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As filed with the Securities and Exchange Commission on February 13, 1997
33-
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
-----------------------
FORM SB-2
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
---------------------------
EMB CORPORATION
(Name of small business issuer in its charter)
HAWAII 6162 95-3811580
(State or other jurisdiction of (Primary Standard (I.R.S. Employer
incorporation or organization) Industrial Classification Identification No.)
Code Number)
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575 ANTON BOULEVARD 575 ANTON BOULEVARD JAMES E. SHIPLEY, PRESIDENT
SUITE 200 SUITE 200 EMB CORPORATION
COSTA MESA, CALIFORNIA 92626 COSTA MESA, CALIFORNIA 92626 575 ANTON BOULEVARD
(714) 437-0715 (Address of principal place of business SUITE 200
(Address and telephone number or intended principal place of business) COSTA MESA, CALIFORNIA 92626
of principal executive offices) (714) 437-0715
(Name, address and telephone
number, of agent for service)
</TABLE>
---------------------------
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. [ ]
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==================================================================================================
CALCULATION OF REGISTRATION FEE
- --------------------------------------------------------------------------------------------------
Title of each class of Dollar Proposed maximum Proposed maximum Amount of
securities to be Amount to be offering price aggregate offering registration
registered registered per unit(1) price(1) fee
- --------------------------------------------------------------------------------------------------
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Common Stock,
no par value $10,335,938 $3.06 $10,335,938 $3,132.10
==================================================================================================
</TABLE>
(1) Estimated solely for the purpose of calculating the registration fee
pursuant to Rule 457(c), based on the average of the closing bid and ask
prices per share of the Common Stock in the over-the-counter (EBB) market
on February 7, 1997.
-------------------------------
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.
- --------------------------------------------------------------------------------
<PAGE>
EMB CORPORATION
CROSS REFERENCE SHEET SHOWING LOCATION
IN PROSPECTUS OF INFORMATION REQUIRED BY ITEMS IN PART I OF FORM SB-2
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ITEM IN PART I OF FORM SB-2 LOCATION IN PROSPECTUS
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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; Investment
Considerations; Business
4. Use of Proceeds................................................ Not Applicable
5. Determination of Offering Price................................ Front Cover Page; Investment
Considerations
6. Dilution....................................................... Investment Considerations
7. Selling Security Holders....................................... Selling Stockholder
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........................... Experts
14. Disclosure of Commission Position on Indemnification for
Securities Act Liabilities................................. Management-Indemnification of
Directors and Officers
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...... Business-Changes in and
and Financial Disclosure................................... Disagreements with Accountants
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i
<PAGE>
SUBJECT TO COMPLETION, DATED FEBRUARY 13, 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. SAG 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 SAG will receive
any proceeds from the transfer of the shares by the Selling
Stockholder.
The Company has an interactive software system for the
origination and processing of mortgage loans which it calls Mortgage
Approval Xpress, 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. The Company also independently originates and processes
mortgage loans, and intends to engage in the secondary placement of
real estate mortgages. See "Business".
The Company's Common Stock is traded in the over-the-counter
market (electronic bulletin board) with the reported price
quotations under the trading symbol EMBU. On February 3, 1997, the
closing bid and asked prices of a share of the Common Stock of the
Company was $3.25 and $3.437 respectively. See "Market Price".
------------------------
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
575 Anton Boulevard
Suite 200
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 all of the issued and outstanding capital stock of
Electronic Mortgage Corporation ("EMB"), a California corporation (formerly
named Electronic Mortgage Banc, Ltd.), certain real property, and other
assets, and to assume certain liabilities, from Sterling Alliance Group, Ltd.
("SAG") in exchange for 3,375,000 shares of the Common Stock of the Company
which presently represents approximately 58.3% 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 engaged in mortgage lending and in the business of
originating, processing and marketing mortgage loans, and is engaged in the
continuing development and marketing of its interactive mortgage software
system. See "Business".
THE OFFERING
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<S> <C>
Common Stock presently outstanding............. 5,792,801 Shares(1)
Common Stock to be outstanding after offering.. 5,792,801 Shares(1)
Current trading symbol......................... EMBU
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- -----------------------
(1) Does not include outstanding warrants to purchase 126,750 shares of
Common Stock that are issued and outstanding as of January 31, 1997.
SUMMARY FINANCIAL INFORMATION
The following table sets forth summary consolidated financial data and
other operating data of the Company as of and for the two fiscal years ended
September 30, 1996, which have been derived from the audited financial
statements of the Company. See "Financial Statements".
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, 1995 and September
30, 1996, are derived from the financial statements of the Company audited by
Harlan & Boettger, independent accountants. This information should be read
in conjunction with the financial statements the notes thereto set forth
elsewhere in the Prospectus.
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<CAPTION>
Fiscal year ended September 30,
-------------------------------
1996 1995
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<S> <C> <C>
STATEMENT OF OPERATIONS:
Net sales $ 276,419 $ 97,400
Cost of sales $ 29,636 $ --
Gross profit $ 246,783 $ 97,400
Operating expenses $ 2,821,300 $ 534,480
</TABLE>
2
<PAGE>
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<S> <C> <C>
Loss from operations $(2,643,198) $ (437,080)
Other income (expense), $( 67,081) $ 7,825
net
Loss before income taxes $(2,641,598) $ (429,255)
Income taxes $ 1,600 $ 800
Net loss $(2,643,198) $ (430,055)
Loss per share $( .73) $(.29)
Weighted average shares 3,641,421 1,469,225
outstanding
</TABLE>
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<CAPTION>
SEPTEMBER 30, 1996
------------------
(audited)
<S> <C>
Balance Sheet Data:
Working capital $ (395)
Total assets $ 1,190,479
Total long-term debt and capital lease obligations $ 95,096
Total shareholders' equity $ 501,600
</TABLE>
USE OF PROCEEDS
The Company and Sterling Alliance Group, Ltd. will not receive any
proceeds from the transfer or sale of the Common Stock offered hereby.
INVESTMENT CONSIDERATIONS
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".
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 the
development of its mortgage software system, 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".
COSTS OF CONDUCTING BUSINESS. The Company will be required to incur
substantial costs in the acquisition of computer and videoconferencing
equipment, computer software and hardware, terminals and related equipment. A
substantial portion of those costs must be paid whether or not its system proves
to be commercially successful on a broad scale. The ability to generate a profit
depends, among other factors, on the amount of equipment acquisition costs
incurred, the amount of revenues from the licensing of its software system and
mortgage services rendered by the Company, and its operating costs.
LICENSING. The Company licenses its mortgage software system to
others. Although the Company will establish criteria for the evaluation of
prospective licensees, there is no assurance that the Company will be successful
in attracting suitable licensees or that they will have the business abilities
or financial resources necessary to fully utilize the services, or to
successfully operate in their market.
COMPETITION. The mortgage software business is expected to become
highly competitive. Companies in the industry may have substantially greater
financial, marketing, and technical resources than the Company. Further, the
entry into this industry does not necessarily require a large capital
expenditure and, accordingly, it can be expected that additional competitors
3
<PAGE>
may enter the industry in the future. It may be particularly difficult for a
relatively small independent company to compete with larger companies which
have significantly greater resources. There can be no assurance that the
Company will be able to successfully compete if such an environment develops.
TECHNOLOGICAL CHANGE AND LACK OF PATENTS. The Company expects that
many new technologies and products will be introduced in the computer software
and services markets over the next several years. The Company's success will
depend, among other things, on its ability to maintain a competitive position
technologically. The Company has not developed its own proprietary software
and hardware and is depending primarily upon others for development of such
software and hardware. There can be no assurance that the Company will have
access to subsequently developed software by other persons. Technological
advances by a competitor may result in the Company's present or future
products becoming noncompetitive or obsolete. The Company cannot be assured
that competitors will not develop functionally similar or superior systems,
which event could have an adverse effect on the Company's business.
Management of the Company is considering the possibility of developing,
alone and jointly with others, software and hardware systems for additional
applications. No final decision to proceed with such development has been
made. There can be no assurance that the Company will undertake the
development of any such systems or, if undertaken, that the systems will be
functional or profitable. See "Business".
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."
LACK OF CONTRACTS. The Company has only entered into a limited number
of contracts for its mortgage software. There can be no assurance that the
Company will be able to obtain sufficient and suitable additional contracts
for its business plan.
DEPENDENCE ON KEY PERSONNEL. The success of the Company is largely
dependent on the efforts of James E. Shipley, the Company's Chief Executive
Officer and President, and of Rory P. Hughes, the Vice President-Research and
Development of the Company. Their loss would be detrimental to the Company
because the specialized nature of the Company's business requires highly
trained personnel.
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 or software 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.
4
<PAGE>
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 intends to arrange for 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.
RISKS RELATING TO SOFTWARE AND LICENSES
FLUCTUATIONS IN OPERATING RESULTS. The Company's revenues and results
of operations have varied on a quarterly and an annual basis in the past and
are expected to vary significantly in the future. The Company's revenues and
results of operations are difficult to forecast and could be materially
adversely affected by many factors, some of which are outside the control of
the Company, including, among others, the expected relatively long sales and
implementation cycles for the Company's software products; the size and timing
of individual license transactions; seasonality of revenues; changes in the
Company's operating expenses; changes in the mix of products and services
sold; timing of introduction or enhancement of products by the Company or its
competitors; market acceptance of new products; technological changes in
software technology; personnel changes and difficulties in attracting and
retaining qualified sales, marketing, technical and consulting personnel;
changes in customers' budgeting cycles; foreign currency exchange rates;
quality control of products sold; and economic conditions generally and in
specific industry segments.
The Company's business has experienced and is expected to continue to
experience seasonality, in part due to customer residential real estate buying
patterns and the Company's expense patterns. The Company has generally had
stronger demand for its products during the spring and summer and has incurred
higher personnel costs in the quarter ending December 31. The Company
believes that these patterns will continue for the foreseeable future.
Licenses of the Company's software products have historically accounted
for a material portion of the Company's revenues, and this trend may continue
for the foreseeable future. The Company generally ships its products within a
short period of time after execution of a license. As a result, the Company
typically does not have a material backlog of unfilled license orders, and
revenues in any quarter are substantially dependent on license revenues
recognized in that quarter. The Company's expense levels are based, in part,
on its expectations as to future revenues and to a large extent are fixed in
the short term. Accordingly, the Company may be unable to adjust spending in
a timely manner to compensate for any unexpected shortfall in revenues, and
any significant shortfall of demand in relation to the Company's expectations
or any material delay of customer orders would have an almost immediate
material adverse effect on the Company's business, financial condition or
results of operations.
As a result, it is likely that in some future period the Company's
results of operations could fail to meet the expectations of public market
analysts or investors. In such event, or in the event that adverse conditions
prevail or are perceived to prevail generally or with respect to the Company's
business, the price of the Company's Common Stock would likely drop
significantly.
LENGTHY SALES AND IMPLEMENTATION CYCLES. The license of the Company's
software products generally requires the Company to engage in a sales cycle
lasting three to six months or longer, during which the Company typically
provides a significant level of education to prospective customers regarding
the use and benefits of the Company's products. In addition, the
implementation of the Company's standard products typically involves a
significant commitment of resources by its customers over an extended period
of time and is commonly associated with reengineering of business processes.
For these reasons, sales and customer implementation cycles are subject to a
number of significant delays over which the Company may have little or no
control. Accordingly, any delay in the sale or customer implementation of a
larger license or a number of smaller licenses would
5
<PAGE>
have a material adverse effect on the Company's business, financial condition
or results of operations and cause the Company's operating results to vary
significantly from quarter to quarter.
RELIANCE ON ACCEPTANCE OF MORTGAGE SOFTWARE SOLUTION. The Company's
future financial performance will depend to a material extent on the growth in
the number of organizations adopting mortgage software solutions and engaging
outside vendors to provide and maintain such solutions. The Company's future
growth, if any, will also depend upon the extent to which such organizations
choose to implement EMB solutions in general, and the Company's EMB solutions
in particular, across their enterprises and on their continued reliance on the
Company's subscription, maintenance and support offerings. Because the
mortgage software market is new and evolving, it is difficult to assess or
predict with any assurance its size or growth rate, if any. There can be no
assurance that the market for EMB products and services will develop, or that
the Company's products or services will achieve market acceptance. If the
mortgage software market fails to develop, develops more slowly than expected
or attracts new competitors, or if the Company's products do not achieve
broader market acceptance, the Company's business, financial condition or
results of operations could be materially and adversely affected.
DEPENDENCE ON RECENTLY INTRODUCED PRODUCTS. The Company currently
derives a material portion of its revenues from the licensing of its M.A.X.
software and fees from related services. These products and services are
expected to continue to account for a substantial portion of the Company's
revenues for the foreseeable future. The Company first made its M.A.X.
software generally commercially available in the second quarter of 1995, and
has issued regular updates since then. As a result, the Company has only a
limited number of fully implemented, operational product installations at
customer sites. There can be no assurance that such products will not require
modifications to satisfy performance requirements of existing or potential
customers or to fix previously undetected errors. While the Company believes
that to date its customers have not experienced significant problems with such
products, if the Company's customers were to do so in the future or if they
were dissatisfied with product functionality or performance, the Company's
business, financial condition or results of operations could be materially
adversely affected.
There can be no assurance that the Company's products will achieve
broader market acceptance or that the Company will be successful in marketing
its products or enhancements thereto. In the event that the Company's current
or future competitors release new products that have more advanced features,
offer better performance or are more price competitive than the Company's
products, demand for the Company's products would decline. A decline in
demand for, or market acceptance of, the M.A.X. software as a result of
competition, technological change, evolution of the Internet or other factors
would have a material adverse effect on the Company's business, financial
condition or results of operations.
MANAGEMENT OF EXPANDING OPERATIONS. The Company's business has grown
rapidly in recent periods. In addition, the Company has experienced
significant growth in the number of its employees, the scope of its operating
and financial systems and the geographic area of its operations, which has
placed a significant strain on the Company's management and cash flow. The
Company's future results of operations will depend in part on the ability of
its officers and other key employees to continue to implement and expand its
operational, customer support and financial control systems and to expand,
train and manage its employee base. In order to successfully manage its
future growth, if any, the Company will be required to hire additional general
and administrative personnel and to augment its existing financial and
management systems or to implement new such systems. There can be no
assurance that the existing and new management will be able to augment or to
implement such systems efficiently or on a timely basis, and the failure to do
so could have a material adverse effect on the Company's business, financial
condition or results of operations. There can be no assurance that the
Company will be able to manage any future expansion successfully, and any
inability to do so would have a material adverse effect on the Company's
business, financial condition or results of operations. In addition, the
Company believes that its future success will also depend to a significant
extent upon its ability to attract, train and retain highly skilled technical,
management, sales, marketing and consulting personnel. Competition for such
personnel is intense, and the Company expects that such competition will
continue for the foreseeable future. The Company has from time to time
experienced difficulty in locating candidates with appropriate qualifications.
There can be no assurance that the Company will be successful in attracting or
retaining such personnel, and the failure to attract or retain such personnel
could have a material adverse effect on the Company's business, financial
condition or results of operations.
CUSTOMER CONCENTRATION. Historically, a relatively small number of
customers has accounted for a significant percentage of the Company's total
revenues, and the Company expects that it will continue to experienced
significant customer concentration for the foreseeable future. There can be
no assurance that such customers or any other customers will in the future
continue to license or purchase products or services from the Company at
levels that equal or exceed those of prior periods, or at all.
6
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RELIANCE ON COMPUTER INDUSTRY; NEED TO PENETRATE NEW VERTICAL MARKETS.
