWAII 6162 95-3811580
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number) Identification No.)
3200 BRISTOL, 8TH FLOOR JAMES E. SHIPLEY, PRESIDENT
COSTA MESA, CALIFORNIA 92626 EMB CORPORATION
(714) 437-0738 3200 BRISTOL, 8TH FLOOR
(Address and telephone number COSTA MESA, CALIFORNIA 92626
of principal executive offices) (714) 437-0738
(Name, address and telephone
number, of agent for service)
3200 BRISTOL, 8TH FLOOR
COSTA MESA, CALIFORNIA 92626
(Address of principal place of business
or intended principal place of business)
------------------------
Copies to:
STEPHEN A. ZRENDA, JR., ESQ.
STEPHEN A. ZRENDA, JR., P.C.
1520 LIBERTY TOWER
100 NORTH BROADWAY
OKLAHOMA CITY, OKLAHOMA 73102-8601
(405) 235-2111
------------------------
Approximate date of proposed sale to the public: AS SOON AS PRACTICABLE AFTER
THIS REGISTRATION STATEMENT BECOMES EFFECTIVE.
If this Form is filed to register additional securities for an offering pursuant
to Rule 462(b) under the Securities Act, please check the following box and list
the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a),
MAY DETERMINE.
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Number of pages in sequential number system _______
Index to Exhibits appears on sequential page _______
<PAGE>
EMB CORPORATION
CROSS REFERENCE SHEET SHOWING LOCATION
IN PROSPECTUS OF INFORMATION REQUIRED BY ITEMS IN PART I OF FORM SB-2
ITEM IN PART I OF FORM SB-2 LOCATION IN PROSPECTUS
--------------------------- ----------------------
1. Front of Registration Statement and Outside
Front Cover of Prospectus........................ Outside Front Cover Page
2. Inside Front and Outside Back Cover Pages
of Prospectus.................................... Inside Front and Outside
Back Cover Pages
3. Summary Information and Risk Factors.............. The Company-Summary
Financial Information;
Risk Factors; Business
4. Use of Proceeds................................... Not Applicable
5. Determination of Offering Price................... Front Cover Page; Risk
Factors
6. Dilution.......................................... Risk Factors
7. Selling Security Holders.......................... Selling Stockholder and
Plan of Distribution
8. Plan of Distribution.............................. Front Cover Page
9. Legal Proceedings................................. Legal Proceedings
10. Directors, Executive Officers, Promoters
and Control Persons.............................. Management
11. Security Ownership of Certain Beneficial
Owners and Management............................ Principal Stockholders;
Management-Security
Ownership of Management
12. Description of Securities......................... Outside Front Cover
Page; Capitalization;
Description of Capital
Stock
13. Interest of Named Experts and Counsel............. Legal Matters; Experts
14. Disclosure of Commission Position on
Indemnification for Securities Act
Liabilities...................................... Management-
Indemnification of
Officers and Directors
15. Organization Within Last Five Years............... The Company; Business
16. Description of Business........................... The Company; Business
17. Management's Discussion and Analysis or
Plan of Operations............................... Management's Discussion
and Analysis of
Financial Condition and
Results of Operations;
Business
18. Description of Property........................... Business-Properties
19. Certain Relationships and Related Transactions.... Management-Certain
Relationships and
Related Transactions
20. Market for Common Equity and Related
Stockholder Matters.............................. Market Price;
Description of Capital
Stock
21. Executive Compensation............................ Management-Compensation
of Executive Officers
22. Financial Statements.............................. Financial Statements
23. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure........... Business-Changes in and
Disagreements with
Accountants
<PAGE>
SUBJECT TO COMPLETION, DATED AUGUST 27, 1997
PROSPECTUS
3,375,000 Shares
EMB CORPORATION
Common Stock
All of the shares of Common Stock of EMB Corporation (the "Company")
offered hereby are being transferred by Sterling Alliance Group, Ltd. (the
"Selling Stockholder"), the largest stockholder of the Company, to its
stockholders. The Selling Stockholder intends to transfer 3,375,000 shares of
the Common Stock, no par value, of the Company to its stockholders in connection
with the proposed dissolution and liquidation of the Selling Stockholder.
Neither the Company nor the Selling Stockholder will receive any proceeds from
the transfer of the shares by the Selling Stockholder.
The Company independently originates and processes mortgage loans, and
intends to engage in the secondary placement of real estate mortgages. The
Company has an interactive software system for the origination and processing of
mortgage loans which it calls Video InteractiveMortgage Process ("VIP"). This
system has been linked to the ProShare(R) software developed by Intel(R)
Corporation that provides direct teleconferencing and interaction between
prospective mortgage borrowers and mortgage lenders. As part of its mortgage
lending marketing activities, the Company licenses its mortgage software system
to real estate brokers, builders, credit unions, mortgage brokers and others in
connection with marketing activities for its mortgage business. See "Business".
The Company's Common Stock is traded in the over-the-counter market
(electronic bulletin board) with reported price quotations under the trading
symbol EMBU. On August 22, 1997, the closing bid and ask prices of a share of
the Common Stock of the Company was $1.875 and $2.026 respectively. See "Market
Price".
SEE "RISK FACTORS" FOR A DISCUSSION OF CERTAIN FACTORS THAT SHOULD BE
CONSIDERED.
-----------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
-----------------
EMB Corporation
3200 Bristol, 8th Floor
Costa Mesa, California 92626
(800) EMB-9022
The date of this Prospectus is _________________, 1997.
<PAGE>
THE COMPANY
The following summary is qualified in its entirety by, and should be read
in conjunction with, the more detailed information and the Financial Statements,
including the notes thereto, appearing elsewhere in this Prospectus. Unless
otherwise indicated, all references in this Prospectus to the number of shares
of Common Stock give effect to a 1 for 4 reverse stock split effected September
27, 1996.
This Prospectus and any accompanying supplements hereto, including
documents incorporated herein and therein by reference, contain forward-looking
statements within the meaning of Section 27A of the Securities Act of 1933 and
Section 21E of the Securities Exchange Act of 1934. Forward-looking statements
are inherently subject to risks and uncertainties, many of which cannot be
predicted with accuracy and some of which might not even be anticipated. Future
events and actual results, financial and otherwise, may differ materially from
the events and results discussed in the forward-looking statements. Factors
that might cause such a difference include, but are not limited to, those
discussed in "Risk Factors" and "Management's Discussion and Analysis of
Financial Condition and Results of Operations" appearing elsewhere in this
Prospectus.
EMB Corporation (the "Company") was incorporated in the State of Hawaii
on May 5, 1960, and was previously known as "Pacific International, Inc."
Until December 1995, the Company had been dormant and conducted no
material operations for many years. The Company was originally incorporated to
acquire developed and undeveloped real estate. In December 1995, the Company
agreed to acquire certain assets from Sterling Alliance Group, Ltd. ("SAG"),
including all of the issued and outstanding capital stock of EMB Mortgage
Corporation ("EMB"), a California corporation (formerly named Electronic
Mortgage Banc, Ltd.), certain real property, and other assets, and to assume
certain liabilities, from SAG in exchange for 3,375,000 shares of the Common
Stock of the Company which represents approximately 43.6% of the issued and
outstanding Common Stock of the Company as of August 22, 1997.
Since the completion of this acquisition, the Company has continued the
operations of EMB, which is presently a wholly owned subsidiary of the Company.
EMB is primarily engaged in mortgage lending and in the business of originating,
processing and marketing mortgage loans. See "Business".
THE OFFERING
<TABLE>
<CAPTION>
<S> <C>
Common Stock presently outstanding......................... 7,086,176 Shares(1)
Common Stock to be outstanding after offering.............. 7,086,176 Shares(1)
Common Stock trading symbol................................ EMBU
</TABLE>
- ------------
(1) Does not include outstanding warrants to purchase 600,000 shares of
Common Stock that are presently issued and outstanding; nor 648,649
shares of the 8% Convertible Preferred Stock, Series A that are issued
and outstanding. See "Description of Capital Stock".
SUMMARY FINANCIAL INFORMATION
The data set forth below is qualified by reference to, and should be read
in conjunction with, the financial statements and notes thereto and
"Management's Discussion and Financial Analysis of Financial Condition and
Results of Operations" included elsewhere in this Prospectus. The following
summary financial data of the Company as of September 30, 1996 and September 30,
1995, are derived from the financial statements of the Company audited by Harlan
& Boettger, independent accountants; and unaudited summary financial data as of
June 30, 1997 and June 30, 1996. This information should be read in conjunction
with the financial statements and the notes thereto set forth elsewhere in the
Prospectus. See "Financial Statements".
2
<PAGE>
<TABLE>
<CAPTION>
NINE MONTH PERIOD ENDED
FISCAL YEAR ENDED SEPTEMBER 30, JUNE 30, (UNAUDITED)
------------------------------- ------------------------
1996 1995 1997 1996
-------------- ----------- ---------- ----------
<S> <C> <C> <C> <C>
STATEMENT OF OPERATIONS:
Revenues $ 276,419 $ 97,400 $2,547,810 $ 195,186
Operating expenses $ 2,850,936 $ 534,480 $3,353,384 $1,137,095
Loss from operations $(2,574,517) $ (437,080) $ (805,574) $ (941,909)
Other income (expense), net $ (67,081) $ 7,825 $ 604,363 $ (39,014)
Loss before income taxes $(2,641,598) $ (429,255) $ (201,211) $ (980,923)
Income taxes $ 1,600 $ 800 $ 1,600 $ 800
Net loss $(2,643,198) $ (430,055) $ (202,811) $ (981,723)
Loss per share $ (.73) $ (.29) $ (.03) $ (.21)
Weighted average shares
outstanding 3,641,421 1,469,225 $5,805,527 $4,735,233
</TABLE>
<TABLE>
<CAPTION>
SEPTEMBER 30, 1996 JUNE 30, 1997
------------------ -------------
(unaudited)
<S> <C> <C>
Balance Sheet Data:
Working capital (deficit) $ (529,482) $ 462,982
Total assets $1,190,479 $10,632,749
Total long-term debt and capital lease obligations $ 95,096 $ 270,385
Deferred Gain $ -- $ 2,560,000
Total shareholders' equity $ 501,600 $ 1,199,102
</TABLE>
SELLING STOCKHOLDER AND PLAN OF DISTRIBUTION
The following table sets forth the aggregate number of shares of Common
Stock of the Company identified by Sterling Alliance Group, Ltd. (the "Selling
Stockholder") as being owned by it as of August 22, 1997, and the aggregate
number of shares of Common Stock being distributed to its stockholders.
<TABLE>
<CAPTION>
Number of shares of Number of shares of Number of shares of
Common Stock Common Stock Common Stock to
owned before to be distributed be owned after
distribution(1) to its stockholders distribution(1)
---------------------- ------------------- ----------------------
<S> <C> <C> <C>
Sterling Alliance Group, Ltd. 3,375,000 3,375,000 0
</TABLE>
As soon as practicable following the date of this Prospectus, the Selling
Stockholder intends to transfer and distribute its shares of the Common Stock of
the Company directly to its stockholders as part of its proposed plan of
dissolution and liquidation. The Selling Stockholder will not receive any
proceeds or other consideration from its shareholders regarding the distribution
of its shares of Common Stock of the Company. The Selling Stockholder has not
retained any underwriters or other persons in connection with the distribution
of its shares of the Company to its stockholders.
Certain directors and officers of the Company are also directors, officers
and stockholders of the Selling Stockholder. See "Management-Security Ownership
of Management".
3
<PAGE>
USE OF PROCEEDS
The Company and the Selling Stockholder will not receive any proceeds
from the transfer or sale of the Common Stock offered hereby.
RISK FACTORS
RISK FACTORS RELATING TO THE COMPANY
THE COMPANY. There is no assurance that the Company's activities will be
profitable. The likelihood of the success of the Company must also be
considered in light of the problems, expenses, difficulties, complications,
delays and all of the inherent risks frequently encountered in the operation of
a relatively new business. See "Business".
The Company may experience continued losses primarily because it will
achieve limited revenues while incurring costs related to its business
development. There is no assurance that the Company will attain profitable
operations. The Company's success will depend upon its ability to continue to
originate and process mortgage loans, and to expand its marketing capabilities.
There can be no assurance that the Company's mortgage services and systems will
achieve a broad market acceptance. See "Capitalization".
CONFLICTS OF INTEREST. There are anticipated material conflicts of
interest between the Company and its stockholders or its affiliates, and there
may be potential conflicts of interest involving the Company and its
stockholders or its affiliates, some of which may affect the planned business
activities of the Company. The Board of Directors will attempt to resolve any
conflict of interest situation which may arise and which is brought to the
attention of the Board of Directors on a case-by-case basis. See "Conflicts of
Interest".
NON-ARM'S LENGTH TRANSACTIONS. The Company may engage in transactions
with its officers, directors and stockholders. Such transactions may be
considered as not having occurred at arm's length. The Company may continue to
do business with such persons in the future, but intends to contract with them
on the same basis and upon no more favorable terms than could be obtained from
persons not affiliated with the Company. See "Conflicts of Interest."
MANAGEMENT AND EMPLOYEES. The Company's success depends to a significant
extent upon members of senior management and other key employees of the Company,
none of whom is bound by an employment agreement or have experience in managing
a large public mortgage company. The Company does not maintain key man life
insurance on any of its employees. The loss of the service of any of these
individuals could have a material adverse effect on the Company. In addition,
the Company believes that its future success will also depend to a significant
extent upon its ability to attract, train and retain highly skilled technical,
management, sales, marketing and consulting personnel. Competition for such
personnel is intense, and the Company expects that such competition will
continue for the foreseeable future. The Company has from time to time
experienced difficulty in locating candidates with appropriate qualifications.
There can be no assurance that the Company will be successful in attracting or
retaining such personnel, and the failure to attract or retain such personnel
could have a material adverse effect on the Company's business, financial
condition or results of operations. See "Management".
RELIANCE ON MANAGEMENT. Substantially all decisions regarding management
of the Company's affairs will be made by the officers of the Company.
Accordingly, stockholders must be willing to entrust all aspects of management
to them. Potential investors must carefully evaluate the personal experience
and business performance of the principals of the Company. The Company also
intends to retain consultants and additional employees to provide services to
the Company regarding the operations of the Company. See "Business", and
"Management-Consultants". Consultants have no fiduciary duty to the
stockholders, and may not perform as expected.
INDEMNIFICATION. The Company's Restated Articles of Incorporation and
By-Laws limit the liability of its directors and officers to the Company and its
stockholders to the extent permitted by Hawaii law, and the Company's Restated
Articles of Incorporation and By-Laws provide for indemnification of the
directors' and officers' to such extent. See "Management - Directors and
Executive Officers." The Company may also obtain directors and officers
liability insurance. These measures will provide additional protection to the
officers and directors of the Company against liability in connection with
certain corporate actions.
UNINSURED LOSSES. The Company has comprehensive insurance, including
general liability, fire and extended coverage, business interruption insurance,
and errors and omissions insurance, which is customarily obtained for similar
operations. Although the Company will maintain insurance coverage in amounts
believed to be prudent and sufficient by the Company, there is a possibility
4
<PAGE>
that losses may exceed such coverage limitations. Furthermore, there are
certain types of losses (generally of a catastrophic nature, including
earthquakes and floods) that are either uninsurable or not economically
insurable. Should such a disaster occur, the Company could suffer a loss of the
capital invested in, as well as anticipated profits from, any assets destroyed
by such casualty.
NEED FOR ADDITIONAL FINANCING. The Company's ability to implement its
business strategy will depend upon its ability to continue to establish
alternative long-term financing arrangements, maintain sufficient financing
under warehousing facilities upon acceptable terms and to access the public or
private capital markets in connection with the issuance of its equity or debt
securities. There can be no assurance that such financing will be available to
the Company on favorable terms, if at all. If such financing were not available
or the Company's capital requirements exceed anticipated levels, then the
Company would be required to obtain additional financing. The Company cannot
presently estimate the amount and timing of additional financing requirements
because such requirements are dependent upon, among other things, the growth of
the Company. If the Company were unable to raise such additional capital, its
results of operations and financial condition would be adversely affected. See
"Management's Discussion and Analysis of Results of Operations and Financial
Condition -- Liquidity and Capital Resources."
RISKS RELATING TO MORTGAGE LENDING
MARKET RISKS. The results of the Company's operations will be affected
by various factors, many of which are beyond the control of the Company. The
results of the Company's operations will depend, among other things, on the
level of net cash flows generated by the Company's mortgage assets and the
supply of and demand for mortgage loans. The Company's net cash flows will vary
as a result of changes in interest rates, the behavior of which involves various
risks and uncertainties as set forth below. Prepayment rates and interest rates
depend upon the nature and terms of the mortgage assets, the geographic location
of the properties securing the mortgage loans, conditions in financial markets,
the fiscal and monetary policies of the United States government and the Board
of Governors of the Federal Reserve System, international economic and financial
conditions, competition and other factors, none of which can be predicted with
any certainty. Because interest rates will significantly affect the Company's
activities, the operating results of the Company will depend, in large part,
upon the ability of the Company to utilize appropriate strategies to maximize
returns to the Company while attempting to minimize risks. See "Business".
GENERAL RISKS OF MORTGAGE LOANS. Mortgage loans are subject to varying
degrees of risk, including the risk of a default by the borrowers on a mortgage
loan, and the added responsibility on the part of the Company of foreclosing in
order to protect its investment. The ability of the borrowers to make payments
on non-single-family mortgage loans is highly dependent on the borrowers'
ability to manage and sell, refinance or otherwise dispose of the properties and
will be dependent upon all the risks generally associated with real estate
investments which are beyond the control of the Company. The Company must rely
on the experience and ability of the borrowers to manage, develop and dispose of
or refinance the properties. Investing in real estate is highly competitive and
is subject to numerous inherent risks, including, without limitation, changes in
general or local economic conditions, neighborhood values and interest rates,
limited availability of mortgage funds which may render the sale or refinancing
of the properties difficult, increases in real estate taxes, other operating
expenses, the supply and demand for properties of the type involved, toxic and
hazardous wastes, environmental considerations, zoning laws, entitlements, rent
control laws, other governmental rules and fiscal policies and acts of God, such
as floods, which may result in uninsured losses. See "Business".
CONCENTRATION. The mortgage loans made by the Company may be obligations
of a limited number of borrowers on a limited number of properties. The lack of
diversity in the type, number and geographic location of mortgage loans made by
the Company would materially increase the risk of an investment in the Common
Stock.
CERTAIN RISKS IN ACQUIRING AND ACCUMULATING MORTGAGE LOANS. The Company
may acquire and accumulate mortgage loans as part of its long-term investment
strategy or until a sufficient quantity has been acquired for securitization
into mortgage-backed securities. There can be no assurance that the Company
will be successful in securitizing mortgage loans. While holding mortgage
loans, the Company will be subject to risks of borrower defaults and
bankruptcies, fraud losses and special hazard losses. In the event of any
default under mortgage loans held by the Company, the Company will bear the risk
of loss of principal to the extent of any deficiency between the value of the
mortgage collateral and the principal amount of the mortgage loan. It may not
be desirable, possible or economic for the Company to complete the
securitization of any or all mortgage loans which the Company acquires or funds,
in which case the Company will continue to hold the mortgage loans and bear the
risks of borrower defaults and special hazard losses.
Mortgage loans invested in by the Company will be secured by the
properties and will also be a recourse obligation of the borrower. In the event
of a default, the Company would be able to look to the borrower to make up any
deficiency between the value of the collateral and the principal amount of the
mortgage loan.
5
<PAGE>
It is expected that when the Company acquires mortgage loans, the sellers
will represent and warrant to the Company that there has been no fraud or
misrepresentation with respect to the origination of the mortgage loans and will
agree to repurchase any loan with respect to which there is fraud or
misrepresentation. There can be no assurance that the Company will be able to
obtain the repurchase agreement from the sellers. Although the Company may have
recourse to the sellers based on the sellers' representations and warranties to
the Company, the Company will be at risk for loss to the extent the sellers do
not perform their repurchase obligations.
The Company may acquire mortgage loans from failed savings and loan
associations or banks through United States government agencies such as the
Resolution Trust Corporation or the Federal Deposit Insurance Corporation.
These institutions do not provide the seller's typical representations against
fraud and misrepresentation. The Company intends to acquire third party
insurance, to the extent that it is available at a reasonable price, for such
risks. In the event the Company is unable to acquire such insurance, the
Company would be relying solely on the value of the collateral underlying the
mortgage loans. Accordingly, the Company will be subject to a greater risk of
loss on obligations purchased from these institutions.
Since 1995, the Company's growth in originating loans has been
significant. In light of this growth, the historical financial performance of
the Company may be of limited relevance in predicting future performance. Also,
the loans originated by the Company have been outstanding for a relatively short
period of time. Consequently, the delinquency and loss experience of the
Company's loans to date may not be indicative of future results. It is unlikely
that the Company will be able to maintain delinquency and loan loss ratios at
their present levels to the extent that the Company's loan portfolio becomes
more seasoned and are not resold by the Company.
ABILITY TO ACQUIRE MORTGAGE ASSETS AT FAVORABLE SPREADS RELATIVE TO
BORROWING COSTS. The Company's net income from mortgage lending will depend
largely on the Company's ability to acquire mortgage assets at favorable spreads
over the Company's borrowing costs. The Company may purchase mortgage assets
from a variety of mortgage bankers, banks, savings and loans, investment banking
firms, home-builders and other firms involved in originating, packaging and
underwriting mortgage loans ("Mortgage Suppliers"). In acquiring mortgage
loans, the Company will compete with REITs, investment banking firms, savings
and loan associations, banks, mortgage bankers, insurance companies, mutual
funds, other lenders, GNMA, FNMA, FHLMC and other entities purchasing mortgage
loans, many of which have greater financial resources than the Company. There
are numerous entities that invest in mortgage loans and others may be organized
in the future. The effect of the existence of additional entities that invest
in mortgage loans may be to increase competition for the available supply of
mortgage loans suitable for purchase by the Company. There can be no assurance
that the Company will be able to acquire sufficient mortgage loans from Mortgage
Suppliers at spreads above the Company's cost of borrowings. In addition, there
can be no assurance that Mortgage Suppliers will continue to originate suitable
types of mortgage loans or that changes in market conditions or applicable laws
will not affect the availability of suitable mortgage loans.
