<PAGE>
As filed with the Securities and Exchange Commission on June 3, 1997
333-21719
================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
------------
Amendment No. 1
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 (Primary Standard (I.R.S. Employer
jurisdiction of Industrial Classification Identification No.)
incorporation or Code Number)
organization)
3200 BRISTOL, 8TH FLOOR 3200 BRISTOL, 8TH FLOOR
COSTA MESA, CALIFORNIA 92626 COSTA MESA, CALIFORNIA 92626
(714) 437-0738 (Address of principal place of business
(Address and telephone number or intended principal place of business)
of principal executive offices)
JAMES E. SHIPLEY, PRESIDENT
EMB CORPORATION
3200 BRISTOL, 8TH FLOOR
COSTA MESA, CALIFORNIA 92626
(714) 437-0738
(Name, address and telephone
number, of agent for service)
------------
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.
================================================================================
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
<TABLE>
<CAPTION>
ITEM IN PART I OF FORM SB-2 LOCATION IN PROSPECTUS
--------------------------- ----------------------
<C> <S> <C>
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 Certain Beneficial Owners and
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
</TABLE>
<PAGE>
SUBJECT TO COMPLETION, DATED JUNE 3, 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 majority 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 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"), which
is based in part on its license of software from Virtual Lending Technology,
Inc., an affiliate of the Company. 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. 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 May 30, 1997, the closing bid and asked prices of a share of the
Common Stock of the Company was $2-1/8 and $2-5/8 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 4-for-1 stock split effected
September 27, 1996.
THE COMPANY
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 presently represents approximately 54.3% of the
issued and outstanding Common Stock of the Company.
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
Common Stock presently outstanding............. 6,211,551 Shares(1)
Common Stock to be outstanding after offering.. 6,211,551 Shares(1)
Common Stock trading symbol.................... EMBU
- ------------
(1) Does not include outstanding warrants to purchase 112,500 shares of Common
Stock that are presently issued and outstanding as of May 31, 1997.
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
March 31, 1997 and March 31, 1996. This information should be read in
conjunction with the financial statements the notes thereto set forth elsewhere
in the Prospectus. See "Financial Statements".
<TABLE>
<CAPTION>
SIX MONTH PERIOD ENDED
FISCAL YEAR ENDED SEPTEMBER 30, MARCH 31, (UNAUDITED)
------------------------------- ---------------------------------------
1996 1995 1997 1996
---------------- ------------- -------------- ---------------
<S> <C> <C> <C> <C>
STATEMENT OF OPERATIONS:
Revenues $ 276,419 $ 97,400 $1,327,951 $ 121,907
Cost of sales $ 29,636 $ -- $ 7,872 $ --
Gross profit $ 246,783 $ 97,400 $1,320,079 $ 121,907
Operating expenses $ 2,821,300 $ 534,480 $2,211,993 $ 817,493
Loss from operations $(2,574,517) $ (437,080) $ (891,914) $ (695,586)
Other income (expense), net $ (67,081) $ 7,825 $ 621,899 $ (24,055)
Loss before income taxes $(2,641,598) $ (429,255) $ (270,015) $ (719,641)
Income taxes $ 1,600 $ 800 $ 1,600 $ 800
</TABLE>
2
<PAGE>
<TABLE>
<CAPTION>
SIX MONTH PERIOD ENDED
FISCAL YEAR ENDED SEPTEMBER 30, MARCH 31, (UNAUDITED)
------------------------------- ---------------------------------------
1996 1995 1997 1996
---------------- ------------- -------------- ---------------
<S> <C> <C> <C> <C>
Net loss $(2,643,198) $ (430,055) $ (271,615) $ (720,441)
Loss per share $ (.73) $ (.29) $ (.05) $ (.23)
Weighted average shares 3,641,421 1,469,225 5,605,527 3,128,199
outstanding
</TABLE>
<TABLE>
<CAPTION>
SEPTEMBER 30, 1996 MARCH 31, 1997
------------------ --------------
(audited) (unaudited)
<S> <C> <C>
Balance Sheet Data:
Working capital $ (529,482) $ (236,001)
Total assets $ 1,190,479 $ 7,312,177
Total long-term debt and capital lease obligations $ 95,096 $ 50,770
Deferred Gain $ -- $ 2,560,000
Total shareholders' equity $ 501,600 $ 1,080,298
</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 May 31, 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 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 Certain Beneficial Owners and Management".
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 formation and operation of a
relatively new business. See "Business".
3
<PAGE>
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 limits 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 provides 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
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 is
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."
4
<PAGE>
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, toxics,
hazardous wastes, environmental considerations, zoning laws, entitlements, rent
control laws, other governmental rules and fiscal policies and acts of God, such
as floods, which may result in uninsured losses.
CONCENTRATION. The mortgage loans 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.
It is expected that when the Company acquires mortgage loans, the seller
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 seller. Although the Company may have
recourse to the seller based on the seller's representations and warranties to
the Company, the Company will be at risk for loss to the extent the seller does
not perform its 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 Iler'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.
5
<PAGE>
Since 1995, the Company's growth in originating and purchasing 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 and purchased 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. 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.
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 a 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, with
an 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.
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
6
<PAGE>
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"), Virtual Lending Technology, Inc. ("VLT"), 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 includes the MortgageShare system of VLT that has also been
licensed to the Company. See "Business--Interactive Mortgage Software". 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. The Company depends in part on
independent mortgage brokers, financial institutions 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 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 originations and purchasers of such loans, market conditions and other
factors.
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.
UNINSURED LOSSES. The Company will require as a condition to making an
investment in a mortgage loan, to the extent possible, comprehensive insurance,
including liability, fire, flood and extended coverage, which is customarily
obtained for or by a mortgagee on properties. However, there are certain types
of losses (generally of a catastrophic nature, such as earthquakes, floods and
wars) which are either uninsurable or not economically insurable. Should such a
disaster occur to, or cause the destruction of, any of such real property
securing the mortgage loans, the Company could lose both its invested capital
and any anticipated profits from such investment. In addition, there can be no
assurance that, if a covered loss occurs, the proceeds will be sufficient to pay
all damages which the real property, the borrower and the Company may have
suffered. Should any such loss occur and the borrower may default on the
mortgage loan, the Company could suffer a partial or total loss of its
investment.