Currently, a substantial part of the Company's revenues results from licenses
of the M.A.X. mortgage software to end user customers in the real estate
industry. The Company's future results of operations may depend, in part, on
its ability to penetrate new vertical markets, such as the financial
institution market. The Company may devote substantial resources to penetrate
these markets, and there can be no assurance that the revenues generated from
new markets, if any, will exceed the cost of such investment. To the extent
that the Company is unable to penetrate new markets, its future financial
condition will be dependent upon its ability to further penetrate the mortgage
industry and on the continued growth of that industry. If the Company expands
its software product lines to market segments other than the mortgage
industry, it could be required to create entirely software systems or to
modify its existing software products, and there can be no assurance that it
will be able to create such systems or modify such software products
effectively or that such software products, if successfully created or
modified, will achieve market acceptance. If the Company is unable to adapt
its products or its sales and marketing efforts to meet the needs of new
industries, the Company's business, financial condition or results of
operations could be materially adversely affected.
COMPETITION. The market for the Company's products is competitive,
subject to rapid change and significantly affected by new product
introductions and other market activities of industry participants. The
Company's products are targeted at the emerging market for open software
solutions, and the Company's competitors offer a variety of products and
services to address this market. Further, the Company currently faces
indirect competition from third-party professional service organizations and
internal management information systems and computer-aided design departments
of potential customers that develop custom internal software.
In the future, because there are relatively low barriers to entry in
the software industry, the Company could experience additional competition
from other established or emerging companies as the mortgage software market
continues to develop and expand. To the extent that the Company expands into
Internet-based or other forms of delivery of information, the Company may
encounter additional competition from its existing competitors and other
established or emerging companies. Many of these potential competitors have
well-established relationships with the Company's current and potential
customers, have extensive knowledge of the industry, better name recognition
and significantly greater financial, technical, sales, marketing and other
resources and are capable of offering single vendor solutions which span
multiple industries. It is also possible that new competitors or alliances
among competitors may emerge and rapidly acquire significant market share.
The Company also expects that competition will increase as a result of
software industry consolidations. The Company's competitors may be able to
respond more quickly to new or emerging technologies and changes in customer
requirements, or to devote greater resources to the development, promotion and
sale of their products.
Increased competition could result in price reductions, reduced gross
margins and loss of market share, any of which could have a materially adverse
affect on the Company's business, financial condition or results of
operations. There can be no assurance that the Company will be able to
compete successfully against current or future competitors or that competitive
pressure will not materially and adversely affect its business, financial
condition or results of operations. See "Business".
DISTRIBUTION RISKS. An integral part of the Company's strategy is to
expand its direct sales force and to establish marketing, selling and
consulting relationships both domestically and internationally. In addition,
the Company intends to leverage its relationships with hardware and software
vendors and systems integrators to encourage these parties to recommend or
distribute the Company's products. The Company has invested resources and may
invest additional resources to develop these channels. The ability of the
Company to achieve revenue growth in the future will depend in part on its
success in adding a substantial number of direct sales employees and
establishing marketing, selling and consulting relationships during 1997 and
future periods. There can be no assurance that the Company will be able to
attract sufficient direct sales personnel, hardware and software vendors,
systems integrators or other marketing or selling partners to market the
Company's products and services effectively. There can be no assurance that
the cost of the Company's investment in direct and indirect sales channels
will not exceed the revenues generated from such investment, if any, or that
the Company's sales and marketing organization will successfully compete
against the sales and marketing organizations of the Company's competitors.
DEPENDENCE ON RELATIONSHIPS WITH COMPLEMENTARY VENDORS. The Company
believes that, in order to provide competitive mortgage software services, it
will be necessary to develop, maintain and enhance close associations with
hardware, software and professional service companies. The Company has
established marketing, selling and consulting relationships with such vendors,
but there can be no assurance that the Company will be able to maintain its
existing relationships or enter into new relationships with such vendors. The
Company's failure to maintain or establish these relationships could
materially adversely affect the compatibility and integration of the Company's
products with the products and services offered by complementary
7
<PAGE>
vendors. In addition, the failure to maintain or establish these
relationships could materially adversely affect the Company's ability to
leverage third party distribution channels and increase its market presence.
Further, the Company may in the future face competition from other mortgage
service companies, and there can be no assurance that these companies, many of
which have significantly greater resources than the Company, will not market
software in competition with the Company or will not otherwise reduce or
discontinue their relationships with or support of the Company and its
products. See "Business-Strategic Relationships".
INTERNATIONAL SALES. In fiscal 1996, the Company had no international
sales. There can be no assurance that the Company will achieve any
significant degree of penetration in any international market.
There are a number of risks inherent in the Company's possible
international business activities, including unexpected changes in regulatory
requirements, tariffs and other trade barriers, costs and risks of localizing
products for foreign countries, longer accounts receivable payment cycles,
potentially adverse tax consequences, repatriation of earnings and the burdens
of complying with a wide variety of foreign laws. International sales are
denominated and collected in both U.S. and foreign currency. Accordingly, a
portion of the Company's international revenues will be subject to currency
fluctuation risks. In those jurisdictions in which the Company's sales are
denominated in foreign currency, fluctuations in such currencies could
adversely affect the Company's business, financial condition or results of
operations. Further, an increase in the value of the U.S. dollar relative to
foreign currencies could make the Company's services more expensive and,
therefore, potentially less competitive in those markets where the Company's
sales are denominated in U.S. dollars. The Company to date has not engaged in
any foreign currency hedging activities. In addition, the Company's revenues
earned in various countries where the Company does business may be subject to
taxation by more than one jurisdiction, thereby adversely affecting the
Company's earnings. There can be no assurance that such factors will not have
an adverse effect on the revenues from the Company's future international
sales and, consequently, the Company's business, financial condition or
results of operations.
NEED TO DEVELOP NEW SOFTWARE PRODUCTS AND ENHANCEMENTS. The market for
the Company's mortgage software products is characterized by rapid
technological change, changing customer requirements, frequent new product
introductions and evolving industry standards. The introduction of products
incorporating new technologies and the emergence of new industry standards
could render existing software obsolete or unmarketable. The life cycles of
the Company's software products are difficult to estimate. The Company's
future success will depend in large part upon its ability to enhance its
current mortgage software products and to develop and introduce on a timely
basis new products that keep pace with technological developments and emerging
industry standards and address the increasingly sophisticated needs of its
customers. The success of the Company's software development efforts will
depend on various factors, including the integration of additional software
modules under development with existing products. There can be no assurance
that the Company will be successful in developing and marketing software
enhancements or new products that respond to technological change or evolving
industry standards, that the Company will not experience difficulties that
could delay or prevent the successful development, introduction or marketing
of these products, or that the Company's new products and software
enhancements will adequately address the requirements of the marketplace and
achieve market acceptance. If the Company is unable to develop and introduce
new software products or enhancements of existing products in a timely manner
or if the Company experiences delays in the commencement of commercial
shipments of new products and enhancements, the Company's business, financial
condition or results of operations could be materially adversely affected.
RISK OF PRODUCT DEFECTS. Software products as complex as those offered
by the Company frequently contain undetected errors or failures when first
introduced or when new versions are released. The Company has in the past
discovered software bugs and errors in certain of its products and
enhancements, both before and after initial shipment. There can be no
assurance that, despite testing by the Company and by current and potential
customers, errors will not occur in products, or releases after commencement
of commercial shipments, resulting in loss of or delay in market acceptance,
which could have a material adverse effect upon the Company's business,
financial condition or results of operations.
RISKS ASSOCIATED WITH EMERGING INTERNET MARKET. A portion of the
Company's strategy is to utilize the Internet and the World Wide Web to
provide access to its mortgage services, as well as to additional value-added
content. The Company may devote resources to developing products designed for
use with the Internet and the World Wide Web, and there can be no assurance
that the revenues generated, if any, from the use of the World Wide Web will
be greater than the costs of developing and modifying products for such use.
Further, the Company's solutions may be rendered obsolete by or become less
valuable in comparison to competitive solutions made possible by future
development of the World Wide Web. If this were to occur, the Company's
business, financial condition or results of operations would be materially
adversely affected.
8
<PAGE>
DEPENDENCE ON PROPRIETARY AND LICENSED TECHNOLOGY. The Company's
success is heavily dependent upon proprietary technology. The Company relies
primarily on a combination of copyright and trademark laws, trade secrets,
confidentiality procedures and contractual provisions with its employees,
consultants and business partners and in its license agreements to protect its
proprietary rights. The Company may seek to protect its software,
documentation and other written materials under trade secret and copyright
laws, which afford only limited protection. Despite the Company's efforts to
protect its proprietary rights, unauthorized parties may attempt to copy
aspects of the Company's products or to obtain and use information that the
Company regards as proprietary.
While the Company is not aware that any of its software infringes upon
the proprietary rights of third parties, there can be no assurance that third
parties will not claim infringement by the Company with resect to current or
future products. The Company expects that it may increasingly be subject to
infringement claims as the number of products and competitors in the Company's
industry segment grows and the functionality of products in different industry
segments overlaps. Any such claims, with or without merit, could be time-
consuming, result in costly litigation, cause product shipment delays or
require the Company to enter into royalty or license agreements. Such royalty
or licenses agreements, if required, may not be available on terms acceptable
to the Company or at all, which could have a material adverse effect upon the
Company's business, financial condition or results of operations.
In addition, the Company relies on certain software that it licenses
from third parties, including software that is used in the Company's products
to perform certain functions. There can be no assurance that such firms will
remain in business, that they will continue to support their products or that
their products will otherwise continue to be available to the Company on
commercially reasonable terms. The loss of or inability to maintain any of
these software or data licenses could result in delays or cancellations in
product shipments until equivalent software or data can be identified and
licensed or developed and integrated with the Company's products. Any such
delay or cancellation could have a materially adverse affect on the Company's
business, financial condition or results of operations.
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 and number of mortgage loans made by the Company would materially
increase the risk of an investment in the Common Stock.
9
<PAGE>
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 Insurance Corporation.
These institutions do not provide the seller's typical representations against
fraud and misrepresentation. The Company intends to acquire third party
insurance, to the extent that it is available at a reasonable price, for such
risks. In the event the Company is unable to acquire such insurance, the
Company would be relying solely on the value of the collateral underlying the
mortgage loans. Accordingly, the Company will be subject to a greater risk of
loss on obligations purchased from these institutions.
ABILITY TO ACQUIRE MORTGAGE ASSETS AT FAVORABLE SPREADS RELATIVE TO
BORROWING COSTS. The Company's net income from mortgage lending will depend
largely on the Company's ability to acquire mortgage assets at favorable
spreads over the Company's borrowing costs. The Company may purchase mortgage
assets from a variety of mortgage bankers, banks, savings and loans,
investment banking firms, home-builders and other firms involved in
originating, packaging and underwriting mortgage loans ("Mortgage Suppliers").
In acquiring mortgage loans, the Company will compete with REITs, investment
banking firms, savings and loan associations, banks, mortgage bankers,
insurance companies, mutual funds, other lenders, GNMA, FNMA, FHLMC and other
entities purchasing mortgage loans, many of which have greater financial
resources than the Company. There are numerous entities that invest in
mortgage loans and others may be organized in the future. The effect of the
existence of additional entities that invest in mortgage loans may be to
increase competition for the available supply of mortgage loans suitable for
purchase by the Company. There can be no assurance that the Company will be
able to acquire sufficient mortgage loans from Mortgage Suppliers at spreads
above the Company's cost of borrowings. In addition, there can be no
assurance that Mortgage Suppliers will continue to originate suitable types of
mortgage loans or that changes in market conditions or applicable laws will
not affect the availability of suitable mortgage loans.
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
10
<PAGE>
guaranteed by the United States government or an agency of the United States
government, such securities generally are structured with one or more types of
credit enhancement. Such forms of credit enhancement are structured to
provide protection against risk of loss due to default on the underlying
mortgage loan, or bankruptcy, fraud and special hazard losses, such as
earthquakes. Typically, third parties insure against these types of losses,
and the Company would be dependent upon the credit worthiness of the insurer
for credit-rating, claims paying ability of the insurer and timeliness of
reimbursement in the event of a default on the underlying obligations.
Furthermore, the insurance coverage for various types of losses is limited in
amount, and losses in excess of the limitation would be the responsibility of
the Company.
The Company may also purchase mortgage loans issued by GNMA, FNMA or
FHLMC. Each of these entities provides guarantees against risk of loss for
securities issued by it. In the case of GNMA, the timely payment of principal
and interest on its certificates is guaranteed by the full faith and credit of
the United States government. FNMA guarantees the scheduled payments of
interest and principal and the full principal amount of any mortgage loan
foreclosed or liquidated on its obligations. FHLMC guarantees the timely
payment of interest and ultimate collection of principal on its obligations,
while with respect to certificates issued by FNMA and FHLMC, payment of
principal and interest of such certificates are guaranteed only by the
respective entity and not by the full faith and credit of the United States
government.
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.
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.
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<PAGE>
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.
USURY LAWS. The amount of interest payable by the 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 will use licensed real estate
brokers to arrange the mortgage loans so that no violation of the applicable
usury law would take place. Additionally, if any employee or director of the
Company or its subsidiaries is a licensed real estate broker in the State of
California, the Company may use such person to arrange all or a portion of the
mortgage loans to qualify for the usury exemption.
The consequences for failing to abide by the usury law include
forfeiture of all interest payable on the loan, treble damages with respect to
excessive interest actually paid, and criminal penalties. The Company
believes that because of the applicable exemptions and the provisions of
California Civil Code 1917.005 exempting lenders who originate loan
transactions from the California usury laws, no violation of the California
Usury Law will occur. The Company shall attempt to rely on similar exemptions
in other states if necessary but there is no guarantee that it will be able to
do so.
BANKRUPTCY OF A BORROWER. If a borrower enters bankruptcy, either
voluntarily or involuntarily, an automatic stay of all proceedings against the
borrower's property will issue. This stay will prevent the Company or any
trustee from foreclosing on the property securing such borrower's loan until
relief from the stay can be sought from the bankruptcy court. No guaranty can
be given that the bankruptcy court will lift the stay, and significant legal
fees and costs may be incurred in attempting to obtain such relief.
COMPETITION. The Company will face intense competition in the
acquisition and liquidation of its mortgage loans. Such competition can be
expected from banks, savings and loan associations and other entities,
including REITs. Many of the Company's competitors have greater financial
resources than the Company.
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.
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 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 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 will qualify under such
exemptive provisions due to, among other things, the adequacy of disclosure
and the manner of distribution of the offering, similar offerings conducted by
the Company or its affiliates in the past and in the future or the retroactive
change in any securities laws or regulations. If, and to the extent suits for
rescission are brought against the Company and successfully concluded for
failure to register other offerings made by the Company under the Securities
Act of 1933, or for acts or omissions constituting certain prohibited
practices under the Securities Exchange Act
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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 - INDEMNIFICATION. 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 250,000 shares of its Common Stock
(which is presently proposed to be increased to 1,250,000 shares), 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
-------
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".
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).
<TABLE>
<CAPTION>
September 30, 1996
------------------
<S> <C>
Common Stock, no par value:
Authorized, 30,000,000 shares,
Issued and outstanding, 5,311,817 shares....... $ 3,910,391
Preferred Stock, $1.00 par value:
Authorized, 5,000,000 shares,
No shares issued and outstanding............... 0
Total Shareholders' Equity....................... ( 501,600)
-------------
Total Stockholders' Equity............. $ 501,600
=============
</TABLE>
- -----------------------------
(1) Does not include the warrants to purchase up to 126,750 shares at prices
ranging from $2.00 to $3.00 per share upon exercise of outstanding
warrants.
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 as of September 30, 1996 and September 30, 1995 and
the results of its operations for the periods then ended.
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<PAGE>
GENERAL
The Company, formerly called "Pacific International, Inc.", a Hawaii
corporation, was incorporated in 1960, and was originally organized to acquire
and manage developed and undeveloped real estate. However, the Company had not
conducted significant operations for a number of years until it agreed to
acquire substantially all of the assets and assume certain liabilities of
Sterling Alliance Group, Ltd. ("SAG") in December, 1995. Subsequently, the
Company changed its name to EMB Corporation to reflect the change in the purpose
and nature of its business. For accounting purposes, this was treated as a
recapitalization of SAG, with the historical financial information prior to
merger being that of SAG.