DEPENDENCE ON WAREHOUSE FINANCING. The Company relies significantly upon
its access to warehouse credit facilities in order to fund new originations and
purchases. The Company has a $3,000,000 warehouse line of credit with Imperial
Warehouse Lending Group, Inc., a division of Imperial Credit Industries, Inc.
("ICI"). There was $5,848,050 extended by ICI on the warehouse lien at June 30,
1997, substantially in excess of the contractual commitment with ICI, based upon
and oral agreements and understandings with ICI. The Company expects to be able
to maintain its existing warehouse line of credit (or to obtain replacement or
additional financing) as the current arrangements expire or become fully
utilized; however, there can be no assurance that such financing will be
obtainable on favorable terms, if at all. To the extent that the Company is
unable to maintain an adequate warehouse line of credit, the Company may have to
curtail loan origination and purchasing activities, which could have a material
adverse effect on the Company's operations and financial condition. The Company
also has a master commitment with ICI Funding Corporation to purchase
$50,000,000 of jumbo and conforming residential mortgages from the Company,
which has been fulfilled, and the Company has exercised its option for an
additional $50,000,000 commitment. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations --Liquidity and Capital
Resources."
PREPAYMENT RISKS ON MORTGAGE ASSETS. Mortgage prepayment rates vary from
time to time and may cause changes in the amount of the Company's net cash
flows. To the extent that prepayments occur, the yield on the Company's
mortgage loans would be affected as well as the Company's net cash flows.
Prepayments of adjustable-rate mortgage loans included in or underlying
mortgage-backed securities generally increase when then-current mortgage
interest rates fall below the interest rates on such adjustable-rate mortgage
loans. Conversely, prepayments of such mortgage loans generally decrease when
then-current mortgage interest rates exceed the interest rate on the mortgage
loans included in or underlying such mortgage-backed securities. Prepayment
experience also may be affected by the geographic location of the properties
securing the mortgage loans included in or underlying mortgage-backed
securities, the assumability of such mortgage loans, the ability of the borrower
to convert to a fixed-rate loan, conditions in the housing and financial markets
and general economic conditions.
6
<PAGE>
RISK OF LOSS ON MORTGAGE ASSETS. The Company may include privately-
issued pass-through certificates backed by pools of adjustable-rate single
family and multi-family mortgage loans and other real estate-backed mortgage
loans in its investment portfolio. Because principal and interest payments on
privately issued pass-through certificates are typically not guaranteed by the
United States government or an agency of the United States government, such
securities generally are structured with one or more types of credit
enhancement. Such forms of credit enhancement are structured to provide
protection against risk of loss due to default on the underlying mortgage loan,
or bankruptcy, fraud and special hazard losses, such as earthquakes. Typically,
third parties insure against these types of losses, and the Company would be
dependent upon the credit worthiness of the insurer for credit-rating, claims
paying ability of the insurer and timeliness of reimbursement in the event of a
default on the underlying obligations. Furthermore, the insurance coverage for
various types of losses is limited in amount, and losses in excess of the
limitation would be the responsibility of the Company.
The Company may also purchase mortgage loans issued by GNMA, FNMA or
FHLMC. Each of these entities provides guarantees against risk of loss for
securities issued by it. In the case of GNMA, the timely payment of principal
and interest on its certificates is guaranteed by the full faith and credit of
the United States government. FNMA guarantees the scheduled payments of
interest and principal and the full principal amount of any mortgage loan
foreclosed or liquidated on its obligations. FHLMC guarantees the timely
payment of interest and ultimate collection of principal on its obligations,
while with respect to certificates issued by FNMA and FHLMC, payment of
principal and interest of such certificates are guaranteed only by the
respective entity and not by the full faith and credit of the United States
government.
DEPENDENCE UPON LICENSED TECHNOLOGY. The Company's V.I.P. mortgage
software system which is used by it and its licensees to originate mortgage
loans is substantially dependent upon technology licensed to the Company from
Intel(R) Corporation ("Intel"), and other technology companies. Although the
primary business of the Company is mortgage lending, the V.I.P. mortgage
software of the Company is instrumental in the marketing, origination and
processing of its mortgage loans. The V.I.P. system is linked to the ProShare
software system developed by Intel that provides direct video conferencing and
interaction between prospective borrowers (and others) and the prospective
mortgage lender, including the Company. The V.I.P. system also incorporates
licensed technology from other vendors. Because the Company does not
independently conduct research and development activities regarding its
software, the Company is dependent upon software technology of others to develop
and enhance its V.I.P. mortgage software system. The failure to maintain these
relationships or to enter into new relationships with technology companies would
inhibit improvements to its mortgage software and may reduce its ability to
effectively compete in the origination and processing of mortgage loans.
DEPENDENCE ON WHOLESALE BROKERS AND OTHERS. The Company depends in part
on independent mortgage brokers, financial institutions, realtors and mortgage
bankers for its originations and purchases of mortgage loans. The Company's
competitors also seek to establish relationships with such independent mortgage
brokers, financial institutions, realtors and mortgage bankers, none of whom is
contractually obligated to continue to do business with the Company. In
addition, the Company expects the volume of wholesale loans that it originates
and purchases to increase. The Company's future results may become more exposed
to fluctuations in the volume and cost of its wholesale loans resulting from
competition from other originators and purchasers of such loans, market
conditions and other factors. See "Business -- Employees".
LACK OF CONTROL OVER PASS-THROUGH ENTITIES. If the Company purchases
interests in various pass-through entities, it will itself be in the position of
a "holder" of shares of such entities including, real estate investment trusts,
other trusts or partnerships, or a holder of other types of pass-through
interests. Therefore, the Company will be relying exclusively on the management
capabilities of the general partners, managers and trustees of those entities
for the management and investment decisions made on their behalf. In
particular, except for voting rights on certain matters, the Company will have
no control over the operations of the pass-through entities in which it
purchases interests, including all matters relating to the operation,
management, investment decisions, income and expenses of such entities,
including decisions with respect to actions to be taken to collect amounts owed
to such entities. If such managers, trustees or general partners take actions
or make decisions which are adverse to a pass-through entity or the Company, it
may not be cost-efficient for the Company to challenge such actions or
decisions. Moreover, if the Company does not become a substituted owner of such
interests, it would not have the right to vote on matters on which other
interest owners in such entities have a right to vote or otherwise challenge
management decisions. Finally, should any of such managers, trustees or general
partners experience financial difficulties for any reason, the entities in which
the Company invests could be adversely affected, thereby adversely affecting the
value of the Company's investments.
BALLOON PAYMENTS. Mortgage loans, other than those representing mortgage
loans on single-family residential, may represent "balloon" obligations,
requiring no payments of principal over the term of the indebtedness with a
"balloon" payment of all of the principal due at maturity. "Balloon" payments
will probably require a sale or refinancing of properties at the time they are
due.
7
<PAGE>
No assurance can be given that the borrowers will have sufficient assets
to pay off the indebtedness when due, or that sufficient liquidity will be
generated from the disposition or refinancing of the properties to enable the
owner to pay the principal or interest due on such mortgage loans.
DEFAULT, FORECLOSURE AND DIFFICULTY IN SALE OF THE SECURED PROPERTIES.
If a mortgaged property is not sold by the maturity date of the underlying
mortgage loan, the borrower may have difficulty in paying the outstanding
balance of such mortgage loan and may have to refinance the property. The
borrower may also experience difficulty in refinancing the property if that
becomes necessary due to unfavorable interest rates or the unavailability of
credit.
If any amounts under a mortgage loan are not paid when due, the Company
may foreclose upon the property of the borrower. In the event of such a default
which requires the Company to foreclose upon a property or otherwise pursue its
remedies in order to protect the Company's investment, the Company will seek to
obtain a purchaser for the property upon such terms as the Company deems
reasonable. However, there can be no assurance that the amount realized upon
any such sale of the underlying property will result in financial profit or
prevent loss to the Company. In addition, because of potential adverse changes
in the real estate market, locally or nationally, the Company may be forced to
own and maintain the property for a period of time to protect the value of its
investment. In that event, the Company may not be able to receive any cash flow
from such mortgage loan and the Company would be required to pay such sums as
may be necessary to maintain and manage the property.
ENVIRONMENTAL LIABILITIES. In the course of its business, the Company
may acquire real property securing loans that are in default. There is a risk
that hazardous substances or waste, contaminants, pollutants or sources thereof
could be discovered on such properties after acquisition by the Company. In
such event, the Company may be required to remove such substances from the
affected properties at its sole cost and expense. There can be no assurances
that the cost of such removal would not substantially exceed the value of the
affected properties or the loans secured by such properties or that the Company
would have adequate remedies against the prior owners or other responsible
parties, or that the Company would not find it difficult or impossible to sell
the affected real properties either prior to or following any such removal.
USURY LAWS. The amount of interest payable by a borrower to the Company
may exceed the rate of interest permitted under the California Usury Law and the
usury laws of other states. Although the Company does not intend to make or
invest in mortgage loans with usurious interest rates, there are uncertainties
in determining the legality of interest rates. Such limitations, if applicable,
may decrease the yield on the Company's investments.
With respect to the interest rate charged by the Company to borrowers in
the State of California, the Company will be relying upon the exemption from its
usury law which provides that loans that are made or arranged by a licensed real
estate broker and which are secured by a lien on real property are exempt from
the usury law. The Company intends to use licensed real estate brokers to
arrange the mortgage loans so that no violation of the applicable usury law
would take place. Additionally, if any employee or director of the Company or
its subsidiaries is a licensed real estate broker in the State of California,
the Company may use such person to arrange all or a portion of the mortgage
loans to qualify for the usury exemption.
The consequences for failing to abide by the usury law include forfeiture
of all interest payable on the loan, treble damages with respect to excessive
interest actually paid, and criminal penalties. The Company believes that
because of the applicable exemptions and the provisions of California Civil Code
1917.005 exempting lenders who originate loan transactions from the California
usury laws, no violation of the California Usury Law will occur. The Company
shall attempt to rely on similar exemptions in other states if necessary but
there is no guarantee that it will be able to do so.
BANKRUPTCY OF A BORROWER. If a borrower enters bankruptcy, either
voluntarily or involuntarily, an automatic stay of all proceedings against the
borrower's property will issue. This stay will prevent the Company or any
trustee from foreclosing on the property securing such borrower's loan until
relief from the stay can be sought from the bankruptcy court. No guaranty can
be given that the bankruptcy court will lift the stay, and significant legal
fees and costs may be incurred in attempting to obtain such relief.
COMPETITION. The Company will face intense competition in the
acquisition and liquidation of its mortgage loans. Such competition can be
expected from banks, savings and loan associations and other entities, including
REITs. Many of the Company's competitors have greater financial resources than
the Company.
8
<PAGE>
RISK FACTORS RELATING TO THIS OFFERING
POSSIBLE LACK OF LIQUIDITY AND NO ASSURANCE OF A PUBLIC MARKET. There is
presently a limited market for the Common Stock of the Company and there can be
no assurance that a broad and active market will develop. There is no assurance
that an active or stable public market for the Common Stock will ever develop.
There may be restrictions upon the transferability of the Common Stock in
certain state jurisdictions. Stockholders should seek the advice of their
personal legal counsel before offering their stock for resale to any person.
POSSIBLE VOLATILITY OF STOCK PRICE; EFFECT OF FUTURE OFFERINGS ON MARKET
PRICE OF COMMON STOCK. The market price of the Common Stock of the Company may
experience fluctuations that are unrelated to the Company's operating
performance. In particular, the price of the Common Stock may be affected by
general market price movements as well as developments specifically related to
the mortgage industry such as, among other things, interest rate movements. In
addition, the Company's operating income on a quarterly basis is significantly
dependent upon the successful completion of the Company's loan sales in the
market, and the Company's inability to complete these transactions in a
particular quarter may have a material adverse impact on the Company's results
of operations for that quarter and could, therefore, negatively impact the price
of the Common Stock.
The Company may increase its capital by making additional private or
public offerings of its Common Stock, securities convertible into its Common
Stock, preferred stock or debt securities. The actual or perceived effect of
such offerings, the timing of which cannot be predicted, may be the dilution of
the book value or earnings per share of the Common Stock outstanding, which may
result in the reduction of the market price of the Common Stock and affect the
Company's ability to access the capital markets.
The 3,375,000 shares of Common Stock of the Company to be distributed to
the stockholders of the Selling Stockholder (approximately 237 persons as of
August 22, 1997) under the terms of this Prospectus will cause the public float
of its securities to significantly increase. To the extent that the
stockholders of the Selling Stockholder sell or otherwise transfer their Common
Stock of the Company in the market, the public market price may be adversely
affected or it may cause the market price to become more volatile.
SHARES ELIGIBLE FOR FUTURE SALE. Certain outstanding shares of the
Company's Common Stock, Convertible Preferred Stock and warrants presently
outstanding are "restricted securities" and under certain circumstances may in
the future be sold in compliance with Rule 144 adopted under the Securities Act
of 1933, as amended, or some other exemption from registration under the
Securities Act of 1933. Future sales of those shares if they are registered or
sold under Rule 144 or other exemption could depress the market price of the
Common Stock in the public market. However, there can be no assurance that Rule
144 or any other specific exemption may be available in the future. See "Shares
Available for Future Sale".
DIVIDENDS NOT LIKELY. There can be no assurance that the operations of
the Company will result in sufficient revenues to enable the Company to operate
at profitable levels or to generate positive cash flow. For the foreseeable
future, it is anticipated any earnings which may be generated from operations of
the Company will be used to finance the growth of the Company and that cash
dividends will not be paid to stockholders. See "Dividends."
COMPLIANCE WITH FEDERAL AND STATE SECURITIES LAWS. The Company has
offered and sold its securities in the past, and may offer and sell its
securities in the future, and may sponsor or act as general partner or otherwise
with regard to registered or unregistered offerings of securities. These
securities were and may be offered and sold in reliance upon exemptions
available pursuant to the Securities Act of 1933, as amended. There can be no
assurance that such offerings qualified or will qualify under such exemptive
provisions due to, among other things, the adequacy of disclosure and the manner
of distribution of the offering, similar offerings conducted by the Company or
its affiliates in the past and in the future or the retroactive change in any
securities laws or regulations. If, and to the extent suits for rescission are
brought against the Company and successfully concluded for failure to register
other offerings made by the Company under the Securities Act of 1933, or for
acts or omissions constituting certain prohibited practices under the Securities
Exchange Act of 1934, both the capital and assets of the Company could be
adversely affected, thus jeopardizing the ability of the Company to operate
successfully. A similar risk exists as a result of the application of state
securities laws of those states in which securities are offered or sold.
Furthermore, the time and capital of the Company could be expended on defending
an action by investors or by state or federal securities commissions even if the
Company is ultimately exonerated.
ABSENCE OF INDEPENDENT MANAGING UNDERWRITER. Under federal securities
laws, underwriters of securities offered to the public may be expected to take
such steps as may be necessary to ensure that the information contained in the
offering documents is accurate and complete. These steps are typically taken by
a "lead underwriter" or "dealer manager" who participates in the preparation
9
<PAGE>
of the offering documents. Since there is no lead underwriter or dealer manager
in the transfer of Common Stock by Sterling Alliance Group, Ltd., stockholders
and prospective stockholders must rely on the Company regarding the information
contained in this Prospectus.
WARRANTS AND OPTIONS. The Company has adopted a stock option plan for
its officers, employees and directors for 1,250,000 shares of its Common Stock.
There are presently no outstanding options to purchase shares of the Common
Stock of the Company under the Plan.
On August 20, 1997, the Company issued a warrant to purchase 150,000
shares of Common Stock that is exercisable at any time before August 31, 2000,
at $2.25 per share. During fiscal 1996, the Company issued warrants in
connection with a limited offering of its Common Stock, of which there are
warrants to purchase 450,000 shares at any time before March 31, 1998, at prices
ranging from $2.00 to $3.00 per share. For the life of the options and warrants,
holders will have the opportunity to profit from a rise in the price of the
Common Stock, with a resulting dilution in the interest of other holders of
Common Stock.
The existence of warrants and options may adversely affect the terms of
additional financing, and the holders of the warrants and options can be
expected to exercise them at a time when the Company would, in all likelihood,
be able to obtain additional capital by an offering of its unissued Common Stock
on terms more favorable to the Company than those provided by the warrants and
options. See "Description of Capital Stock-Warrants and Options".
NOTE: In addition to such risks, businesses are often subject to risks
not foreseen or fully appreciated by management. In reviewing this Prospectus,
it should be kept in mind that other possible risks may exist.
CAPITALIZATION
The following table sets forth the capitalization of the Company as of
September 30, 1996 (audited) and as of June 30, 1997 (unaudited).
<TABLE>
<CAPTION>
September 30, 1996 June 30, 1997
------------------- --------------
(unaudited)
<S> <C> <C>
Short-term debt:
Borrowings under warehouse line of
credit............................. $ -- $ 5,848,050
Notes payable, capital leases,
current portion.................... 322,346 260,454
----------- -----------
$ 322,346 $ 6,108,504
=========== ===========
Notes payable, capital leases, net of
current portion......................... $ 95,096 $ 270,385
Preferred Stock, no par value:
Authorized, 5,000,000 shares,
No shares issued and outstanding(1).... 0 0
Common Stock, no par value:
Authorized, 30,000,000 shares,
Issued and outstanding, 5,311,817
shares and 5,806,792, respectively(2).. $ 3,910,391 $ 4,798,579
Common Stock subscribed.................. $ ( 200,000) $ (187,875)
Retained deficit......................... $(3,208,791) $(3,411,602)
----------- -----------
Total Shareholders' Equity............... $ 501,600 $ 1,199,102
----------- -----------
Total Capitalization..................... $ 919,042 $ 7,577,991
=========== ===========
</TABLE>
- ----------------
(1) Does not include 648,649 shares of the 8% Convertible Preferred Stock,
Series A of the Company which were sold for $1,200,000 during August
1997.
(2) There were 7,086,176 shares of Common Stock issued and outstanding as of
August 22, 1997. The above presentation does not include 1,250,000
shares of Common Stock reserved for issuance under the Company's stock
option plan nor outstanding warrants to purchase up to 600,000 shares of
the Common Stock at prices ranging from $2.00 to $3.00 per share.
10
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion is intended to assist in an understanding of the
Company's financial position for the fiscal years September 30, 1996 and
September 30, 1995 and the results of its operations for the periods then ended.
It also analyzes the nine month period ended June 30, 1997 (unaudited), versus
the nine month period ended June 30, 1996 (unaudited).
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. in December, 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 the Selling Stockholder, with the historical financial
information prior to the acquisition merger being that of the Selling
Stockholder.
The principal business of the Company is the origination and processing
of residential mortgage loans using a service which the Company calls Video
InteractiveMortgage Process ("VIP"). Mortgages originated and/or purchased by
the Company have been resold primarily to ICI Funding Corporation, a division of
Imperial Credit Industries, Inc.; although mortgages in the future may be held
for investment, sold to third parties, or securitized and issued as mortgage
backed securities. See "Liquidity and Capital Resources", below.
The Company originates loans through its executive office in Costa Mesa,
California and through its branch offices located in Connecticut, Florida,
Nevada and Texas. The Company's strategy of originating, as compared to
purchasing, substantially all of its loan volume, results in the generation of
origination fees, service release fees, and other fees which is the principal
source of revenue to the Company. The Company has sold all of its mortgage
loans, and does not retain any servicing rights. This income has recently
allowed the Company to generate positive operating cash flow beginning with the
three month period ended June 30, 1997. There can be no assurance, however, that
the Company's operating cash flow will continue to be positive in the future.
Fiscal year ended September 30, 1996 compared with the fiscal year ended
- ------------------------------------------------------------------------
September 30, 1995
- ------------------
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>
Mortgage loan revenues and product
sales................................. $ 276,419 $ 97,400
Operating expenses:
General and administrative expense... $ 2,790,244 $ 531,818
Cost of sales-product sales.......... $ 29,636 $ 0
Depreciation......................... $ 31,056 $ 2,662
------------ ----------
Total operating expenses................. $ 2,850,936 $ 534,480
Loss from operations..................... $ (2,574,517) $ (437,080)
Other income (expenses).................. $ (67,081) $ 7,825
------------ ----------
Loss before income taxes................. $ (2,641,598) $ (429,255)
Income taxes............................. $ 1,600 $ 800
------------ ----------
Net Loss................................. $ (2,643,198) $ (430,055)
============ ==========
Net loss per share....................... $ (.73) $ (.29)
</TABLE>
11
<PAGE>
REVENUES. Revenues increased 184% to $276,419 in fiscal 1996 from
$97,400 in 1995. Revenues were generated from the loan process services and
product sales. No income was generated from mortgages originated by the
Company. No real estate was sold during either year.
OPERATING EXPENSES. Operating expenses increased 425% to $2,850,936 in
fiscal 1996 from $534,380 in 1995. This increase can be attributable to
increased activity in the loan processing segment of the business and the
acquisition of additional computer equipment.
NET LOSS FROM OPERATIONS. The net loss from operations increased 489% to
$2,574,517 in fiscal 1996 as compared with $437,080 in 1995 due primarily to the
increase in general and administrative expenses in 1996 over 1995.
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.