BALLOON PAYMENTS. Mortgage loans, other than those representing mortgage
loans on single-family residential, will probably 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.
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.
7
<PAGE>
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 mortage loans
to qualify for the usary 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.
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.
8
<PAGE>
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 231 persons as of May
31, 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.
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 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 cities
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 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.
SHARES ELIGIBLE FOR FUTURE SALE. Certain outstanding shares of the
Company's Common Stock 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.
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
although no stock options have been granted to any person under the Plan as of
the date of this Prospectus. There are presently outstanding warrants to
purchase 112,500 shares of the Common Stock of the Company exercisable 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".
9
<PAGE>
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 March 31, 1997 (unaudited).
<TABLE>
<CAPTION>
September 30, 1996 March 31, 1997
------------------ ---------------
(unaudited)
<S> <C> <C>
Short-term debt:
Borrowings under warehouse line of credit............. $ -- $3,105,625
Due others............................................ 293,793 515,484
---------- ----------
$ 293,793 $3,621,109
========== ==========
Long-term debt............................................. $ 65,000 $ 22,770
Common Stock, no par value:
Authorized, 30,000,000 shares,
Issued and outstanding, 5,311,817 shares and 6,190,267,
respectively(1).......................................... $3,910,391 $4,748,579
Preferred Stock, no par value:
Authorized, 5,000,000 shares,
No shares issued and outstanding......................... 0 0
Total Shareholders' Equity................................. $ 501,600 $1,080,298
========== ==========
</TABLE>
- ------------------
(1) Does not include 1,250,000 shares of Common Stock reserved for issuance
under the Company's stock option plan (no options are presently issued or
outstanding); nor outstanding warrants to purchase up to 112,500 shares at
prices ranging from $2.00 to $3.00 per share.
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 three and six month periods ended March 31, 1997, versus
the three and six month periods ended March 31, 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 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 "Capital Resources" and "Liquidity", below.
10
<PAGE>
LOAN ORIGINATIONS AND PURCHASES
The Company increased its mortgage loan volume from $10,436,740 during
the three month period ended March 31, 1996, to $56,609,743 for the three month
period ended March 31, 1997, representing an increase of 542%. Mortgage volume
increased 728% to $101,789,905 during the six month period ended March 31, 1997,
from $13,981,976 during the six month period ended March 31, 1996. This increase
in mortgage loan volume appears to be continuing primarily due to the expansion
of the Company's marketing activities.
RESULTS OF OPERATIONS
The following table sets forth certain operating information (unaudited)
regarding the Company:
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
MARCH 31, MARCH 31,
----------------------------------- -------------------------------
1997 1996 1997 1996
---------------- ------------ ----------- ---------
<S> <C> <C> <C> <C>
Mortgage loan revenues............... $ 78,309 $ 18,129 $ 1,318,741 $ 121,907
Product sales revenues............... $ 276 $ -- $ 9,210 $ --
General and administrative expenses.. $ 61,151 $ 376,790 $ 2,200,140 $ 805,230
Depreciation......................... $ 5,000 $ 10,763 $ 11,853 $ 12,263
Interest expense..................... $ (6,095) $ (20,135) $ (18,101) $ (24,055)
Gain on sale of land................. $ -- $ -- $ 640,000 $ --
Net income (loss).................... $ 6,339 $ (390,359) $ (271,615) $(720,441)
Net income (loss) per share.......... $ -- $ (.09) $ (.05) $ (.23)
</TABLE>
Three months ended March 31, 1997 compared with three months ended March 31,
- ----------------------------------------------------------------------------
1996
- ----
REVENUES. Mortgage loan revenues increased 5,296% to $978,309 in the
three month period ended March 31, 1997, from $18,129 in 1996. Revenues were
generated primarily from loan processing and resale of mortgage loans. No real
estate was sold during either fiscal quarter. The increase in revenues was
attributable to the expansion of the Company's marketing activities, and an
increase in mortgage lending in California.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
increased 155% to $961,151 in the three month period ended March 31, 1997 from
$376,790 in 1996. This increase is principally attributable to increased
activity in its mortgage loan processing business, an increase in employees, and
the costs of establishing additional mortgage loan offices.
DEPRECIATION. Depreciation decreased 54% to $5,000 in the three month
period ended March 31, 1997, from $10,763 in the three months ended March 31,
1996.
RESULTS OF OPERATIONS. Net income was $6,339 during the three month
period ended March 31, 1997, as compared with a net loss of $(390,359) during
the same period of 1996, due primarily to the increase in mortgage loan
revenues.
Six months ended March 31, 1997 compared with six months ended March 31, 1996
- -----------------------------------------------------------------------------
REVENUES. Revenues increased 989% in the six month period ended
March 31, 1997, to $1,327,951 from $121,907 during the same period of 1996. This
increase is attributable to the expansion and growth of the mortgage lending
business of the Company.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
increased 173% to $2,200,140 during the six month period ended March 31, 1997,
from $805,230 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.
11
<PAGE>
DEPRECIATION. Depreciation decreased 3.3% to $11,853 in the six month
period ended March 31, 1997, from $12,263 in the six month period ended
March 31, 1996.
RESULTS OF OPERATIONS. The net loss decreased 62% to $271,615 in the six
month period ended March 31, 1997, from $720,441 in the six month period ended
March 31, 1996. This decrease was due primarily to the sale of real property
held for sale and the expansion of the marketing activities of the Company,
including the establishment of additional mortgage loan offices in Florida,
Nevada and Texas.
CAPITAL EXPENDITURES, CAPITAL RESOURCES AND LIQUIDITY
The following summary table (unaudited) presents comparative cash flows
of the Company for the periods indicated.
<TABLE>
<CAPTION>
SIX MONTHS ENDED
MARCH 31,
----------------------------
1997 1996
------------ ------------
<S> <C> <C>
Net cash used in operating activities... $ (968,101) $ (511,254)
Net cash provided by (used in)
used in investing activities.......... $ 890,756 $ (301,420)
Net cash provided by financing
activities............................ $ 206,595 $ 787,958
</TABLE>
CAPITAL EXPENDITURES. The Company has incurred capital expenditures for
equipment and office furniture used in its mortgage loan business. Capital
expenditures during the three month period ended March 31, 1997 and 1996 totaled
$29,990 and $34,096, respectively. During the six month periods ended March 31,
1997 and 1996, capital expenditures totaled $37,673 and $37,199, respectively.