There are two primary segments of the mortgage business in which the
activities of the Company will be concentrated, the processing of residential
mortgage loans using a service which the Company calls Mortgage Approval Xpress,
and earnings from mortgages to be originated by the Company. Mortgages
originated by the Company may be held for investment, sold to third parties, or
securitized and issued as mortgage backed securities.
Historically, the Company has used capital contributions and loans from
various individuals to fund its operations. To this point, the Company has not
had adequate funds to actually originate mortgages on its own behalf.
Management believes its unique approach to originating and processing
residential mortgage loans through the use of its MortgageShare software
distinguishes it from other companies in the industry.
There are no assurances that the Company will be able to obtain a
profitable level of operations.
RESULTS OF OPERATIONS
The following table sets forth certain operating information regarding
the Company:
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED
SEPTEMBER 30, 1996 SEPTEMBER 30, 1995
------------------- -------------------
<S> <C> <C>
Revenues from processing
mortgages and product sales....... $ 276,419 $ 97,400
General and administrative expense.. $ 2,790,244 $ 531,818
Depreciation........................ $ 31,056 $ 2,662
Net Loss............................ $ (2,574,517) $(430,055)
</TABLE>
Year ended September 30, 1996 compared with the year ended September 30, 1995
- ------------------------------------------------------------------------------
REVENUES. Revenues increased 184% to $276,419 in 1996 from $97,400 in
1995. Revenues were generated from the loan process segment and product sales.
No income was generated from mortgages originated by the Company. No real estate
was sold during either year.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
increased 425% to $2,790,244 in 1996 from $531,818 in 1995. This increase can be
attributable to increased activity in the loan processing segment of the
business.
DEPRECIATION. Depreciation increased 1,067% to $31,056 in 1996 from
$2,662 in 1995 due to the acquisition of additional computer equipment.
NET LOSS FROM OPERATIONS. The net loss from operations increased 489% to
$2,574,517 in 1996 as compared with $437,080 in 1995 due primarily to the
increase in general and administrative expenses in 1996 over 1995.
14
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CAPITAL EXPENDITURES, CAPITAL RESOURCES AND LIQUIDITY
The following summary table presents comparative cash flows of the
Company for the years ended September 30, 1996 and 1995.
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED
SEPTEMBER 30, 1996 SEPTEMBER 30, 1995
------------------- -------------------
<S> <C> <C>
Net cash used in operating activities...... $ (1,085,286) $ (264,522)
Net cash used in investing activities...... $ (171,644) $ (59,812)
Net cash provided by financing activities.. $ 1,231,254 $ 355,776
</TABLE>
In addition to the above, during fiscal 1996, the Company acquired land
recorded at $800,000 in exchange for capital stock.
CAPITAL EXPENDITURES. The Company has incurred capital expenditures
for equipment and office furniture used in its loan process service. Capital
expenditures during the fiscal years ended September 30, 1996 and 1995 totaled
$96,846 and $6,720 respectively.
The Company intends to finance any future capital expenditures by
utilizing capital lease arrangements with various leasing companies.
CAPITAL RESOURCES. The Company's capital resources have been provided
by capital contributions and loans. The Company intends to raise capital
through an offering of its common stock and warrants which will be used to
purchase additional computers and related equipment, to further develop its
software, to expand its marketing activities, and to provide additional
working capital to fund future operations.
LIQUIDITY. Since October 1, 1995, the Company has increased its
liquidity through the sale of its Common Stock and warrants in its limited
offering made under Rule 504 of Regulation D under the Securities Act of 1933,
as amended. The Company has further extended its liquidity for its mortgage
lending operations by increasing its warehouse line of credit to $3,000,000
with ICI Funding Corporation, a division of Imperial Credit Industries, Inc.
The Company has reduced the amount of its outstanding indebtedness
during fiscal 1996. An undeveloped property continues to be subject to a deed of
trust in the amount of $65,000. However, the notes to related parties payable of
$407,528 have been paid in full, and other notes have been reduced as of
September 30, 1996, by cash payments and by issuance of 465,000 shares of the
Common Stock of the Company to a noteholder.
As of September 30, 1996, the Company has notes payable to unrelated
parties in the total amount of approximately $358,793, including the $65,000
deed of trust amount on its undeveloped land. The Company believes that this
remaining indebtedness will be paid primarily from its cash flow from operations
and from the sale of additional shares of its Common Stock.
MARKET PRICE
Market for Common Equity. The Common Stock of the Company is currently
------------------------
quoted in the over-the-counter market on the Bulletin Board maintained by the
National Association of Securities Dealers, Inc. under the symbol "EMBU".
For several years prior to January 1, 1996, the market price of the
Common Stock of the Company was either nominal or non-existent because the
Company had no substantial assets and had little or no operations. However,
after the Company entered into an acquisition agreement regarding the purchase
of certain assets of Sterling Alliance Group, Ltd. in December 1995, the Common
Stock of the Company began actively trading.
15
<PAGE>
The following table sets forth the range of high and low closing bid
prices per share of the Common Stock as reported by National Quotation Bureau,
Inc. for the periods indicated.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1996: HIGH BID(1)(2) LOW BID(1)(2)
- ----------------------------- -------------- -------------
<S> <C> <C>
1st Quarter......................... $ 21.00 $ 1.00
2nd Quarter......................... $ 15.00 $ 7.50
3rd Quarter......................... $ 12.00 $ 3.25
4th Quarter......................... $ 5.125 $ 2.375
</TABLE>
- ---------------------
(1) The Company is unaware of the factors which resulted in the significant
fluctuations in the bid prices per share during the periods being
presented, although it is aware that there is a very thin market for the
Common Stock, that there are very few shares being traded and that any
sales significantly impact the market.
(2) During September, 1996, the Company effectuated a one for four (1:4)
reverse stock split. The above prices have been revised to reflect this
split.
On February 3, 1997, the closing bid and ask prices of the Common Stock
of the Company were $3.25 bid and $3.437 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 January
31, 1997, there were approximately 11 broker-dealers publishing quotes for the
Common Stock of the Company.
As of January 31, 1997, there were 5,792,801 shares of Common Stock
issued and outstanding which were held by approximately 662 holders of record.
DIVIDENDS
The Company has not paid any dividends on its Common Stock and does not
expect to do so in the foreseeable future. The Company intends to apply its
earnings, if any, in expanding its operations and related activities. The
payment of cash dividends in the future will be at the discretion of the Board
of Directors and will depend upon such factors as earnings levels, capital
requirements, the Company's financial condition and other factors deemed
relevant by the Board of Directors. In addition, the Company's ability to pay
dividends may be limited under future loan agreements of the Company which
restrict or prohibit the payment of dividends.
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.
("SAG") in December 1995, including all of the issued and outstanding capital
stock of EMB Mortgage Corporation (formerly named Electronic Mortgage Banc,
Ltd.)("EMB") which is presently a wholly owned subsidiary of the Company. The
Company changed its corporate name from "Pacific International, Inc." to EMB
Corporation during 1996 to reflect the change in the purposes and nature of
its business.
The Company, through EMB, is primarily engaged in business activities
in the mortgage loan industry. There are two primary segments of the mortgage
business in which the activities of the Company are concentrated. First, EMB
acquired a license from Virtual Lending Technology, Inc. ("VLT"), an affiliate
of the Company, for EMB's proprietary version of its software which is part of
the Company's software system designed for the origination and processing of
residential mortgage loans that it presently calls Mortgage Approval Xpress.
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.
16
<PAGE>
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 SAG which presently represents approximately 58.3% of the issued and
outstanding Common Stock of the Company. See "Principal Stockholders".
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 M.A.X.
software system and continuing evaluation of electronic information gathering
and communication equipment. The Company intends to continue to focus on its
technology and marketing relationship with Intel Corporation. This relationship
has accelerated the development of the Company's software and has enhanced its
marketing program through exhibitions, trade shows and seminars with real estate
brokers, credit unions, residential real estate developers, mortgage brokers,
and others. An objective of the Company is to become a leader in advanced
mortgage software and video communications to facilitate mortgage loans. To the
extent that the Company achieves its objective in this technological area, the
Company believes that it will complement and increase its mortgage lending
business.
LICENSES OF M.A.X. The Company licenses its mortgage software system to
real estate brokerage firms, credit unions, real estate developers, mortgage
brokers and others. EMB presently has approximately 109 licensees and mortgage
brokers who are served by 10 Company loan officers. Each licensee has their own
computer systems with the Company's software and ProShare software with video
videoconferencing capability.
The direct relationship with real estate brokers, credit unions, land
developers and other organizations enables the Company to establish point-of-
sale opportunities to originate and process mortgage loans. The business of the
licensee is improved because of the substantial savings of time and effort in
securing pre-qualification of their customers for mortgage financing and for
prompt loan approvals, and also provides an opportunity to enhance the quality
and timeliness of its services to its customers. Because the mortgage services
of EMB are available seven days a week, the licensees always have on-line access
to current interest rates and fees which can be downloaded at any time to any
computer utilized by a licensee. Similarly, the status of loans and processing
or underwriting can be determined at any time. The borrower or his agent at any
remote site can also utilize 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
17
<PAGE>
fee for additional office sites. The Company also charges an additional
continuing license fee calculated on each loan originated by the licensee equal
to 50% to 70% of the loan origination fee and yield spread pricing of each loan,
depending upon the loan production volume of the licensee's office. The Company
may offer discounts to customers based on the scope of the customer's commitment
and other commercial considerations. Additionally, the Company may in the future
offer new or different configurations at significantly lower or higher prices.
CUSTOMER SERVICE AND SUPPORT. The Company's customer service and
support organization provides customers with technical support, training,
consulting and implementation services. All of the Company's current customers
have software maintenance agreements with the Company that provide for one or
both of the following services:
Customer Education and Training. The Company offers training courses
designed to meet the needs of end users, integration experts and system
administrators. The Company also trains customer personnel who in turn may train
end users in larger deployments. Training classes are provided at the customers'
offices. Fees for education and training services are in addition to and
separate from the fees for software products and are typically charged either
per student and per class, or on a per diem basis.
Software Maintenance and Support. The Company offers telephone,
electronic mail and facsimile customer support through its central technical
support staff at the Company's headquarters. The Company also provides customers
with product documentation and release notes that describe features in new
products, known problems and workarounds, and application notes. Software
product license fees do not cover maintenance. Each customer is entitled to
receive certain software upgrades, maintenance releases and technical support
for an annual fee. The annual subscription service fee for the Company's
products covers all updates and maintenance on an ongoing basis for the term of
the subscription.
SALES AND MARKETING. The Company markets and sells its software and
services primarily through a direct sales force based in Costa Mesa, California.
The Company's sales and marketing organization consisted of 10 employees as of
January 31, 1997. The Company also has regional marketing representatives based
in Florida, Pennsylvania, Texas and Connecticut. To support its sales force, the
Company conducts a number of marketing programs, which includes public
relations, telemarketing, seminars, trade shows and customer advisory board
meetings.
The Company's strategy is to expand its marketing efforts to reach a
broad customer base in its targeted mortgage industry. The Company's field sales
force conducts multiple presentations and demonstrations of the Company's
software to users at the customer site as a part of the direct sales effort.
The Company believes that in order to increase sales opportunities and
profitability, it may expand into international sales. The Company intends to
continue to expand its direct and indirect sales and marketing activities, which
will require significant management attention and financial resources.
The Company may commit significant time and financial resources to
developing international sales and support channels. There will be a number of
risks inherent in the Company's international business activities, including
unexpected changes in regulatory requirements, tariffs and other trade barriers,
costs and risks of localizing products for foreign countries, longer accounts
receivable payment cycles, potentially adverse tax consequences, currency
fluctuations, repatriation of earnings and the burdens of complying with a wide
variety of foreign laws. In addition, revenues of the Company earned in various
countries where the Company does business may be subject to taxation by more
than one jurisdiction, thereby adversely affecting the Company's earnings. There
can be no assurance that such factors will not have an adverse effect on the
revenues from the Company's future international sales and, consequently, the
Company's business, financial condition or results of operations.
The Company licenses its software system to customers pursuant to
license agreements which are generally standard in form, although each license
is individually negotiated and may contain variations. The standard form
agreements allow the customer to use the Company's software solely on the
customer's computer equipment for the customer's internal purposes, and the
customer is generally prohibited from sublicensing or transferring the licensed
materials. The agreements generally provide that the Company's warranty of its
software is limited to correction or replacement of the affected software, and
in most cases the Company's warranty liability may not exceed the licensing fees
from the customer. The Company's form agreement also includes a confidentiality
clause protecting proprietary information relating to the Company's software
system.
18
<PAGE>
The Company generally ships its products within a short period of time
after execution of a license. As a result, the Company typically does not have a
material backlog of unfilled license orders at any given time, and the Company
does not consider backlog to be a meaningful indicator of future performance.
STRATEGIC RELATIONSHIPS. The Company believes that, in order to
provide comprehensive component and supplier management solutions, it will be
necessary to develop, maintain and enhance close associations with vendors of
hardware, software, database, and professional services. The Company has
established marketing and strategic relationships with Intel Corporation. The
Company's relationship with Intel Corporation has enabled it to integrate its
software with standard hardware platforms. The Company meets regularly with
Intel Corporation to enhance integration between their complementary products
and the Company's software. The Company believes this relationship can enhance
the Company's ability to deliver mortgage software that support customers'
existing management architecture and that is tailored to the specific
requirements of the mortgage industry. Although the Company seeks to maintain a
close relationship with Intel Corporation, if the Company is unable to develop
and retain effective, long-term relationships with other third parties, the
Company's competitive position could be adversely affected.
RESEARCH AND DEVELOPMENT. The Company has committed, and expects to
continue to commit in the future, substantial resources for its software product
development. Research and development efforts are directed at increasing
software functionality, improving its performance and expanding the capability
of the software to interoperate with third party software. The Company intends
to release new software and enhancements to existing software. Although the
Company expects that certain of its new software will be developed internally,
the Company may, based on timing and cost considerations, acquire technology and
products from third parties.
The Company supplements its software development efforts by reviewing
customer feedback on existing software and working with customers and
potential customers to anticipate future functionality requirements. To
assist this effort, the Company intends to organize a customer advisory board
made up of representatives from its key customers which will meet periodically
to provide feedback regarding the Company's current and future product plans.
The Company's future success will depend in part upon its ability to
enhance its current software and to develop and introduce new software on a
timely basis that keep pace with technological developments, emerging industry
standards and the increasingly sophisticated needs of its customers. There can
be no assurance that the Company will be successful in developing or marketing
software enhancements or new software that respond to technological change or
evolving industry standards, that the Company will not experience difficulties
that could delay or prevent the successful development, introduction and
marketing of these products or that its new software or software enhancements
will adequately meet the requirements of the marketplace and achieve market
acceptance. If the Company is unable, for technological or other reasons, to
develop and introduce new software or enhancements, the Company's business,
financial condition or results of operations could be materially adversely
affected.
In addition, applications software products as complex as those offered
by the Company frequently contain undetected errors or failures when first
introduced or when new versions are released. The Company has in the past
discovered software errors in certain of its products and enhancements, both
before and after initial shipments, and has experienced delays or lost revenues
during the period required to correct these errors. There can be no assurance
that, despite testing by the Company and by current and potential customers,
errors will not occur in software or releases after commencement of commercial
shipments, resulting in loss of or delay in market acceptance, which could have
a material adverse effect upon the Company's business, financial condition or
results of operations.
COMPETITION. The market for the Company's software is competitive,
subject to rapid change and significantly affected by new product introductions
and other market activities of industry participants. The Company's software
products are targeted at the emerging market for open, mortgage software, and
the Company's competitors offer a variety of products and services to address
this market. Further, the Company currently faces indirect competition from
third-party professional service organizations and internal management
information systems and computer design departments of potential customers that
develop custom internal software.