Nine months ended June 30, 1997 compared with nine months ended June 30, 1996
- -----------------------------------------------------------------------------
RESULTS OF OPERATIONS. The following table sets forth certain operating
information (unaudited) regarding the Company for the periods indicated.
<TABLE>
<CAPTION>
NINE MONTHS ENDED
JUNE 30,
---------------------------
1997 1996
------------ ------------
(unaudited)
<S> <C> <C>
Mortgage loan revenues and product sales..................... $ 2,547,810 $ 195,186
Operating expenses:
General and administrative expenses........................ $ 3,316,239 $ 1,123,795
Cost of sales-product sales................................ $ 9,752 $ --
Depreciation............................................... $ 27,393 $ 13,300
--------- ---------
Total Operating Expenses..................................... $ 3,353,384 $ 1,137,095
Loss from operations......................................... $ (805,574) $ (941,909)
Other income (expenses)...................................... $ 604,363 $ (39,014)
Loss before income taxes..................................... $ (201,211) $ (980,923)
Income taxes................................................. $ 1,600 $ 800
Net loss..................................................... $ (202,811) $ (981,723)
Net loss per share........................................... $ (.03) $ (.21)
</TABLE>
REVENUES. Revenues increased 1,200% in the nine month period ended June
30, 1997, to $2,547,810 from $195,186 during the same period of 1996. This
increase is attributable to the expansion and growth of the mortgage lending
business of the Company.
OPERATING EXPENSES. General and administrative expenses increased 195%
to $3,316,239 during the nine month period ended June 30, 1997, from $1,123,795
in the same period of 1996, due to increases in the number of employees of the
Company, compensation to consultants paid in Common Stock of the Company, and
the opening of additional mortgage loan offices of the Company. Depreciation
increased 106% to $27,393 in the nine month period ended June 30, 1997, from
$13,300 in the nine month period ended June 30, 1996.
NET LOSS FROM OPERATIONS. The net loss from operations decreased 15% to
$805,574 in the nine month period ended June 30, 1997, from $941,909 in the nine
month period ended June 30, 1996. This increase was due primarily to the costs
of expanding the marketing activities of the Company, including the
establishment of additional mortgage loan offices in Florida, Nevada and Texas.
12
<PAGE>
LOAN ORIGINATIONS AND PURCHASES. Mortgage volume increased 645% to
$144,593,864 during the nine month period ended June 30, 1997, from $18,149,130
during the nine month period ended June 30, 1996. This increase in mortgage
loan volume appears to be continuing primarily due to the expansion of the
Company's marketing activities.
CAPITAL EXPENDITURES, CAPITAL RESOURCES AND LIQUIDITY
CASH FLOWS. The following summary table presents comparative cash flows
of the Company for the periods indicated.
<TABLE>
<CAPTION>
YEAR ENDED NINE MONTHS ENDED
SEPTEMBER 30, JUNE 30, (UNAUDITED)
--------------------------- ------------------------
1996 1995 1997 1996
------------- ----------- ----------- ----------
<S> <C> <C> <C> <C>
Net cash used in operating activities................ $ (1,085,286) $ (264,522) $ (877,273) $ (900,064)
Net cash provided by (used in) investing activities.. $ (171,644) $ (59,812) $ 440,165 $ (4,620)
Net cash provided by financing activities............ $ 1,231,254 $ 355,776 $ 476,210 $ 895,019
</TABLE>
CAPITAL EXPENDITURES. The Company has incurred capital expenditures for
equipment and office furniture used in its mortgage loan business. Capital
expenditures during the nine month periods ended June 30, 1997 and 1996, totaled
$231,272 and $54,509, respectively.
LIQUIDITY AND CAPITAL RESOURCES. The Company's capital resources have
historically been provided by cash from operations, by the sale of its Common
Stock and warrants and by short term loans.
The Company intends to raise additional capital through offerings of its
Common Stock, Preferred Stock and warrants to fund mortgage loans and to provide
additional working capital to fund future operations, although no specific plans
or commitments presently exist to pursue an offering of its securities.
At June 30, 1997, the Company had current assets of $7,066,244 and current
liabilities of $6,603,262, resulting in working capital of $462,982, as compared
to a working capital deficit of $(216,664) at June 30, 1996. Working capital
increased by $679,646.
Net cash used in operating activities decreased to $(877,273) for the nine
months ended June 30, 1997, from $(900,064) for the nine months ended June 30,
1996, or a difference of $22,791. The decrease in net cash used in operating
activities was primarily attributable to the increase of other assets.
The Company has recently completed the opening of four (4) regional
offices, located in Las Vegas, Nevada; Houston, Texas; Daytona Beach, Florida
and Ft. Lauderdale, Florida.
The Company has increased the amount of its outstanding indebtedness to
$9,433,647 from $688,879 during the nine month period ended June 30, 1997, an
increase of $8,744,768. This outstanding indebtedness is due primarily to the
warehouse line of credit of $5,848,050 and deferred gain on sale of land of
$2,560,000. An undeveloped property continues to be subject to a deed of trust
in the amount of $65,000.
The warehouse line of credit is available for the funding of loans which
will be sold not only to ICI Funding Corporation, but also to other investors,
including Resource Bancshares Mortgage Group. During the time period following
funding of a loan, but prior to resale of the loan, the Company realizes either
interest income or expense depending upon the note rate for the underlying
mortgage vis a vis the interest rate on the warehouse line of credit, i.e.,
presently, prime + 1/2%.
As of June 30, 1997, the Company has notes payable to unrelated parties in
the total amount of approximately $497,663, including a $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
proceeds from the sale of its equity securities.
13
<PAGE>
During August 1997, the Company increased its liquidity and capital by
its sale of 648,649 shares of its 8% Convertible Preferred Stock, Series A and a
warrant to purchase 150,000 shares of Common Stock of the Company, for
$1,200,000.
MARKET PRICE
The Common Stock of the Company is currently quoted in the over-the-
counter market on the electronic bulletin board maintained by the National
Association of Securities Dealers, Inc. under the symbol "EMBU".
When the trading price of the Company's Common Stock is below $5.00 per
share, the Common Stock is considered to be "penny stocks" that are subject to
rules promulgated by the Securities and Exchange Commission (Rule 15g-1 through
15g-9) under the Securities Exchange Act of 1934. These rules impose significant
requirements on brokers under these circumstances, including: (a) delivering to
customers the Commission's standardized risk disclosure document; (b) providing
to customers current bid and offers; (c) disclosing to customers the brokers-
dealer and sales representatives compensation; and (d) providing to customers
monthly account statements.
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.
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
YEAR ENDING DECEMBER 31, 1997:
- -----------------------------
1st Quarter....................... $ 3.75 $2.125
2nd Quarter....................... $ 3.25 $1.375
</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 thin market for the
Common Stock, that there are frequently 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 for the first three quarters of
1996 have been revised to reflect this split.
On August 22, 1997, the closing bid and ask prices of the Common Stock of the
Company were $1.875 bid and $2.065 asked 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 August 22,
1997, there were approximately 11 broker-dealers publishing quotes for the
Common Stock of the Company.
As of August 22, 1997, there were 7,086,176 shares of Common Stock issued
and outstanding which were held by approximately 682 holders of record; and
648,649 shares of 8% Convertible Preferred Stock, Series A which were held by
one holder of record were issued and outstanding which are not traded in any
market. See "Description of Capital Stock".
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, and is subject to the dividend rights of the
8% Convertible Preferred Stock, Series A of the Company. 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.
14
<PAGE>
BUSINESS
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. (the "Selling
Stockholder") 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 the mortgage loan
industry. EMB acquired a license from Virtual Lending Technology, Inc. ("VLT"),
an affiliate of the Company, for its 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 presently calls Video
InteractiveMortgage Process ("VIP"). The software 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.
Although the Company is not intended to be a real estate company, it will
hold real estate for sale from time to time, as a result of foreclosures or
other events. See Note A to Financial Statements.
In connection with the acquisition of assets from SAG, including the
acquisition of EMB and land, the Company issued 3,375,000 shares of its Common
Stock to the Selling Stockholder which presently represents approximately 43.6%
of the issued and outstanding Common Stock of the Company. See "Principal
Stockholders".
MORTGAGE LENDING
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 underwrites and funds its mortgage
loans through a wholesale line of credit from Imperial Warehouse Lending Group
Inc., and then resells 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 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 in the future.
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
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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 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 accordingly 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.
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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.
CURRENT MARKETS AND EXPANSION PLANS
The Company is licensed to originate loans and/or is exempt from such
requirements in 26 states through its six offices. The Company believes that its
strategy of originating loans through a retail branch office network represents
the most profitable loan origination strategy due to the significant level of
loan origination fees. Additionally, such a strategy allows the Company to
maintain its underwriting quality standards when compared to competitors that
rely primarily on independent mortgage brokers. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
Although the Company is licensed to originate loans in 26 states, it has
historically concentrated its business in California. While this concentration
has recently declined significantly, California remains a significant part of
the Company's business and has contributed approximately 90% and 100% of the
Company's total loan originations and purchases for the years ended September
30, 1996 and year ended September 30, 1995, respectively. Expansion outside
California began in late 1996 when the Company began to establish or acquire
additional branch offices.
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 mortgage. Although a
deed of trust is similar to a mortgage, a deed of trust formally has three
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.
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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 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.
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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.
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.
INTERACTIVE MORTGAGE SOFTWARE. The 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 software applications of the Company.
The software 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. The software 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. The
software 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 V.I.P.
software system and continuing evaluation of electronic information gathering
and communication equipment. The Company intends to continue to focus on its
technology and marketing relationship with Intel Corporation. This relationship
has accelerated the development of the Company's software and has enhanced its
marketing program through exhibitions, trade shows and seminars with real estate
brokers, credit unions, residential real estate developers, mortgage brokers,
and others. An objective of the Company is to become a leader in advanced
mortgage software and video communications to facilitate mortgage loans. To the
extent that the Company achieves its objective in this technological area, the
Company believes that it will complement and increase its mortgage lending
business.
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LICENSES OF V.I.P. The Company licenses its V.I.P. mortgage software
system to real estate brokerage firms, credit unions, real estate developers,
mortgage brokers and others. EMB presently has approximately 14 licensees and
approximately 316 mortgage broker/representatives who are served by 17 Company
loan officers. Each licensee has its own computer systems with the Company's
software and ProShare software with 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 the Company's software 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 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 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.
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.
LEGISLATIVE AND REGULATORY MATTERS
Members of Congress and government officials have from time to time
suggested the elimination of the mortgage interest deduction for federal income
tax purposes, either entirely or in part, based on borrower income, type of loan
or principal amount. Because certain Company's loans may be made to borrowers
for the purpose of consolidating consumer debt or financing other consumer
needs, the competitive advantages of tax deductible interest, when compared with
alternative sources of financing, could be eliminated or seriously impaired by
such government action. Accordingly, the reduction or elimination of these tax
benefits could have a material adverse effect on the demand for loans offered by
the Company.
The Company's domestic business is subject to extensive regulation,
supervision and licensing by federal, state and local governmental authorities
and is subject to various laws and judicial and administrative decisions
imposing requirements and restrictions on a substantial portion of its
operations. The Company's consumer lending activities are subject to the
Federal Truth-in-Lending Act and Regulation Z (including the Home Ownership and
Equity Protection Act of 1994), the Federal Equal Credit Opportunity Act and
Regulation B, as amended ("ECOA"), the Fair Credit Reporting Act of 1970, as
amended, the Federal Real Estate Settlement Procedures Act ("RESPA") and
Regulation X, the Fair Housing Act, the Home Mortgage Disclosure Act and the
Federal Debt Collection Practices Act, as well as other federal and state
statutes and regulations affecting the Company's activities. The Company is
also subject to the rules and regulations of and examinations by the Department
of Housing and Urban Development ("HUD") and state regulatory authorities with
respect to originating, processing, underwriting, selling, securitizing and
servicing loans. These rules and regulations, among other things, impose
licensing obligations on the Company, establish eligibility criteria for
mortgage loans, prohibit discrimination, provide for inspections and appraisals
of properties, require credit reports on loan applicants, regulate assessment,
collection, foreclosure and claims handling, investment and interest payments on
escrow balances and payment features, mandate certain
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disclosures and notices to borrowers and, in some cases, fix maximum interest
rates, fees and mortgage loan amounts. Failure to comply with these requirements
can lead to loss of approved status, termination or suspension of servicing
contracts without compensation to the servicer, demands for indemnifications or
mortgage loan repurchases, certain rights of rescission for mortgage loans,
class action lawsuits and administrative enforcement actions.
Although the Company believes that it has systems and procedures to
facilitate compliance with these requirements and believes that it is in
compliance in all material respects with applicable local, state and federal
laws, rules and regulations, there can be no assurance that more restrictive
laws, rules and regulations will be adopted in the future that could make
compliance more difficult or expensive.
OWNERSHIP OF REAL ESTATE
GENERAL. The Company does not intend to be a real estate company. All
real property owned by the Company is held for sale and not for development
purposes. The financial statements of the Company presently reflect land held
for sale as an asset at $843,000 as of September 30, 1996, and at $43,000 as of
June 30, 1997. See Note A to Financial Statements. The Company sold its 61 acre
property in Monterey County, California during December 1996, for $4,000,000,
receiving a payment of $800,000 and an installment contract for $3,200,000, as
described below. 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.
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 an installment contract
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. This 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.
TRADE NAMES AND SERVICE MARKS
The Company intends to register its service marks "EMB" and "EMB Funding"
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.
21
<PAGE>
EXECUTIVE OFFICES
The Company currently leases its executive offices located at 3200
Bristol, 8th Floor, Costa Mesa, California 92626. The lease covers approximately
15,000 square feet at a monthly rental of approximately $6,024 per month during
its initial year, which increases to $18,937 per month during the second year,
$20,394 per month in the third year, and $21,851 per month during the fourth and
fifth year of the lease. The lease expires in 2002. The Company believes that
its new facilities are adequate for its needs, and that, should it be needed,
suitable additional or alternative space will be available in the future on
commercially reasonable terms.
EMPLOYEES
As of July 31, 1997, the Company employed a total of 47 persons. Of the
total, 29 officers and employees are employed at the principal executive offices
of the Company of which 10 were engaged in sales and marketing, 10 loan
processing support staff, 1 was in product development and technical support and
3 were in finance and administration. There were 18 employees in the 5 branch
offices of the Company of which 7 were engaged in sales and marketing, 7 in loan
processing support, and 4 in administration. In addition to its retail branch
office employees, the Company has approximately 316 mortgage broker
representatives in the State of Florida who are licensed real estate agents that
originate mortgage loans on a commission basis as wholesale buyers. None of the
Company's employees are 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.
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS.
For fiscal 1995 and fiscal 1996, the principal independent accountant of
the Company is Harlan & Boettger, independent certified public accountants
located in San Diego, California. For fiscal 1994 and prior fiscal years, the
principal independent accountant of the Company was George F. Rombach, C.P.A. of
Newport Beach, California.
George F. Rombach, C.P.A., the former accountant of the Company, did not
resign or decline to stand for re-election, nor was such accountant dismissed by
the Company. The Company changed its principal independent accountant effective
in April, 1996, without any disagreement regarding accounting matters. The
decision to change accountants was recommended by the Board of Directors and
approved by the shareholders of the Company at its 1996 annual meeting held on
May 21, 1996.
During the Company's two 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.
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The directors and executive officers of the Company are as follows:
22
<PAGE>
<TABLE>
<CAPTION>
Name(1)(2) Age Position
- ---------- --- --------
<S> <C> <C>
Joseph K. Brick 59 Director, and Vice President of
EMB Mortgage Corporation
Bruce J. Brosky(3) 42 Director and Vice President-
Marketing and Public Relations
William V. Perry(3)(4) 73 Director and Executive Vice
President, and President of EMB
Mortgage Corporation
Ann L. Petersen 59 Director
Michael P. Roth 58 Director and Vice President
James E. Shipley(4) 61 Director and President
B. Joe Wimer(4) 41 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 executive
officer of the Company are as follows:
Mr. Brick became a director of the Company at the 1997 Annual Meeting of
Stockholders in March 1997. In January 1997, he became the President of EMB
Mortgage Corporation, the principal operating subsidiary of the Company until
May 1997, when he became the Vice President of EMB Mortgage Corporation. From
May 1981 to January 1997, Mr. Brick was a mortgage portfolio consultant
regarding the evaluation of commercial, multi-family and residential mortgage
products, and the servicing and conversion of mortgage portfolios. From August
1988 to April 1991, he was employed by Countrywide Funding Corporation and
managed its mortgage operations for all states east of the Mississippi. From
1984 to 1987, he was employed by Money Market Mortgage Corporation as operations
manager for its eastern region for commercial, multi-family and residential
mortgages. From 1983 to 1984, Mr. Brick was employed by M & I Mortgage
Corporation as its Vice President and Production Manager and supervised its
start-up of a national bank's mortgage subsidiary. Mr. Brick attended Marquette
University.
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. Brosky received a B.A. degree
from the University of Dubuque in 1978, and received a MBA degree from Loras
College in 1979.
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 and President 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.
23
<PAGE>
Mr. Roth became a director of the Company at the 1997 Annual Meeting of
the Stockholders of the Company in March 1997, and became a Vice President of
the real estate division of the Company on June 16, 1997. From 1993 to the
present, he has been the Assistant Branch Manager and Sales Associate with
Coldwell Banker Real Estate, Inc., a real estate brokerage company, at its
branch office in South Laguna, California. From 1981 to 1992, Mr. Roth was the
President of Food Service Concept Marketing Inc., a marketing consulting firm.
From 1975 to 1981, he was the Vice President Management Supervisor of Wells,
Rich, Green Advertising. From 1974 to 1975, Mr. Roth was a Vice President of
Shakey's Pizza Parlors. From 1969 to 1975, he was Vice President of Marketing of
Bonanza Steakhouses, and was President of its International Division. From 1963
to 1968, Mr. Roth was engaged in franchise marketing for McDonald's Corporation
in charge of marketing in 12 western states and Hawaii. Mr. Roth received a B.S.
degree from U.C.L.A. in 1962.
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.
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
registration statement of the Company.
COMPENSATION OF EXECUTIVE OFFICERS
No executive officer or director of the Company received compensation in
excess of $100,000 during its fiscal year ended September 30, 1996.
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 1,250,000 shares of Common Stock for issuance under the Company's 1996
Stock Option, SAR and Stock Bonus Plan (the "Plan"). At July 31, 1997, no
options or stock bonuses covering shares of Common Stock have been granted and
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
presently Bruce J. Brosky and William V. Perry.
COMPENSATORY BENEFIT PLAN. The Company established a Compensatory
Benefit Plan (the "Plan") that authorized the issuance of up to $500,000 of the
fair market value of the Common Stock of the Company to its directors, officers,
employees, consultants and advisers for their bona fide services (and such
services must not be in connection with the offer and sale of securities in a
capital
24
<PAGE>
raising transaction or pursuant to a written contract relating to the
compensation of such persons), consistent with Rule 701 under the Securities Act
of 1933. The Plan was administered by the Compensation Committee of the Board of
Directors. The Plan has been terminated.
401(k) PLAN. In August 1997, the Company adopted a Section 401(k)
Retirement Savings Plan (the "401(k) Plan"). The 401(k) Plan is a tax-qualified
plan covering Company employees who, as of the enrollment eligibility dates
under the 401(k) Plan, have completed at least six months of service with the
Company and elect to participate in the 401(k) Plan. The Company may make
discretionary matching cash contributions to each participant based upon his or
her elective deferrals in a percentage determined by the Company prior to the
end of each plan year, and may make additional contributions in its sole
judgment. All employee contributions are fully vested at all times and
contributions by the Company to the 401(k) Plan vest over a six-year period
based upon years of service. Benefits will normally be distributed to an
employee upon (i) the employee reaching age 65, (ii) the employee's retirement
with the Company, (iii) the employee's death or disability, (iv) the termination
of the employee's employment with the Company, or (v) the termination of the
401(k) Plan.
BOARD COMPENSATION. Directors of the Company will be compensated by the
Company for meeting attendance by an annual directors' fee of $2,500, and 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 or stock bonuses. The Company does not
pay additional amounts for committee participation or special assignments of the
Board of Directors.
SECURITY OWNERSHIP OF 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 and Preferred Stock of the Company as of August 22, 1997, are as follows:
<TABLE>
<CAPTION>
SHARES PERCENT OF
MANAGEMENT BENEFICIALLY OUTSTANDING
SHAREHOLDERS(1) OWNED(1) STOCK
- --------------- ------------ ------------
<S> <C> <C>
Joseph K. Brick................................ 0 0%
1420 North Atlantic Avenue
Suite 1704
Daytona Beach, Florida 32118
Bruce J. Brosky................................ 88,763(2) 1.1%
3200 Bristol, 8th Floor
Costa Mesa, California 92626
William V. Perry............................... 290,470(2)(3) 3.8%
3200 Bristol, 8th Floor
Costa Mesa, California 92626
Ann L. Petersen................................ 6,250 .001%
Star Route 5080
Keaau, Hawaii 96749
Michael P. Roth................................ 0 0%
3200 Bristol, 8th Floor
Costa Mesa, California 92626
James E. Shipley............................... 813,375(4) 10.5%
3200 Bristol, 8th Floor
Costa Mesa, California 92626
</TABLE>
25
<PAGE>
<TABLE>
<CAPTION>
SHARES PERCENT OF
MANAGEMENT BENEFICIALLY OUTSTANDING
SHAREHOLDERS(1) OWNED(1) STOCK
- --------------- ------------ ------------
<S> <C> <C>
B. Joe Wimer................................... 6,250(2) .001%
3200 Bristol, 8th Floor
Costa Mesa, California 92626
Directors and officers as a group
(7 persons, including the above)............ 1,203,845 15.6%
========= =====
</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 (43.6% 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. (the "Selling
Stockholder")(specifically, William V. Perry, James E. Shipley, Bruce J. Brosky
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 the
Selling Stockholder.