LIQUIDITY AND CAPITAL RESOURCES. The Company's capital resources have
historically been provided primarily by the sale of its Common Stock and
warrants and by short term loans.
The Company intends to raise additional capital through an offering of
its Common 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 March 31, 1997, the Company had current assets of $3,385,108 and
current liabilities of $3,621,109, resulting in a working capital deficit of
$(236,001), as compared to a working capital deficit of $(192,232) at March 31,
1996. Working capital decreased by $43,769.
Net cash used in operating activities increased to $(968,101) for the
six months ended March 31, 1997, from $(511,254) for the six months ended March
31, 1996, or a difference of $456,847. The increase in net cash used in
operating activities was primarily attributable to the increase in 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 offices in Ft. Lauderdale and Las Vegas were
acquired from James Financial Services Corp.
The $3,000,000 warehouse line of credit of the Company with Imperial
Warehouse Lending Group 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
versus the interest rate on the warehouse line of credit, which is presently
prime + 1/2%.
As of March 31, 1997, the Company has notes payable to unrelated parties
in the total amount of $269,063, 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. See Note J to Financial
Statements.
12
<PAGE>
MARKET PRICE
The Common Stock of the Company is currently quoted in the over-the-
counter market on the Bulletin Board maintained by the National Association of
Securities Dealers, Inc. under the symbol "EMBU".
When the trading price of the Company's Common Stock falls 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
brokers-dealer and sales representative 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
</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 May 30, 1997, the closing bid and ask prices of the Common Stock of the
Company were $2-1/8 bid and $2-5/8 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 May 30,
1997, there were approximately 11 broker-dealers publishing quotes for the
Common Stock of the Company.
As of May 11, 1997, there were 6,211,551 shares of Common Stock issued
and outstanding which were held by approximately 657 holders of record. 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. 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.
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
13
<PAGE>
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 EMB's proprietary version of its software which
is part of the Company's software system designed for the origination and
processing of residential mortgage loans that it 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 54.3%
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.
LOAN STANDARDS. Mortgage loans made by EMB will be loans with fixed or
adjustable rates of interest secured by first mortgages, deeds of trust or
security deeds on residential properties with original principal balances that
do not exceed 95% of the value of the mortgaged properties, unless such loans
are FHA-insured or VA-guaranteed. Generally, each mortgage loan having a
loan-to-value ratio, as of the cut-off-date, in excess of 80%, or which is
secured by a second or vacation home, will be covered by a Mortgage Insurance
Policy, FHA Insurance Policy or VA Guaranty insuring against default all or a
specified portion of the principal amount thereof.
The mortgage loans will be "one to four-family" mortgage loans, which
means permanent loans (as opposed to construction or land development loans)
secured by mortgages on non-farm properties, including attached or detached
single-family or second/vacation homes, two to four-family primary residences
and condominiums or other attached dwelling units, including individual
condominiums, row houses, townhouses and other separate dwelling units even when
located in buildings containing five or more such units. Each mortgage loan must
be secured by an owner occupied primary residence or second/vacation home, or by
a nonowner occupied residence. The mortgaged property may not be a mobile home.
No mortgage loan is expected to have an original principal balance less
than $30,000. While most loans may be less than $700,000, EMB may fund loans of
up to $2,000,000 through its own wholesale credit lines or by brokering such
loans to unaffiliated third-party mortgage lenders. Fixed rate mortgage loans
must be repayable in equal monthly installments which reduce the principal
balance of the loans to zero at the end of the term.
CREDIT, APPRAISAL AND UNDERWRITING STANDARDS. Each mortgage loan must
(i) be an FHA-insured or VA-guaranteed loan meeting the credit and underwriting
requirements of such agency, or (ii) meet the credit, appraisal and underwriting
standards established by the Company. For certain mortgage loans which may be
subject to a mortgage pool insurance policy, the Company may delegate to the
issuer of the mortgage pool insurance policy the responsibility of underwriting
such mortgage loans, in accordance with the Company's credit appraisal and
underwriting standards. In addition, the Company may delegate to one or more
lenders the responsibility of underwriting mortgage loans offered to the Company
by such lenders, in accordance with the Company's credit, appraisal and
underwriting standards. In connection with any such delegation of underwriting
responsibility to a lender, the Company will require that the lender (i) make
certain representations and warranties to the Company which shall be the basis
for certain of the Company's representations and warranties to the trustee; (ii)
agree to repurchase any mortgage loan which is discovered at any time not to be
in conformance with such
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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 ait 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.
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 or exempt from requirements
in 10 states through its six retail branch 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 earned by the Company. Additionally, such a
strategy allows the
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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 10 states, it has
historically concentrated its business in California. While this concentration
has declined, 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
December 31, 1995, respectively. Expansion outside California began in late
1996.
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.
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 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
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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 lure had been entered
in state court (provided no sale of the residence had yet occurred) prior to the
filing of a debtor's petition. Some courts with federal bankruptcy jurisdiction
have approved plans based on the particular facts of the reorganization case,
that effected the curing of a mortgage loan default by paying arrearages over a
number of years.
Courts with federal bankruptcy jurisdiction have also indicated that the
terms of a mortgage loan secured by property of the debtor may be modified.
These courts have suggested that such modification may include reducing the
amount of each monthly payment, changing the rate of interest, altering the
repayment schedule, and reducing the lender's security interest to the value of
the residence, thus leaving the lender a general unsecured creditor for the
difference between the value of the residence and the outstanding balance of the
loan.
The Internal Revenue Code of 1986, as amended, provides priority to
certain tax liens over the lien of a mortgage. In addition, substantive
requirements are imposed upon mortgage lenders in connection with the
origination and the servicing of mortgage loans by numerous federal and some
state consumer protection laws. These laws include the federal Truth-In-Lending
Act, Real Estate Settlement Procedures Act, Equal Credit Opportunity Act, Fair
Credit Billing Act, Fair Credit Reporting Act, and related statutes. These
federal laws impose specific statutory liabilities upon lenders who originate
mortgage loans and who fail to comply with the provisions of the law. In some
cases, this liability may affect assignees of the mortgage loans.
