<PAGE>
As filed with the Securities and Exchange
Commission on February 13, 1998 333-21719
==============================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
------------------------
AMENDMENT NO. 3 TO
FORM SB-2
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
EMB CORPORATION
(NAME OF SMALL BUSINESS ISSUER IN ITS CHARTER)
<TABLE>
<S> <C> <C>
HAWAII 6162 95-3811580
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number) Identification No.)
3200 BRISTOL, 8TH FLOOR 3200 BRISTOL, 8TH FLOOR James E. Shipley, President
COSTA MESA, CALIFORNIA 92626 COSTA MESA, CALIFORNIA 92626 EMB CORPORATION
(714) 437-0738 (Address of principal place of business 3200 BRISTOL, 8TH FLOOR
(Address and telephone number or intended principal place of business) COSTA MESA, CALIFORNIA 92626
of principal executive offices) (714) 437-0738
(Name, address and telephone
number, of agent for service)
</TABLE>
------------------------
Copies to:
STEPHEN A. ZRENDA, JR., ESQ.
STEPHEN A. ZRENDA, JR., P.C.
1520 BANK ONE CENTER
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 this Form is a post-effective amendment filed pursuant to Rule 462(d) 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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<CAPTION>
====================================================================================================
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 price fee(3)
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Stock, to be distribut- $10,335,938 $ 3.06 $10,335,938 $3,426(1)
ed by stockholder(1)
Common Stock, issuable upon $ 1,237,865 $ 1.92 $ 1,237,865 $ 366
conversion of preferred
stock(2)
Common Stock, issuable upon $ 1,647,657 $2.375 $ 1,647,657 $ 487
exercise of warrants(2)
====================================================================================================
</TABLE>
(1) Represents 3,375,000 shares outstanding Common Stock of the Registrant held
by Sterling Alliance Group, Ltd. for which the filing fee has been
previously paid.
(2) Includes 644,134 shares of Common Stock issuable upon the conversion of
outstanding preferred stock and 693,750 shares issuable upon the exercise
of outstanding warrants of the registrant.
(3) 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 12, 1998, regarding the shares of Common Stock issuable upon
the conversion of preferred stock (644,143 shares) and the exercise of
warrants (643,750).
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE
OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a),
MAY DETERMINE.
- --------------------------------------------------------------------------------
Number of pages in sequential number system _______
Index to Exhibits appears on sequential page _______
<PAGE>
EMB CORPORATION
CROSS REFERENCE SHEET SHOWING LOCATION
IN PROSPECTUS OF INFORMATION REQUIRED BY ITEMS IN PART I OF FORM SB-2
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<CAPTION>
ITEM IN PART I OF FORM SB-2 LOCATION IN PROSPECTUS
--------------------------- ----------------------
<S> <C> <C>
1. Front of Registration Statement and Outside Front Cover of Prospectus.......... Outside Front Cover Page
2. Inside Front and Outside Back Cover Pages of Prospectus........................ Inside Front and Outside Back Cover Pages
3. Summary Information and Risk Factors........................................... The Company-Summary Financial
Information; Risk Factors; Business
4. Use of Proceeds................................................................ Not Applicable
5. Determination of Offering Price................................................ Front Cover Page; Risk Factors
6. Dilution....................................................................... Risk Factors
7. Selling Security Holders....................................................... Not Applicable
8. Plan of Distribution........................................................... Front Cover Page
9. Legal Proceedings.............................................................. Legal Proceedings
10. Directors, Executive Officers, Promoters and Control Persons................... Management
11. Security Ownership of Certain Beneficial Owners and Management................. Principal Stockholders; Management-
Security Ownership of Management
12. Description of Securities...................................................... Outside Front Cover Page; Capitalization;
Description of Capital Stock
13. Interest of Named Experts and Counsel.......................................... Legal Matters; Experts
14. Disclosure of Commission Position on Indemnification for Securities Act
Liabilities........................................................... Management-Indemnification of Officers
and Directors
15. Organization Within Last Five Years............................................ The Company; Business
16. Description of Business........................................................ The Company; Business
17. Management's Discussion and Analysis or Plan of Operations..................... Management's Discussion and
Analysis of Financial Condition
and Results of Operations; Business
18. Description of Property........................................................ Business-Properties
19. Certain Relationships and Related Transactions................................. Management-Certain Relationships and
Related Transactions
20. Market for Common Equity and Related Stockholder Matters....................... Market Price; Description of Capital Stock
21. Executive Compensation......................................................... Management-Compensation of Executive Officers
22. Financial Statements........................................................... Financial Statements
23. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.................................................. Not Applicable
</TABLE>
<PAGE>
SUBJECT TO COMPLETION, DATED FEBRUARY 13, 1998
PROSPECTUS
4,662,893 Shares
EMB CORPORATION
Common Stock
3,375,000 of the shares of Common Stock of EMB Corporation (the "Company")
offered hereby are being transferred by Sterling Alliance Group, Ltd. ("SAG"),
the largest stockholder of the Company, to its stockholders. SAG intends to
transfer its 3,375,000 shares of the Common Stock, no par value, of the Company
to its stockholders in connection with the proposed dissolution and liquidation
of SAG. Neither the Company nor SAG will receive any proceeds from the transfer
of the shares of the Company held by SAG.