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. The Selling
Stockholder is a Colorado corporation that is beneficially owned 24.3% by James
E. Shipley, a director and the President of the Company, and owned 14.8% by Rory
P. Hughes, a former director 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 the Selling Stockholder, 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 the Selling
Stockholder. In exchange, the Company issued 3,375,000 legended-restricted
shares of its Common Stock to the Selling Stockholder which presently represents
approximately 43.6% of the total issued and outstanding Common Stock of the
Company. After this acquisition, the directors, officers and certain consultants
of the Selling Stockholder became directors and officers of the Company. As a
result of the ownership of common stock of the Selling Stockholder 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, 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 Alliance Real Estate, a real estate
brokerage company owned by the family of James E. Shipley, a director and
officer of the Company, in the amount of $129,687 of which $1,258 remained due
and payable as of June 30, 1997.
26
<PAGE>
Effective June 10, 1997, the Company issued a promissory note in the
principal amount of $100,000 to James E. Shipley for advances made to the
Company. The note bears interest at 8% per annum and is due on December 1, 1997.
INDEMNIFICATION OF DIRECTORS AND OFFICERS
As permitted by Section 415-48.5 of the Hawaii Business Corporation Law,
the Restated Articles of Incorporation and By-Laws of the Company provide for
the indemnification of the directors and officers of the Company to the fullest
extent permitted by the Hawaii General Corporation Law. These provisions
generally permit indemnification of directors and officers against certain
costs, liabilities and expenses of any threatened, pending or completed action,
suit or proceeding that any such person may incur by reason of serving in such
positions, except that a Hawaii corporation has no power to eliminate or limit
the personal liability of a director: (1) for any breach of the director's duty
of loyalty to the corporation or its shareholders; (2) for any act or omission
of the director not performed in good faith, or which involves intentional
misconduct or knowing violation of law, or which constitutes a wilful or
reckless disregard of the director's fiduciary duty; (3) for the director's
wilful or negligent violation of any provision of this chapter regarding payment
of dividends or stock purchase or redemption; or (4) for any transaction from
which the director received an improper benefit. Any determination that
indemnification of a director or an officer is, unless ordered by a court, must
be made (i) by the Company's stockholders, (ii) by the Company's Board of
Directors by a majority vote of a quorum consisting of directors who were not
parties to the act, suit or proceeding, (iii) if a majority vote of quorum
consisting of directors who were not parties to the act, suit or proceeding so
orders, by independent legal counsel in a written opinion, or (iv) if a quorum
consisting of directors who where not parties to the act, suit or proceeding
cannot be obtained, by independent legal counsel in a written opinion. The
Restated Articles of Incorporation, By-Laws, and the Hawaii Business Corporation
Law further provide that such indemnification is not exclusive of any other
rights to which such directors, officers or persons controlling the Company
pursuant to the foregoing provisions.
These provisions do not eliminate the liability of a director for
violations of federal securities laws, nor do they limit the rights of the
Company or the shareholders, in appropriate circumstances, to seek equitable
remedies such as injunctive or other forms of non-monetary relief. However, such
remedies may not be effective in all cases.
Insofar as indemnification for liabilities arising under the Securities
Act of 1933 (the "Act") may be permitted to directors, officers and controlling
persons of the Company, the Company has been advised that in the opinion of the
Securities and Exchange Commission such indemnification is against public policy
as expressed in the Act and is, therefore, unenforceable.
PRINCIPAL STOCKHOLDERS
The following table sets forth information with respect to the beneficial
ownership of the Company's Common Stock and Preferred Stock by each shareholder
who beneficially owns more than five percent (5%) of the Company's capital
stock, the number of shares beneficially owned by each and the percent of
outstanding capital stock so owned of record as of August 22, 1997. It is
believed by the Company that all persons listed have sole voting and investment
power with respect to their shares, except as otherwise indicated.
<TABLE>
<CAPTION>
SHARES PERCENT OF
NAME AND ADDRESS BENEFICIALLY OUTSTANDING
OF BENEFICIAL OWNER TITLE OF CLASS OWNED CAPITAL STOCK
------------------- -------------- ------------ --------------
<S> <C> <C> <C>
M. Marcus and Michael Common Stock 390,450 5.0%
Marcus (1)
2205 Ocean Avenue
Torrence, California 90503
Sterling Alliance Group, Common Stock 3,375,000 43.6%
Ltd.(2)
3200 Bristol, 8th Floor
Costa Mesa, CA 92626
Paninvestas, Ltd.(1) Common Stock 410,158 5.3%
21218 St. Andrews
Blvd., #10-122
Boca Raton, FL 33433
</TABLE>
27
<PAGE>
<TABLE>
<CAPTION>
SHARES PERCENT OF
NAME AND ADDRESS BENEFICIALLY OUTSTANDING
OF BENEFICIAL OWNER TITLE OF CLASS OWNED CAPITAL STOCK
------------------- -------------- ------------ --------------
<S> <C> <C> <C>
Rory P. Hughes(3) Common Stock 496,125 6.4%
3200 Bristol, 8th Floor
Costa Mesa, California
92626
James E. Shipley(2)(3) Common Stock 813,375 10.5%
World Trends Financial,
Ltd.
508 Easy Street
Las Vegas, Nevada 89707
Millenco, L.P.(4) Preferred Stock and 798,649 10.1%
111 Broadway, 20th Floor Warrant
New York, New York 10006
Jorge and Deyanira Common Stock 404,048 5.2%
Gonzalez
2101 Palm Avenue
Manhattan Beach, CA
Cede & Co. Common Stock 839,878 10.8%
P.O. Box 222
Bowling Green Station
New York, New York 10274
</TABLE>
- ----------------
(1) Represents shares of the Common Stock of the Company and shares of common
stock of Sterling Alliance Group, Ltd.
(2) Sterling Alliance Group, Ltd. (the "Selling Stockholder") is a Colorado
corporation. Certain directors and officers of the Company are
stockholders, directors, officers and controlling persons of the Selling
Stockholder. See "Transactions with Management" and "Security Ownership
of Management", above.
(3) Represents shares of the common stock of the Selling Stockholder which
owns 3,375,000 shares of the Common Stock of the Company.
(4) Represents 648,649 shares of 8% Convertible Preferred Stock, Series A of
the Company which is convertible into the Common Stock of the Company,
and a warrant to purchase 150,000 shares of Common Stock at $2.25 per
share which expires August 31, 2000.
CONFLICTS OF INTEREST
Certain of the present officers and directors of the Company invest
independently in securities, either individually or through entities in which
they have an interest or with which they are associated. See "Management." Such
officers and directors have invested in securities for their own accounts and
have engaged in related activities. Participation by such persons in these
activities in the future may pose inherent conflicts of interest, including
corporate opportunity, time and effort.
With regard to future situations, the Board of Directors of the Company has
adopted a policy statement regarding conflicts of interest between the Company
and its officers, directors owning more than 5% of the Company's Common Stock,
employees and members of their immediate families. The policy states that the
Board considers it a potential conflict with the Company's interests for such
persons to take any of the following actions, among others, without disclosure
to and approval by the Board of Directors: (i) to serve as an officer, director,
employee or be a principal shareholder of, or to receive income from, any
enterprise doing business with or competing with the Company; (ii) to speculate
or deal in securities purchased or sold by the Company; (iii) to own an interest
in any enterprise doing business with or competing with the Company, other than
an interest in less than 1% of the securities of a publicly held company or in
securities of banks or savings associations; (iv) participate in the development
of any corporation in which the Company has acquired an interest after the date
of this Memorandum; or (v) otherwise to benefit from their position with the
Company or to deprive the Company of an opportunity to benefit with respect to
any transactions between such persons and any business organization other than
the Company.
28
<PAGE>
The foregoing policy does not apply to directors owning less than 5% of the
Company's Common Stock or consultants who are not officers or employees of the
Company. However, such persons are subject to fiduciary responsibilities as
directors or agents of the Company. Officers and directors of the Company may be
presented with opportunities which give rise to apparent conflicts of interest
which can be resolved only through the exercise of judgment by such officers and
directors consistent with their fiduciary duties to the Company arising under
Hawaii statutory law and general corporate law.
The Company has a right of first refusal on all opportunities to
participate in the purchase of securities which may be presented to its officers
and employees after the date of this Memorandum that are consistent with the
investment objectives of the Company. With respect to all directors of the
Company, including those who are not officers, employees or owners of 5% or more
of the Company's Common Stock, fiduciary obligations exist under Hawaii law
prohibiting them from taking advantage of corporate opportunities and from
otherwise benefitting by reason of their position on the Company's Board of
Directors. In the event any director becomes aware of an opportunity in which he
knows the Company would be interested, he is obligated to make the Company aware
of that opportunity and to offer it to them on the same terms as it may have
been offered to him. Any transactions that take place between any director and
the Company or the affiliate of any director and the Company shall be approved
by the Board of Directors without the involvement of the interested director and
will be approved only if the terms are deemed to be no less favorable to the
Company than could be expected in a transaction with an unaffiliated third
party.
As a result of the foregoing policies, all corporate opportunities
presented to officers and directors are to be disclosed to the Board of
Directors. When the Board of Directors of the Company is presented with a
specific situation under the foregoing policy, it will make a judgment as to
whether a specific activity should be approved in a manner that is consistent
with their fiduciary obligations to resolve such situations in the best
interests of the Company. However, due to capital limitations or other factors
which the Board may consider in making these judgments, the Board may approve a
director's or officer's participation in a securities or other related business
opportunity in which the Company will not participate.
The Board of Directors of the Company will make every effort to minimize
any conflicts of interest and, to the extent that any person may be placed in a
position of such conflict by virtue of a personal interest in a transaction with
the Company, the Board will request that he not participate in any decision
making process with regard to the transaction.
DESCRIPTION OF CAPITAL STOCK
DESCRIPTION OF SECURITIES.
GENERAL. The Company is authorized to issue 30,000,000 shares of Common
Stock, no par value per share, and 5,000,000 shares of Preferred Stock. There
are presently 648,649 shares of 8% Convertible Preferred Stock, Series A issued
and outstanding held by one holder of record. As of August 22, 1997, there were
7,086,176 shares of Common Stock issued and outstanding held by 682 stockholders
of record.
COMMON STOCK. Holders of Common Stock are entitled to receive ratably such
dividends as may be declared by the Board of Directors, out of funds legally
available, without any preference. Holders of Common Stock are entitled to one
vote per share. Cumulative voting is not allowed for purposes of the election of
directors. Thus, the holders of more than 50% of the shares voting for directors
can elect all directors. The holders of the Common Stock of the Company have no
preemptive rights to purchase new issues of the securities of the Company.
At the present time, the Company does not intend to pay any dividends on
its Common Stock. See "Dividends."
Upon liquidation or dissolution of the Company, holders of Common Stock are
entitled to receive pro rata, either in cash or in kind, all of the assets of
the Company after payment of debts, subject to the rights of the holders of the
outstanding Preferred Stock of the Company. There are no redemption, conversion
or preemptive rights attached to the Common Stock.
29
<PAGE>
PREFERRED STOCK. The Board of Directors has the authority, without action
by the stockholders, to designate and issue up to 5,000,000 shares of Preferred
Stock in one or more series and to designate the dividend rate, voting rights
and other rights, preferences and restrictions of each series any or all of
which may be greater than the rights of the Common Stock.
The Company has authorized one class of Preferred Stock, comprised of
1,066,666 shares of its 8% Convertible Preferred Stock, Series A ("Series A
Preferred Stock") of which there are 648,649 shares presently issued and
outstanding. The shares of Series A Preferred Stock are convertible into the
Common Stock of the Company beginning on December 1, 1997. Dividends are payable
in arrears upon the conversion of the Series A Preferred Stock by the issuance
of shares of Common Stock of the Company which will be valued at the lesser of
$1.85 per share or an amount equal to 75% of the average of the closing bid
prices of the Common Stock on the five business days preceding the conversion
date.
The shares of Preferred Stock have voting rights and are entitled to the
number of votes equal to the number of shares of Common Stock into which they
are convertible, and have the right to vote together with the holders of Common
Stock as a single class. In the event of the liquidation of the Company, the
holders of the Series A Preferred Stock have a liquidation preference over the
holders of Common Stock and any junior series of Preferred Stock and will be
entitled to receive $2.16 per share. After receipt of this liquidation
preference, the holders of the Series A Preferred Stock and Common Stock shall
be entitled to distributions, if any, pro rata based upon the number of shares
held by each assuming the conversion of the Series A Preferred Stock. Upon
receipt of notice of a holder's exercise of their right to convert their Series
A Preferred Stock, the Company has the option to redeem such shares for $2.16
plus any accrued and unpaid dividends. The terms of the Series A Preferred Stock
are subject to adjustment upon the occurrence of certain events. The holders of
Series A Preferred Stock also have registration rights upon conversion into
Common Stock of the Company.
The effect of the issuance of any other shares of Preferred Stock upon the
rights of holders of the Common Stock may not be determined until the Board of
Directors specifies the rights of the holders of such Preferred Stock. Such
effects might include, among other things, restricting dividends on the Common
Stock, diluting the voting power of the Common Stock, impairment of the
liquidation rights of the Common Stock and delaying or preventing a change in
control of the Company without further action by the stockholders.
WARRANTS AND OPTIONS. There are presently outstanding warrants to purchase
up to 600,000 shares of the Common Stock of the Company exercisable at prices
ranging from $2.00 to $3.00 per share.
The Company has a stock option and stock bonus plan which covers 1,250,000
shares of the Common Stock of the Company. As of August 22, 1997, no options or
stock bonuses covering shares of Common Stock have been granted and issued under
the Plan.
HAWAII CORPORATE LAW AND CERTAIN CHARTER PROVISIONS. The Company is a
Hawaii corporation and subject to Chapter 417E of the Hawaii Business
Corporation Act (the "Hawaii Law"), an anti-takeover law. In general, Chapter
417E of the Hawaii Law prevents take-over offers to acquire equity securities of
a Hawaii corporation if the offeror would become a beneficial owner of more than
10% of any class of outstanding equity securities, and other similar provisions,
subject to certain exceptions such as the written approval of the board of
directors. The existence of this provisions would be expected to have an anti-
takeover effect, including attempts that might result in a premium over the
market price for the shares of Common Stock held by stockholders.
The Hawaii Law further provides that all stockholder action must be
effected at a duly called meeting of stockholders. The Company's Restated
Articles of Incorporation and By-Laws provide that only the Company's President,
a majority of the members of the Company's Board of Directors or at the written
request of the holders of at least 50% of the outstanding voting power may call
a special meeting of stockholders. These provisions of the Restated Articles of
Incorporation and By-Laws could discourage potential acquisition proposals and
could delay or prevent a change in control of the Company. Such provisions also
may have the effect of preventing changes in the management of the Company.
TRANSFER AGENT AND REGISTRAR. The transfer agent and registrar for the
Common Stock of the Company is Securities Transfer Corporation in Dallas, Texas.
30
<PAGE>
SHARES AVAILABLE FOR FUTURE SALE
As of August 22, 1997, the Company had outstanding (or reserved for
issuance upon the conversion and stock dividends relating to its outstanding
shares of Series A Preferred Stock, for the exercise of outstanding warrants,
and for options available to be granted under the Company's 1996 Stock Option,
SAR and Stock Bonus Plan (the "1996 Plan")) 9,402,842 shares of Common Stock.
Substantially all of such shares of Common Stock is or will be freely tradeable
by persons, other than "Affiliates" of the Company, without restriction under
the Securities Act of 1933.
The Company has reserved an aggregate of 1,250,000 shares of Common Stock
for issuance under the 1996 Plan. The Company intends to file a registration
statement on Form S-8 with respect to the shares of Common Stock issuable under
the 1996 Plan. Shares of Common Stock issued after the effective date of any
such registration statement on Form S-8 upon the exercise of options granted
under the 1996 Plan will be available for sale in the public market without
restriction to the extent that they are held by persons who are not affiliates
of the Company and, to the extent that they are held by affiliates, pursuant to
Rule 144 under the Securities Act, without observance of the holding period
requirement.
The Company further intends to file a registration statement with respect
to the shares of Common Stock issuable upon the conversion of its Series A
Preferred Stock (648,649 shares) plus Common Stock to be issued as dividends
upon the conversion of such shares of Series A Preferred Stock into the Common
Stock of the Company, as adjusted upon the occurrence of certain events. The
holder of the Series A Preferred Stock also holds a warrant to purchase 150,000
shares of Common Stock for $2.25 per share exercisable on or before August 31,
2000, which also registration rights upon notice of exercise. Registration
rights may also be granted to additional stockholders and warrantholders of the
Company.
The Company's Common Stock trades in the over-the-counter (Electronic
Bulletin Board) under the Symbol "EMBU". No prediction can be made as to the
effect, if any, that future sales of shares, or the availability of shares for
future sale, will have on the market price prevailing from time to time. Sales
of substantial amounts of Common Stock, or the perception that such sales could
occur, may affect adversely prevailing market prices of the Common Stock. See
"Risk Factors -- Market for Common Stock".
LEGAL PROCEEDINGS
The Company is engaged in various legal proceedings which arise in the
ordinary course of its business. In the opinion of management, the amount of
ultimate liability with respect to those proceedings will not be material to the
Company's financial position or results of operations. A reserve of $52,000 has
been recorded during fiscal 1997, which represents the anticipated costs of
final settlement of certain pending litigation.
LEGAL MATTERS
The validity of the securities offered hereby will be passed upon for the
Company by the law firm of Stephen A. Zrenda, Jr., P.C., Oklahoma City,
Oklahoma.
EXPERTS
The consolidated financial statements of the Company at September 30, 1996,
appearing in this Prospectus and Registration Statement have been audited by
Harlan & Boettger, independent auditors, as set forth in their report thereon
appearing elsewhere herein and in the Registration Statement, and are included
in reliance upon such report given upon the authority of such firm as experts in
accounting and auditing.
31
<PAGE>
ADDITIONAL INFORMATION
The Company has filed with the Securities and Exchange Commission a
Registration Statement (which term shall include all amendments thereto) on Form
SB-2 (No. 333-21719) under the Securities Act with respect to the Common Stock
offered hereby. This Prospectus, which constitutes a part of the Registration
Statement does not contain all of the information set forth in the Registration
Statement, certain items of which are contained in exhibits to the Registration
Statement as permitted by the rules and regulations of the Commission. For
further information with respect to the Company and the Common Stock offered
hereby, reference is made to the Registration Statement, including the exhibits
thereto, and the financial statements and notes filed as a part thereof.
Statements made in this Prospectus concerning the contents of any document
referred to herein are not necessarily complete. With respect to each such
document filed with the Commission as an exhibit to the Registration Statement,
reference is made to the exhibit for a more complete description of the matter
involved. The Registration Statement, including the exhibits thereto and the
financial statements and notes filed as a part thereof, as well as such reports
and other information filed with the Commission, may be inspected without charge
at the public reference facilities maintained by the Commission at Room 1024,
450 Fifth Street, N.W., Washington, D.C. 20549 and at the regional offices of
the Commission located at 7 World Trade Center, 13th Floor, Judiciary Plaza, New
York, New York 10048 and Citicorp Center, 500 West Madison Street, Suite 1400,
Chicago, Illinois 60661. Copies of all or any part thereof may be obtained from
the Commission upon the payment of certain fees prescribed by the Commission.
The Company is subject to the reporting requirements of the Securities
Exchange Act of 1934 and in accordance therewith files reports and other
information with the Commission (File No. 0-11883). Reports and other
information can be inspected and copied at the public reference facilities of
the Commission at 450 Fifth Street, N.W., Washington D.C. 20549; at its
Northeast Regional Office, Suite 1300, 7 World Trade Center, New York, New York
10048; and at its Midwest Regional Office, Citicorp Center, 500 West Madison
Street, Suite 1400, Chicago, Illinois 60661-2511. Copies of such material can be
obtained from the Public Reference Section at prescribed rates. The Company
intends to furnish its stockholders with annual reports containing audited
financial statements and such other periodic reports as the Company may
determine to be appropriate or as may be required by law.
32
<PAGE>
INDEPENDENT AUDITORS' REPORT
TO THE BOARD OF DIRECTORS AND SHAREHOLDERS OF
EMB CORPORATION AND SUBSIDIARY:
We have audited the accompanying consolidated balance sheet of EMB Corporation
(a Hawaii corporation) and subsidiary as of September 30, 1996 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 audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides 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 the results of their operations and
their cash flows for the years ended September 30, 1996 and 1995 in conformity
with generally accepted accounting principles.