ENFORCEABILITY OF CERTAIN PROVISIONS. Certain of the mortgage loans will
contain due-on-sale clauses. These clauses permit the lender to accelerate the
maturity of the loan if the borrower sells, transfer or conveys the property.
The enforceability of these clauses has been the subject of legislation and
litigation in many states, and in some cases the clauses have been upheld, while
in other cases their enforceability has been limited or denied.
Upon foreclosure, courts have imposed general equitable principles.
These equitable principles are generally designed to relieve the borrower form
the legal effect of his defaults under the loan documents. Examples of judicial
remedies that have been fashioned including judicial requirements that the
lender undertake affirmative and expensive actions to determine the causes for
the borrower's default and the likelihood that the borrower will be able to
reinstate the loan. In some cases, courts have substituted their judgment for
the lender's judgment and have required that lenders reinstate loans or recast
payment schedules in order to accommodate borrowers who are suffering from
temporary financial disability. In other cases, courts have limited the right of
the lender to foreclose if the default under the mortgage instrument is not
monetary, such as the borrower failing to adequately maintain the property or
the borrower executing a second mortgage or deed of trust affecting the
property. Finally, some courts have been faced with the issue of whether or not
federal or state constitutional provisions reflecting due process concerns for
adequate notice require that borrowers under deeds of trust or mortgages receive
notices in addition to the statutorily-prescribed minimum. For the most part,
these cases have upheld the notice provision as being reasonable or have found
that the sale by a Trustee under a deed of trust, or under a mortgage having a
power of sale, does not involve sufficient state action to afford constitutional
protections to the borrowers.
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
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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 interactive mortgage software utilized by the Company includes MortgageShare
which is an integral part of the overall EMB system. The software was licensed
to EMB, a wholly owned subsidiary of the Company, by Virtual Lending Technology,
Inc. which is owned and operated by Rory P. Hughes who is also a director and
officer of the Company.
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.
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 235 licensees and
mortgage brokers who are served by 16 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,
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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
Inteetain 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 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
December 31, 1996. 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,
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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.
All real property owned by the Company is held for resale and not for
development purposes. The Company may also hold real estate for sale from time
to time as a result of its foreclosure on mortgage loans that may become in
default.
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.
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 April 30, 1997, the Company employed a total of 46 persons. Of the
total, 30 officers and employees are employed at the principal executive offices
of the Company of which 10 were engaged in sales and marketing, 6 loan
processing support staff, two were in product development and technical support
and 12 were in finance and administration. There were 16 employees in the 6
retail branch offices of the Company of which 6 were engaged in sales and
marketing, 7 in loan processing support, and 3 in administration. None of the
Company's employees is represented by a labor union with respect to his or her
employment by the Company.
The Company has experienced no organized work stoppages and believes its
relationship with its employees is good. The Company believes that its future
success will also depend to a significant extent upon its ability to attract,
train and retain highly skilled technical, management, sales, marketing and
consulting personnel. Competition for such personnel in the computer software
and mortgage industry in the United States is intense. The Company has from time
to time experienced difficulty in locating candidates with appropriate
qualifications. There can be no assurance that the Company will be successful in
attracting or retaining such personnel, and the failure to attract or retain
such personnel could have a material adverse effect on the Company's business or
results of operations.
BANKING ARRANGEMENTS
The Company is presently negotiating with several national banks to
obtain a line of credit for the purpose of assuring the availability of
financing in the event the Company determines bank financing to be necessary or
desirable in the future.
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,
20
<PAGE>
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 as follows:
Name(1)(2) Age Position
- ---------- --- --------
Joseph K. Brick 58 Director, and President of
EMB Mortgage Corporation
Bruce J. Brosky(3) 42 Director and Vice President-
Marketing and Public Relations
Malcolm K. Crist 51 Director
William V. Perry(3)(4) 73 Director and Executive Vice
President
Ann L. Petersen 59 Director
Michael P. Roth 57 Director
James E. Shipley(4) 61 Director and President
B. Joe Wimer(4) 40 Director, Secretary and
Treasurer
- ------------------
(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 a director and the
President of EMB Mortgage Corporation, the principal operating subsidiary of the
Company. 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. Crist became a director of the Company at the 1997 Annual Meeting of
Stockholders of the Company in March 1997. From 1974 to the present, he has been
the President of Crist Accountancy Corporation, a certified public accounting
firm in Orange County, California. From 1969 to 1973, Mr. Crist was a staff and
a senior audit accountant with Price Waterhouse & Company. He
21
<PAGE>
became a certified public accountant in Maryland in 1969 and in California in
1974. Mr. Crist received a B.A. degree in accounting from the College of William
and Mary in 1967, and received a M.B.A. degree in finance and accounting from
the University of Maryland in 1969.
Mr. Perry has been the Executive Vice President of the Company since
April 29, 1996, and became a director of the Company on May 21, 1996. He is also
the Chairman of the Board of EMB Mortgage Corporation, a wholly owned subsidiary
of the Company. From 1994 to the present, he has been a director and Vice
President of Sterling Alliance Group, Ltd. From October 1993 to the present, Mr.
Perry has been associated with ERA Sterling Real Estate. From 1990 to October
1993, he was a director and Vice President of Ameri-West Funding, Inc., engaged
in residential, multi-family and commercial mortgages. From 1988 to 1990, Mr.
Perry was the President of First Marine Mortgage Company. From 1985 to 1987, he
was the Chief Financial Officer of Mobile Medical Group, Inc.; and was the Chief
Financial Officer and a director of Oceanic Opera, Inc. from 1984 to 1985. From
1970 to 1984, Mr. Perry was engaged in the real estate brokerage business with
several real estate brokerage companies. From 1962 to 1970, he was an
electronics engineer with Lockheed Missle and Space Corporation. Mr. Perry
graduated from Pacific States University in 1948 with a degree in electrical
engineering.
Mrs. Petersen became a director of the Company on November 25, 1992. She
is a resident of Hawaii and has been a housewife since being married in 1958.
She attended Marquette University for two years. Mrs. Petersen is an active
volunteer in various charitable organizations, including the American Cancer
Association.
Mr. Roth became a director of the Company at the 1997 Annual Meeting of
the Stockholders of the Company in March 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 e 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.