In the future, because there are relatively low barriers to entry in
the software industry, the Company could experience additional competition from
other established or emerging companies as the application mortgage software
market continues to develop and expand. To the extent that the Company expands
into Internet-based or other forms of delivery of mortgage services,
19
<PAGE>
the Company may encounter additional competition from its existing competitors
and other established or emerging companies. Many of these potential competitors
may have well-established relationships with the Company's current and potential
customers, may have extensive knowledge of the mortgage industry, better name
recognition and significantly greater financial, technical, sales, marketing and
other resources and are capable of offering single vendor solutions which span
multiple industries. It is also possible that new competitors or alliances among
competitors may emerge and rapidly acquire significant market share. The Company
also expects that competition will increase as a result of software industry
consolidations. The Company's competitors may be able to respond more quickly to
new or emerging technologies and changes in customer requirements, or to devote
greater resources to the development, promotion and sale of their products.
Increased competition may result in price reductions, reduced gross
margins and loss of market share, any of which could materially adversely affect
the Company's business, financial condition or results of operations. There can
be no assurance that the Company will be able to compete successfully against
current or future competitors or that competitive pressure will not adversely
affect its business, financial condition or results of operations.
The Company believes that the principal competitive factors affecting
its market include features such as openness, scalability, ability to integrate
with third party products, functionality, adaptability, ease of use, product
reputation, quality, performance, price, customer service and support,
effectiveness of sales and marketing efforts and company reputation. Although
the Company believes that it currently competes favorably with respect to such
factors, there can be no assurance that the Company can maintain its competitive
position against current and potential competitors, especially those with
greater financial, marketing, service, support, technical and other resources
than the Company.
PROPRIETARY RIGHTS AND LICENSING. The Company's success is heavily
dependent upon proprietary technology. The Company will rely primarily on a
combination of copyright and trademark laws, trade secrets, confidentiality
procedures and contractual provisions with its employees, consultants and
business partners and in its license agreements to protect its proprietary
rights. The Company seeks to protect its software, documentation and other
written materials under trade secret and copyright laws, which afford only
limited protection. Despite the Company's efforts to protect its proprietary
rights, unauthorized parties may attempt to copy aspects of the Company's
mortgage software or to obtain and use information that the Company regards as
proprietary. While the Company is not aware that any of its software infringes
upon the proprietary rights of third parties, there can be no assurance that
third parties will not claim infringement by the Company with resect to current
of future products.
In addition, the Company relies on certain software that it licenses
from Virtual Lending Technology, Inc. and other third parties, including
software is used in the Company's products to perform certain functions. There
can be no assurance that such firms will remain in business, that they will
continue to support their products or that their products will otherwise
continue to be available to the Company on commercially reasonable terms. The
loss or inability to maintain any of these software or data licenses could
result in delays or cancellations in product shipments until equivalent software
can be identified and licensed or developed and integrated with the Company's
products. Any such delay or cancellation could materially adversely affect the
Company's business, financial condition or results of operations.
The Company's products are generally provided to customers in object
code (machine-readable) format only. From time to time, in limited
circumstances, the Company has licensed source code (human-readable) format
subject to customary protections such as use restrictions and confidentiality
agreements. In addition, certain customers may enter into source code escrow
arrangements with the Company, pursuant to which the Company's source code will
be released to the customer upon the occurrence of certain events, such as the
commencement of bankruptcy or insolvency proceedings by or against the Company,
or certain material breaches of the agreement. In the event of any release of
the source code from escrow, the customer's license is generally limited to use
of the source code to maintain, support and configure the Company's software
products.
MORTGAGE LENDER
GENERAL. EMB has been a retail mortgage broker for approximately three
years, and has recently commenced its business as a wholesale mortgage banker,
using the tradename "EMB Funding". EMB originates its own loans and those of its
licensees on a retail basis and provides wholesale lending services to approved
mortgage brokers. It has entered into a correspondent lending relationship with
ICI Funding Corporation, a division of Imperial Credit Industries, Inc. ("ICI"),
a national mortgage lender. Initially, EMB will underwrite and fund through a
wholesale line of credit from Imperial Warehouse Lending Group Inc., and then
resell such loans to ICI. In the future, the Company intends to develop
associations with other mortgage lenders to participate in the secondary
marketing of mortgages. EMB expects to negotiate servicing fees for servicing
its mortgage
20
<PAGE>
loans, or to obtain service release fees upon the resale of mortgages. The
Company may also package and resell mortgage loans as asset-backed securities.
LOAN STANDARDS. Mortgage loans made by EMB will be loans with fixed or
adjustable rates of interest secured by first mortgages, deeds of trust or
security deeds on residential properties with original principal balances that
do not exceed 95% of the value of the mortgaged properties, unless such loans
are FHA-insured or VA-guaranteed. Generally, each mortgage loan having a loan-
to-value ratio, as of the cut-off-date, in excess of 80%, or which is secured by
a second or vacation home, will be covered by a Mortgage Insurance Policy, FHA
Insurance Policy or VA Guaranty insuring against default all or a specified
portion of the principal amount thereof.
The mortgage loans will be "one to four-family" mortgage loans, which
means permanent loans (as opposed to construction or land development loans)
secured by mortgages on non-farm properties, including attached or detached
single-family or second/vacation homes, two to four-family primary residences
and condominiums or other attached dwelling units, including individual
condominiums, row houses, townhouses and other separate dwelling units even when
located in buildings containing five or more such units. Each mortgage loan must
be secured by an owner occupied primary residence or second/vacation home, or by
a nonowner occupied residence. The mortgaged property may not be a mobile home.
No mortgage loan is expected to have an original principal balance less
than $30,000. While most loans may be less than $700,000, EMB may fund loans of
up to $2,000,000 through its own wholesale credit lines or by brokering such
loans to unaffiliated third-party mortgage lenders. Fixed rate mortgage loans
must be repayable in equal monthly installments which reduce the principal
balance of the loans to zero at the end of the term.
CREDIT, APPRAISAL AND UNDERWRITING STANDARDS. Each mortgage loan must
(i) be an FHA-insured or VA-guaranteed loan meeting the credit and underwriting
requirements of such agency, or (ii) meet the credit, appraisal and underwriting
standards established by the Company. For certain mortgage loans which may be
subject to a mortgage pool insurance policy, the Company may delegate to the
issuer of the mortgage pool insurance policy the responsibility of underwriting
such mortgage loans, in accordance with the Company's credit appraisal and
underwriting standards. In addition, the Company may delegate to one or more
lenders the responsibility of underwriting mortgage loans offered to the Company
by such lenders, in accordance with the Company's credit, appraisal and
underwriting standards. In connection with any such delegation of underwriting
responsibility to a lender, the Company will require that the lender (i) make
certain representations and warranties to the Company which shall be the basis
for certain of the Company's representations and warranties to the trustee; (ii)
agree to repurchase any mortgage loan which is discovered at any time not to be
in conformance with such representations and warranties, if such defect cannot
be cured within 60 days of discovery of such breach; and (iii) agree to provide
the Company within 10 days of request the credit file for any mortgage loan the
Company desires to audit for compliance with the terms of the Company's loan
purchase program. It is anticipated that the Company will select for audit
certain of the credit files after purchase of the related mortgage loans.
The Company's underwriting standards are intended to evaluate the
prospective mortgagor's credit standing and repayment ability, and the value and
adequacy of the proposed mortgaged property as collateral. In the loan
application process, prospective mortgagors will be required to provide
information regarding such factors as their assets, liabilities, income, credit
history, employment history and other related items. Each prospective mortgagor
will also provide an authorization to apply for a credit report which summarizes
the mortgagor's credit history. With respect to establishing the prospective
mortgagor's ability to make timely payments, the Company will require evidence
regarding the mortgagor's employment and income, and of the amount of deposits
made to financial institutions where the mortgagor maintains demand or savings
accounts. In some instances, mortgage loans may be made by the Company under a
Limited Documentation Origination Program. For a mortgage loan to qualify for
the Limited Documentation Origination Program, the prospective mortgagor must
have a good credit history and be financially capable of making a larger cash
down payment in a purchase, or be willing to finance less of the appraised
value, in a refinancing, than would otherwise be required by the Company.
Currently, only mortgage loans with certain loan-to-value ratios will qualify
for the Limited Documentation Origination Program. If the mortgage loan
qualifies, the Company waives some of its documentation requirements and
eliminates verification of income and employment for the prospective mortgagor.
The Limited Documentation Origination Program has been implemented relatively
recently and according its impact, if any, on the rates of delinquencies and
losses experienced on the mortgage loans so originated cannot be determined at
this time.
The Company's underwriting standards generally follow guidelines
acceptable to FNMA and FHLMC. The Company's underwriting policies may be varied
in appropriate cases. In determining the adequacy of the property as collateral,
21
<PAGE>
an independent appraisal is made of each property considered for financing. The
appraiser is required to inspect the property and verify that it is in good
condition and that construction, if new, has been completed. The appraisal is
based on the appraiser's judgment of values, giving appropriate weight to both
the market value of comparable homes and the cost of replacing the property.
Certain states where the mortgaged properties may be located are "anti-
deficiency" states where, in general, lenders providing credit on one to four-
family properties must look solely to the property for repayment in the event of
foreclosure. See "Certain Legal Aspects of the Mortgage Loans-Anti-Deficiency
Legislation and Other Limitations on Lenders". The Company's underwriting
standards in all states (including anti-deficiency states) require that the
underwriting officers be satisfied that the value of the property being
financed, as indicated by the independent appraisal, currently supports and is
anticipated to support in the future the outstanding loan balance, and provides
sufficient value to mitigate the effects of adverse shifts in real estate
values.
LENDER WARRANTIES AND INDEMNIFICATION OF THE COMPANY. With respect to
the mortgage loans sold by it, each lender will make representations and
warranties to the Company which the Company deems sufficient to permit it to
make its representations and warranties in respect of such mortgage loans to the
Trustee and the certificateholders under the Pooling Agreement. Additional
representations and warranties will be made by each lender which has been
delegated the responsibility to underwrite mortgage loans on behalf of the
Company. See "-Credit, Appraisal and Underwriting Standards" above. Each lender
will also make certain other representations and warranties regarding mortgage
loans sold by it.
Each lender will agree to indemnify the Company against any loss or
liability incurred by the Company on account of any breach of any representation
or warranty made by the lender, any failure to disclose any matter that makes
any such representation and warranty misleading, or any inaccuracy in
information furnished by the lender to the Company.
Upon the breach of any misrepresentation or warranty made by a lender,
the Company may require the lender to repurchase the related mortgage loan.
TITLE INSURANCE POLICIES. The servicing agreement regarding the
mortgage loans originated by the Company will usually require that, at the time
of the origination of the mortgage loans and continuously thereafter, a title
insurance policy be in effect on each of the mortgaged properties and that such
title insurance policy contain no coverage exceptions, except those permitted
pursuant to the guidelines heretofore established by FNMA.
CERTAIN LEGAL ASPECTS OF MORTGAGE LOANS
GENERAL. The mortgages originated by the Company and its licensed
affiliates will be either mortgages or deeds of trust, depending upon the
prevailing practice in the state in which the property subject to a mortgage
loan is located. A mortgage creates a lien upon the real property encumbered by
the mortgage. It is not generally prior to liens for real estate taxes and
assessments. Priority between mortgages depends on their terms and generally on
the order of filing with a state or county office. There are two parties to a
mortgage, the mortgagor, who is the borrower and homeowner (the "Mortgagor"),
and the mortgagee, who is the lender. Under the mortgage instrument, the
Mortgagor delivers to the mortgagee a note or bond and the mortgage. Although a
deed of trust is similar to a mortgage, a deed of trust formally has tree
parties, the borrower-homeowners called the trustor (similar to a Mortgagor), a
lender (similar to a mortgagee) called the beneficiary, and a third-party
grantee called the Trustee. Under a deed of trust, the borrower grants the
property, irrevocably until the debt is paid, in trust, generally with a power
of sale, to the Trustee to secure payment of the obligation. The Trustee's
authority under a deed of trust and the mortgagee's authority under a mortgage
are governed by law, the express provisions of the deed of trust or mortgage,
and, in some cases, the directors of the beneficiary.
FORECLOSURE. Foreclosure of a deed of trust is generally accomplished
by a non-judicial Trustee's sale under a specific provision in the deed of trust
which authorizes the Trustee to sell the property to a third party upon any
default by the borrower under the terms of the note or deed of trust. In some
states, the Trustee must record a notice of default and send a copy to the
borrower-trustor and to any person who has recorded a requests for a copy of a
notice of default and notice of sale. In addition, the Trustee must provide
notice in some states to any other individual having an interest in the real
property, including any junior lienholders. The borrower, or any other person
having a junior encumbrance on the real estate, may, during a reinstatement
period, cure the default by paying the entire amount in arrears plus the costs
and expenses incurred in enforcing the obligation.
22
<PAGE>
Generally, state laws require that a copy of the notice of sale be posted on the
property and sent to all parties having an interest in the real property.
Foreclosure of a mortgage is generally accomplished by judicial action.
The action is initiated by the service of legal pleadings upon all parties
having an interest in the real property. Delays in completion of the foreclosure
may occasionally result from difficulties in locating necessary parties
defendant. Judicial foreclosure proceedings are often not contested by any of
the parties defendant. However, even when the mortgagee's right to foreclose is
contested, the court generally issues a judgment of foreclosure and appoints a
referee or other court officer to conduct the sale of the property.
In the case of foreclosure under either a mortgage or a deed of trust,
the sale by the referee or other designated officer or by the Trustee is a
public sale. However, because of the difficulty a potential buyer at the sale
would have in determining the exact status of title and because the physical
condition of the property may have deteriorated during the foreclosure
proceedings, it is uncommon for a third party to purchase the property at the
foreclosure sale. Rather, it is common for the lender to purchase the property
from the Trustee or referee for an amount equal to the principal amount of the
mortgage or deed of trust, accrued and unpaid interest and the expense of
foreclosure. Thereafter, the lender will assume the burdens of ownership,
including obtaining casualty insurance and making such repairs at its own
expense as are necessary to render the property suitable for sale. The lender
will commonly obtain the services of a real estate broker and pay the broker's
commission in connection with the sale of the property. Depending upon market
conditions, the ultimate proceeds of the property may not equal the lender's
investment in the property. Any loss may be reduced by the receipt of any
mortgage insurance proceeds.
RIGHTS OF REDEMPTION. In some states, after sale pursuant to a deed of
trust or foreclosure of a mortgage, the borrower and foreclosed junior lienors
are given a statutory period in which to redeem the property from the
foreclosure sale. In some states, redemption may occur only upon a payment of
the entire principal balance of the loan, accrued interest and expenses of
foreclosure. In other states, redemption may be authorized if the former
borrower pays only a portion of the sums due. The effect of a statutory right of
redemption is to diminish the ability of the lender to sell the foreclosed
property. The rights of redemption would defeat the title of any purchaser from
the lender subsequent to foreclosure or sale under a deed of trust.
Consequently, the practical effort of the redemption right is to force the
lender to retain the property and pay the expenses of ownership until the
redemption period has run.
ANTI-DEFICIENCY LEGISLATION AND OTHER LIMITATIONS ON LENDERS. Certain
states have imposed statutory prohibitions which limit the remedies of a
beneficiary under a deed of trust or a mortgage. In some states, statutes limit
the right of the beneficiary or mortgagee to obtain a deficiency judgment
against the borrower following foreclosure or sale under a deed of trust. A
deficiency judgment would be a personal judgment against the former borrower
equal in most cases to the difference between the net amount realized upon the
public sale of the real property and the amount due to the lender. Other
statutes require the beneficiary or mortgagee to exhaust the security afforded
under a deed of trust or mortgage by foreclosure in an attempt to satisfy the
full debt before bringing a personal action against the borrower. Finally, other
statutory provisions limit any deficiency judgment against the former borrower
following a judicial sale to the excess of the outstanding debt over the fair
market value of the property at the time of the public sale. The purpose of
these statutes is generally to prevent a beneficiary or a mortgagee from
obtaining a large deficiency judgment against the former borrower as a result of
low or no bids at the judicial sale.