HARLAN & BOETTGER, LLP
Harlan & Boettger
San Diego, California
January 8, 1997
F-1
<PAGE>
EMB CORPORATION AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
ASSETS As of As of
June 30, 1997 September 30,
CURRENT ASSETS (Unaudited) 1996
------------- -------------
<S> <C> <C>
Cash $ 39,497 $ 395
Accounts receivable (no allowance deemed necessary) 292,099 14,582
Inventory, net 31,880 35,324
Notes receivable (Note G) 656,218 14,000
Mortgage loans receivable (Note D) 5,848,050 -
Employee advances 198,500 -
------------- -------------
TOTAL CURRENT ASSETS 7,066,244 64,301
PROPERTY AND EQUIPMENT, net (Note E) 353,242 149,363
RELATED PARTY RECEIVABLE (Note F) - 129,687
NOTE RECEIVABLE, less current portion (Note G) 3,161,134 -
LAND HELD FOR SALE (Notes A and H) 43,000 843,000
OTHER ASSETS 9,129 4,128
------------- -------------
$ 10,632,749 $ 1,190,479
============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 484,893 $ 195,374
Bank overdrafts - 27,177
Accrued expenses 9,865 48,886
Line of credit (Note I) 5,848,050 -
Notes payable - current portion (Note J) 246,293 293,793
Capital lease obligations - current portion (Note K) 14,161 28,553
------------- -------------
TOTAL CURRENT LIABILITIES 6,603,262 593,783
NOTES PAYABLE, net of current portion (Note J) 251,370 65,000
CAPITAL LEASE OBLIGATIONS, net of current portion (Note K) 19,015 30,096
DEFERRED GAIN (Note G) 2,560,000 -
------------- -------------
TOTAL LIABILITIES 9,433,647 688,879
COMMITMENTS (Note K)
SHAREHOLDERS' EQUITY
Preferred stock, no par value, 5,000,000 shares authorized, no shares
issued or outstanding - -
Common stock, no par value, 30,000,000 shares
authorized; 5,856,692 and 5,311,817 shares issued
and outstanding, respectively 4,798,579 3,910,391
Common stock subscribed (187,875) (200,000)
Retained deficit (3,411,602) (3,208,791)
------------- -------------
TOTAL SHAREHOLDERS' EQUITY 1,199,102 501,600
------------- -------------
$ 10,632,749 $ 1,190,479
============= =============
</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>
For the nine months For the years ended
ended June 30, September 30,
-------------------------- ------------------------
1997 1996 1996 1995
----------- ----------- ----------- ----------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
REVENUES
Mortgage loan revenue $2,536,337 $ 195,186 $ 244,874 $ 97,400
Product sales 11,473 31,545 -
---------- ----------- ----------
TOTAL REVENUES 2,547,810 195,186 276,419 97,400
OPERATING EXPENSES
General and administrative 3,316,239 1,123,795 2,790,244 531,818
Cost of sales - product sales 9,752 - 29,636 -
Depreciation 27,393 13,300 31,056 2,662
---------- ---------- ----------- ----------
TOTAL OPERATING EXPENSES 3,353,384 1,137,095 2,850,936 534,480
---------- ---------- ----------- ----------
LOSS FROM OPERATIONS (805,574) (941,909) (2,574,517) (437,080)
OTHER INCOME (EXPENSES)
Interest expense (35,637) (39,014) (67,081) (2,164)
Gain on land sale 640,000 - - -
Other - - - 9,989
---------- ---------- ----------- ----------
TOTAL OTHER INCOME (EXPENSE) 604,363 (39,014) (67,081) 7,825
---------- ---------- ----------- ----------
LOSS BEFORE INCOME TAXES (201,211) (980,923) (2,641,598) (429,255)
Income taxes (Note L) 1,600 800 1,600 800
---------- ---------- ----------- ----------
NET LOSS $ (202,811) $ (981,723) $(2,643,198) $ (430,055)
========== ========== =========== ==========
NET INCOME (LOSS) PER COMMON SHARE $ (.03) $ (.21) $ (.73) $ (.29)
========== ========== =========== ==========
WEIGHTED AVERAGE NUMBER OF SHARES
OUTSTANDING 5,805,527 4,735,233 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>
Common Stock Preferred Stock Stock Total
-------------------------- -------------------------- 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
Proceeds from sale of
shares 50,000 137,500 - - - - 137,500
Proceeds from exercise of
warrants 108,750 140,938 - - - - 140,938
Shares issued for services 350,000 537,500 - - - - 537,500
Warrants exercised for
note receivable 36,125 72,250 - - (112,875) - (40,625)
Payments on note receivable - - - - 125,000 - 125,000
Warrants exercised - - - - - - 35,938
Net loss - - - - - (202,811) (202,811)
--------- ------------- ------------ ------------ ------------ ----------- ---------------
BALANCE, JUNE 30, 1997
(Unaudited) 5,856,692 $ 4,798,579 - $ - $ (187,875) $(3,411,602) $ 1,199,102
========= ============= ============ ============ ============ =========== ===============
</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>
Nine months Nine months
ended ended
June 30, June 30, Year ended Year ended
1997 1996 September 30, September 30,
(Unaudited) (Unaudited) 1996 1995
----------- ----------- ------------- -------------
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $ (202,811) $ (981,723) $ (2,643,198) $ (430,055)
Adjustments to reconcile net loss to net cash
used in operating activities:
Common stock issued for services 537,500 116,307 1,315,209 162,250
Gain on sale of land (640,000) - - -
Depreciation 27,393 13,300 31,056 2,662
Changes in operating assets and liabilities:
(Increase) decrease in:
Accounts receivable (277,517) (21,613) (14,582) -
Inventory 3,444 (67,798) (35,324) -
Notes receivable (345,102) - - -
Employee advances (198,500) - - -
Prepaid expenses and other assets (5,001) (181,609) (2,951) (1,177)
Increase (decrease) in:
Accounts payable 262,342 120,653 217,867 349
Accrued expenses (39,021) 102,419 46,637 1,449
----------- ----------- ------------- -------------
NET CASH USED IN OPERATING ACTIVITIES (877,273) (900,064) (1,085,286) (264,522)
----------- ----------- ------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of property and equipment (231,272) (54,509) (96,846) (6,720)
Proceeds from sale of land 800,000 - - (10,000)
Loans made on notes receivable (258,250) - - (14,000)
Related party receivable 129,687 49,889 (74,798) (29,092)
----------- ----------- ------------- -------------
NET CASH PROVIDED BY (USED IN)
INVESTING ACTIVITIES 440,165 (4,620) (171,644) (59,812)
----------- ----------- ------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from issuance of notes payable 287,000 874,798 268,893 355,776
Line of credit 5,848,050 - - -
Mortgage loan receivable (5,848,050) - - -
Payments under capital lease obligations (25,473) (11,000) (17,300) -
Proceeds from exercise of warrants 140,938 - - -
Payments on borrowings (188,755) (68,779) (38,253) -
Payments on common stock subscribed 125,000 - - -
Sale of common stock 137,500 100,000 1,017,914 -
----------- ----------- ------------- -------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 476,210 895,019 1,231,254 355,776
----------- ----------- ------------- -------------
NET INCREASE (DECREASE) IN CASH 39,102 (9,665) (25,676) 31,442
CASH, BEGINNING OF PERIOD 395 26,071 26,071 (5,371)
----------- ----------- ------------- -------------
CASH, END OF PERIOD $ 39,497 $ 16,406 $ 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
(INCLUDING DATA APPLICABLE TO UNAUDITED PERIODS)
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 Video Interactive Mortgage
Process ("VIP"). 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.
Interim Financial Statements
The consolidated balance sheet as of June 30, 1997 and the related
consolidated statements of operations, shareholders' equity (deficit), and
cash flows for the nine-month periods ended June 30, 1997 and 1996 are
unaudited. However, in the opinion of management these interim financial
statements include all adjustments (consisting of only normal recurring
adjustments) which are necessary for the fair presentation of the results for
the interim periods presented. The results of operations for the unaudited
nine-month period ended June 30, 1997 are not necessarily indicative of the
results which may be expected for the entire 1997 fiscal year.
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.
Cash
Cash includes cash on hand and cash in checking and savings accounts at high
credit quality financial institutions. The balance, at times, may exceed
federally insured limits.
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
F-6
<PAGE>
EMB CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INCLUDING DATA APPLICABLE TO UNAUDITED PERIODS)
(Continued)
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.
A. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):
Revenue Recognition - Mortgage Brokerage
The Company currently generates substantially all of its revenues from two
sources. The first source of revenue, Mortgage Loan Origination and
Processing Revenue, represents fees charged by the Company to brokers and
borrowers for the processing, underwriting and funding of mortgage loans. The
second source of revenue, Mortgage Loan Sales Revenue, represents fees
received when the Company sells the mortgage loans to ICI Funding Corporation
(ICIFC). The Company has a Master Repurchase Agreement with ICIFC, whereby
ICIFC has agreed to purchase all retail mortgage loans which have been funded
on the Company's line of credit. (See Note I).
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 8,250
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 asset and liability method of
accounting in accordance with Statement of Financial Accounting Standards No.
109 (SFAS 109), "Accounting for Income Taxes." Deferred income tax assets and
liabilities are computed annually for temporary differences between the
financial statement and tax bases of assets and liabilities that will result
in taxable or deductible amounts in the future based on enacted tax laws and
rates applicable to the period in which the differences are expected to
affect taxable income. Valuation allowances are established when necessary to
reduce deferred tax assets to the amounts expected to be realized. Income tax
expense is the tax payable or refundable for the period plus or minus the
change during the period in 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 stock 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.
F-7
<PAGE>
EMB CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INCLUDING DATA APPLICABLE TO UNAUDITED PERIODS)
(Continued)
A. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):
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 the fiscal year ended September 30, 1996, the
Company's operations were sufficient to be considered an operating Company.
The Company's efforts are concentrated in the mortgage loan industry,
including the development of residential mortgage lending on a retail basis
directly to consumers and on a wholesale basis to other mortgage brokers.
C. RECAPITALIZATION:
Effective December 16, 1995, the Company acquired the net assets of Sterling
Alliance Group, Ltd. ("SAG") 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. MORTGAGE LOANS RECEIVABLE:
Mortgage loans receivable represent the Company's security interest in
mortgage loans made to retail customers funded on its Imperial Warehouse
Lending Group, Inc. line-of-credit, which have not yet been repurchased by
ICI Funding Corporation under the terms of a Master Repurchase Agreement.
These loans are normally repurchased by ICI Funding Corporation within
approximately 10 days of being funded and are therefore classified as a
current asset. All mortgage loans receivable as of June 30, 1997 were
subsequently repurchased within the standard 10 day period. If a loan becomes
impaired after being repurchased, ICI Funding Corporation would have recourse
against the Company if it was determined that fraud was present in the
procurement of the loan. Cost approximates market value of such loans (See
Note I).
F-8
<PAGE>
EMB CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INCLUDING DATA APPLICABLE TO UNAUDITED PERIODS)
(Continued)
E. PROPERTY AND EQUIPMENT:
<TABLE>
<CAPTION>
Property and equipment are summarized as follows:
June 30,
1997 September 30,
(Unaudited) 1996
----------- -------------
<S> <C> <C>
Machinery and equipment $ 219,705 $ 112,532
Furniture and fixtures 71,657 71,317
----------- -------------
291,362 183,849
Less accumulated depreciation 61,880 34,486
----------- -------------
Property and equipment, net $ 353,242 $ 149,363
=========== =============
</TABLE>
F. RELATED PARTY TRANSACTIONS:
Related party receivable at June 30, 1997 and September 30, 1996 consists of
amounts due from a related corporation of $0 and $129,687, respectively.
G. NOTES RECEIVABLE:
Notes receivable at June 30, 1997, consists of two notes. The first note, in
the amount of $3,200,000, is due from the sale of the Monterey Land to an
unrelated third party for $4,000,000. The note is secured by the property
and payable in nine annual payments of $422,867 commencing December, 1997
including interest at 12% per annum with a final payment of principal and
any accrued interest due December, 2006. Current principal portion was
$38,866 at June 30, 1997.In accordance with Statement of Financial
Accounting Standards No. 66, "Accounting for Sales of Real Estate" the
Company has provided for the recognition of profit based on the Installment
Method and accordingly has recorded a deferred gain of $2,560,000 as of June
30, 1997.
The second note relates to an agreement the Company entered into in March,
1997 wherein a related party acquired the right to act as the Company's
exclusive representative in the state of Washington for a period of ten
years. As consideration for this right the Company was issued a $400,000
promissory note which bears interest at 8% per annum and matures August 31,
1997.
H. 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 its
common stock as consideration. Management estimated the fair market value of
the common stock to be $4.00 per share, based on sales to unrelated third
parties to arrive at a total book value of $43,000 for the property. The
land was subsequently collateralized against the $65,000 note payable to
Howard C. Kuhle (See Note F).
F-9
<PAGE>
EMB CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INCLUDING DATA APPLICABLE TO UNAUDITED PERIODS)
(Continued)
H. LAND HELD FOR SALE: (CONTINUED)
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 its common stock as consideration.
Management estimated the fair market value of the common stock to be $4.00
per share, based on sales to unrelated third parties, to arrive at a
$800,000 book value for the property. The Company sold the Monterey property
on December 30, 1996 for $800,000 cash and a note receivable for $3,200,000.
I. LINE OF CREDIT:
The Company has a $3,000,000 line-of-credit with Imperial Warehouse Lending
Group, Inc. which can be used solely for the purpose of funding mortgage
loans. Borrowings bear interest at Bank of America's prime+ .5%. The line is
secured by a personal guarantee and the original mortgage notes. The Company
must maintain an average daily balance of $1,500,000. As of June 30, 1997
the outstanding balance was $5,848,050. The Company has recorded a
corresponding asset, Mortgage Loans Receivable, representing the Company's
security interest in the underlying properties. The line expires September
26, 1997. The Company may from time to time exceed its credit limit.
J. NOTES PAYABLE:
<TABLE>
<CAPTION>
Notes payable are summarized as follows:
June 30,
1997 September 30,
(Unaudited) 1996
----------- -------------
<S> <C> <C>
Note payable to Frederic R. Weeth, interest at 10%,
no established repayment schedule, note past due, principal
and any unpaid interest due on demand $24,250 $26,250
Note payable to Thomas J. Donahue, interest at 10%,
no established repayment schedule, note past due, principal
and any unpaid interest due on demand 21,750 26,250
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
</TABLE>
F-10
<PAGE>
EMB CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INCLUDING DATA APPLICABLE TO UNAUDITED PERIODS)
(Continued)
<TABLE>
<CAPTION>
J. NOTES PAYABLE: (CONTINUED)
June 30,
1997 September 30,
(Unaudited) 1996
----------- -------------
<S> <C> <C>
Note payable to Baronin Enterprises, Inc., interest at 8%,
principal and any unpaid interest due on demand 50,000
Note payable to Haven Funding, L.P., interest at 10.5%, 24
monthly payments of $480 including interest, final payment
including any unpaid interest due November, 1998 22,770 -
Various notes payable to unrelated parties, no established
repayment schedule, interest ranging from 8% to 11% 363,893 191,293
----------- -------------
497,663 358,793
Less current portion 246,293 293,793
----------- -------------
$ 251,370 $ 65,000
=========== =============
</TABLE>
K. COMMITMENTS AND CONTINGENCIES:
Operating Leases
The Company leases its facilities under an operating lease from an unrelated
third party which expires in March, 2002. Rental expense for the nine months
ended June 30, 1997 and the year ended September 30, 1996 was $59,411 and
$90,132, respectively. The noncancelable operating lease provides that the
Company pays for property taxes, insurance and certain other operating
expenses applicable to the leased premises.
Minimum future rental payments under the lease are as follows:
<TABLE>
<CAPTION>
Twelve months ending
June 30, (Unaudited)
--------------------
<S> <C>
1998 $ 72,288
1999 227,244
2000 244,728
2001 262,212
2002 262,212
Thereafter -
----------
$1,068,684
==========
</TABLE>
F-11
<PAGE>
EMB CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INCLUDING DATA APPLICABLE TO UNAUDITED PERIODS)
(Continued)
K. COMMITMENTS AND CONTINGENCIES: (CONTINUED)
Capital Leases
The Company acquired part of its equipment and furniture under capital lease
obligations. The economic substance of the capital lease agreements is that
the Company finances the acquisition by making monthly payments over a
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.
<TABLE>
<CAPTION>
June 30,
1997 September 30,
(Unaudited) 1996
----------- --------------
<S> <C> <C>
Cost $ 75,949 $ 75,949
Accumulated depreciation (29,174) (23,450)
----------- --------------
Net Book Value $ 46,775 $ 52,499
=========== ==============
</TABLE>
The future minimum lease payments under capitalized leases and the present
value of the net minimum lease payments are as follows:
<TABLE>
<CAPTION>
Twelve months ended
June 30, (Unaudited)
--------------------
<S> <C>
1998 $21,760
1999 20,497
-------
42,257
Less amount representing interest 9,081
-------
33,176
Less current portion of capital lease 14,161
-------
$19,015
=======
</TABLE>
F-12
<PAGE>
EMB CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INCLUDING DATA APPLICABLE TO UNAUDITED PERIODS)
(Continued)
L. 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 nine months ended June
30, 1997 and the year ended September 30, 1996 consists solely of the $800
minimum California franchise tax.
Provisions for income taxes are summarized as follows:
<TABLE>
<CAPTION>
For the nine months For the years ended
ended June 30, September 30,
------------------- -------------------
1997 1996 1996 1995
-------- -------- ------ -------
(Unaudited)
<S> <C> <C> <C> <C>
Current income taxes $1,600 $ 800 $1,600 $ 800
------ -------- ------ -------
Provision for income taxes $1,600 $ 800 $1,600 $ 800
====== ======== ====== =======
</TABLE>
The components of deferred tax assets are as follows:
<TABLE>
<CAPTION>
June 30,
1997 September 30,
(Unaudited) 1996
----------- -------------
<S> <C> <C>
Deferred tax assets:
Net operating losses $ 763,300 $ 763,500
----------- -------------
Gross deferred tax assets 763,300 763,500
Valuation adjustment (763,300) (763,500)
----------- -------------
Net deferred tax assets $ - $ -
=========== =============
</TABLE>
F-13
<PAGE>
EMB CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INCLUDING DATA APPLICABLE TO UNAUDITED PERIODS)
(Continued)
L. INCOME TAXES: (CONTINUED)
The Company has unused net operating loss carryforwards available to offset
future taxable income and tax liabilities for income tax reporting purposes.
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>
<CAPTION>
Years ending
September 30, Federal State
------------- ------------- -------------
<S> <C> <C>
1999 $ -
2000 - $ 430,100
2001 - 2,641,600
2002 - 170,700
2009 86,600 -
2010 430,100 -
2011 2,641,600 -
2012 314,500 -
------------- -------------
$ 3,472,800 $ 3,286,400
============= =============
</TABLE>
M. SUPPLEMENTAL CASH FLOW INFORMATION:
Supplemental disclosures of cash flow information are summarized as follows:
<TABLE>
<CAPTION>
For the nine months For the years ended
ended June 30, September 30,
-------------------- -------------------
1997 1996 1996 1995
---------- --------- --------- ---------
(Unaudited)
<S> <C> <C> <C> <C>
Cash paid for interest and income taxes:
Interest $ 18,101 $ 17,770 $ 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 $ 800,000 $ 33,000
Common stock issued for related
party payable $ - $ - $ 232,018 $ -
Note receivable received for sale
of land $3,200,000 $ - $ - $ -
</TABLE>
F-14
<PAGE>
EMB CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INCLUDING DATA APPLICABLE TO UNAUDITED PERIODS)
(Continued)
N. 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 June 30, 1997 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 shareholders' equity
(deficit).
O. 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 1,250,000 shares of common stock for
issuance under the plan. As of June 30, 1997, no shares have been granted
under the plan. The Company increased the number of shares authorized for
issuance under the plan from 250,000 to 1,250,000 at its March 1997
stockholders meeting.
P. WARRANTS:
The Company has issued 131,250 outstanding warrants to purchase 131,250
shares of no par value common stock at $2.00- $3.00 per share. During the
nine months ended June 30, 1997, 67,375 warrants were exercised and none have
been canceled.
Q. MAJOR CUSTOMER:
A major source of revenue for the Company is derived from the resale of
retail mortgage loans to ICI Funding Corporation (ICIFC). The loss of this
business would have a material effect on the Company.
F-15
<PAGE>
===============================================================================
No person has been authorized in connection with the offering made hereby to
give any information or to make any representations not contained in this
Prospectus and, if given or made, such information or representations must not
be relied upon as having been authorized by the Company or the Selling
Stockholder. This Prospectus does not constitute an offer to sell or a
solicitation of any offer to buy any of the securities offered hereby to any
person or by anyone in any jurisdiction in which it is unlawful to make such
offer or solicitation. Neither the delivery of this Prospectus nor any sales
made hereunder shall, under any circumstances, create any implication that there
has been no change in the affairs of the Company or that the information
contained herein is correct as of any time subsequent to the date hereof.
------------------
TABLE OF CONTENTS
PAGE
----
Summary.........................................................
The Company.....................................................
Selling Stockholder and Plan of Distribution....................
Use of Proceeds.................................................
Risk Factors....................................................
Capitalization..................................................
Management's Discussion and Analysis of Financial
Condition and Results of Operations.............................
Market Price....................................................
Dividends.......................................................
Business........................................................
Management......................................................
Principal Stockholders..........................................
Conflicts of Interest...........................................
Description of Capital Stock....................................
Shares Available for Future Sale................................
Legal Proceedings...............................................
Legal Matters...................................................
Experts.........................................................
Additional Information..........................................
Financial Statements............................................
UNTIL ___________, 1997 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL DEALERS
EFFECTING TRANSACTIONS IN THE REGISTERED SECURITIES, WHETHER OR NOT
PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS.
================================================================================
================================================================================
3,375,000 SHARES
OF
COMMON STOCK
EMB CORPORATION
---------------------
PROSPECTUS
---------------------
___________, 1997
===============================================================================
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 24. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
-----------------------------------------
The Company is a Hawaii corporation. Section 415-48.5 of the Hawaii
Business Corporation Act (the "HBCA") provides authority for broad
indemnification of officers, directors, employees and agents of a corporation,
with certain specified exceptions.
Article XIII of the Company's Restated Articles of Incorporation provides
that the Company shall have the power to indemnify its directors, officers,
employees and agents to the fullest extent allowed by the HBCA.
Article III, Section 6 of the Company's By-Laws provides for extensive
indemnification of its directors, officers, employees and agents.
At the present time, the Company does not have any officer-director
liability insurance, nor does the Company have indemnification agreements with
any of its directors, officers, employees or agents.