22
<PAGE>
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 May 31, 1997, no
options, SAR's or stock bonuses have been granted or issued under the Plan.
Options may be granted to employees (including officers), consultants, advisors
and directors, although only employees and directors and officers who are also
employees may receive "incentive stock options" intended to qualify for certain
tax treatment. The exercise price of non-qualified stock options must equal at
least 85% of the fair market value of the Common Stock on the date of grant, and
in the case of incentive stock options must be no less than the fair market
value. Options granted under the Plan are immediately exercisable but generally
vest over four years and must be exercised within 10 years. The members of the
Stock Option Committee that administer the Plan are 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 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.
OTHER BENEFIT PLANS. The Company does not have any pension plan, profit
sharing plan or similar plans for the benefit of its officers, directors or
employees. However, the Company reserves the right to establish any such plans
in the future.
BOARD COMPENSATION. Directors of the Company 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 CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
- --------------------------------------------------------------
The total number of shares of Common Stock of the Company beneficially
owned by each of the officers and directors, and persons nominated to become
directors of the Company, and all of such directors and officers as a group, and
their percentage ownership of the outstanding Common Stock of the Company as of
May 31, 1997, are as follows:
<TABLE>
<CAPTION>
SHARES PERCENT OF
MANAGEMENT BENEFICIALLY COMMON
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..................... 87,500(2) 1.4%
575 Anton Boulevard, Suite 200
Costa Mesa, California 92626
Malcolm K. Crist.................... 0 0%
1015 East Chapman Avenue
Orange, California 92866
</TABLE>
23
<PAGE>
<TABLE>
<CAPTION>
SHARES PERCENT OF
MANAGEMENT BENEFICIALLY COMMON
SHAREHOLDERS(1) OWNED(1) STOCK
- --------------- ------------ ----------
<S> <C> <C>
William V. Perry.................... 290,470(2)(3) 4.7%
575 Anton Boulevard, Suite 200
Costa Mesa, California 92626
Ann L. Petersen..................... 6,250 .001%
Star Route 5080
Keaau, Hawaii 96749
Michael P. Roth..................... 0 0%
575 Anton Boulevard, Suite 200
Costa Mesa, California 92626
James E. Shipley.................... 813,375(4) 13.1%
575 Anton Boulevard, Suite 200
Costa Mesa, California 92626
B. Joe Wimer........................ 6,250(2) .001%
575 Anton Boulevard, Suite 200
Costa Mesa, California 92626
Directors and officers as a group
(8 persons, including the above).. 1,203,845 19.4%
========= ====
</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 (54.3% 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.
24
<PAGE>
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 54.3% 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, and $1,258 as of March 31,
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 by each shareholder who
beneficially owns more than five percent (5%) of the Company's Common Stock, the
number of shares beneficially owned by each and the percent of outstanding
Common Stock so owned of record as of May 31, 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.
25
<PAGE>
<TABLE>
<CAPTION>
SHARES PERCENT OF
NAME AND ADDRESS BENEFICIALLY OUTSTANDING
OF BENEFICIAL OWNER TITLE OF CLASS OWNED COMMON STOCK
- ------------------- -------------- ------------ ------------
<S> <C> <C> <C>
Sterling Alliance Group, Ltd.(1) Common Stock 3,375,000 54.3%(3)
575 Anton Boulevard, Suite 200
Costa Mesa, CA 92626
Rory P. Hughes(2) Common Stock 499,973 8.0%
575 Anton Boulevard, Suite 200
Costa Mesa, California 92626
James E. Shipley Common Stock 813,375 13.1%
World Trends Financial, Ltd.(2)
508 Easy Street
Las Vegas, Nevada 89707
Cede & Co. Common Stock 777,303 12.5%
P.O. Box 222
Bowling Green Station
New York, New York 10274
</TABLE>
- -------------------
(1) 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.
(2) Represents shares of the Common Stock of the Selling Stockholder which
owns 3,375,000 shares of the Common Stock of the Company.
(3) After the distribution of the shares of Common Stock of the Company by the
Selling Stockholder, the Selling Stockholder will not own any shares of the
Company. See "Selling Stockholder and Plan of Distribution".
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.
The foregoing policy does not apply to directors owning less than 5%
of the Company's Common Stock or consultants who ares 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.
26
<PAGE>
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 no shares of Preferred Stock issued and outstanding. As of May 31,
1997, there were 6,211,511 shares of Common Stock issued and outstanding held by
657 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. There are no redemption,
conversion or preemptive rights attached to the Common Stock.
PREFERRED STOCK. The Board of Directors has the authority, without
action by the stockholders, to designate and issue up to 5,000,000 shares of
Preferred Stock in one or more series and to designate the dividend rate, voting
rights and other rights, preferences and restrictions of each series any or all
of which may be greater than the rights of the Common Stock. The effect of the
issuance of any shares of Preferred Stock upon the rights of holders of the
Common Stock may not be determined until the Board of Directors specifies the
rights of the holders of such Preferred Stock. Such effects might include, among
other things, restricting dividends on the Common Stock, diluting the voting
power of the Common Stock, impairment of the liquidation rights of the Common
Stock and delaying or preventing a change in control of the Company without
further action by the stockholders. The Company has no present plans to issue
any shares of Preferred Stock. There are presently no shares of Preferred Stock
of the Company that are issued and outstanding.
27
<PAGE>
WARRANTS AND OPTIONS. As of May 31, 1997, there were outstanding
warrants to purchase up to 112,500 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, but no options have been
granted under the plan as of the date hereof.
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.
LEGAL PROCEEDINGS
There are no known pending or threatened legal proceedings to which
the Company is, or is likely to be, a party or of which any of its assets are
or are likely to be subject.
LEGAL MATTERS
The validity of the securities offered hereby will be passed upon
for the Company by 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.
ADDITIONAL INFORMATION
The Company has filed with the Securities and Exchange Commission a
Registration Statement (which term shall include any 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,
28
<PAGE>
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 recently became 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.
29
<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 year then ended. 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 year then ended in conformity with generally accepted
accounting principles.
We have compiled the accompanying consolidated balance sheet of EMB Corporation
and subsidiary as of March 31, 1997, and the consolidated related statements of
operations, stockholder's equity and cash flows for the six months then ended,
in accordance with Statements on Standards for Accounting and Review Services
issued by the American Institute of Certified Public Accountants.