In addition to laws limiting or prohibiting deficiency judgments,
numerous other statutory provisions, including the federal bankruptcy laws and
state laws affording relief to debtors, may interfere with or affect the ability
of the secured mortgage lender to realize upon collateral and/or enforce a
deficiency judgment. For example, with respect to federal bankruptcy law, a
court with federal bankruptcy jurisdiction may permit a debtor through his or
her Chapter 11 or Chapter 13 rehabilitative plan to cure a monetary default in
respect of a mortgage loan on a debtor's residence by paying arrears within a
reasonable time period and reinstating the original Mortgage Loan payment
schedule even though the lender accelerated the mortgage loan and final judgment
of foreclosure had been entered in state court (provided no sale of the
residence had yet occurred) prior to the filing of a debtor's petition. Some
courts with federal bankruptcy jurisdiction have approved plans based on the
particular facts of the reorganization case, that effected the curing of a
mortgage loan default by paying arrearages over a number of years.
Courts with federal bankruptcy jurisdiction have also indicated that
the terms of a mortgage loan secured by property of the debtor may be modified.
These courts have suggested that such modification may include reducing the
amount of each monthly payment, changing the rate of interest, altering the
repayment schedule, and reducing the lender's security interest to the value of
the residence, thus leaving the lender a general unsecured creditor for the
difference between the value of the residence and the outstanding balance of the
loan.
23
<PAGE>
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 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.
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 resale and not for development
purposes. The financial statements of the Company presently reflect land held
for resale as an asset at $843,000 as of September 30, 1996. See Note A to
Financial Statements. However, the Company sold its 61 acre property in Monterey
County, California, for $4,000,000, receiving a payment of $800,000 and an
installment contract for $3,200,000, as described below. The Company may also
hold real estate for sale from time to time as a result of its foreclosure on
mortgage loans that may become in default.
UNDEVELOPED LAND AND WATER RIGHTS. As of September 30, 1996, the
Company owned approximately 61 acres of undeveloped real property with extensive
water and electrical improvements, and extensive water producing wells, located
on Paris Valley Road in the San Ardo area of Monterey County, California. This
property was appraised at an estimated market value of the fee simple interest
as of April 20, 1996, at $3,860,000. The property is located close to Highway
101, a major California highway. The area is rural in nature, used primarily for
cattle and sheep raising and agricultural purposes, including vineyards and
wineries to the north and to the south. The property is comprised of two parcels
separated by Paris Valley Road. The zoning for the property is for
agriculture/grazing in the lower half, and for heavy mineral extraction on the
upper half. The water and electrical improvements provide primarily for farming
use. Because of the producing water wells on the property, commercial water
production for agricultural use is available to provide adjacent farms with
excess water. The property formerly produced crude oil; but such wells have been
shut-in and the power plant substation, natural gas pipeline system, pumps,
tanks and used pipe on the property are considered obsolete. The water producing
wells, as described in the appraisal, are capable of producing
24
<PAGE>
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 subleases its executive offices located at 575 Anton
Boulevard, Suite 200, Costa Mesa, California 92626. The lease covers
approximately 6,500 square feet at a monthly rental of approximately $7,500 per
month. The sublease expires in March 1997. The Company believes that its current
facilities are adequate for its needs through March 1997, and that, should it be
needed, suitable additional or alternative space will be available in the future
on commercially reasonable terms.
EMPLOYEES
As of January 31, 1997, the Company employed 26 persons. Of the total,
10 were engaged in sales and marketing, one was in product development and
technical support and 15 were in finance and administration. None of the
Company's employees is represented by a labor union with respect to his or her
employment by the Company. The Company has experienced no organized work
stoppages and believes its relationship with its employees is good. The Company
believes that its future success will also depend to a significant extent upon
its ability to attract, train and retain highly skilled technical, management,
sales, marketing and consulting personnel. Competition for such personnel in the
computer software and mortgage industry in the United States is intense. The
Company has from time to time experienced difficulty in locating candidates with
appropriate qualifications. There can be no assurance that the Company will be
successful in attracting or retaining such personnel, and the failure to attract
or retain such personnel could have a material adverse effect on the Company's
business or results of operations.
BANKING ARRANGEMENTS
The Company is presently negotiating with several national banks to
obtain a line of credit for the purpose of assuring the availability of
financing in the event the Company determines bank financing to be necessary or
desirable in the future.
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS.
For fiscal 1995 and fiscal 1996, the principal independent accountant
of the Company is Harlan & Boettger, independent certified public accountants
located in San Diego, California. For fiscal 1994 and prior fiscal years, the
principal independent accountant of the Company was George F. Rombach, C.P.A. of
Newport Beach, California.
George F. Rombach, C.P.A., the former accountant of the Company, did
not resign or decline to stand for re-election, nor was such accountant
dismissed by the Company. The Company changed its principal independent
accountant effective in April, 1996, without any disagreement regarding
accounting matters. The decision to change accountants was recommended by the
Board of Directors and approved by the shareholders of the Company at its 1996
annual meeting held on May 21, 1996.
25
<PAGE>
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 OFFICERS
The directors and officers of the Company as follows:
<TABLE>
<CAPTION>
Name(1)(2) Age Position
- ---------- --- --------
<S> <C> <C>
Joseph K. Brick(3) 58 Nominee Director, and President of
EMB Mortgage Corporation(5)
Bruce J. Brosky(4) 41 Director and Vice President-
Marketing and Public Relations
Malcom K. Crist(3) 51 Nominee Director(5)
Rory P. Hughes(4) 38 Director and Vice President -
Research and Development
William V. Perry(4)(5) 73 Director and Executive Vice
President
Ann L. Petersen 59 Director
Michael P. Roth(3) 57 Nominee Director(5)
James E. Shipley(5) 61 Director and President
B. Joe Wimer(5) 40 Director, Secretary and
Treasurer
</TABLE>
- ---------------------------
(1) The Company presently has no executive committee, nominating committee or
audit committee of the Board of Directors.
(2) The officers of the Company hold office until their successors are
elected and qualified, or until their death, resignation or removal.
(3) Nominated to become a director of the Company at its Annual Meeting of
shareholders scheduled for March 21, 1997.
(4) Member of the Company's Stock Option Committee. See "1996 Stock Option,
SAR and Stock Bonus Plan", below.
(5) Member of the Company's Compensation Committee. See "Compensation
Committee", below.
The background and principal occupations of each director nominee,
director and officer of the Company are as follows:
Mr. Brick has been nominated to become a director of the Company at the
1997 Annual Meeting of Stockholders. 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.
26
<PAGE>
Mr. Crist has been nominated to become a director of the Company at the
1997 Annual Meeting of Stockholders of the Company. 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 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. Hughes has been Vice President-Research and Development of the
Company since April 29, 1996, and became a director of the Company on May 21,
1996. He has been the President and a director of EMB Mortgage Corporation, a
wholly owned subsidiary of the Company engaged in real estate mortgage business,
since September, 1995. From 1994 to the present, he has been a director and
President of Virtual Lending Technology, Inc. From 1993 to 1994, he was the
Marketing Director of Delphi Information Sciences Corp. From 1993 to September
1995, Mr. Hughes was also employed by Members Capital Corporation, a mortgage
broker. From 1985 to 1993, he owned and operated Financial Computing
International, a software technology firm. Mr. Hughes attended California State
University-Fullerton majoring in corporate finance and real estate finance.
Mr. Perry has been the Executive Vice President of the Company since
April 29, 1996, and became a director of the Company on May 21, 1996. He is also
the Chairman of the Board of EMB Mortgage Corporation, a wholly owned subsidiary
of the Company. From 1994 to the present, he has been a director and Vice
President of Sterling Alliance Group, Ltd. From October 1993 to the present, Mr.
Perry has been associated with ERA Sterling Real Estate. From 1990 to October
1993, he was a director and Vice President of Ameri-West Funding, Inc., engaged
in residential, multi-family and commercial mortgages. From 1988 to 1990, Mr.
Perry was the President of First Marine Mortgage Company. From 1985 to 1987, he
was the Chief Financial Officer of Mobile Medical Group, Inc.; and was the Chief
Financial Officer and a director of Oceanic Opera, Inc. from 1984 to 1985. From
1970 to 1984, Mr. Perry was engaged in the real estate brokerage business with
several real estate brokerage companies. From 1962 to 1970, he was an
electronics engineer with Lockheed Missle and Space Corporation. Mr. Perry
graduated from Pacific States University in 1948 with a degree in electrical
engineering.
Mrs. Petersen became a director of the Company on November 25, 1992.
She is a resident of Hawaii and has been a housewife since being married in
1958. She attended Marquette University for two years. Mrs. Petersen is an
active volunteer in various charitable organizations, including the American
Cancer Association.
Mr. Roth has been nominated to become a director of the Company at the
1997 Annual Meeting of the Stockholders of the Company. From 1993 to the
present, he has been the Assistant Branch Manager and Sales Associate with
Coldwell Banker Real Estate, Inc., a real estate brokerage company, at its
branch office in South Laguna, California. From 1981 to 1992, Mr. Roth was the
President of Food Service Concept Marketing Inc., a marketing consulting firm.
From 1975 to 1981, he was the Vice President Management Supervisor of Wells,
Rich, Green Advertising. From 1974 to 1975, Mr. Roth was a Vice President of
Shakey's Pizza Parlors. From 1969 to 1975, he was Vice President of Marketing of
Bonanza Steakhouses, and was President of its International Division. From 1963
to 1968, Mr. Roth was engaged in franchise marketing for McDonald's Corporation
in charge of marketing in 12 western states and Hawaii. Mr. Roth received a B.S.
degree from U.C.L.A. in 1962.
Mr. Shipley has been a director of the Company since January 15, 1996,
and became the President of the Company on April 29, 1996. From 1993 to the
present, he has been a director and the President of Sterling Alliance Group,
Ltd., an affiliate of the Company which recently sold substantially all of its
assets and operations to the Company in exchange for Common Stock. He was the
Managing Director of EMB Mortgage Corporation, a wholly owned subsidiary of the
Company engaged in the real estate mortgage business, from October 1993 to April
1996. Mr. Shipley has served as the Managing Director of ERA Sterling Real
Estate, a real estate brokerage firm, from 1987 to the present. From 1968 to
1987, he was engaged in the real estate development business with several
companies. In 1988, Mr. Shipley became subject to two felony convictions for
forgery endorsement of a check and appropriation of property entrusted to him in
the Superior Court of the State of California. Mr. Shipley received a Bachelor
of Science degree from Eastern Illinois University in 1960.
Mr. Wimer has been the Secretary and Treasurer of the Company since
April 29, 1996, and became a director of the Company on May 21, 1996. From April
1993 to September 1995, he was the director of business promotion of City Lights
Escrow, Inc.; and from October 1992 to April 1993, was the owner and President
of Better Service Escrow, Inc. From October
27
<PAGE>
1990 to October 1992, Mr. Wimer was employed by Escrow Masters Inc. regarding
business promotion; and held a similar position with Melrose Escrow Inc. from
1988 to October 1990. In each of these positions, he was also responsible for
all banking and money management functions. From 1985 to 1988, he was the Chief
Financial Officer of Sierra Mortgage Corporation. Mr. Wimer attended California
State University-Fullerton and Clark College.
COMPLIANCE WITH SECTION 16(A) OF EXCHANGE ACT. To the best of the
knowledge of the Company, its directors, officers and 10% beneficial owners have
filed all reports in compliance with the reporting requirements of Section 16(a)
of the Exchange Act, except that Form 3 filed by such persons were not timely
filed on or before August 28, 1996, the effective date of the Form 10-SB
registration statement of the Company.
COMPENSATION OF EXECUTIVE OFFICERS
No executive officer or director of the Company received compensation
in excess of $100,000 during its fiscal year ended September 30, 1996.
COMPENSATION COMMITTEE. The Compensation Committee of the Board of
Directors is comprised of Messrs. James E. Shipley, B. Joe Wimer, and William V.
Perry. The Committee makes decisions regarding the Company's employee stock plan
and makes decisions concerning salaries and incentive compensation for the
executive officers, employees and consultants of the Company.
1996 STOCK OPTION, SAR AND STOCK BONUS PLAN. The Company has reserved
a total of 250,000 shares of Common Stock for issuance under the Company's 1996
Stock Option, SAR and Stock Bonus Plan (the "Plan"). At January 31, 1997, no
options, SAR's or stock bonuses have been granted or issued under the Plan. It
is presently proposed to increase the number of shares under the Plan from
250,000 shares to 1,250,000 shares. Options may be granted to employees
(including officers), consultants, advisors and directors, although only
employees and directors and officers who are also employees may receive
"incentive stock options" intended to qualify for certain tax treatment. The
exercise price of non-qualified stock options must equal at least 85% of the
fair market value of the Common Stock on the date of grant, and in the case of
incentive stock options must be no less than the fair market value. Options
granted under the Plan are immediately exercisable but generally vest over four
years and must be exercised within 10 years. The members of the Stock Option
Committee that administer the Plan are Bruce J. Brosky, Rory P. Hughes and
William V. Perry.
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
28
<PAGE>
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 January 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) 1.5%
575 Anton Boulevard, Suite 200
Costa Mesa, California 92626
Malcom K. Crist.................... 0 0%
1015 East Chapman Avenue
Orange, California 92866
Rory P. Hughes...................... 499,973(2) 8.7%
575 Anton Boulevard, Suite 200
Costa Mesa, California 92626
William V. Perry.................... 290,470(2)(3) 5.1%
575 Anton Boulevard, Suite 200
Costa Mesa, California 92626
Ann L. Petersen..................... 6,250 .001%
Star Route 5080
Keaau, Hawaii 96749
Michael P. Roth..................... 0 0%
575 Anton Boulevard, Suite 200
Costa Mesa, California 92626
James E. Shipley.................... 813,375(4) 14.1%
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
(9 persons, including the above).. 1,703,818 29.4%
========= ====
</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
29
<PAGE>
security. A person is also deemed to be a beneficial owner of any
security which that person has the right to acquire within 60 days, such
as warrants or options to purchase the Common Stock of the Company.
(2) Represents shares of the common stock of Sterling Alliance Group, Ltd.
which owns 3,375,000 shares of the Common Stock of the Company (58.3% 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. ("SAG")(specifically,
William V. Perry, James E. Shipley, Bruce J. Brosky, Rory P. Hughes and B. Joe
Wimer), such persons may be deemed to be the beneficial owners of the 3,375,000
shares of the Common Stock of the Company held in the name of SAG.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The Company entered into certain material transactions with SAG during
its fiscal year ended September 30, 1996, as described below. SAG is a Colorado
corporation that is beneficially owned 24.3% by James E. Shipley, a director and
the President of the Company, and owned 14.8% by Rory P. Hughes, a director and
Vice President of the Company, and by certain other directors and officers of
the Company to a lesser extent.
In December 1995, the Company agreed to acquire substantially all of
the assets of SAG, including all of the issued capital stock of its subsidiary,
Electronic Mortgage Corporation ("EMB"), real property located in Monterey
County and in Riverside County, California, office equipment and furniture, and
its interests in MortgageShare software as licensed by Virtual Lending
Technology, Inc., and assumed certain liabilities of SAG. In exchange, the
Company issued 3,375,000 legended-restricted shares of its Common Stock to SAG
which presently represents approximately 58.3% of the total issued and
outstanding Common Stock of the Company. After this acquisition, the directors,
officers and certain consultants of SAG became directors and officers of the
Company. As a result of the ownership of common stock of SAG owned by certain
present directors and officers of the Company and their families, they are
deemed to be beneficial owners of the Common Stock of the Company.