ITEM 25. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
-------------------------------------------
The estimated fees and expenses payable by the Company in connection with
the distribution of the Common Stock registered hereunder are as follows:
Securities and Exchange Commission registration fee $ 3,426
*Legal fees and expenses 20,000
*Blue sky fees and expenses 1,500
*Printing and engraving expenses 3,000
*Accounting fees and expenses 2,000
*Transfer agent and registrar fees 1,000
*Miscellaneous 2,000
-------
TOTAL $32,926
=======
-----------------------
* Estimated
ITEM 26. RECENT 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, a sophisticated
purchaser, exchange for assets in reliance upon Section 4(2) of the Securities
Act of 1933, as amended (the "Act"). In addition, the Company issued 407,666
shares of its Common Stock to two sophisticated purchasers 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. During 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. From October 1, 1996 through June 30,
1997, warrants covering 133,750 shares were exercised at $2.00 per share for a
total of $217,500.
II-1
<PAGE>
During the fiscal year ended September 30, 1996, the Company issued
502,000 shares of Common Stock in reliance upon Rule 701 under the Act under the
terms of the Compensatory Benefit Plan of the Company to consultants for
services.
During June 1997, the Company issued 100,000 shares of Common Stock
for $100,000 in a private transaction made in reliance upon Section 4(2) under
the Act.
During July 1997, the Company issued 63,175 restricted shares of
Common Stock as stock bonuses to its employees; and issued 135,209 shares of
Common Stock in exchange for cancellation of debt in reliance upon Section 4(2)
under the Act.
In August 1997, the Company issued 648,649 shares of its 8%
Convertible Preferred Stock, Series A, and a warrant to purchase 150,000 shares
of its Common Stock exercisable at $2.25 per share, for $1,200,000 in a private
offering made in reliance upon Rule 506 of Regulation D under the Act. The
warrant expires at the close of business on August 31, 2000.
ITEM 27. EXHIBITS.
--------
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.
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.
10(k) The new Seller Agreement between ICI Funding Corporation and
EMB Mortgage Corporation is incorporated herein by reference to
Exhibit 10(k) to the Form SB-2 (No. 333-21719) of the
Registrant filed with the Commission on February 13, 1997 (the
"Form SB-2").
II-2
<PAGE>
10(l) Master Commitment to Purchase Jumbo and Conforming Residential
Mortgages dated January 1, 1997, is incorporated herein by
reference to Exhibit 10(e) to the Form 10-QSB of the
Registrant for its fiscal quarter ended March 31, 1997.
10(m) Marketing and Distribution Agreement dated March 12, 1997, with
Provider Financial Services, Inc. is incorporated herein by
reference to Exhibit 10( ) to Amendment No. 1 to Form SB-2 of
the Registrant.
10(n)* Certificate of Designations applicable to the 8% Convertible
Preferred Stock, Series A of the Registrant.
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 is incorporated herein by reference to Exhibit
10( ) to Amendment No. 1 to Form SB-2 of the Registrant and its
Form 10-QSB for the nine months ended June 30, 1997.
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 subsidiaries of the Registrant is
incorporated herein by reference to Exhibit 21.1 to the Form
10-KSB of the Registrant for its fiscal year ended September
30, 1996.
23.1* Consent of Harlan & Boettger
23.2* Consent of Stephen A. Zrenda, Jr., P.C.
24.1 Power of Attorney (see signature page of Amendment No. 1 to
this Registration Statement)
27.1 Financial Data Schedule as of September 30, 1996 is
incorporated herein by reference to Exhibit 27 to the Form 10-
KSB of the Registrant.
27.2 Financial Data Schedule as of June 30, 1997 is incorporated by
reference to the Form 10-QSB of the Registrant for the fiscal
quarter ended June 30, 1997.
------------------
*Filed herewith
(b) Reports on Form 8-K. The Registrant did not file any reports
-------------------
on Form 8-K during the last quarter of its fiscal year ended
September 30, 1996. The Company filed a Form 8-K report on
January 9, 1997, regarding the sale of its real property in
Monterey, California.
(c) Financial Statement Schedules:
The following financial statement schedules should be read in conjunction
with the consolidated financial statements and notes thereto.
Independent Auditors' Report
Schedule V - Property and Equipment
Schedule VI - Accumulated Depreciation and Amortization of Property and
Equipment
Schedule VIII - Valuation and Qualifying Accounts and Reserves
Schedule IX - Short-term Borrowings
II-3
<PAGE>
ITEM 28. UNDERTAKINGS.
------------
Insofar as indemnification for liabilities arising under the 1933 Act may
be permitted to directors, officers and controlling persons of the Registrant
pursuant to the 1933 Act or otherwise, the Registrant has been advised that in
the opinion of the Securities and Exchange Commission such indemnification is
against public policy as expressed in the Securities Act and is, therefore,
unenforceable. In the event that a claim for indemnification against such
liabilities (other than the payment by the Registrant of expenses incurred or
paid by a director, officer or controlling person of the Registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the 1933 Act and will be governed by the final
adjudication of such issue.
The undersigned Registrant hereby undertakes:
(1) To file during any period in which offers or sales are being made, a
post-effective amendment to this registration statement;
(i) To include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events arising after
the effective date of the registration statement (or the most recent post-
effective amendment thereof) which, individually or in the aggregate, represent
a fundamental change in the information set forth in the registration statement;
and
(iii) To include any material information with respect to the plan of
distribution not previously disclosed in the registration statement or any
material change to such information in the registration statement.
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be deemed to be
a new registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial bona
fide offering thereof.
(3) To remove from registration by means of a post-effective amendment any
of the securities being registered which remain unsold at the termination of the
offering.
The undersigned Registrant hereby undertakes:
(1) For purposes of determining any liability under the Securities Act of
1933, the information omitted from the form of prospectus filed as part of this
registration statement in reliance upon Rule 430A and contained in a form of
prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4) or 497(h)
under the Securities Act shall be deemed to be part of this registration
statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities Act
of 1933, each post-effective amendment that contains a form of prospectus shall
be deemed to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to be
the initial bona fide offering thereof.
II-4
<PAGE>
SIGNATURES
In accordance with the requirements of the Securities Act of 1933, the
registrant certifies that it has reasonable grounds to believe that it meets all
of the requirements of filing on Form SB-2 and authorized this amendment to the
registration statement to be signed on its behalf by the undersigned, in the
City of Costa Mesa, State of California, on August 27, 1997.
Registrant: EMB CORPORATION
By: /s/ James E. Shipley
---------------------------------
James E. Shipley, President
Date: August 27, 1997
By: /s/ Bruce J. Brosky /s/ William V. Perry
------------------------------------- --------------------------------
Bruce J. Brosky William V. Perry
Director and Vice President-Marketing Director and Executive
and Vice President Public Relations
/s/ Michael P. Roth /s/ James E. Shipley
------------------------------------- --------------------------------
Michael P. Roth James E. Shipley
Director Director and President
/s/ B. Joe Wimer
-------------------------------------
B. Joe Wimer
Director, Secretary, Treasurer, and
Principal Accounting Officer
<PAGE>
EXHIBIT 10(n)
CERTIFICATE OF DESIGNATIONS
OF
8% CONVERTIBLE PREFERRED STOCK, SERIES A
OF
EMB CORPORATION
Pursuant to (S)415-15 and (S)415-16 of the Hawaii Business Corporation Law,
the undersigned duly authorized officer of EMB CORPORATION, a Hawaii corporation
(the "Company"), hereby certifies that the following resolution was duly adopted
on August 18, 1997, by the Board of Directors of the Company pursuant to
authority conferred on the Board of Directors by the provisions of the Restated
Articles of Incorporation of the Company (as amended) and in accordance with the
provisions of the Hawaii Business Corporation Law, and that said resolution has
not been amended or rescinded and is in full force and effect at the date
hereof:
RESOLVED, that pursuant to the authority expressly granted and vested in
the Board of Directors of the Company by the Corporation's Certificate of
Incorporation, as amended to date, the Board of Directors hereby creates a new
series of the Corporation's authorized but unissued preferred stock, no par
value per share, to be designated "8% Convertible Preferred Stock, Series A" and
to consist of 1,066,666 shares, and hereby fixes the voting powers,
designations, preferences and relative, participating, optional or other special
rights and the qualifications, limitations or restrictions thereof:
1. Number of Shares and Designation. The shares of this series of
--------------------------------
preferred stock shall be designated as "8% Convertible Preferred Stock, Series
A," no par value per share (the "Series A Preferred Stock"), and the number of
shares constituting this series shall be 1,066,666.
2. Definitions. For purposes of the Series A Preferred Stock, the
-----------
following terms shall have the meanings indicated:
"Board of Directors" shall mean the board of directors of the
Company or any committee authorized by such Board of Directors to
perform any of its responsibilities with respect to the Series A
Preferred Stock.
"Business Day" shall mean any day other than a Saturday, Sunday or a
day on which banking institutions in the City of Oklahoma City are
authorized or obligated by law or executed order to close.
"Common Stock" shall mean the Common Stock of the Company, no par
value per share, and any capital stock of the Company which has the
right to participate in the distribution of earnings and assets of
the Company without limit as to amount or percentage, into which the
Common Stock may hereafter be classified by appropriate amendment to
the Corporation's Certificate of Incorporation, as amended.
EXH.10(n)-Page 1
<PAGE>
EXHIBIT 10(n)
"Conversion Price" shall mean the shares of Common Stock into which
the Series A Preferred Stock is convertible, as such Conversion
Price may be adjusted pursuant to Section 8 hereof. The Conversion
Price will be as defined in Section 8 hereof.
"Dividend Payment Date" shall have the meaning set forth in
Subsection 3.2 hereof.
"Dividend Periods" shall mean quarterly dividend periods commencing
on the first day of March, June, September and December of each year
and ending on and including the day preceding the first day of the
next succeeding Dividend Period (other than the initial Dividend
Period which shall commence on the Original Issue Date.
"Holders" shall mean the purchasers of the Series A Preferred Stock
of the Company and their successors and assigns of record on the
stock record books of the Company.
"Liquidation Value" shall mean, as to each share of Series A
Preferred Stock, the sum of $2.16.
"Original Issue Date" shall mean the first date on which shares of
Series A Preferred Stock are issued.
"Person" shall mean any individual, firm, partnership, corporation,
limited liability company, association, joint stock company, trust,
joint venture or other entity, and shall include any successor (by
merger or otherwise) of such entity.
"Purchase Price" shall mean $1.85, the amount paid to the Company
for each share of Series A Preferred Stock.
"Securities Act" means the Securities Act of 1933, as amended, and
the rules and regulations promulgated thereunder.
"Transaction" shall have the meaning set forth in Subsection 8.6(a)
hereof.
3. Dividends.
---------
3.1 General. The Holders of shares of the Series A Preferred Stock
shall be entitled to receive, when, as and if declared by the Board of Directors
out of assets legally available therefor, dividends payable in Common Stock of
the Company as provided in Section 3.2 hereof.
3.2 Dividend Preference and Payment Dates. Such dividends shall be
cumulative from the Original Issue Date, whether or not in any Dividend Period
or Periods there shall be assets of the Company legally available for the
payment of such dividends and whether or not such dividends are declared, and
shall be payable upon conversion in arrears as provided in Section 8 hereof by
the issuance of shares of the Common Stock of the Company valued at the lesser
of (i) $1.85 per share, or (ii) an amount equal to seventy-five percent (75%) of
the average closing bid prices of the Company's Common Stock on the five (5)
EXH.10(n)-Page 2
<PAGE>
EXHIBIT (10)n
business days preceding the Conversion Date. As used herein, the term "accrued"
with respect to dividends includes both accrued and accumulated dividends.
3.3 Computation of Dividends for Partial Dividend Periods; Payment of
Dividends on Shares Called for Redemption. The amount of dividends payable
for each full Dividend Period for the Series A Preferred Stock shall be computed
by dividing the annual dividend rate by four (rounded down to the nearest cent).
The amount of dividends payable for the initial Dividend Period on the Series A
Preferred Stock, or any other period shorter or longer than a full Dividend
Period on the Series A Preferred Stock, shall be computed on the basis of a 360-
day year consisting of twelve 30-day months. Holders of shares of Series A
Preferred Stock called for redemption on a redemption date falling between the
close of business on a Dividend Payment Record Date and the opening of business
on the corresponding Dividend Payment Date shall, in lieu of receiving such
dividend on the Dividend Payment Date fixed therefor, receive such dividend
payment together with all other accrued and unpaid dividends on the date fixed
for redemption (unless such Holder converts such shares in accordance with
Section 8 hereof). No interest, or sum of money in lieu of interest, shall be
payable in respect of any dividend payment or payments on the Series A Preferred
Stock which are in arrears.
3.4 Priority and Dividend Participation/Parity Stock. (a) So long
as any shares of the Series A Preferred Stock are outstanding, no dividends,
except as described in the next succeeding sentence, shall be declared or paid
or set apart for payment on any class or series of stock of the Company ranking,
as to dividends, on a parity with the Series A Preferred Stock, for any period
unless full cumulative dividends have been or contemporaneously are declared and
paid or declared and a sum sufficient for the payment thereof set apart for such
payment on the Series A Preferred Stock for all Dividend Periods terminating on
or prior to the date of payment, or setting apart for payment, of such full
cumulative dividends on such parity stock. When dividends are not paid in full
or a sum sufficient for such payment is not set apart, as aforesaid, upon the
shares of the Series A Preferred Stock and any other class or series of stock
ranking on a parity as to dividends with the Series Preferred Stock, all
dividends declared upon shares of the Series Preferred Stock and all dividends
declared upon such other stock shall be declared pro rata so that the amounts of
dividends per share declared on the Series A Preferred Stock and such other
stock shall in all cases bear to each other the same ratio that accrued
dividends per share on the shares of the Series A Preferred Stock and on such
other stock bear to each other.
(b) So long as any shares of the Series A Preferred Stock are
outstanding, no other stock of the Company ranking on a parity with the Series A
Preferred Stock as to dividends or upon liquidation, dissolution or winding up
shall be redeemed, purchased or otherwise acquired for any consideration (or any
moneys be paid to or made available for a sinking fund or otherwise for the
purchase or redemption of any shares of any such stock) by the Company (except
by conversion into or exchange for stock of the Company ranking junior to the
Series A Preferred Stock as to dividends and upon liquidation, dissolution or
winding up) unless (a) the full cumulative dividends, if any, accrued on all
outstanding shares of the Series A Preferred Stock shall have been paid or set
apart for payment for all past Dividend Periods and (b) sufficient funds shall
have been set apart for the payment of the dividend for the current Dividend
Period with respect to the Series A Preferred Stock.
EXH.10(n)-Page 3
<PAGE>
EXHIBIT 10(n)
3.5 Priority and Dividend Participation/Junior Stock. So long as any
shares of the Series A Preferred Stock are outstanding, no dividends shall be
declared or paid or set apart for payment and no other distribution shall be
declared or made or set apart for payment, in each case upon the Common Stock or
any other stock of the Company ranking junior to the Series A Preferred Stock as
to dividends or upon liquidation, dissolution or winding up, nor shall any
Common Stock nor any other such stock of the Company ranking junior to the
Series A Preferred Stock as to dividends or upon liquidation, dissolution or
winding up be redeemed, purchased or otherwise acquired for any consideration.
3.6 Dividend Participation with Common Stock after Payment of
Cumulative Dividends. If the Company has paid the Holders of the Series A
Preferred Stock the full amount of the cumulative dividends thereon as required
by this Section 3, and shall elect to declare additional dividends in any fiscal
year out of funds legally available therefor, subject to the rights of the
Holders of shares of any series or classes of stock ranking on a parity with or
prior to the Series A Preferred Stock as to dividends, such additional dividends
shall be declared and shall be paid on both the Series A Preferred Stock and the
Common Stock equally, with the Series A Preferred Stock for this purpose being
deemed converted into such number of shares of Common Stock (including fractions
of a share) as each such share of Series A Preferred Stock is convertible on the
date the dividend is declared.
4. Liquidation Value.
------------------
4.1 General. In the event of any liquidation, dissolution or
winding up of the Company, whether voluntary or involuntary, before any payment
or distribution of the assets of the Company (whether capital or surplus) shall
be made to or set apart for the Holders of Common Stock or any other series or
class or classes of stock of the Company ranking junior to the Series A
Preferred Stock upon liquidation, dissolution or winding up, the Holders of the
shares of Series A Preferred Stock shall be entitled to receive $2.16 per share
(the "Liquidation Value"). No payment on account of any liquidation,
dissolution or winding up of the Company shall be made to the Holders of any
class or series of stock ranking on a parity with the Series A Preferred Stock
in respect of the distribution of assets upon dissolution, liquidation or
winding up unless there shall likewise be paid at the same time to the Holders
of the Series A Preferred Stock like proportionate amounts determined ratably in
proportion to the full amounts to which the Holders of all outstanding shares of
Series A Preferred Stock and the Holders of all outstanding shares of such
parity stock are respectively entitled with respect to such distribution. If,
upon any liquidation, dissolution or winding up of the Company, the assets of
the Company, or proceeds thereof, distributable among the Holders of the shares
of Series A Preferred Stock shall be insufficient to pay in full the
preferential amount aforesaid and liquidating payments on any other shares of
stock ranking, as to liquidation, dissolution or winding up, on a parity with
the Series A Preferred Stock, then such assets, or the proceeds thereof, shall
be distributed among the Holders of shares of Series A Preferred Stock and any
such other stock ratably in accordance with the respective amounts which would
be payable on such shares of Series A Preferred Stock and any such other stock
if all amounts payable thereon were paid in full. For the purposes of this
Section 4, (a) a consolidation or merger of the Company with one or more
corporations or other entities, (b) a sale, lease, exchange or transfer of all
or any part of the Corporation's assets or (c) a statutory share exchange shall
not be deemed to be a liquidation, dissolution or winding up, voluntary or
involuntary.
EXH.10(n)-Page 4
<PAGE>
EXHIBIT 10(n)
4.2 Liquidation Participation with Common Stock after Payment of
Liquidation Preference. Upon any liquidation, dissolution or winding up of the
Company, subject to the rights of the Holders of shares of any series or class
or classes of stock ranking on a parity with or prior to the Series A Preferred
Stock upon liquidation, dissolution or winding up, after payment shall have been
made in full to the Holders of Series A Preferred Stock as provided in
Subsection 4.1, the remaining assets of the Company available for distribution
to stockholders shall be distributed among the Holders of Series A Preferred
Stock and Common Stock pro rata based on the number of shares of Common Stock
held by each (assuming conversion of all such Series A Preferred Stock).
4.3 Notice of Liquidation, Dissolution or Winding Up. Written
notice of any liquidation, dissolution or winding up of the Company, stating
the payment date or dates when and the place or places where the amounts
distributable in such circumstances shall be payable, shall be given by first
class mail, postage prepaid, not less than 30 days prior to any payment date
stated therein, to the Holders of record of the Series A Preferred Stock at
their respective addresses as the same shall appear on the books of the Company.
5. Transfers.
---------
5.1 Transfer Restrictions. Each certificate of Series A Preferred
Stock shall bear the customary securities law restrictive legend.
5.2 Delivery of Certificate, Transfer Instructions and Transfer
Certificate. Each certificate of Series A Preferred Stock presented for
transfer, exchange or conversion:
(a) shall be duly endorsed or accompanied by a written
instruction of transfer in form satisfactory to the Company or to its
registrar therefor duly executed by such Holder or its attorney, duly
authorized in writing; and
(b) shall be accompanied by a Transferor Certificate in the form
of Exhibit B.
6. Redemption.
----------
6.1 Redemption at the Option of the Company. (a) In the event of any
noticed conversion of the Preferred Stock at a conversion price of less than One
Dollar and Twelve and One-Half Cents ($1.125) per common share then within ten
(10) business days of receipt of written notice of a Holder's right to convert
as provided in Section 8 hereof, the Company may, at its option, redeem the
shares of Series A Preferred Stock, in whole or in part, out of funds legally
available therefor, subject to the notice provisions [and provisions for partial
redemption described below], at an amount equal to one hundred and seventeen
percent (117%) of the Purchase Price of the Holder's Series A Preferred Stock
plus an amount equal to accrued and unpaid dividends, if any, to (and including)
the date fixed for redemption, whether or not earned or declared (the
"Redemption Price").
EXH.10(n)-Page 5
<PAGE>
EXHIBIT 10(n)
(b) In the event the Company shall redeem shares of Series A Preferred
Stock, notice of such redemption shall be given promptly by first class mail,
postage prepaid, mailed not less than one (1) day after its receipt of the
notice from the Holder of his election to convert, to each such Holder of record
of the shares to be redeemed, at such Holder's address as the same appears on
the stock records of the Company. Each such notice shall state: (i) the
redemption date; (ii) the number of shares of Series A Preferred Stock to be
redeemed and, if less than all the shares held by such Holder are to be
redeemed, the number of such shares to be redeemed from such Holder; (iii) the
redemption price; (iv) the place or places where certificates for such shares
are to be surrendered for payment of the redemption price; (v) the conversion
price of one share of Common Stock for each share of Series A Preferred Stock;
and (vi) that dividends on the shares to be redeemed shall cease to accrue on
such redemption date. Notice having been mailed as aforesaid, from and after
the redemption date, unless the Company shall be in default in providing money
for the payment of the Redemption Price, (i) dividends on the shares of the
Series A Preferred Stock so called for redemption shall cease to accrue, (ii)
said shares shall be deemed no longer outstanding, and (iii) all rights of the
Holders thereof as stockholders of the Company (except the right to receive from
the Company the moneys payable upon redemption without interest thereon) shall
cease. The Corporation's obligation to provide moneys in accordance with the
preceding sentence shall be deemed fulfilled if, on or before the redemption
date, the Company shall deposit with a bank or trust company having an office in
the State of California, and having a capital and surplus of at least
$50,000,000, funds necessary for such redemption, in trust for the account of
the Holders of the shares to be redeemed (and so as to be and continue to be
available therefor), with irrevocable instructions and authority to such bank or
trust company that such funds be applied to the redemption of the shares of
Series A Preferred Stock so called for redemption. Any interest accrued on such
funds shall be paid to the Company from time to time. Any funds so deposited
and unclaimed at the end of three years from such redemption date shall be
released or repaid to the Company, after which, subject to any applicable laws
relating to escheat or unclaimed property, the Holder or Holders of such shares
of Series A Preferred Stock so called for redemption shall look only to the
Company for payment of the Redemption Price.