A compilation is limited to presenting in the form of financial statements
information that is the representation of management. We have not audited or
reviewed the accompanying March 31, 1997 consolidated financial statements, and
accordingly, do not express an opinion or any other form of assurance on them.
Harlan & Boettger
San Diego, California
February 11, 1997
F-1
<PAGE>
EMB CORPORATION AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
ASSETS As of As of
March 31, 1997 September 30,
CURRENT ASSETS (Unaudited) 1996
-------------- ------------
<S> <C> <C>
Cash $ 129,645 $ 395
Accounts receivable (no allowance deemed necessary) 17,958 14,582
Inventory, net 31,880 35,324
Note receivable 100,000 14,000
Mortgage loans receivable (Note D) 3,105,625 -
----------- -----------
TOTAL CURRENT ASSETS 3,385,108 64,301
PROPERTY AND EQUIPMENT, net (Note E) 175,182 149,363
RELATED PARTY RECEIVABLE (Note F) 1,258 129,687
NOTE RECEIVABLE (Note G) 3,200,000 -
LAND HELD FOR SALE (Notes A and H) 43,000 843,000
OTHER ASSETS 507,629 4,128
----------- -----------
$ 7,312,177 $ 1,190,479
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 213,393 $ 195,374
Bank overdrafts - 27,177
Accrued expenses 41,637 48,886
Line of credit (Note I) 3,105,625 -
Notes payable - current portion (Note J) 246,293 293,793
Capital lease obligations - current portion (Note K) 14,161 28,553
----------- -----------
TOTAL CURRENT LIABILITIES 3,621,109 593,783
NOTES PAYABLE, net of current portion (Note J) 22,770 65,000
CAPITAL LEASE OBLIGATIONS, net of current portion (Note K) 28,000 30,096
DEFERRED GAIN (Note G) 2,560,000 -
----------- -----------
TOTAL LIABILITIES 6,231,879 688,879
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; 5,806,692 and 5,311,817 shares issued
and outstanding, respectively 4,748,579 3,910,391
Common stock subscribed (187,875) (200,000)
Retained deficit (3,480,406) (3,208,791)
----------- -----------
TOTAL SHAREHOLDERS' EQUITY 1,080,298 501,600
----------- -----------
$ 7,312,177 $ 1,190,479
=========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-2
<PAGE>
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
For the six months
ended March 31, For the year ended
(Unaudited) September 30, 1996
------------------ ------------------
REVENUES
<S> <C> <C>
Mortgage loan revenues $1,318,741 $ 244,874
Product sales 9,210 31,545
---------- -----------
TOTAL REVENUES 1,327,951 276,419
COST OF SALES - PRODUCT SALES 7,872 29,636
---------- -----------
Gross profit 1,320,079 246,783
OPERATING EXPENSES
General and administrative 2,200,140 2,790,244
Depreciation 11,853 31,056
---------- -----------
TOTAL OPERATING EXPENSES 2,211,993 2,821,300
---------- -----------
LOSS FROM OPERATIONS (891,914) (2,574,517)
OTHER INCOME (EXPENSES)
Interest expense (18,101) (67,081)
Gain on land sale 640,000 -
---------- -----------
TOTAL OTHER INCOME (EXPENSE) 621,899 (67,081)
---------- -----------
LOSS BEFORE INCOME TAXES (270,015) (2,641,598)
Income taxes (Note L) 1,600 1,600
---------- -----------
NET LOSS $ (271,615) $(2,643,198)
========== ===========
NET LOSS PER COMMON SHARE $ (.05) $ (.73)
========== ===========
WEIGHTED AVERAGE NUMBER OF SHARES
OUTSTANDING 5,605,527 3,641,421
========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-3
<PAGE>
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT)
<TABLE>
<CAPTION>
Total
Common Stock Preferred Stock Stock Shareholders'
-------------------------- -------------------------- Subscription Retained Equity
Shares Amounts Shares Amount Receivable Deficit (Deficit)
----------- ------------- ------------ ------------ ---------- --------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
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 27,500 55,000 - - - - 55,000
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 31,250 35,938 - - - - 35,938
Net loss - - - - - (271,615) (271,615)
--------- ---------- ------------ ------------ ---------- ------------ -----------
BALANCE, MARCH 31, 1997 5,806,692 $4,748,579 - $ - $ (187,875) $ (3,480,406) $ 1,080,298
========= ========== ============ ============ ========== ============ ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-4
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Six months
ended
March 31, Year ended
1997 September 30,
(Unaudited) 1996
----------- ------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $ (271,615) $(2,643,198)
Adjustments to reconcile net loss to net cash
used in operating activities:
Common stock issued for services 537,500 1,315,209
Gain on sale of land (640,000) -
Depreciation 11,853 31,056
Changes in operating assets and liabilities:
(Increase) decrease in:
Accounts receivable (3,376) (14,582)
Mortgage loans receivable (3,105,625) -
Inventory 3,444 (35,324)
Note receivable (86,000) -
Prepaid expenses and other assets (503,501) (2,951)
Increase (decrease) in:
Accounts payable 18,019 217,867
Accrued expenses (34,425) 46,637
Line of credit 3,105,625 -
----------- -----------
NET CASH USED IN OPERATING ACTIVITIES (968,101) (1,085,286)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of property and equipment (37,673) (96,846)
Proceeds from sale of land 800,000 -
Loans made on related party receivable 128,429 (74,798)
----------- -----------
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES 890,756 (171,644)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from issuance of notes payable 54,000 268,893
Payments under capital lease obligations (16,488) (17,300)
Proceeds from exercise of warrants 35,938 -
Payments on borrowings (184,355) (38,253)
Payments on common stock subscribed 125,000 -
Sale of common stock 192,500 1,017,914
----------- -----------
NET CASH PROVIDED BY FINANCING ACTIVITIES 206,595 1,231,254
----------- -----------
NET INCREASE (DECREASE) IN CASH 129,250 (25,676)
CASH, BEGINNING OF PERIOD 395 26,071
----------- -----------
CASH, END OF PERIOD $ 129,645 $ 395
=========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-5
<PAGE>
EMB CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
A. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Organization and Nature of Operations
EMB Corporation (formerly called Pacific International, Inc.) (the "Company")
was incorporated under the laws of the State of Hawaii on May 5, 1960.