Prior to this acquisition, Virtual Lending Technology, Inc., a Nevada
corporation, licensed certain software to EMB under the terms of a Software
Provider Agreement to be used in the mortgage lending business. Rory P. Hughes
and Frank D. Tuttle, present and former officers and directors of the Company,
are also the owners and principal officers of Virtual Lending Technology, Inc.
Rory P. Hughes and Frank D. Tuttle became directors and officers of the Company
after this transaction.
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.
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
30
<PAGE>
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.
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 January 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.
<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 58.3%
575 Anton Boulevard, Suite 200
Costa Mesa, CA 92626
Rory P. Hughes(2) Common Stock 499,973 8.7%
575 Anton Boulevard, Suite 200
Costa Mesa, California 92626
James E. Shipley Common Stock 813,375 14.1%
World Trends Financial, Ltd.(2)
508 Easy Street
Las Vegas, Nevada 89707
William V. Perry Common Stock 290,470 5.0%
Win, Win, Solver Group, Inc.(2)
1055 E. Flamingo Road, #1009
Las Vegas, Nevada 89109
Cede & Co. Common Stock 682,930 11.8%
P.O. Box 222
Bowling Green Station
New York, New York 10274
</TABLE>
____________________________
(1) Sterling Alliance Group, Ltd. ("SAG") is a Colorado corporation. Certain
directors and officers of the Company are stockholders, directors,
officers and controlling persons of SAG. See "Transactions with
Management" and "Security Ownership of Management", above.
(2) Represents shares of the Common Stock of Sterling Alliance Group, Ltd.
which owns 3,375,000 shares of the Common Stock of the Company.
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.
31
<PAGE>
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 are not officers or employees
of the Company. However, such persons are subject to fiduciary responsibilities
as directors or agents of the Company. Officers and directors of the Company may
be presented with opportunities which give rise to apparent conflicts of
interest which can be resolved only through the exercise of judgment by such
officers and directors consistent with their fiduciary duties to the Company
arising under Hawaii statutory law and general corporate law.
The Company has a right of first refusal on all opportunities to
participate in the purchase of securities which may be presented to its officers
and employees after the date of this Memorandum that are consistent with the
investment objectives of the Company. With respect to all directors of the
Company, including those who are not officers, employees or owners of 5% or more
of the Company's Common Stock, fiduciary obligations exist under Hawaii law
prohibiting them from taking advantage of corporate opportunities and from
otherwise benefiting 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 January 31,
1997, there were 5,792,801 shares of Common Stock issued and outstanding.
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.
32
<PAGE>
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.
WARRANTS AND OPTIONS. As of January 31, 1997, there were
outstanding warrants to purchase up to 126,750 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
250,000 shares of the Common Stock of the Company, but no options have been
granted under the plan as of the date hereof. It is presently proposed to
increase the number of shares under the plan from 250,000 shares to 1,250,000
shares.
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.
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
33
<PAGE>
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 under the Securities Act with respect to the Common Stock offered hereby.
This Prospectus, which constitutes a part of the Registration Statement does not
contain all of the information set forth in the Registration Statement, certain
items of which are contained in exhibits to the Registration Statement as
permitted by the rules and regulations of the Commission. For further
information with respect to the Company and the Common Stock offered hereby,
reference is made to the Registration Statement, including the exhibits thereto,
and the financial statements and notes filed as a part thereof. Statements made
in this Prospectus concerning the contents of any document referred to herein
are not necessarily complete. With respect to each such document filed with the
Commission as an exhibit to the Registration Statement, reference is made to the
exhibit for a more complete description of the matter involved. The Registration
Statement, including the exhibits thereto and the financial statements and notes
filed as a part thereof, as well as such reports and other information filed
with the Commission, may be inspected without charge at the public reference
facilities maintained by the Commission at Room 1024, 450 Fifth Street, N.W.,
Washington, D.C. 20549 and at the regional offices of the Commission located at
7 World Trade Center, 13th Floor, Judiciary Plaza, New York, New York 10048 and
Citicorp Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661.
Copies of all or any part thereof may be obtained from the Commission upon the
payment of certain fees prescribed by the Commission.
The Company 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.
34
<PAGE>
C O N T E N T S
<TABLE>
<CAPTION>
PAGE
--------
<S> <C>
INDEPENDENT AUDITORS' REPORT.......................................... F-1
CONSOLIDATED FINANCIAL STATEMENTS:
Consolidated Balance Sheets as of September 30, 1996 and 1995......... F-2
Consolidated Statements of Operations for the years ended
September 30, 1996 and 1995.......................................... F-3
Consolidated Statements of Shareholders' Equity (Deficit) for the
years ended September 30, 1996 and 1995.............................. F-4
Consolidated Statements of Cash Flows for the years ended
September 30, 1996 and 1995.......................................... F-5
Notes to Consolidated Financial Statements............................ F-6-F-11
</TABLE>
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Shareholders of
EMB CORPORATION AND SUBSIDIARY:
We have audited the accompanying consolidated balance sheets of EMB
Corporation (a Hawaii corporation) and subsidiary as of September 30, 1996 and
1995, and the related consolidated statements of operations, shareholders'
equity (deficit), and cash flows for the years ended September 30, 1996 and
1995. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of EMB
Corporation and subsidiary as of September 30, 1996 and 1995, and the results
of their operations and their cash flows for the years then ended in
conformity with generally accepted accounting principles.
Harlan & Boettger
San Diego, California
January 8, 1997
F-1
<PAGE>
EMB CORPORATION AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
SEPTEMBER 30, SEPTEMBER 30,
ASSETS 1996 1995
------ ------------- -------------
<S> <C> <C>
CURRENT ASSETS
Cash............................................. $ 395 $ 26,071
Accounts receivable (no allowance deemed
necessary)...................................... 14,582 --
Inventory, net................................... 35,324 --
Note receivable.................................. 14,000 14,000
----------- ---------
TOTAL CURRENT ASSETS........................... 64,301 40,071
PROPERTY AND EQUIPMENT, net (Note D)............... 149,363 25,692
RELATED PARTY RECEIVABLE (Note G).................. 129,687 54,889
LAND HELD FOR SALE (Notes A and E)................. 843,000 43,000
OTHER ASSETS ...................................... 4,128 1,177
----------- ---------
$1,190,479 $ 164,829
=========== =========
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
----------------------------------------------
CURRENT LIABILITIES
Accounts payable................................. $ 195,374 $ 4,684
Bank overdrafts.................................. 27,177 --
Accrued expenses................................. 48,886 2,249
Notes payable--current portion (Note F).......... 293,793 60,000
Capital lease obligations--current portion
(Note I)........................................ 28,553 7,821
----------- ---------
TOTAL CURRENT LIABILITIES...................... 593,783 74,754
RELATED PARTY PAYABLE (Note G)..................... -- 235,171
NOTES PAYABLE, net of current portion (Note F)..... 65,000 65,000
CAPITAL LEASE OBLIGATIONS, net of current portion
(Note I).......................................... 30,096 10,247
----------- ---------
TOTAL LIABILITIES.............................. 688,879 385,172
COMMITMENTS (Note I)
SHAREHOLDERS' EQUITY (DEFICIT)
Common stock, no par value, 30,000,000 shares
authorized; 5,311,817 and 1,644,350 shares
issued and outstanding, respectively............ 3,910,391 345,250
Preferred stock, no par value, 5,000,000 shares
authorized, no shares issued or outstanding..... -- --
Common stock subscribed.......................... (200,000) --
Retained deficit................................. (3,208,791) (565,593)
----------- ---------
TOTAL SHAREHOLDERS' EQUITY (DEFICIT)........... 501,600 (220,343)
----------- ---------
$ 1,190,479 $ 164,829
=========== =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-2
<PAGE>
EMB CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEARS ENDED SEPTEMBER 30,
-------------------------
1996 1995
----------- ----------
<S> <C> <C>
REVENUES
Mortgage loan revenue................................ $ 244,874 $ 97,400
Product sales........................................ 31,545 --
----------- ----------
TOTAL REVENUES..................................... 276,419 97,400
COST OF SALES.......................................... 29,636 --
----------- ----------
Gross profit......................................... 246,783 97,400
OPERATING EXPENSES
General and administrative........................... 2,790,244 531,818
Depreciation......................................... 31,056 2,662
----------- ----------
TOTAL OPERATING EXPENSES........................... 2,821,300 534,480
----------- ----------
LOSS FROM OPERATIONS................................... (2,574,517) (437,080)
OTHER INCOME (EXPENSES)
Interest expense..................................... (64,393) (2,164)
Other................................................ (2,688) 9,989
----------- ----------
TOTAL OTHER INCOME (EXPENSE)....................... (67,081) 7,825
----------- ----------
LOSS BEFORE INCOME TAXES............................... (2,641,598) (429,255)
Income taxes (Note G)................................ 1,600 800
----------- ----------
NET LOSS............................................... $(2,643,198) $ (430,055)
=========== ==========
NET LOSS PER COMMON SHARE.............................. $ (.73) $ (.29)
=========== ==========
WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING.......... 3,641,421 1,469,225
=========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-3
<PAGE>
EMB CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT)
<TABLE>
<CAPTION>
PREFERRED
COMMON STOCK STOCK STOCK TOTAL
-------------------- ------------- SUBSCRIPTION RETAINED SHAREHOLDERS'
(DEFICIT) SHARES AMOUNTS SHARES AMOUNT RECEIVABLE DEFICIT EQUITY
--------- --------- ---------- ------ ------ ------------ ----------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE, SEPTEMBER 30,
1994................... 1,288,600 $ 150,000 -- $-- $ -- $ (135,538) $ 14,462
Shares issued for
Riverside land....... 8,250 33,000 -- -- -- -- 33,000
Shares issued for
services............. 172,500 155,250 -- -- -- -- 155,250
Shares issued to
founders for
services............. 175,000 7,000 -- -- -- -- 7,000
Net loss.............. -- -- -- -- -- (430,055) (430,055)
--------- ---------- --- --- --------- ----------- -----------
BALANCE, SEPTEMBER 30,
1995................... 1,644,350 345,250 -- -- -- (565,593) (220,343)
Proceeds from sale of
shares............... 412,707 1,017,914 -- -- -- -- 1,017,914
Shares issued for
services............. 836,389 1,279,460 -- -- -- -- 1,279,460
Shares issued to
founders for
services............. 893,712 35,749 -- -- -- -- 35,749
Shares issued for
Monterey land........ 200,000 800,000 -- -- -- -- 800,000
Shares issued for note
receivable........... 50,000 200,000 -- -- (200,000) -- --
Shares issued for
debt................. 116,009 232,018 -- -- -- -- 232,018
Shares issued for net
assets of Pacific
International, Inc... 1,158,650 -- -- -- -- -- --
Net loss.............. -- -- -- -- -- (2,643,198) (2,643,198)
--------- ---------- --- --- --------- ----------- -----------
BALANCE, SEPTEMBER 30,
1996................... 5,311,817 $3,910,391 -- $-- $(200,000) $(3,208,791) $ 501,600
========= ========== === === ========= =========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-4
<PAGE>
EMB CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED SEPTEMBER 30,
-------------------------
1996 1995
----------- ----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss.............................................. $(2,643,198) $ (430,055)
Adjustments to reconcile net income to net cash used
in operating activities:
Common stock issued for services..................... 1,315,209 162,250
Depreciation......................................... 31,056 2,662
Changes in operating assets and liabilities:
Increase in:
Accounts receivable................................ (14,582) --
Inventory.......................................... (35,324) --
Prepaid expenses and other assets.................. (2,951) (1,177)
Accounts payable................................... 217,867 349
Accrued expenses................................... 46,637 1,449
----------- ---------
NET CASH USED IN OPERATING ACTIVITIES.................. (1,085,286) (264,522)
----------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of property and equipment................... (96,846) (6,720)
Payment for land purchase............................. -- (10,000)
Loans made on notes receivable........................ -- (14,000)
Loans made on related party receivable................ (74,798) (29,092)
----------- ---------
NET CASH USED IN INVESTING ACTIVITIES.................. (171,644) (59,812)
----------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from issuance of notes payable............... 268,893 355,776
Payments under capital lease obligations.............. (17,300) --
Payments on borrowings................................ (38,253) --
Sale of common stock.................................. 1,017,914 --
----------- ---------
NET CASH PROVIDED BY FINANCING ACTIVITIES.............. 1,231,254 355,776
----------- ---------
NET INCREASE (DECREASE) IN CASH........................ (25,676) 31,442
CASH, BEGINNING OF PERIOD.............................. 26,071 (5,371)
----------- ---------
CASH, END OF PERIOD.................................... $ 395 $ 26,071
=========== =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-5
<PAGE>
EMB CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
A. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Organization and Nature of Operations
EMB Corporation (formerly called Pacific International, Inc.) (the
"Company") was incorporated under the laws of the State of Hawaii on May 5,
1960. Effective December 16, 1995, the Company acquired the net assets of
Sterling Alliance Group, Ltd ("SAG") which included 100% ownership in
Electronic Mortgage Banc, Ltd. ("EMB") and land held for sale. For financial
statement purposes the transaction has been recorded as a recapitalization of
SAG and the issuance of shares for the net assets of the Company due to the
fact that SAG provides substantially all of the historic and on-going
operations (See Note C). The historical and on-going financial statements
primarily represent the assets, liabilities and operations which were acquired
from SAG. All significant intercompany accounts and transactions have been
eliminated.
The Company has an interactive software system for the origination and
processing of mortgage loans which it calls Mortgage Approval Xpress
("M.A.X."). This system has been linked to the ProShare software developed by
Intel Corporation that provides direct teleconferencing and interaction
between prospective mortgage borrowers and mortgage lenders. The Company
licenses its mortgage software system to real estate brokers, builders, credit
unions, mortgage brokers and others. The Company also independently originates
and processes mortgage loans, and intends to engage in the secondary placement
of real estate mortgages.
Basis of Accounting
The Company's policy is to use the accrual method of accounting and to
prepare and present financial statements which conform to generally accepted
accounting principles. The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and reported amounts of revenues and expenses during
the reporting periods. Actual results could differ from those estimates.
Cash
Cash includes cash on hand and cash in checking and savings accounts.
Inventory
Inventory is stated at the lower of cost or market, cost being determined on
the first-in, first-out (FIFO) method. Inventory consists of mortgage loan
processing and teleconferencing software and equipment.
Property and Equipment
Property and equipment is stated at cost, and depreciated using the
straight-line method over the estimated useful lives of the assets, which
range from five to ten years. Maintenance and repairs are charged to
operations as incurred, and major improvements are capitalized. Upon
retirement, sale, or other disposition, the related cost and accumulated
depreciation are eliminated from the respective accounts and any gain or loss
on disposition is reflected in operations.
Revenue Recognition--Mortgage Brokerage
Revenue from mortgage brokerage transactions are recognized when the loan is
funded and escrow on the related real estate transaction is closed.
F-6
<PAGE>
EMB CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Revenue and Cost Recognition--Land Held for Sale
The Company expects that it will from time to time hold real estate for
sale. Revenue from such sales will be recognized upon closing of the sale.
Land acquisition costs have been capitalized and they will be charged to
earnings when the related revenue is recognized. Other costs incurred in
connection with the land are charged to earnings when incurred. The basis of
the land held for sale has been determined based on cash paid of $10,000 and
208,250 shares of common stock given as consideration. A $4.00 per share value
was determined by management to be a more clearly evident value in determining
the basis for the land held for sale.
Income Taxes
Income taxes, are provided for using the liability method of accounting in
accordance with Statement of Financial Accounting Standards No. 109 (SFAS
109), "Accounting for Income Taxes." A deferred tax asset or liability is
recorded for all temporary differences between financial and tax reporting.
Deferred tax expense (benefit) results from the net change during the year of
deferred tax assets and liabilities.