644,143 of the shares of Common Stock are to be issued to holders of the
convertible preferred stock and convertible notes of the Company, specifically,
its 8% Convertible Preferred Stock, Series A, its 10% Convertible Preferred
Stock, Series B, and its 8% Convertible Notes. The Company will not receive any
proceeds from the conversion of such preferred stock into the Common Stock of
the Company.
643,750 of the shares of Common Stock are to be issued upon the exercise of
warrants, comprised of one warrant to purchase 150,00 shares of Common Stock at
an exercise price of $1.85 per share, and of warrants to purchase 493,750 shares
at an exercise price of $2.375 per share. If all warrants are exercised by the
holders, the Company will receive an aggregate $1,450,656.25 in proceeds.
The Company independently originates and processes mortgage loans, and
intends to engage in the secondary placement of real estate mortgages. The
Company has an interactive software system for the origination and processing of
mortgage loans which it calls Video InteractiveMortgage Process ("VIP"). This
system has been linked to the ProShare(R) software developed by Intel(R)
Corporation that provides direct teleconferencing and interaction between
prospective mortgage borrowers and mortgage lenders. See "Business".
The Company's Common Stock is traded in the over-the-counter market
(electronic bulletin board) with reported price quotations under the trading
symbol EMBU. On February 12, 1998, the closing bid and ask prices of a share of
the Common Stock of the Company was $1.8125 and $2.031 respectively. See
"Market Price".
SEE "RISK FACTORS" FOR A DISCUSSION OF CERTAIN FACTORS THAT SHOULD BE
CONSIDERED.
---------------------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
---------------------------------------
EMB Corporation
3200 Bristol, 8th Floor
Costa Mesa, California 92626
(800) EMB-9022
The date of this Prospectus is _________________, 1998.
<PAGE>
THE COMPANY
The following summary is qualified in its entirety by, and should be read
in conjunction with, the more detailed information and the Financial Statements,
including the notes thereto, appearing elsewhere in this Prospectus. Unless
otherwise indicated, all references in this Prospectus to the number of shares
of Common Stock give effect to a 1 for 4 reverse stock split effected September
27, 1996.
This Prospectus and any accompanying supplements hereto, including
documents incorporated herein and therein by reference, contain forward-looking
statements within the meaning of Section 27A of the Securities Act of 1933 and
Section 21E of the Securities Exchange Act of 1934. Forward-looking statements
are inherently subject to risks and uncertainties, many of which cannot be
predicted with accuracy and some of which might not even be anticipated. Future
events and actual results, financial and otherwise, may differ materially from
the events and results discussed in the forward-looking statements. Factors
that might cause such a difference include, but are not limited to, those
discussed in "Risk Factors" and "Management's Discussion and Analysis of
Financial Condition and Results of Operations" appearing elsewhere in this
Prospectus.
EMB Corporation (the "Company") was incorporated in the State of Hawaii
on May 5, 1960, and was previously known as "Pacific International, Inc."