Effective December 16, 1995, the Company acquired the net assets of Sterling
Alliance Group, Ltd ("SAG") which included 100% ownership in Electronic
Mortgage Banc, Ltd. ("EMB") and land held for sale. For financial statement
purposes the transaction has been recorded as a recapitalization of SAG and
the issuance of shares for the net assets of the Company due to the fact that
SAG provides substantially all of the historic and on-going operations (See
Note C). The historical and on-going financial statements primarily represent
the assets, liabilities and operations which were acquired from SAG. All
significant intercompany accounts and transactions have been eliminated.
The Company has an interactive software system for the origination and
processing of mortgage loans which it calls 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.
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
Property and equipment is stated at cost, and depreciated using the straight-
line method over the estimated useful lives of the assets, which range from
five to ten years. Maintenance and repairs are charged to operations as
incurred, and major improvements are capitalized. Upon retirement, sale, or
other disposition, the related cost and accumulated depreciation are
eliminated from the respective accounts and any gain or loss on disposition is
reflected in operations.
F-6
<PAGE>
EMB CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
A. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):
Revenue Recognition - Mortgage Brokerage
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.
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.
F-7
<PAGE>
EMB CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
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. Cost
approximates market value of such loans (See Note I).
E. PROPERTY AND EQUIPMENT:
Property and equipment are summarized as follows:
<TABLE>
<CAPTION>
March 31,
1997 September 30,
(Unaudited) 1996
----------- -------------
<S> <C> <C>
Machinery and equipment $149,865 $112,532
Furniture and fixtures 71,657 71,317
-------- --------
221,522 183,849
Less accumulated depreciation 46,340 34,486
-------- --------
Property and equipment, net $175,182 $149,363
======== ========
</TABLE>
F. RELATED PARTY TRANSACTIONS:
Related party receivable at March 31, 1997 and September 30, 1996 consists of
amounts due from a related corporation of $1,258 and $129,687, respectively.
F-8
<PAGE>
EMB CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
G. NOTE RECEIVABLE:
Note receivable at March 31, 1997, consists of $3,200,000 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. 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 March 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).
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 Momterey property on
December 30, 1996 for $800,000 cash and a note receivable for $3,200,000.
I. LINE OF CREDIT:
The Company had 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 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 March 31, 1997
the outstanding balance was $3,105,625. 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.
F-9
<PAGE>
EMB CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
J. NOTES PAYABLE:
Notes payable are summarized as follows:
<TABLE>
<CAPTION>
March 31,
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
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% 135,293 191,293
---------- ------------
269,063 358,793
Less current portion 246,293 293,793
---------- ------------
$ 22,770 $ 65,000
========== ============
</TABLE>
F-10
<PAGE>
EMB CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
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 six months
ended March 31, 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
March 31, (Unaudited)
--------------------
<S> <C>
1998 $ 72,288
1999 227,244
2000 244,728
2001 262,212
2002 262,212
Thereafter -
----------
$1,068,684
==========
</TABLE>
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>
March 31,
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>
F-11
<PAGE>
EMB CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
K. COMMITMENTS AND CONTINGENCIES: (CONTINUED)
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
March 31, (Unaudited)
--------------------
<S> <C>
1998 $30,745
1999 20,497
-------
51,242
Less amount representing interest 9,081
-------
42,161
Less current portion of capital lease 14,161
-------
$28,000
=======
</TABLE>
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 six months ended March
31, 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>
Six months ended Year ended
March 31, 1997 September 30,
(Unaudited) 1996
---------------- -------------
<S> <C> <C>
Current income taxes $ 1,600 $ 1,600
--------- ---------
Provision for income taxes $ 1,600 $ 1,600
========= =========
</TABLE>
The components of deferred tax assets are as follows:
<TABLE>
<CAPTION>
Six months ended Year ended
March 31, 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-12
<PAGE>
EMB CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(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 $ - $ 44,000
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 for the six months ended
March 31, 1997 and the year ended September 30, 1996 are summarized as
follows:
<TABLE>
<CAPTION>
March 31,
1997 September 30,
(Unaudited) 1996
----------- -------------
<S> <C> <C>
Cash paid for interest and income taxes:
Interest $18,101 $ 52,232
Income taxes $ - $ -
Noncash investing and financing activities:
Capital lease obligations incurred $ - $ 57,881
Common stock issued for land $ - $800,000
Common stock issued for related party
payable $ - $232,018
</TABLE>
F-13
<PAGE>
EMB CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(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 March 31, 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 March 31, 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 six
months ended March 31, 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-14
<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.................................................................... 2
The Company................................................................ 2
Selling Stockholder and Plan of Distribution............................... 3
Use of Proceeds............................................................ 3
Risk Factors............................................................... 3
Capitalization............................................................. 10
Management's Discussion and Analysis of Financial Condition and
Results of Operations..................................................... 10
Market Price............................................................... 13
Dividends.................................................................. 13
Business................................................................... 13
Management................................................................. 21
Principal Stockholders..................................................... 25
Conflicts of Interest...................................................... 26
Description of Capital Stock............................................... 27
Legal Proceedings.......................................................... 28
Legal Matters.............................................................. 28
Experts.................................................................... 28
Additional Information..................................................... 28
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:
<TABLE>
<CAPTION>
<S> <C>
*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
=======
</TABLE>
- -------------
* 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 821,825
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 April 30,
1997, warrants covering 72,250 shares were exercised at $2.00 per share for a
total of $144,500.
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.
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").
10(l) Master Commitment to Purchase Jumbo and Conforming Residential
Mortgages dated January 1, 197, 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.
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, and the three months ended December 31,
1996, which are incorporated by reference herein.
16 Letter on changes in certifying accountant is incorporated by
reference to Exhibit 16 of Amendment No. 1 to the Form 10-SB of the
Registrant.
II-2
<PAGE>
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 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 March 31, 1997 is incorporated by
reference to the Form 10-QSB of the Registrant for the fiscal quarter
ended March 31, 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.
(b) 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
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-3
<PAGE>
(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 June 2, 1997.