Per Share Information
Net loss per common share amounts are computed by dividing net loss by the
weighted average number of common and common equivalent shares outstanding in
the period. Common stock equivalents consist of warrants granted. For the net
loss per common share calculation there were no dilutive common stock
equivalents.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
B. DEVELOPMENT STAGE BUSINESS:
During the Company's fiscal year ended September 30, 1995, its operations
were not significant; therefore, the Company was considered in the development
stage. During its fiscal 1996 year, the Company's operations were sufficient
to now be considered an operating Company. The Company's efforts are
concentrated in two areas in the mortgage loan industry. First, the
development of the Company's M.A.X. software system. Second, the development
of residential mortgage lending on a retail basis directly to consumers and on
a wholesale basis to other mortgage brokers.
C. RECAPITALIZATION:
Effective December 16, 1995, the Company acquired the net assets of Sterling
Alliance Group, Ltd. for 3,375,000 shares of the Company's common stock.
The Company previously did not have an operating business and, accordingly,
has treated the transaction as a recapitalization of SAG and recorded the
transaction at historical cost. Accordingly, the net assets acquired were
accounted for in a manner similar to a pooling of interest.
F-7
<PAGE>
EMB CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
D. PROPERTY AND EQUIPMENT:
Property and equipment are summarized as follows:
<TABLE>
<CAPTION>
SEPTEMBER 30, SEPTEMBER 30,
1996 1995
------------- -------------
<S> <C> <C>
Machinery and equipment....................... $112,532 $30,160
Furniture & fixtures.......................... 71,317 --
-------- -------
183,849 30,160
Less accumulated depreciation................. 34,486 4,468
-------- -------
Property and equipment, net................... $149,363 $25,692
======== =======
</TABLE>
E. LAND HELD FOR SALE:
SAG acquired approximately five acres of undeveloped land in Riverside
County, California on February 24, 1995 from Rancho Brisa Corp., an unrelated
third party. SAG paid $10,000 cash, and issued 8,250 shares of their common
stock as consideration. The land was subsequently collateralized against the
$65,000 note payable to Howard C. Kuhle (See Note F).
SAG also acquired approximately 61 acres of undeveloped land with water
producing rights and three wells in Monterey County, California on December
11, 1995 from Golden River Corp., an unrelated third party. Each well can
produce approximately 900,000 gallons of water per 24 hour period and the
water supply is replenished annually from the run-off of the surrounding
mountains. SAG issued 200,000 shares of their common stock as consideration.
F. NOTES PAYABLE:
Notes payable are summarized as follows:
<TABLE>
<CAPTION>
SEPTEMBER 30, SEPTEMBER 30,
1996 1995
------------- -------------
<S> <C> <C>
Note payable due to Frederic R. Weeth, interest at
10%, no established repayment schedule, note past
due, principal and any unpaid interest due on
demand............................................ $26,250 $30,000
Note payable due to Thomas J. Donahue, interest at
10%, no established repayment schedule, note past
due, principal and any unpaid interest due on
demand............................................ 26,250 30,000
Note payable to Howard C. Kuhle, interest at 12%,
interest only payable monthly, principal and any
unpaid interest due March 1998, secured by deed of
trust on Riverside County land.................... 65,000 65,000
Note payable to Baronin Enterprises, Inc., interest
at 8%, note past due, principal and any unpaid
interest due on demand............................ 50,000 --
Various notes payable to unrelated parties, no
established repayment schedule, interest ranging
from 8% to 11%.................................... 191,293 --
------- -------
358,793 125,000
Less current portion............................. 293,793 60,000
------- -------
$65,000 $65,000
======= =======
</TABLE>
F-8
<PAGE>
EMB CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
G. RELATED PARTY TRANSACTIONS:
Related party receivable at September 30, 1996 and 1995 consists of amounts
due from a related corporation of $129,687 and $54,889, respectively.
Related party payable consists of certain operating expenses that were paid
on behalf of the Company by a related corporation. During the year ended
September 30, 1996 the Company issued common stock in lieu of payment.
H. INCOME TAXES:
As discussed in Note A, the Company accounts for income taxes in accordance
with SFAS 109. The provision for income taxes for the years ended September
30, 1996 and 1995 consists solely of the $800 minimum California franchise
tax.
Provisions for income taxes are summarized as follows:
<TABLE>
<CAPTION>
YEAR ENDED
---------------------------
SEPTEMBER 30, SEPTEMBER 30,
1996 1995
------------- -------------
<S> <C> <C>
Current income taxes.......................... $1,600 $800
Deferred income taxes......................... -- --
------ ----
Provision for income taxes.................. $1,600 $800
====== ====
</TABLE>
As a result of adopting SFAS 109, the Company has recognized deferred tax
assets for the tax effects of temporary differences for the years ended
September 30, 1996 and 1995 as follows:
<TABLE>
<CAPTION>
1996 1995
----------- ---------
<S> <C> <C>
Deferred tax assets:
Net operating losses............................ $ 1,120,000 $ 120,000
----------- ---------
Gross deferred tax assets....................... 1,120,000 120,000
Valuation adjustment............................ (1,120,000) (120,000)
----------- ---------
Net deferred tax assets....................... $ -- $ --
=========== =========
</TABLE>
The Company has net operating loss carryforwards remaining of approximately
$2,800,000. The regular net operating loss carryforwards, which are
approximately the same as the alternative net operating loss carryforwards, if
not utilized, will expire as follows:
<TABLE>
<S> <C>
2009........................................................... $ 100,000
2010........................................................... 200,000
2011........................................................... 2,500,000
----------
$2,800,000
==========
</TABLE>
F-9
<PAGE>
EMB CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
I. COMMITMENTS AND CONTINGENCIES:
Operating Leases
The Company subleases its facilities under an operating lease from an
unrelated third party which expires in March, 1997. Rental expense for the
year ended September 30, 1996 was $90,132.
Minimum future rental payments under the sublease total approximately
$45,064.
The noncancelable operating lease provides that the Company pays for
property taxes, insurance and certain other operating expenses applicable to
the leased premises.
Capital Leases
The Company acquired part of its equipment and furniture under capital lease
obligations. The economic substance of the capital lease agreements is that
the Company finances the acquisition by making monthly payments over a thirty-
six month period. The assets are reflected as part of property and equipment.
The following is an analysis of the book value of the leased assets included
in property and equipment as of:
<TABLE>
<CAPTION>
SEPTEMBER 30, SEPTEMBER 30,
1996 1995
------------- -------------
<S> <C> <C>
Cost.......................................... $ 75,949 $18,068
Accumulated depreciation...................... (23,450) (1,506)
-------- -------
Net Book Value.............................. $ 52,499 $16,562
======== =======
</TABLE>
The future minimum lease payments under capitalized leases and the present
value of the net minimum lease payments are as follows:
<TABLE>
<CAPTION>
YEAR ENDING SEPTEMBER 30,
-------------------------
<S> <C> <C>
1997.................................................... $39,927
1998.................................................... 30,356
1999.................................................... 3,469
-----
73,752
Less amount representing interest.......................... 15,103
-------
58,649
Less current portion of capital lease.................... 28,553
=======
$30,096
=======
</TABLE>
J. SUPPLEMENTAL CASH FLOW INFORMATION:
Supplemental disclosures of cash flow information are summarized as follows:
<TABLE>
<CAPTION>
YEARS ENDED
SEPTEMBER 30,
----------------
1996 1995
-------- -------
<S> <C> <C>
Cash paid for interest and income taxes:
Interest.................................................... $ 52,232 $ 2,164
Income taxes................................................ $ -- $ --
Noncash investing and financing activities:
Capital lease obligations incurred.......................... $ 57,881 $18,068
Common stock issued for land................................ $800,000 $33,000
Common stock issued for related party payable............... $232,018 $ --
</TABLE>
F-10
<PAGE>
EMB CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
K. CAPITAL STOCK:
The Company amended its Articles of Incorporation on May 21, 1996, which
authorized the issuance of 35,000,000 shares of capital stock; 30,000,000
shares are no par value common stock and 5,000,000 shares are preferred stock.
The preferred stock may be divided into and issued in one or more series. As
of September 30, 1996 there were no shares of preferred stock issued or
outstanding.
On September 27, 1996 the Company effectuated a one for four (1:4) reverse
stock split. The effect of this event has been retroactively applied for
financial statement presentation on the statement of stockholders' equity
(deficit).
L. STOCK OPTION, SAR AND STOCK BONUS PLAN:
On April 29, 1996 the Board of Directors approved the "EMB Corporation 196
Stock Option, SAR and Stock Bonus Plan." Options and SAR's may be granted to
employees and independent consultants. No options and SAR's shall be
exercisable within six months from date of grant or more than ten years after
date of grant. The option price of stock options shall in no event be less
than 85%, and for incentive stock options shall in no event be less than 100%
of the "fair market value" of the stock on the date of grant.
The Company has reserved a total of 250,000 shares of common stock for
issuances under the plan. As of September 30, 1996 no shares have been granted
under the plan.
M. WARRANTS:
As of September 30, 1996 there are 108,750 outstanding warrants to purchase
108,750 shares of no par value common stock at $2.00- $3.00 per share. No
warrants have been exercised as of September 30, 1996.
N. MAJOR CUSTOMER:
A major source of revenue for the Company is derived from the resale of
retail mortgage loans to a single national mortgage lender. The loss of this
business would have a material effect on the Company.
O. SUBSEQUENT EVENT:
On December 30, 1996 the Company sold the Monterey land (which has been held
for sale) to an unrelated third-party for $4,000,000. The Company received
$800,000 cash and a note receivable for $3,200,000. The note receivable is
secured by the property, bears interest at 12% per annum, and calls for ten
equal annual installments of principal and interest of $422,867 commencing
December 30, 1997, with the balance due on December 30, 2006.
F-11
<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>
<CAPTION>
TABLE OF CONTENTS
PAGE
----
<S> <C>
Summary..............................................................
The Company..........................................................
Use of Proceeds......................................................
Investment Considerations............................................
Capitalization.......................................................
Management's Discussion and Analysis
of Financial Condition and
Results of Operations................................................
Market Price.........................................................
Dividends............................................................
Business.............................................................
Management...........................................................
Principal Stockholders...............................................
Conflicts of Interest................................................
Description of Capital Stock.........................................
Legal Proceedings....................................................
Experts..............................................................
Additional Information...............................................
Financial Statements.................................................
</TABLE>
UNTIL , 1997 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL DEALERS
-----------
EFFECTING TRANSACTIONS IN THE REGISTERED SECURITIES, WHETHER OR NOT
PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS.
================================================================================
================================================================================
3,375,000 SHARES
OF
COMMON STOCK
EMB CORPORATION
----------------------------------------------------------------
PROSPECTUS
----------------------------------------------------------------
___________, 1997
================================================================================
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 24. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
-----------------------------------------
The Company is a Hawaii corporation. Section 415-48.5 of the Hawaii
Business Corporation Act (the "HBCA") provides authority for broad
indemnification of officers, directors, employees and agents of a corporation,
with certain specified exceptions.
Article XIII of the Company's Restated Articles of Incorporation provides
that the Company shall have the power to indemnify its directors, officers,
employees and agents to the fullest extent allowed by the HBCA.
Article III, Section 6 of the Company's By-Laws provides for extensive
indemnification of its directors, officers, employees and agents.
At the present time, the Company does not have any officer-director
liability insurance, nor does the Company have indemnification agreements with
any of its directors, officers, employees or agents.
ITEM 25. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
-------------------------------------------
The estimated fees and expenses payable by the Company in connection with
the distribution of the Common Stock registered hereunder are as follows:
*Securities and Exchange Commission registration fee....... $ 3,426
*Legal fees and expenses................................... 12,000
*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 $24,926
======
--------------------
* Estimated
ITEM 26. RECENT SALES OF UNREGISTERED SECURITIES.
---------------------------------------
In February 1996, the Company issued 3,375,000 shares (post-split
shares) of its Common Stock to Sterling Alliance Group, Ltd. in exchange for
assets in reliance upon Section 4(2) of the Securities Act of 1933, as amended
(the "Act"). In addition, the Company issued 821,825 shares of its Common Stock
in exchange for cancellation of debt and for services during fiscal 1996 in
reliance upon Section 4(2) under the Act.
The Company offered up to $1,000,000 of its Common Stock and
warrants in a limited offering made in reliance upon Rule 504 of Regulation D
under the Act. 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.
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.
II-1
<PAGE>
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.
11 Statement re: computation of per share earnings --Reference is made
to the Statements of Operations of the Registrant for its fiscal
year ended September 30, 1996, which are incorporated by reference
herein.
16 Letter on changes in certifying accountant is incorporated by
reference to Exhibit 16 of Amendment No. 1 to the Form 10-SB of the
Registrant.
21.1 A description of the subsidiaries of the Registrant is incorporated
herein by reference to Exhibit 21.1 to the Form 10-KSB of the
Registrant.
23.1* Consent of Harlan & Boettger
23.2* Consent of Stephen A. Zrenda, Jr., P.C.
II-2
<PAGE>
23.3* Consents of nominee directors
24.1* Power of Attorney (see signature page of this Registration
Statement)
27. Financial Data Schedule is incorporated herein by reference to
Exhibit 27 to the Form 10-KSB of the Registrant.
------------------------
*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) 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.
II-3
<PAGE>
(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
registration statement to be signed on its behalf by the undersigned, in the
City of Costa Mesa, State of California, on February 5, 1997.
Registrant: EMB CORPORATION
By:
---------------------------
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: February 5, 1997
By:
------------------------------- ----------------------------------
James E. Shipley William V. Perry
Director and President Director and Executive Vice President
------------------------------- ----------------------------------
B. Joe Wimer Bruce J. Brosky
Director, Secretary, Treasurer, Director and Vice President-
Chief Financial Officer and Marketing and
Principal Accounting Officer Public Relations
--------------------------------
Rory P. Hughes
Director and Vice President-
Research and Development
II-5
<PAGE>
EXHIBIT 10(K)
[LETTERHEAD OF ICI FUNDING CORPORATION APPEARS HERE]
Commitment No. 3539
Seller No. 000600013
January 24, 1997
Ms. Rory Hughes
President
ELECTRONIC MORTGAGE BANC, LTD.
575 Anton Blvd., Suite 200
Costa Mesa, CA 92626
RE: MASTER COMMITMENT TO PURCHASE JUMBO AND CONFORMING RESIDENTIAL MORTGAGES
Dear Ms. Hughes:
ICI FUNDING CORPORATION, a subsidiary of IMPERIAL CREDIT MORTGAGE HOLDINGS,
INC., hereinafter referred to as "Buyer", hereby commits to purchase/fund from
ELECTRONIC MORTGAGE BANC, LTD., hereinafter referred to as "Seller" first trust
deed mortgage loan(s) pursuant to the terms and conditions set forth herein and
the ICI Sellers Guide, the Progressive Series, Progressive Express and Advantage
Series Guide (Guides) as amended from time to time, and the ICIFC Sale
Agreement. Seller is bound by all conditions of the Guides and Sale Agreement or
under a separate written agreement. By executing this Commitment, Buyer hereby
agrees to purchase, and Seller hereby agrees to sell those certain Loan(s),
subject to terms and conditions of this Commitment.
1. AMOUNT OF COMMITMENT: Buyer will offer Seller $50,000,000
---------------------
commitment in exchange for 30,000 shares of Seller's non
restricted stock at a price of $2.00.
2. TERM OF COMMITMENT: This is a nine month (9), optional delivery,
-------------------
Master Commitment. The Commitment expiration date will be
October 31, 1997 or upon the fulfillment of the amount of
commitment, whichever occurs first. All loans must be committed
and delivered to Buyer in purchasable form prior to expiration
of this commitment.
3. COMMITMENT FEE: An up front commitment fee of one-eighth of one
---------------
percent (.125%) will be waived by Buyer in exchange for 30,000
shares of Seller's non restricted stock at a price of $2.00
(assuming the stock currently trades at $4.00)
. Credit history and delinquent credit outside of
program guidelines;
. 2 years employment not in the same line of work;
<PAGE>
3a. OPTIONAL COMMITMENT: Buyer will also offer Seller an option to
--------------------
an additional $50,000,000 forward commitment with an expiration
date of July 31, 1998, for an additional 30,000 shares at a
price of $2.00 to be delivered to Buyer at the time of
exercising the option. The option must be exercised by
September, 1997.