Until December 1995, the Company had been dormant and conducted no
material operations for many years. The Company was originally incorporated to
acquire developed and undeveloped real estate. In December 1995, the Company
agreed to acquire certain assets from Sterling Alliance Group, Ltd. ("SAG"),
including all of the issued and outstanding capital stock of EMB Mortgage
Corporation ("EMB"), a California corporation (formerly named Electronic
Mortgage Banc, Ltd.), certain real property, and other assets, and to assume
certain liabilities, from SAG in exchange for 3,375,000 shares of the Common
Stock of the Company.
Since the completion of this acquisition, the Company has continued the
operations of EMB, which is presently a wholly owned subsidiary of the Company.
EMB is primarily engaged in mortgage lending and in the business of originating,
processing and marketing mortgage loans. See "Business".
THE OFFERING
Common Stock presently outstanding ...................... 8,691,142 Shares(1)
Common Stock to be outstanding after offering............ 9,979,035 Shares(1)
Common Stock trading symbol.............................. EMBU
- -----------------------------
(1) As of February 2, 1998.
SUMMARY FINANCIAL INFORMATION
The data set forth below is qualified by reference to, and should be read
in conjunction with, the financial statements and notes thereto and
"Management's Discussion and Financial Analysis of Financial Condition and
Results of Operations" included elsewhere in this Prospectus. The following
summary financial data of the Company as of September 30, 1997 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 and the notes thereto set forth
elsewhere in the Prospectus. See "Financial Statements".
2
<PAGE>
<TABLE>
<CAPTION>
FISCAL YEAR ENDED SEPTEMBER 30,
-------------------------------------------------
1997 1996 1995
----------- ----------- ----------
<S> <C> <C> <C>
STATEMENT OF OPERATIONS:
Revenues $ 4,156,193 $ 276,419 $ 97,400
Operating expenses $ 6,750,523 $ 3,406,300 $ 534,480
Loss from operations $(2,594,330) $(3,159,517) $ (437,080)
Other income (expenses) $ 44,105 (67,081) $ 7,825
Loss before income taxes $(2,550,225) $(3,226,598) $ (429,255)
Income taxes $ 1,600 $ 1,600 $ 800
Net loss $(2,551,825) $(3,228,198) $ (430,055)
Loss per share $(.42) $(.89) $(.29)
Weighted average shares $ 6,114,176 3,641,421 1,469,225
outstanding
</TABLE>
SEPTEMBER 30, 1997
------------------
Balance Sheet Data:
Working capital (deficit) (183,771)
Total assets $13,022,584
Total long-term debt and capital lease obligations $ 20,515
Deferred Gain $ 3,200,000
Total shareholders' equity $ 1,679,741
USE OF PROCEEDS
The Company will not receive any proceeds from the conversion of the 8%
Convertible Preferred Stock, Series A, or of the 10% Convertible Preferred
Stock, Series B, into the Common Stock of the Company. However, the Company may
receive up to $1,450,656.25 from the exercise of the outstanding warrants to
purchase 643,750 shares of Common Stock held by the preferred stockholders if
all warrants are exercised by the holders. The proceeds from the exercise of
the warrants will be used by the Company for general operating capital.
RISK FACTORS
RISK FACTORS RELATING TO THE COMPANY
THE COMPANY. There is no assurance that the Company's activities will be
profitable in the future. The likelihood of the success of the Company must
also be considered in light of the problems, expenses, difficulties,
complications, delays and all of the inherent risks frequently encountered in
the operation of a relatively new business. See "Business".
The Company may experience continued losses primarily because it will
achieve limited revenues while incurring costs related to its business
development. There is no assurance that the Company will attain profitable
operations. The Company's success
3
<PAGE>
will depend upon its ability to continue to originate and process mortgage
loans, and to expand its marketing capabilities. There can be no assurance that
the Company's mortgage services and systems will achieve a broad market
acceptance. See "Capitalization".
CONFLICTS OF INTEREST. There are anticipated material conflicts of
interest between the Company and its stockholders or its affiliates, and there
may be potential conflicts of interest involving the Company and its
stockholders or its affiliates, some of which may affect the planned business
activities of the Company. The Board of Directors will attempt to resolve any
conflict of interest situation which may arise and which is brought to the
attention of the Board of Directors on a case-by-case basis. See "Conflicts of
Interest".