Registrant: EMB CORPORATION
By: /s/ James E. Shipley
---------------------------------
James E. Shipley, President
POWER OF ATTORNEY
Each person whose signature appears below hereby constitutes and
appoints James E. Shipley and B. Joe Wimer and each of them, each with full
power to act without the other, his true and lawful attorneys-in-fact and
agents, each with full power of substitution and resubstitution, for him and in
his name, place and stead in any and all capacities, to sign any and all
amendments (including post-effective amendments) to this Registration Statement,
and any registration statement relating to the same offering as this
Registration statement that is to be effective upon filing pursuant to Rule
462(b) under the Securities Act of 1933, and to file the same, with all exhibits
thereto, and other documents in connection therewith, with the Securities and
Exchange Commission, granting unto each of said attorneys-in-fact and agents
full power and authority to do and perform each and every act and thing
requisite and necessary to be done in and about the premises, as fully to all
intents and purposes as he might or could do in person, hereby ratifying and
confirming all that each of said attorneys-in-fact and agents, or his substitute
or substitutes, may lawfully do or cause to be done by virtue hereof.
Date: June 2, 1997
By: /s/ Bruce J. Brosky /s/ William V. Perry
------------------------------------- ----------------------------------
Bruce J. Brosky William V. Perry
Director and Vice President-Marketing Director and Executive Vice
and Public Relations President
/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
II-5
<PAGE>
EXHIBIT 10(m)
PROVIDER FINANCIAL SERVICES, INC.
1061 FLAMINGO ROAD, SUITE 11
LAS VEGAS, NEVADA 89119
March 12, 1997
EMB Mortgage Corporation
575 Anton Boulevard
Suite 200
Costa Mesa, California 92626
Gentlemen
The purpose of this letter is to enter into an agreement formalizing a
relationships hereby under which Provider Financial Services, Inc. ("Provider"),
a Nevada corporation, would acquire from EMB Mortgage Corporation ("EMB") the
exclusive rights for the next ten years to develop the market and establish
distribution in the State of Washington for mortgages and mortgage related
services provided by EMB Mortgage corporation. As indicated in prior
correspondence with representatives of EMB, provider Financial is willing to
withdraw its application and release EMB from any prior intended commitment
expressed or implied with respect to the State of Nevada and acknowledge the
value of such marketing rights in Washington to be $400,000.00.
In furthering this objective, Provider Financial Services, Inc. proposes to
perform the following in connection with EMB products for the State of
Washington:
1) brokering loans to EMB
2) acting in the interests of EMB to establish net branch offices
and other outlets to secure originators submitting applications
for loans to EMB
3) distributing agent for EMB for sale or lease of Proshare
computer systems loaded with M.A.X. proprietary software to
parties as originators of loan applications to EMB.
In performing all of the above, provider would be acting as exclusive
representative for EMB Mortgage Corporation in Washington. The basic
compensation arrangement with respect to mortgage origination is that EMB
retains all Service Release Premiums and the first 12?? Basis points (1/8th of
1%) of such mortgages with Provider retaining all processing fees and remainder
of moneys earned on pricing. Payment for the performance of other services on
behalf of EMB are to be negotiated on a case by case basis. Although this
agreement is deemed effective upon execution hereof, the final arrangements
would be subject to meeting certain conditions subsequent attached hereto as
Attachment A, including the licensing of EMB's mortgage brokering activities in
Washington, which EMB will diligently pursue with the assistance and cooperation
of Provider.
Payment by Provider to EMB for the aforementioned exclusive rights to
the State of Washington shall be in the form of a Promissory Note in the
principal amount of $400,000.00 in the form and manner attached and incorporated
by this reference. This note is due and payable on or before August 31, 1997,
however, all deposits and payments made to EMB by Provider through Alliance
financial Services in connection with Provider's option to secure the subject
rights shall be credited against the payment of said Note, upon proper
accounting, within sixty days after execution of this Letter Agreement.
If the foregoing is acceptable to you, please so indicate as provided
below and return a copy to me at the above address so we may begin in earnest to
accomplish our goals.
Thank you for this opportunity to create a team in Washington that will
work for the benefit of all concerned.
Sincerely,
Provider Financial Services, Inc.
By:/s/ George Roth
----------------------------------
George Roth, President
<PAGE>
EXHIBIT 10(m)
ACCEPTED:
EMB Mortgage Corporation
By:/s/ William V. Perry
---------------------------------
II-2
<PAGE>
EXHIBIT 10(m)
ATTACHMENT A
------------
1. EMB shall pay all expenses required to become licensed as a mortgage
lender in the State of Washington.
2. EMB will supply Provider with all necessary for Provider to operate as a
mortgage broker in the State of Washington, at EMB's cost.
II-3
<PAGE>
EXHIBIT 10(m)
PROMISSORY NOTE
---------------
$400,000.00 Las Vegas, Nevada
March 12, 1997
FOR VALUE RECEIVED, the undersigned, a Nevada corporation, promises to pay to
EMB MORTGAGE CORPORATION, or order, the principal sum of $400,000.00, together
with interest on the outstanding balance of such principal sum computed at the
rate of eight percent (8%) per annum from date hereof.
The principal balance, together with all accrued interest thereon, shall be
due and payable, in full, on August 31, 1997.
There shall be no penalty for prepayment of principal at any time following
the date hereof.
If this Note is not paid in full when it becomes due, Maker agrees to pay all
costs and expenses of collection, including reasonable attorney's fees.
PROVIDER FINANCIAL SERVICES, INC.
A Nevada corporation
by:/s/ George Roth
--------------------------------
George Roth, President
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use in the Amendment No. 1 to Form SB-2 of our report
dated February 11, 1997, relating to the financial statements of EMB Corporation
(formerly called Pacific International, Inc.), which is contained therein.
/s/ Harlan & Roettger, LLP
San Diego, California
June 2, 1997
<PAGE>
EXHIBIT 23.2
CONSENT OF LEGAL COUNSEL
We hereby consent to the use of our name in Amendment No. 1 to the Form SB-2
registration statement of EMB Corporation.
Oklahoma City, Oklahoma STEPHEN A. ZRENDA, JR., P.C.
June 2, 1997
By: /s/ Stephen A. Zrenda, Jr.
--------------------------
Stephen A. Zrenda, Jr.