3b. OPTIONAL COMMITMENT FEE: If Seller elects to exercise the option
------------------------
of $50,000,000 commitment, an additional 30,000 shares of
Seller's non restricted stock at a price of $2.00 should be
delivered to Buyer at the time of exercising the option.
4. ELIGIBLE PRODUCT TYPES: Seller may sell and Buyer will purchase
-----------------------
mortgage products pursuant to the terms of the Guide(s), the
following types of mortgage loans:
. Progressive Series (including Super Select) loan programs;
. Progressive Advantages Series;
. Progressive Express program, Retail Originations only - See
attached Guidelines.
Each product offers the following type of mortgage loan:
. 30 year fully amortizing fixed rate;
. 15 year fully amortizing fixed rate;
. 6 month LIBOR semi-annually adjusting ARMs with 1/6 Caps;
. 2 year fixed Rollover to 6 month LIBOR semi-annually
adjusting ARMs;
5. UNDERWRITING GUIDELINES: Except as set forth herein, including
------------------------
the attached conditions, loan documentation and underwriting
must be in compliance with the Guide(s). Any exception to the
guidelines not specified within this commitment, must be
approved by Buyer prior to the delivery of the loan for
purchase. Program parameters and pricing parameters are subject
to change.
6. PRIOR UNDERWRITING APPROVAL BY BUYER: Seller may submit loans to
-------------------------------------
Buyer for prior approval. Loans that are rejected by Buyer are
ineligible for purchase. If a loan has been rejected by another
conduit, Seller must notify Buyer of reason for rejection at the
time of loan submission. Prior underwriting is required by Buyer
on loan as parameters stated in the attached Exhibit "B".
Regardless of the underwriting delegation given herein as shown
in Exhibit B, Buyer will require prior underwriting for the
following:
. Any loans with exceptions to the Guideline(s);
. Cash reserves less than required by Guideline(s);
. Non-ARMs length transactions (as define in ICIFC's
Underwriting Guideline);
. Credit history and delinquent credit outside of program
guidelines;
. 2 years employment not in the same line of work;
<PAGE>
7. DELEGATED UNDERWRITING: Seller is delegated as per attached
-----------------------
Exhibit B. All loans not delegated as per attached must be prior
approved by Buyer or contract Services as described below. Buyer
will have the right to terminate all or any portion of the
delegation given to the Seller providing Buyer notify Seller in
writing stating a termination date of such delegation.
8. PRIOR APPROVAL BY CONTRACT SERVICES: Seller may select prior
------------------------------------
underwriting by Contract Service Underwriting (acceptable to
Buyer) for Progressive Series (Select) as stated in Exhibit B.
Loans rejected by another conduit or Buyer will not be eligible
for Contract Service Underwriting.
Acceptable Mortgage Insurance Contract Services:
. CMAC
. UGI
. PMI
. GE
. RMIC
Unacceptable Mortgage Insurance Contract Services:
. MGIC
9. PURCHASE PRICE: The purchase price will be based on the posted
---------------
rates and prices, plus any pricing adjustments on Knight Ridder
screens 7271 through 7289 for the applicable loan program being
locked in. For all fixed rate Progressive Series, Smart and
Progressive Express loans, the screen price will be increased by
one-half of one percent (0.50%) at time of rate lock in. For all
fixed rated Advantage Series loans, the screen price will be
increased by five-eighths of one percent (0.625%) at time of
rate lock in. For all adjustable loans described herein, the
screen price will also be increased by one-eighth of one percent
(.125%) at time of rate lock in.
10. LOCK-IN PROCEDURES: Seller will reference this Master Commitment
-------------------
number and specify the preferred pricing parameters at time of
commitment, and follow the standard Guide requirements for best
efforts lock-in. Bulk lock-ins are allowed for a minimum of
$500,000 and are considered mandatory delivery, plus or minus
two percent (2%).
11. PRIVATE MORTGAGE INSURANCE: All Progressive loans with balances
---------------------------
exceeding the lesser of 80.01% of the purchase price or the
appraised value shall be insured by a mortgage insurance company
acceptable to Buyer. Said mortgage insurance coverage shall be
in a form acceptable to Buyer and must reduce exposure to
<PAGE>
at least seventy-five (75%) percent of the original value on
Progressive products. For loans originated under Progressive
Express, refer to Underwriting Guidelines attached for specific
mortgage insurance coverage and companies. The Progressive Guide
provides for a "Lenders Option" (no MI option) for Progressive
product, with additional cost to Seller (see applicable KR screen
for pricing).
12. DELIVERY RESTRICTIONS: Property types and program percentages
---------------------
are unrestricted except for the Progressive program which will
be subject to delivery limitations set forth below:
PROGRESSIVE DELIVERY PERCENTAGE LIMITATIONS:
-------------------------------------------
. LTV LIMITATIONS: Allow a maximum of 30% of the aggregate
amount of all Progressive delivered to exceed 80%LTV to a
maximum of 95%LTV, with mortgages greater than 90% LTV not to
exceed 20% of the Commitment amount;
. REDUCED DOC: Not to exceed 40% of the aggregate amount of all
Progressive delivered;
. NOO and SECOND HOME: Not to exceed 15% of the aggregate
amount of all Progressive delivered;
. LOANS GREATER THAN $650,000: Not to exceed 20% of the
aggregate amount of all Progressive delivered;
. 2-4 UNIT PROPERTIES: Not to exceed 5% of the aggregate amount
of all Progressive delivered;
. NO INCOME/NO ASSET: Not to exceed 20% of the Commitment
amount;
. 100% FINANCING: Not to exceed 5% of the Commitment amount;
. 80% NO RATIO: Not to exceed 15% of the Commitment amount;
. PROGRESSIVE EXPRESS: Not exceed 50% of the total Commitment
amount;
. PROGRESSIVE EXPRESS GEOGRAPHIC LIMITATION: Not more than 40%
of this commitment may consist of loans located in
California;
13. SERVICING: Loans shall be sold in their entirety to Buyer, with
---------
servicing rights of such loans released to Buyer upon purchase.
All servicing rights of loans purchased according to this
Commitment shall be included with this purchase and shall be
considered transferred and owned by Buyer as of the date of
funding of each loan purchase and Seller shall have no further
rights or claims of any type as of the date of each loan
purchase.
All servicing activities, records, funds and including, but not
limited to, any escrow and buydown balances, all funds held for
the benefit of these loans, and insurance records shall be
transferred to Buyer on the date of purchase. The cost for
establishing new tax service contracts will be at Seller's
expense.
<PAGE>
14. PAIR-OFF: Once loans are locked in for block commitments, a
--------
pair-off fee of one eighth of one percent (.125%), plus any
market movement, will be assessed on the difference, if any,
between the Commitment amount (minus delivery tolerance and the
actual amount delivered. Seller will remit payment to Buyer for
the amount of the pair-off fee within ten(10) days from the
expiration date of the commitment.
15. SALES AND FUNDING: Funding will occur within seventy two (72)
-----------------
hours of delivery, provided Seller delivers all required
documents and outstanding condition, in addition to, the
original promissory notes evidencing the loans to be purchased,
duly endorsed in favor of Buyer, prior to the purchase date.
Seller shall furnish copies of the assignment of deed of trust
or mortgage, in addition to other documents outlined in the
Guide.
In addition to any applicable pricing adjustments posted on
applicable Knight Ridder screens the following additional fees
will be charged on all loans purchased by Buyer;
Tax Service Fee - $55.00 or prevailing
TransAmerica rate;
Administrative Fee - $125.00 per loan;
Prior Underwriting Fee - $75.00;
16. GEOGRAPHICAL RESTRICTIONS: Unless otherwise stated, mortgages
-------------------------
secured by properties located in the continental United States
and Hawaii, Alabama are eligible for purchase.
17. WARRANTIES AND REPRESENTATIONS: Seller to induce Buyer to fund
------------------------------
loans, warrants, represents and covenants to Buyer that in
connection with each loan transaction.
Warranties within this agreement shall survive the transfer to
and purchase by Buyer and shall be deemed to successors and
assigns. No waiver of any default or breach by Seller shall be
implied from any omission by Buyer or its assigns to take any
action on account of such default if such default continues or
is repeated. No written waiver shall affect any breach other
than the breach specified in such waiver and only to the extent
therein expressly stated. Any failure or delay by Buyer or its
assigns in exercising any rights, power, or remedy hereunder
shall not be deemed a waiver thereof.
17a.PROGRESSIVE EXPRESS SELLER'S CERTIFICATION: Seller makes the
------------------------------------------
following certification to induce Buyer to commit to the
purchase of Progressive Express loans.
. The loan terms furnished in Progressive Express
Application are true, accurate, and complete.
<PAGE>
. The information contained in Progressive Express
Application was obtained directly from the borrower by a
full-time employee of Seller or its duly authorized
agent.
. The credit report submitted on the subject borrower, co-
borrower, if applicable, was ordered by Seller or its
duly authorized agent directly from the credit bureau
which prepared the report was received directly from
said credit bureau.
18. INDEMNIFICATION: Without limiting any of Buyer's right contained
---------------
in this agreement, Seller shall indemnify, defend and hold
Buyer, its successors and assigns, and its officers, agent, and
employees harmless including judgments, court costs, and actual
credit reporting agency costs, and attorney fees related to any
breach of Seller warranty, representation, or covenant contained
in this agreement. This indemnification shall survive the terms
of this agreement for all loans closed until the sooner of: (a)
written release by Buyer and any successor or assign; (b) payoff
of the loan; or (c) the lapse of any applicable statute of
limitation.
19. MODIFICATION, WAIVER OR AMENDMENT: No modification or waiver of
---------------------------------
or amendment to any of the terms of this Commitment shall be
effective unless it is in writing signed by all parties hereto.
20. ASSIGNMENT: This Commitment is only assignable by Buyer. This
----------
Commitment is not intended to benefit any third party. Buyer may
only assign this Commitment to a party who has the ability to
perform all of Buyer's obligations under this Commitment.
21. APPLICABLE LAW: The Commitment shall be governed by and
--------------
construed under the laws of the State of California, to the
jurisdiction of whose courts the parties hereby agree to submit.
22. ENFORCEMENT: In the event of any action by Buyer or Seller to
-----------
enforce this Commitment, the prevailing party shall be entitled
to receive, in addition to all other relief, the costs thereof
including, without limitation, attorney's fees and court costs.
23. ENTIRE AGREEMENT: This Commitment and any agreement, document or
----------------
instrument attached hereto or referenced herein integrates all
of the terms and conditions mentioned herein or incidental
hereto, and supersedes all oral negotiations and prior writings
regarding the subject matter hereof.
24. NOTICES: Buyer and Seller mutually agree that each of them will
-------
immediately upon demand by the other party, execute such
documents or perform such acts as may be required by such party
to perform their objectives under this agreement; and refusal to
cooperate and execute documents or perform acts required by this
agreement shall be considered a material breach hereof and shall
suspend the performance of non-breaching party full and complete
performance of the breaching party.
<PAGE>
All notices, requests, demands or other communications that are
to be given under this contract shall be in writing, addressed
to the appropriate parties and sent postage prepaid to the
address below:
If to Buyer: ICI Funding Corporation
20371 Irving Ave., Bldg. A
Santa Ana Heights, CA 92707
ATTN: Mary Glass
If to Seller: ELECTRONIC MORTGAGE BANC, LTD.
575 Anton Blvd. Suite 200
Costa Mesa, CA 92626
ATTN: Rory Hughes
25. SEVERABILITY: Whenever possible, each provision of this
------------
Commitment shall be interpreted in such manner as to be valid
and effective under applicable law, but if any such provision
shall be ineffective to the extent of such prohibition or
invalidity without invalidating the remainder of such provision
or the remaining provisions of the Commitment.
26. HEADINGS: The headings used herein are used for convenience
--------
only, are not part hereof and shall not be used in construing
this Commitment.
27. COUNTERPARTS: This Commitment may be executed in any number of
------------
counterparts and all such counterparts taken together shall be
deemed to constitute on and the same instrument.
28. FINANCIAL CONDITION: Prior to, or concurrent with the execution
-------------------
of this Commitment, Seller agrees to submit a recent audited
financial statement. Unless otherwise waived by Buyer, Seller
must have a minimum audited net worth of at least $1,000,000 in
order to deliver loans under this Commitment.
<PAGE>
If the terms and conditions of the Commitment are acceptable to Seller, please
execute the acceptance where indicated on this Commitment and return one copy of
the signed agreement. A signed copy hereof signed by Seller must be received by
Buyer or its authorized representative along with the contract for stock option
mentioned in paragraph 3 within five (5) business days of receipt by Seller.
The individuals executing this Commitment by their signatures do hereby
certify they are duly authorized to execute this document on behalf of
the parties they represent.
-------------------------------
By: Frank Martorano
Senior Vice President
ICI FUNDING CORPORATION
/s/Mary C. Glass
-------------------------------
By: Mary C. Glass
Senior Vice President
ICI FUNDING CORPORATION
We hereby acknowledge and accept all of the terms and conditions of this
Commitment for the sale of the Loans described herein.
Date: 1-29-97
-------------------------
/s/ Joseph K. Brick
---------------------------------
By: Joseph K. Brick
President
ELECTRONIC MORTGAGE BANC, LTD.
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use in the Form SB-2 registration statement of our
report dated January 13, 1997, relating to the financial statements of EMB
Corporation (formerly called Pacific International, Inc.), which is contained
therein and to use of our name therein and in the section "Experts".
San Diego, California HARLAN & BOETTGER
February 5, 1997
By:
------------------------------------------
<PAGE>
EXHIBIT 23.2
CONSENT OF LEGAL COUNSEL
We hereby consent to the use of our name in Form SB-2 registration statement of
EMB Corporation.
Oklahoma City, Oklahoma STEPHEN A. ZRENDA, JR., P.C.
February 5, 1997
By:
--------------------------------------------
Stephen A. Zrenda, Jr., President
<PAGE>
EXHIBIT 23.3
February 4, 1997
Board of Directors
EMB Corporation
575 Anton Boulevard
Suite 200
Costa Mesa, California 92626
Re: Nomination as a director of EMB Corporation
Gentlemen:
This letter hereby confirms my acceptance of my nomination to become a
director of EMB Corporation (the "Company") for election at its 1997 annual
stockholders meeting.
I hereby consent to use of my name in the proxy material of the
Company, and in the proposed Form SB-2 registration statement of the Company to
be filed with the U.S. Securities and Exchange Commission.
Very truly yours,
Joseph K. Brick
<PAGE>
EXHIBIT 23.3
February 4, 1997
Board of Directors
EMB Corporation
575 Anton Boulevard
Suite 200
Costa Mesa, California 92626
Re: Nomination as a director of EMB Corporation
Gentlemen:
This letter hereby confirms my acceptance of my nomination to become a
director of EMB Corporation (the "Company") for election at its 1997 annual
stockholders meeting.
I hereby consent to use of my name in the proxy material of the
Company, and in the proposed Form SB-2 registration statement of the Company to
be filed with the U.S. Securities and Exchange Commission.
Very truly yours,
Malcomb K. Crist
<PAGE>
EXHIBIT 23.3
February 4, 1997
Board of Directors
EMB Corporation
575 Anton Boulevard
Suite 200
Costa Mesa, California 92626
Re: Nomination as a director of EMB Corporation
Gentlemen:
This letter hereby confirms my acceptance of my nomination to become
a director of EMB Corporation (the "Company") for election at its 1997 annual
stockholders meeting.
I hereby consent to use of my name in the proxy material of the
Company, and in the proposed Form SB-2 registration statement of the Company
to be filed with the U.S. Securities and Exchange Commission.
Very truly yours,
Michael P. Roth