NON-ARM'S LENGTH TRANSACTIONS. The Company may engage in transactions
with its officers, directors and stockholders. Such transactions may be
considered as not having occurred at arm's length. The Company may continue to
do business with such persons in the future, but intends to contract with them
on the same basis and upon no more favorable terms than could be obtained from
persons not affiliated with the Company. See "Conflicts of Interest."
MANAGEMENT AND EMPLOYEES. The Company's success depends to a significant
extent upon members of senior management and other key employees of the Company,
none of whom is bound by an employment agreement or have experience in managing
a large public mortgage company. The Company does not maintain key man life
insurance on any of its employees. The loss of the service of any of these
individuals could have a material adverse effect on the Company. In addition,
the Company believes that its future success will also depend to a significant
extent upon its ability to attract, train and retain highly skilled technical,
management, sales, marketing and consulting personnel. Competition for such
personnel is intense, and the Company expects that such competition will
continue for the foreseeable future. The Company has from time to time
experienced difficulty in locating candidates with appropriate qualifications.
There can be no assurance that the Company will be successful in attracting or
retaining such personnel, and the failure to attract or retain such personnel
could have a material adverse effect on the Company's business, financial
condition or results of operations. See "Management".
RELIANCE ON MANAGEMENT. Substantially all decisions regarding management
of the Company's affairs will be made by the officers of the Company.
Accordingly, stockholders must be willing to entrust all aspects of management
to them. Potential investors must carefully evaluate the personal experience
and business performance of the principals of the Company. The Company also
intends to retain consultants and additional employees to provide services to
the Company regarding the operations of the Company. See "Business", and
"Management-Consultants". Consultants have no fiduciary duty to the
stockholders, and may not perform as expected.
INDEMNIFICATION. The Company's Restated Articles of Incorporation and
By-Laws limit the liability of its directors and officers to the Company and its
stockholders to the extent permitted by Hawaii law, and the Company's Restated
Articles of Incorporation and By-Laws provide for indemnification of the
directors' and officers' to such extent. See "Management - Directors and
Executive Officers." The Company may also obtain directors and officers
liability insurance. These measures will provide additional protection to the
officers and directors of the Company against liability in connection with
certain corporate actions.
UNINSURED LOSSES. The Company has comprehensive insurance, including
general liability, fire and extended coverage, business interruption insurance,
and errors and omissions insurance, which is customarily obtained for similar
operations. Although the Company will maintain insurance coverage in amounts
believed to be prudent and sufficient by the Company, there is a possibility
that losses may exceed such coverage limitations. Furthermore, there are
certain types of losses (generally of a catastrophic nature, including
earthquakes and floods) that are either uninsurable or not economically
insurable. Should such a disaster occur, the Company could suffer a loss of the
capital invested in, as well as anticipated profits from, any assets destroyed
by such casualty.
NEED FOR ADDITIONAL FINANCING. The Company's ability to implement its
business strategy will depend upon its ability to continue to establish
alternative long-term financing arrangements, maintain sufficient financing
under warehousing facilities upon acceptable terms and to access the public or
private capital markets in connection with the issuance of its equity or debt
securities. There can be no assurance that such financing will be available to
the Company on favorable terms, if at all. If such financing were not available
or the Company's capital requirements exceed anticipated levels, then the
Company would be required to obtain additional financing. The Company cannot
presently estimate the amount and timing of additional financing requirements
because such requirements are dependent upon, among other things, the growth of
the Company. If the Company were unable to raise such additional
4
<PAGE>
capital, its results of operations and financial condition would be adversely
affected. See "Management's Discussion and Analysis of Results of Operations and
Financial Condition -- Liquidity and Capital Resources."
RISKS RELATING TO MORTGAGE LENDING
MARKET RISKS. The results of the Company's operations will be affected
by various factors, many of which are beyond the control of the Company. The
results of the Company's operations will depend, among other things, on the
level of net cash flows generated by the Company's mortgage assets and the
supply of and demand for mortgage loans. The Company's net cash flows will vary
as a result of changes in interest rates, the behavior of which involves various
risks and uncertainties as set forth below. Prepayment rates and interest rates
depend upon the nature and terms of the mortgage assets, the geographic location
of the properties securing the mortgage loans, conditions in financial markets,
the fiscal and monetary policies of the United States government and the Board
of Governors of the Federal Reserve System, international economic and financial
conditions, competition and other factors, none of which can be predicted with
any certainty. Because interest rates will significantly affect the Company's
activities, the operating results of the Company will depend, in large part,
upon the ability of the Company to utilize appropriate strategies to maximize
returns to the Company while attempting to minimize risks. See "Business".