In the event that the Company fails to pay in trust for the redemption
of the shares of Series A Preferred Stock as provided herein, the Holders shall
again have the right to convert their Series A Preferred Stock and the Company
shall not have any further right to redeem the shares unless the Company
simultaneously sends a written notice of redemption to the Holder or Holders and
sends monies by wire transfer to them as directed by the Holders to a financial
institution identified in their notice of conversion to the Company.
(c) Upon surrender in accordance with said notice of the certificates for
any such shares so redeemed (properly endorsed or assigned for transfer, if the
Board of Directors shall so require and the notice shall so state), such shares
shall be redeemed by the Company at the applicable Redemption Price aforesaid.
If fewer than all the outstanding shares of Series A Preferred Stock are to be
redeemed, shares to be redeemed shall be selected by the Company from
outstanding shares of Series A Preferred Stock not previously called for
redemption by lot or pro rata (as near as may be) or by any other method
determined by the Company in its sole discretion to be equitable. If fewer than
all the shares represented by any certificate are redeemed, a new certificate
shall be issued representing the unredeemed shares without cost to the Holder
thereof.
EXH.10(n)-Page 6
<PAGE>
EXHIBIT 10(n)
(d) For the purpose of determining whether funds are legally available for
redemption of shares of Series A Preferred Stock as provided in this Subsection
6.1, the Company shall value its assets at the highest amount permissible under
applicable law. If the funds of the Company legally available for redemption on
any Redemption Date are insufficient to redeem the total number of shares
requested to be redeemed on such date, those funds which are legally available
shall, subject to the rights of any class or series of stock of the Company
ranking, as to dividends or upon dissolution, liquidation or winding up, on a
parity with the Series A Preferred Stock, be used to redeem the maximum possible
number of shares requested to be redeemed ratably among the Holders of shares of
Series A Preferred Stock requested to be redeemed based upon the aggregate
Series A Redemption Price of such shares held by each such Holder. The shares
of Series A Preferred Stock not redeemed shall remain outstanding and entitled
to all the rights and preferences provided herein. The redemption requirements
provided hereby shall be continuous, so that at any time thereafter when
additional funds of the Company are legally available for redemption of Series A
Preferred Stock, such funds shall immediately be used to redeem the balance of
any Series A Preferred Stock which the Company has become obligated to redeem on
any Redemption Date but which it has not redeemed, without further action by any
Holder of Series A Preferred Stock.
7. Shares to be Retired. All shares of Series A Preferred Stock
--------------------
purchased, redeemed, exchanged or converted by the Company shall be retired and
canceled and shall be restored to the status of authorized but unissued shares
of the Corporation's preferred stock, without designation as to series and may
thereafter be reissued.
8. Conversion. Holders of shares of Series A Preferred Stock shall have
----------
the right to convert all or a portion of such shares (including fractions of
such shares) into shares of Common Stock, as follows:
8.1 Right to Convert. Subject to and in compliance with the provisions
of this Section 8, a Holder of shares of Series A Preferred Stock shall have the
right, at such Holder's option, to convert any of such shares into that number
of shares of Common Stock determined by the "Conversion Price". The Conversion
Price means an amount equal to the lesser of (a) One Dollar and Eighty-Five
Cents ($1.85) per share or (b) Seventy-Five percent (75%) of the average closing
bid price of the Common Stock during the five (5) trading days immediately
preceding such conversion, provided, that the Holder shall have no right to
convert shares of Series A Preferred Stock called for redemption pursuant to
Section 6 hereof, if the Company shall timely elect redemption and pay for the
redemption of the shares of Series A Preferred Stock as provided herein. No
fractional shares or securities representing fractional shares of Common Stock
will be issued upon conversion. Instead, such amounts as would have been paid
in fractional shares will be paid in cash as provided in subsection 8.3 hereof.
(b) Notwithstanding any other provision herein contained, a maximum of
162,162 shares of the Preferred Stock may be converted on and after December 1,
1997.
(c) Notwithstanding any other provision herein contained, a maximum of
162,162 shares of the Preferred Stock may be converted on and after January 1,
1998, plus any Preferred Shares which remain to be converted pursuant to Section
(b) above.
EXH.10(n)-Page 7
<PAGE>
EXHIBIT 10(n)
(d) Notwithstanding any other provision herein contained, a maximum of
162,162 shares of the Preferred Stock may be converted on and after February 1,
1998, plus any Preferred Shares which remain to be converted pursuant to
sections (b) and (c) above.
(e) All of any remaining unconverted Preferred Shares will be convertible
at any time on and after March 1, 1998.
(f) So long as any Holder retains the right to convert Series A Preferred
Stock, the Company will not, without the written consent of the Holders, issue
any other series of Preferred Stock or other securities convertible into Common
Stock, if the issuance of such Preferred Stock or other Convertible Securities
is exempt from registration pursuant to Regulation D or Regulation S under the
Securities Act, provided, however, that this limitation shall expire on the
later of September 1, 1998, or nine (9) months following the effective date of
the registration of the Series A Preferred Stock.
8.2 Mechanics of Conversion. (a) In order to exercise the conversion
right pursuant to Subsection 8.1 above, the Holder of each share of Series A
Preferred Stock (or fraction thereof) to be converted shall surrender the
certificate representing such share, duly endorsed or assigned to the Company or
in blank, at the office of the Company, accompanied by written notice by mail or
telecopy to the Company that the Holder thereof elects to convert Series A
Preferred Stock or a specified portion thereof. Unless the shares issuable on
conversion are to be issued in the same name as the name in which such share of
Series A Preferred Stock is registered, each share surrendered for conversion
shall be accompanied by instruments of transfer, in form satisfactory to the
Company, duly executed by the Holder or such Holder's duly authorized attorney
and an amount sufficient to pay any transfer or similar tax (or evidence
reasonably satisfactory to the Company demonstrating that such taxes have been
paid or are not required to be paid).
(b) Holders of shares of Series A Preferred Stock shall be entitled to
receive the dividend payable on such shares upon their conversion into the
Common Stock of the Company as provided in Section 8.1 hereof.
(c) Within five (5) days after the surrender of certificates for shares of
Series A Preferred Stock as aforesaid, the Company shall issue and shall deliver
at such office to such Holder, or on such Holder's written order, a certificate
or certificates for the number of shares of Common Stock issuable upon the
conversion of such shares in accordance with the provisions of this Section 8,
and any fractional interest in respect of a share of Common Stock arising upon
such conversion shall be settled as provided in Subsection 8.4 hereof.
In the event that the Common Stock issuable upon conversion of the
Preferred Stock is not delivered, unless redeemed, within eight (8) business
days of receipt by the Company of a valid Conversion Notice and the Preferred
Stock to be converted (such date of receipt referred to as the "Conversion
Date"), the Company shall pay to the Purchaser, by wire transfer, as non-
cumulative additional interest for such failure and not as a penalty, for each
of Preferred Stock sought to be converted, the greater of Three Hundred Dollars
($300.00) per day or .30 of one percent (.30%) of the face amount proposed to be
converted, for
EXH.10(n)-Page 8
<PAGE>
EXHIBIT 10(n)
each day thereafter that the Conversion Shares are not delivered, which non-
cumulative additional interest shall run from the ninth (9th) business day after
the Conversion Date.
(d) Each conversion shall be deemed to have been effected immediately
prior to the close of business on the date on which the certificates for shares
of Series A Preferred Stock shall have been surrendered and such notice received
by the Company as aforesaid, and the person or persons in whose name or names
any certificate or certificates for shares of Common Stock shall be issuable
upon such conversion shall be deemed to have become the Holder or Holders of
record of the shares represented thereby at such time on such date, and such
conversion shall be at the Conversion Price in effect at such time on such date,
unless the stock transfer books of the Company shall be closed on that date, in
which event such person or persons shall be deemed to have become such Holder or
Holders of record at the close of business on the next succeeding day on which
such stock transfer books are open, but such conversion shall be at the
Conversion Price in effect on the date upon which such shares shall have been
surrendered and such notice received by the Company. All shares of Common Stock
delivered upon conversion of the Series A Preferred Stock will upon delivery be
duly and validly issued and fully paid and nonassessable.
8.3 Payment of Fractional Interests. Instead of any fractional interest
in a share of Common Stock which would otherwise be deliverable upon the
conversion of a share of Series A Preferred Stock (or fraction thereof), the
Company shall pay to the Holder of such share an amount in cash equal to $2.16
multiplied by the fraction of a share of Common Stock represented by such
fractional interest. If more than one share shall be surrendered for
conversion at one time by the same Holder, the number of full shares of Common
Stock issuable upon conversion thereof shall be computed on the basis of the
aggregate number of shares of Series A Preferred Stock so surrendered.
8.4 Adjustments to $1.85 Maximum Conversion Price for Diluting Issues.
(a) Special Definitions. For purposes of this Subsection 8.5, the
-------------------
following definitions shall apply:
"Additional Shares of Common Stock" shall mean all shares of Common
Stock issued (or, pursuant to Subsection 8.5(c), deemed to be issued)
by the Company after the Original Issue Date other than shares of
Common Stock issued or issuable at any time:
(i) upon conversion of shares of Series A Preferred Stock; or
(ii) upon exercise of existing options to officers, directors or
employees of, or consultants to, the Company pursuant to a
stock option plan or other employee stock incentive program
approved by the Board of Directors; or
(iii) as a dividend or distribution on the Series A Preferred
Stock; or
(iv) by way of dividend or other distribution on shares of Common
Stock excluded from the definition of Additional Shares of
Common Stock by the foregoing clauses (i), (ii) or (iii) or
this clause (iv).
EXH.10(n)-Page 9
<PAGE>
EXHIBIT 10(n)
"Convertible Securities" shall mean any evidences of indebtedness,
shares (other than Common Stock and Series A Preferred Stock) or other
securities directly or indirectly convertible into or exchangeable for Common
Stock.
"Option" shall mean rights, options or warrants to subscribe for,
purchase or otherwise acquire either Common Stock or Convertible Securities.
(b) No Adjustment of Conversion Price. No adjustment in the number of
---------------------------------
shares of Common Stock into which the Series A Preferred Stock is convertible
shall be made, by adjustment in the Conversion Price of Series A Preferred Stock
in respect of the issuance of Additional Shares of Common Stock or otherwise,
unless the consideration per share for an Additional Share of Common Stock
issued or deemed to be issued by the corporation is less than the greater of (i)
market value of the Common Stock in effect on the date of, and immediately prior
to, the issue of such Additional Shares of Common Stock, or (ii) $1.85 per
share.
(c) Issue of Securities Deemed Issue of Additional Shares of Common Stock.
---------------------------------------------------------------------
(i) Options and Convertible Securities. In the event the Company at
----------------------------------
any time or from time to time after the Original Issue Date shall
issue any Options or Convertible Securities or shall fix a record
date for the determination of Holders of any class of securities
entitled to receive any such Options or Convertible Securities,
then the maximum number of shares (as set forth in the instrument
relating thereto without regard to any provisions contained
therein for a subsequent adjustment of such number) of Common
Stock issuable upon the exercise of such Options or, in the case
of Convertible Securities and Options therefor, the conversion or
exchange of such Convertible Securities, shall be deemed to be
Additional Shares of Common Stock issued as of the time of such
issue or, in case such a record date shall have been fixed, as of
the close of business on such record date, provided that
Additional Shares of Common Stock shall not be deemed to have
been issued unless the consideration per share (determined
pursuant to Subsection 8.5(e) hereof), of such Additional Shares
of Common Stock would be less than the greater of (1) market
value of the Common Stock on the date thereof, or (2) $1.85 per
share:
(A) no further adjustment in the Conversion Price shall be made
upon the subsequent issue of Convertible Securities or
shares of Common Stock upon the exercise of such Options or
conversion or exchange of such Convertible Securities;
(B) if such Options or Convertible Securities by their terms
provide, with the passage of time or otherwise, for any
increase or decrease in the consideration payable to the
corporation, or increase or decrease in the number of shares
of Common Stock issuable, upon the exercise, conversion or
exchange thereof, the Conversion Price computed upon the
original issue thereof (or upon the
EXH.10(n)-Page 10
<PAGE>
EXHIBIT 10(n)
occurrence of a record date with respect thereto), and any
subsequent adjustments based thereon, shall, upon any such
increase or decrease becoming effective, be recomputed to
reflect such increase or decrease insofar as it affects such
Options or the rights of conversion or exchange under such
Convertible Securities;
(C) upon the expiration of any such Options or any rights of
conversion or exchange under such Convertible Securities
which shall not have been exercised, the Conversion Price
computed upon the original issue thereof (or upon the
occurrence of a record date with respect thereto), and any
subsequent adjustments based thereon, shall, upon such
expiration, be recomputed as if:
(1) in the case of Convertible Securities or Options for
Common Stock the only Additional Shares of Common Stock
issued were the shares of Common Stock, if any,
actually issued upon the exercise, of such Options or
the conversion or exchange of such Convertible
Securities and the consideration received therefor was
the consideration actually received by the Company for
the issue of all such Options, whether or not
exercised, plus the consideration actually received by
the Company upon such exercise, or for the issue of all
such Convertible Securities which were actually
converted or exchanged, plus the additional
consideration, if any, actually received by the Company
upon such conversion or exchange, and
(2) in the case of Options for Convertible Securities only
the Convertible Securities, if any, actually issued
upon the exercise thereof were issued at the time of
issue of such Options, and the consideration received
by the Company for the Additional Shares of Common
Stock deemed to have been then issued was the
consideration actually received by the Company for the
issue of all such Options, whether or not exercised,
plus the consideration deemed to have been received by
the Company (determined pursuant to Subsection 8.5(e)
upon the issue of the Convertible Securities with
respect to which such Options were actually exercised;
(D) no readjustment pursuant to clause (B) or (C) above shall
have the effect of increasing the Conversion Price to an
amount which exceeds the lower of (1) the Conversion Price
on the original adjustment date, or (ii) the Conversion
Price that would have resulted from any issuance of
Additional Shares of Common Stock between the original
adjustment date and such readjustment date;
EXH.10(n)-Page 11
<PAGE>
EXHIBIT 10(n)
(E) in the case of any Options which expire by their terms not
more than 30 days after the date of issue thereof, no
adjustment of the Conversion Price shall be made until the
expiration or exercise of all such Options, whereupon such
adjustment shall be made in the same manner provided in
clause (C) above; and
(F) if such record date shall have been fixed and such Options
or Convertible Securities are not issued on the date fixed
therefor, the adjustment previously made in the Conversion
Price which became effective on such record date shall be
canceled as of the close of business on such record date,
and thereafter the Conversion Price shall be adjusted
pursuant to this Subsection 8.5(c)(i) as of the actual date
of their issuance.
(ii) Stock Dividends, Stock Distributions and Subdivisions. In the
event the Company at any time or from time to time after the
Original Issue Date shall declare or pay any dividend or make any
other distribution on the Common Stock payable in Common Stock,
or effect a subdivision of the outstanding shares of Common Stock
(by reclassification or otherwise than by payment of a dividend
in Common Stock), then and in any such event, Additional Shares
of Common Stock shall be deemed to have been issued:
(A) in the case of any such dividend or distribution,
immediately after the close of business on the record date
for the determination of Holders of any class of securities
entitled to receive such dividend or distribution, or
(B) in the case of any such subdivision, at the close of
business on the date immediately prior to the date upon
which such corporate action becomes effective.
If such record date shall have been fixed and such dividend shall not
have been fully paid on the date fixed therefor, the adjustment
previously made in the Conversion Price which became effective on such
record date shall be canceled as of the close of business on such
record date, and thereafter the Conversion Price shall be adjusted
pursuant to this Subsection 8.5(c)(ii) as of the time of actual
payment of such dividend.
(d) Adjustment of Conversion Price Upon Issuance of Additional Shares of
Common Stock. In the event the Company shall issue or shall be deemed to issue
Additional Shares of Common Stock (including Additional Shares of Common Stock
deemed to be issued pursuant to Subsection 8.5(c), but excluding Additional
Shares of Common Stock issued pursuant to Subsection 8.5(c)(ii), which event is
dealt with in Subsection 8.5(f) hereof) without consideration or for a
consideration per share less than the greater of $1.85 or market value on the
date of and immediately prior to such issue, then and in such issue, such
Conversion Price shall be reduced, concurrently with such issue in order to
increase the number of shares of Common Stock into which the Convertible
Preferred Stock is convertible, to a price determined by multiplying such
EXH.10(n)-Page 12
<PAGE>
EXHIBIT 10(n)
Conversion Price by a fraction (x) the denominator of which shall be (1) the
number of shares of Common Stock outstanding immediately prior to such issue
(including shares of Common Stock issuable upon conversion of any outstanding
Series A Preferred Stock or Convertible Securities or upon exercise of any
outstanding Options), plus (2) the number of shares of Common Stock which the
aggregate consideration received by the Company for the total number of
Additional Shares of Common Stock so issued would purchase at such Conversion
Price, and (y) the numerator of which shall be (1) the number of shares of
Common Stock outstanding immediately prior to such issue (including shares of
Common Stock issuable upon conversion of any outstanding Preferred Stock or
Convertible Securities or upon exercise of any outstanding Options), plus (2)
the number of such Additional Shares of Common Stock so issued.
(e) Determination of Consideration. For purposes of this Subsection 8.5,
------------------------------
the consideration received by the corporation for the issue of any Additional
Shares of Common Stock shall be computed as follows:
(i) Cash and Property: Such consideration shall:
-----------------
(A) insofar as it consists of cash, be computed at the aggregate
amount of cash received by the Company excluding amounts
paid or payable for accrued interest or accrued dividends;
(B) insofar as it consists of property other than cash, be
computed at the fair value thereof at the time of such
issue, as determined in good faith by the Board of
Directors; and
(C) in the event Additional Shares of Common Stock are issued
together with other shares or securities or other assets of
the Company for consideration which covers both, be the
proportion of such consideration so received, computed as
provided in clauses (A) and (B) above, as determined in good
faith by the Board of Directors.
(ii) Options and Convertible Securities. The consideration per
----------------------------------
share received by the Company for Additional Shares of Common
Stock deemed to have been issued pursuant to Subsection
8.5(c)(i), relating to Options and Convertible Securities, shall
be determined by dividing (x) the total amount, if any, received
or receivable by the Company as consideration for the issue of
such Options or Convertible Securities, plus the minimum
aggregate amount of additional consideration (as set forth in the
instruments relating thereto, without regard to any provision
contained therein for a subsequent adjustment of such
consideration) payable to the Company upon the exercise of such
Options or the conversion or exchange of such Convertible
Securities, or in the case of Options for Convertible Securities,
the exercise of such Options or the conversion or exchange of
such Convertible Securities, or in the case of Options for
Convertible Securities, the exercise of such Options for
Convertible Securities and the conversion or exchange of such
Convertible Securities, by (y) the
EXH.10(n)-Page 13
<PAGE>
EXHIBIT 10(n)
maximum number of shares of Common Stock (as set forth in the
instruments relating thereto, without regard to any provision
contained therein for a subsequent adjustment of such number)
issuable upon the exercise of such Options or the conversion or
exchange of such Convertible Securities.
(f) Adjustment for Dividends, Distributions, Subdivisions, Combinations or
----------------------------------------------------------------------
Consolidation of Common Stock.
- -----------------------------
(i) Stock Dividends, Distributions or Subdivisions. In the event
----------------------------------------------
the Company shall issue Additional Shares of Common Stock
pursuant to Subsection 8.5(c)(ii) in a stock dividend, stock
distribution or subdivision, the Conversion Price in effect
immediately prior to such stock dividend, stock distribution or
subdivision shall, concurrently with the effectiveness of such
stock dividend, stock distribution or subdivision, be
proportionately decreased.
(ii) Combinations or Consolidations. In the event the outstanding
------------------------------
shares of Common Stock shall be combined or consolidated, by
reclassification or otherwise, into a lesser number of shares of
Common Stock, the Conversion Price in effect immediately prior to
such combination or consolidation shall, concurrently with the
effectiveness of such combination or consolidation, be
proportionately increased.
(g) Adjustment for Merger or Reorganization, etc. (i) In case of any
---------------------------------------------
recapitalization, reorganization, reclassification, consolidation, merger or the
conveyance of all or substantially all of the assets of the Company pursuant to
which the Holders of Common Stock are entitled to receive (either directly or on
subsequent liquidation) stock, securities or assets with respect to or in
exchange for Common Stock (an "Organic Change"), each of the Holders of Series A
Preferred Stock shall thereafter have the right to acquire and receive, in lieu
of or in addition to (as the case may be) the shares of Common Stock acquirable
and receivable upon conversion of such Holder's Series A Preferred Stock, such
shares of stock, securities or assets as such Holder would have received if such
Holder had converted its Series A Preferred Stock immediately prior to such
Organic Change. In each such case, the Company shall also make appropriate
provisions to insure that each share of Series A Preferred Stock shall
thereafter be convertible into the number of shares of stock or other securities
or property to which a Holder of the number of shares of Common Stock of the
Company deliverable upon conversion of such Series A Preferred Stock would have
been entitled upon such consolidation, merger or conveyance and that appropriate
adjustment (as determined by the Board of Directors) shall be made in the
application of the provisions herein set forth with respect to the rights and
interest thereafter of the Holders of the Series A Preferred Stock, to the end
that the provisions set forth herein (including provisions with respect to
changes in and other adjustments of the Conversion Price) shall thereafter be
applicable, as nearly as reasonably may be, in relation to any shares of stock
or other property thereafter deliverable upon the conversion of the Series A
Preferred Stock. The Company shall not effect any such Organic Change unless
prior to the consummation thereof, the successor entity (if other than the
Company) assumes by written instrument the obligations set forth herein.
EXH.10(n)-Page 14
<PAGE>
EXHIBIT 10(n)
(ii) For purposes of this Subsection 8.5(g), any amounts of cash or
other consideration payable to any stockholder of the Company in
connection with any such Organic Change, such as, by way of
example only, any employment contracts, consulting contracts or
noncompete payments which result in payments to such stockholder
in excess of 150% of his or her current compensation, shall be
deemed a part of the total consideration payable in connection
with such Organic Change.
8.5 No Impairment. The Company will not, by amendment of its Restated
Articles of Incorporation or through any reorganization, transfer of assets,
consolidation, merger, dissolution, issue or sale of securities or any other
voluntary action, avoid or seek to avoid the observance or performance of any of
the terms to be observed or performed hereunder by the Company but will at all
times in good faith assist in the carrying out of all the provisions of this
Section 8 and in the taking of all such action as may be necessary or
appropriate in order to protect the conversion rights of the Holders of the
Series A Preferred Stock against impairment.
8.6 Certificate as to Adjustments. Whenever the Conversion Price is
adjusted as herein provided, the Company shall prepare a notice of such
adjustment of the Conversion Price setting forth the adjusted Conversion Price,
the facts requiring such adjustment and upon which such adjustments are based
and the date on which such adjustment becomes effective and shall mail such
notice of such adjustment of the Conversion Price to the Holder of each share of
Series A Preferred Stock at such Holder's last address as shown on the stock
records of the Company.
8.7 Deferral of Issuance of Additional Shares. In any case in which
Subsection 8.5 provides that an adjustment shall become effective immediately
after a record date for an event and the date fixed for conversion pursuant to
Section 8 occurs after such record date but before the occurrence of such event,
the Company may defer until the actual occurrence of such event (a) issuing to
the Holder of any share of Series A Preferred Stock surrendered for conversion
the additional shares of Common Stock issuable upon such conversion by reason
of the adjustment required by such event over and above the Common Stock
issuable upon such conversion before giving effect to such adjustment and (b)
paying to such Holder any amount in cash in lieu of any fraction pursuant to
Subsection 8.4 hereof.
8.8 Computation of Outstanding Common Stock. For purposes of this
Section 8, the number of shares of Common Stock at any time outstanding shall
not include any shares of Common Stock then owned or held by or for the account
of the Company or any corporation controlled by the Company.
8.9 Multiple Adjustments in a Single Transaction. Notwithstanding any
other provision herein to the contrary, the issuance of any shares of Common
Stock pursuant to any plan providing for the reinvestment of dividends or
interest payable on securities of the Company and the investment of additional
optional amounts in shares of Common Stock under any such plan shall not be
deemed to constitute an issuance of Common Stock. There shall be no adjustment
of the Conversion Price in case of the issuance of any stock of the Company in a
reorganization, acquisition or other similar transaction except as specifically
set forth in this Section 8. If any action or transaction would require
adjustment of the Conversion Price
EXH.10(n)-Page 15
<PAGE>
EXHIBIT 10(n)
pursuant to more than one Section of this Section 8, only one adjustment shall
be made and such adjustment shall be the amount of adjustment which has the
highest absolute value.
8.10 Further Adjustment by the Board of Directors. In case the Company
shall take any action affecting the Common Stock, other than action described in
this Section 8, which in the opinion of the Board of Directors may materially
adversely affect the conversion rights of the Holders of the shares of Series A
Preferred Stock, the Conversion Price for the Series A Preferred Stock shall be
adjusted, to the extent permitted by law, in such manner, if any, and at such
time, as the Board of Directors may determine to be equitable in the
circumstances.
8.11 Payment of Documentary Stamp and Transfer Taxes. The Company will
pay any and all documentary stamp or similar issue or transfer taxes payable in
respect of the issue or delivery of the shares of Series A Preferred Stock (or
any other securities issued on account of the Series A Preferred Stock pursuant
hereto) or shares of Common Stock on conversion of the Series A Preferred Stock
pursuant hereto; provided, however, that the Company shall not be required to
pay any tax which may be payable in respect of any transfer involved in the
issue or delivery of shares of Series A Preferred Stock (or any other securities
issued on account of the Series A Preferred Stock pursuant hereto) or shares of
Common Stock in a name other than the name in which the shares of Series A
Preferred Stock with respect to which such Common Stock shares are issued were
registered and the Company shall not be required to make any issue or delivery
unless and until the person requesting such issue or delivery has paid to the
Company the amount of any such tax or has established, to the reasonable
satisfaction of the Company, that such tax has been paid or is not required to
be paid.
8.12 Reservation of Common Stock. The Company shall reserve and keep
available out of its authorized but unissued Common Stock such number of shares
of Common Stock as shall from time to time be sufficient to effect conversion of
the Convertible Preferred Stock.
9. Ranking. Any class or classes of stock of the Company shall be deemed
-------
to rank:
(a) prior to the Series A Preferred Stock, as to dividends or as to the
distribution of assets upon liquidation, dissolution or winding up, if the
Holders of such class shall be entitled to the receipt of dividends or of
amounts distributable upon liquidation, dissolution or winding up, as the case
may be, in preference or priority to the Holders of Series A Preferred Stock;
(b) on a parity with the Series A Preferred Stock, as to dividends or as
to the distribution of assets upon liquidation, dissolution or winding up,
whether or not the dividend rates, dividend payment dates or redemption or
liquidation prices per share thereof be different from those of the Series A
Preferred Stock, if the Holders of such class of stock and the Series A
Preferred Stock shall be entitled to the receipt of dividends or of amounts
distributable upon liquidation, dissolution or winding up, as the case may be,
in proportion to their respective amounts of accrued and unpaid dividends per
share or liquidation prices, without preference or priority of one over the
other; and
EXH.10(n)-Page 16
<PAGE>
EXHIBIT 10(n)
(c) junior to the Series A Preferred Stock, as to dividends or as to the
distribution of assets upon liquidation, dissolution or winding up, if such
stock shall be Common Stock or if the Holders of Series A Preferred Stock shall
be entitled to receipt of dividends or of amounts distributable upon
liquidation, dissolution or winding up, as the case may be, in preference or
priority to the Holders of shares of such stock.
10. Voting.
------
10.1 Voting Rights with Common Stock. Except as described below or as
required by law, Holders of Series A Preferred Stock shall be entitled to the
number of votes equal to the number of shares of Common Stock of the Company
into which such Series A Preferred Stock could be converted and shall have the
voting rights and powers equal to the voting rights and powers of the Common
Stock (voting together with the Common Stock as a single class) and shall be
entitled to notice of any stockholders' meeting in accordance with the By-Laws
of the Company. With respect to matters affecting only the Series A Preferred
Stock, each outstanding share of Series A Preferred Stock will be entitled to
one vote. In either case described in this Section 10, shares held by the
Company or any entity controlled by the Company shall be excluded and shall have
no voting rights.
11. Events of Default.
-----------------
11.1 Events of Default Defined. Each of the events specified in the
following Subsections 11.1(a) through (f) shall, upon written notice of default
from Holders of a majority of the outstanding shares of Series A Preferred
Stock, be an Event of Default, provided that an Event of Default may be waived
in writing by such Holders:
(a) the Company shall breach or default in the performance of or
compliance with, any representation or warranty, covenant,
agreement, condition or term contained in the Series A Preferred
Stock Purchase Agreement which is then applicable or this
Certificate of Designations, including the payment of any
dividend or redemption amount hereunder, and such default shall
not have been remedied within 90 days after written notice
thereof shall have been given to the Company; or
(b) the Company shall default in the payment when due of any
principal or interest on any material debt instrument or shall
default under or fail to perform or observe any material terms,
covenant or agreement contained in, any agreement, document or
instrument to which it is a party or to which it or its assets
are bound, including any obligation for borrowed money or for the
purchase price of property, and such default or failure to
perform shall continue and remain unwaived by the obligee for
more than 90 days or any shorter or longer applicable period of
grace therein specified, except where the Company is in good
faith and through appropriate proceedings contesting such default
or failure to perform; or
(c) the Company or any operating subsidiary shall make an assignment
for the benefit of creditors, or shall admit in writing its
inability to pay its debts as they become due, or
EXH.10(n)-Page 17
<PAGE>
EXHIBIT 10(n)
an order for relief is entered against the Company or such
operating subsidiary under any bankruptcy laws or the Company or
any such operating subsidiary shall file any petition or answer
seeking for itself any reorganization, arrangement, composition,
readjustment, dissolution or similar relief under any present or
future statute, law or regulation, or shall file an answer
admitting the material allegations of a petition filed against
the Company or such operating subsidiary in any such proceeding,
or shall seek or consent to or acquiesce in the appointment of
any trustee, receiver or liquidator of the Company or such
operating subsidiary, or the Company or its board of directors or
its stockholders shall take any action looking to the dissolution
or liquidation of the Company or such operating subsidiary and
such has not been remedied within 30 days after written notice
thereof shall have been given to the Company; or
(d) within 60 days after the commencement of any proceeding against
the Company or such operating subsidiary seeking any
reorganization, arrangement, composition, readjustment,
liquidation, dissolution or similar relief under any present or
future statute, law or regulation, such proceeding shall not have
been dismissed or, within 60 days after the appointment without
the consent or acquiescence of the Company of any trustee,
receiver or liquidator of the Company or such operating
subsidiary of all or any substantial part of the properties of
the Company or such operating subsidiary, such appointment shall
not have been vacated; or
(e) a final judgment which, together with other outstanding final
judgments against the Company, exceeds an aggregate of $500,000,
shall be rendered against the Company and within 90 days after
entry thereof, such judgment shall not have been discharged or
execution thereof stayed pending appeal or, within 60 days after
the expiration of any such stay, such judgment shall not have
been discharged; or
(f) the Company fails to make any redemption payment with respect to
the Series A Preferred Stock which it is obligated to make
hereunder, whether or not such payment is then legally
permissible or is prohibited by any agreement to which the
Company is subject.
11.2 Other Remedies. The Holders of a majority of the Series A Preferred
Stock outstanding at the time of any Event of Default may proceed to protect and
enforce the rights of said Holders by a suit in equity, action at law or other
appropriate proceeding, including but not limited to the enforcement of any
rights under any of the other documents executed and delivered in connection
herewith, for the specific performance of any agreement contained herein or in
any other documents executed and delivered in connection herewith, or for any
injunction against a violation of any of the terms or provisions hereof or
thereof or in aid of the exercise of any power granted hereby or thereby or by
law. The Company will pay to the Holders thereof such further amount as shall
be sufficient to cover the cost and expense of any action instituted by the
Holders upon such Event of Default, including (without limitation) reasonable
attorneys fees. If the Holders shall give any notice or take any action in
respect of a claimed default, the Company will
EXH.10(n)-Page 18
<PAGE>
EXHIBIT 10(n)
forthwith give written notice thereof to all other such Holder at the time
outstanding, describing the notices or action and the nature of the claimed
default. No course of dealing and no delay on the part of any Holders in
exercising any right shall operate as a waiver thereof or otherwise prejudice
such Holders' rights. No remedy conferred hereby or by any of the other
documents executed and delivered in connection herewith shall be exclusive of
any other remedy referred to herein or therein or now or hereafter available at
law, in equity, by statute or otherwise.
12. Covenants. In addition to any other rights provided by law or
---------
agreement so long as any shares of the Series A Preferred Stock remain shall be
outstanding, without first obtaining the affirmative vote or written consent of
the Holders of not less than 50% of the shares of Series A Preferred Stock then
outstanding (as adjusted for all subdivisions and combinations), the Company
shall not:
(a) pay or declare any dividend or distribution on any shares of
Common Stock or apply any of its assets to the redemption,
retirement, purchase or other acquisition directly or indirectly,
through subsidiaries or otherwise, of any shares of Common Stock;
(b) issue or sell any shares of its capital stock, or any rights or
options to acquire any shares of its capital stock, other than
(i) issuances of Common Stock upon conversion of the Series A
Preferred Stock, (ii) issuances of Common Stock or Series A
Preferred Stock in the form of dividends payable on shares of
outstanding Common Stock or Series A Preferred Stock,
respectively, and (iii) upon exercise of options granted
subsequent to the date hereof at prices in excess of the greater
of (a) $1.85 per share or (b) market value as of the date of any
such grant to officers, directors or employees of, or consultants
to, the Company pursuant to a stock option plan or other employee
stock incentive program approved by the Board of Directors;
(c) cause or permit, or agree or consent to cause or permit in the
future (upon the happening of a contingency or otherwise) any of
its property, whether now owned or hereafter acquired, to be
subject to a lien or liens except:
(i) liens securing taxes, assessments or governmental charges or
the claims or demands of materialmen, mechanics, carriers,
warehousemen, landlords and other like persons, none of
which are in default or delinquent;
(ii) liens incurred or deposits made in the ordinary course of
business (A) in connection with workmen's compensation,
unemployment insurance, social security and other like laws,
or (B) to secure the performance of letters of credit, bids,
tenders, sales contracts, leases, statutory obligations,
surety, appeal and performance bonds and other similar
obligations not incurred in connection with the borrowing of
money, the obtaining of advances or the payment of the
deferred purchase price of property; and
EXH.10(n)-Page 19
<PAGE>
EXHIBIT 10(n)
(iii) attachment, judgment and other similar liens arising in
connection with any court proceedings, provided the
execution or other enforcement of such liens is effectively
stayed and the claims secured thereby are being actively
contested in good faith and by appropriate proceedings;
(iv) reservations, exceptions, encroachments, easements, rights
of way, covenants, conditions, restrictions, leases and
other similar title exceptions or encumbrances affecting
real property provided they do not in the aggregate
materially detract from the value of said properties or
materially interfere with their use in the ordinary conduct
of the Corporation's business; and
(v) liens arising out of debt authorized by the requisite vote
of the Board of Directors.
(d) amend or repeal any provision of, or add any provision to, the
Corporation's Certificate of Incorporation or Bylaws if such
action would alter or change the preferences, rights, privileges
or powers of, or the restrictions provided for the benefit of,
the Series A Preferred Stock;
(e) change the general character of its business as constituted as of
the Original Issue Date;
(f) except as otherwise provided herein, apply any of its assets to
redeem, retire, purchase or otherwise acquire any capital stock
of the Company;
(g) enter into any material transaction, including, without
limitation, the purchase, sale, lease, rental or exchange of
property or the rendering of any service, with an affiliate,
employee, officer, director or shareholder or engage in any
transaction not in the normal course of business with any
supplier, customer or any other person unless approved by the
Board of Directors of the Company;
(h) grant to any future purchaser of its securities any rights to
register such securities under the Securities Act that are more
favorable than those provided to the Holders of the Series A
Preferred Stock pursuant to the 8% Convertible Preferred Purchase
Agreement and will not grant any registration rights to any
future purchaser of its securities unless such registration
rights shall provide that (i) they are subject to the rights of
the Holders of the Series A Preferred Stock to the extent that if
the managing underwriter of any offering which includes shares of
Common
EXH.10(n)-Page 20
<PAGE>
EXHIBIT 10(n)
Stock into which the Series A Preferred Stock is convertible
determines that marketing factors require the limitation of the
number of shares of such Common Stock or other securities to be
included in the offering, the securities of the Company held by
such future purchasers of its securities shall be excluded from
such registration to the extent required by such limitation
before the exclusion of any shares of Common Stock into which the
Series A Preferred Stock is convertible, and (ii) such securities
as are excluded from registration shall not be offered to the
public until at least [180] days following the completion of the
offering of the securities included in the registration.
(i) issue any of its equity securities for consideration other than
cash, other than (i) issuances of Common Stock upon conversion of
the Series A Preferred Stock, (ii) issuances of Common Stock or
Series A Preferred Stock in the form of dividends payable on
shares of outstanding Common Stock or Series A Preferred Stock,
respectively, (iii) issuances of up to 1,250,000 shares (which
number shall be proportionately adjusted in the case of
recapitalizations, stock splits, stock dividends or combinations
of shares) of Common Stock upon exercise of options therefor to
officers, directors or employees of, or consultants to, the
Company pursuant to a stock option plan or other employee stock
incentive program approved by the Board of Directors, and (iv)
acquisitions of other companies or assets related to the business
of the Company;
(j) make or permit to remain outstanding any loan or advance to, or
extend credit other than credit extended in the normal course of
business to any Person who is not an affiliate of the Company, or
guarantee, endorse or otherwise be or become contingently liable,
directly or indirectly, in connection with the obligations, stock
or dividends of, or own, purchase or acquire any stock,
obligations or securities of, or any other interest in, or make
any capital contribution to, any Person, except that the Company
------
or any subsidiary may:
(i) own, purchase or acquire (A) certificates of deposit of
commercial banks organized under the laws of the United
States (having a capital and surplus in excess of
$50,000,000) and (B) obligations of the United States
Government or any agency thereof, and obligations
guaranteed by the United States Government, in each case
due within one year from the date of purchase and payable
in the United States in United States dollars;
(ii) endorse negotiable instruments for collection or deposit in
the ordinary course of business; and
(iii) permit to make and remain outstanding indebtedness
permitted by clause (d) of this Section 13.
13. Record Holder. The Company may deem and treat the record Holder of
-------------
any shares of Series A Preferred Stock as the true and lawful owner thereof for
all purposes, and the Company shall not be affected by any notice to the
contrary.
EXH.10(n)-Page 21
<PAGE>
EXHIBIT 10(n)
14. Notice. Except as may otherwise be provided for herein, all notices
------
referred to herein shall be in writing, and all notices hereunder shall be
deemed to have been given upon receipt. In the case of a notice of conversion
given to the Company as contemplated in Subsection 8.3 hereof, or, in all other
cases, upon the earlier of receipt of such notice or three Business Days after
the mailing of such notice if sent by registered mail (unless first class mail
shall be specifically permitted for such notice under the terms of this
Certificate) with postage prepaid, addressed: if to the Company, to its offices
at 3200 Bristol Avenue, 8th Floor, Costa Mesa, California 92626, or such other
place as designated in a written notice to the Holders of the Series A Preferred
Stock, or other agent of the Company designated as permitted by this
Certificate, or, if to any Holder of the Series A Preferred Stock, to such
Holder at the address of such Holder of the Series A Preferred Stock as listed
in the stock record books of the Company; or to such other address as the
Company or Holder, as the case may be, shall have designated by notice similarly
given.
IN WITNESS WHEREOF, this Certificate has been executed on behalf of the
Company by the undersigned on the 20th day of August, 1997.
EMB CORPORATION
By: /s/ James E. Shipley
-----------------------------------
James E. Shipley, President
EXH.10(n)-Page 22
<PAGE>
EXHIBIT 10(n)
TABLE OF CONTENTS
Exhibit 10(n)
Page
1. Number of Shares and Designation........................... 1
--------------------------------
2. Definitions................................................ 1
-----------
3. Dividends.................................................. 2
---------
3.1 General............................................... 2
3.2 Dividend Preference and Payment Dates................. 2
3.3 Computation of Dividends for Partial
Dividend Periods; Payment of Dividends on
Shares Called for Redemption......................... 3
3.4 Priority and Dividend Participation/Parity Stock...... 3
3.5 Priority and Dividend Participation/Junior Stock...... 4
3.6 Dividend Participation with Common Stock after
Payment of Cumulative Dividends...................... 4
4. Liquidation Value.......................................... 4
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4.1 General............................................... 4
4.2 Liquidation Participation with Common Stock after
Payment of Liquidation Preference.................... 5
4.3 Notice of Liquidation, Dissolution or Winding Up...... 5
5. Transfers.................................................. 5
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5.1 Transfer Restrictions................................. 5
5.2 Delivery of Certificate, Transfer Instructions and
Transfer Certificate................................. 5
6. Redemption................................................. 5
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6.1 Redemption at the Option of the Company............. 5
7. Shares to be Retired....................................... 7
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8. Conversion................................................. 7
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8.1 Right to Convert..................................... 7
8.2 Mechanics of Conversion.............................. 8
8.3 Payment of Fractional Interests...................... 9
8.4 Adjustments to $1.85 Maximum Conversion Price
for Diluting Issues................................. 9
8.5 No Impairment........................................ 15
8.6 Certificate as to Adjustments........................ 15
8.7 Deferral of Issuance of Additional Shares............ 15
8.8 Computation of Outstanding Common Stock.............. 15
8.9 Multiple Adjustments in a Single Transaction......... 16
8.10 Further Adjustment by the Board of Directors......... 16
8.11 Payment of Documentary Stamp and Transfer Taxes...... 16
8.12 Reservation of Common Stock.......................... 16
EXH.10(n)-Page i
<PAGE>
EXHIBIT 10(n)
9. Ranking.................................................... 16
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10. Voting..................................................... 17
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10.1 Voting Rights with Common Stock.................... 17
11. Events of Default.......................................... 17
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11.1 Events of Default Defined.......................... 17
11.2 Other Remedies..................................... 19
12. Covenants.................................................. 19
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13. Record Holder.............................................. 22
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14. Notice..................................................... 22
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EXH.10(n)-Page ii
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use in Amendment No. 2 to Form SB-2 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 /s/ Harlan & Boettger, L.L.P.
-------------------------------------------
August 27, 1997
<PAGE>
EXHIBIT 23.2
CONSENT OF LEGAL COUNSEL
We hereby consent to the use of our name in Amendment No. 2 to the Form SB-2
registration statement of EMB Corporation.
Oklahoma City, Oklahoma STEPHEN A. ZRENDA, JR., P.C.
August 27, 1997
By: /s/ Stephen A. Zrenda, Jr.
-------------------------------------
Stephen A. Zrenda, Jr.