GENERAL RISKS OF MORTGAGE LOANS. Mortgage loans are subject to varying
degrees of risk, including the risk of a default by the borrowers on a mortgage
loan, and the added responsibility on the part of the Company of foreclosing in
order to protect its investment. The ability of the borrowers to make payments
on non-single-family mortgage loans is highly dependent on the borrowers'
ability to manage and sell, refinance or otherwise dispose of the properties and
will be dependent upon all the risks generally associated with real estate
investments which are beyond the control of the Company. The Company must rely
on the experience and ability of the borrowers to manage, develop and dispose of
or refinance the properties. Investing in real estate is highly competitive and
is subject to numerous inherent risks, including, without limitation, changes in
general or local economic conditions, neighborhood values and interest rates,
limited availability of mortgage funds which may render the sale or refinancing
of the properties difficult, increases in real estate taxes, other operating
expenses, the supply and demand for properties of the type involved, toxic and
hazardous wastes, environmental considerations, zoning laws, entitlements, rent
control laws, other governmental rules and fiscal policies and acts of God, such
as floods, which may result in uninsured losses. See "Business".
CONCENTRATION. The mortgage loans made by the Company may be obligations
of a limited number of borrowers on a limited number of properties. The lack of
diversity in the type, number and geographic location of mortgage loans made by
the Company would materially increase the risk of an investment in the Common
Stock.
CERTAIN RISKS IN ACQUIRING AND ACCUMULATING MORTGAGE LOANS. The Company
may acquire and accumulate mortgage loans as part of its long-term investment
strategy or until a sufficient quantity has been acquired for securitization
into mortgage-backed securities. There can be no assurance that the Company
will be successful in securitizing mortgage loans. While holding mortgage
loans, the Company will be subject to risks of borrower defaults and
bankruptcies, fraud losses and special hazard losses. In the event of any
default under mortgage loans held by the Company, the Company will bear the risk
of loss of principal to the extent of any deficiency between the value of the
mortgage collateral and the principal amount of the mortgage loan. It may not
be desirable, possible or economic for the Company to complete the
securitization of any or all mortgage loans which the Company acquires or funds,
in which case the Company will continue to hold the mortgage loans and bear the
risks of borrower defaults and special hazard losses.
Mortgage loans invested in by the Company will be secured by the
properties and will also be a recourse obligation of the borrower. In the event
of a default, the Company would be able to look to the borrower to make up any
deficiency between the value of the collateral and the principal amount of the
mortgage loan.
It is expected that when the Company acquires mortgage loans, the sellers
will represent and warrant to the Company that there has been no fraud or
misrepresentation with respect to the origination of the mortgage loans and will
agree to repurchase any loan with respect to which there is fraud or
misrepresentation. There can be no assurance that the Company will be able to
obtain the repurchase agreement from the sellers. Although the Company may have
recourse to the sellers based on the sellers' representations and warranties to
the Company, the Company will be at risk for loss to the extent the sellers do
not perform their repurchase obligations.
5
<PAGE>
The Company may acquire mortgage loans from failed savings and loan
associations or banks through United States government agencies such as the
Resolution Trust Corporation or the Federal Deposit Insurance Corporation.
These institutions do not provide the seller's typical representations against
fraud and misrepresentation. The Company intends to acquire third party
insurance, to the extent that it is available at a reasonable price, for such
risks. In the event the Company is unable to acquire such insurance, the
Company would be relying solely on the value of the collateral underlying the
mortgage loans. Accordingly, the Company will be subject to a greater risk of
loss on obligations purchased from these institutions.
Since 1995, the Company's growth in originating loans has been
significant. In light of this growth, the historical financial performance of
the Company may be of limited relevance in predicting future performance. Also,
the loans originated by the Company have been outstanding for a relatively short
period of time. Consequently, the delinquency and loss experience of the
Company's loans to date may not be indicative of future results. It is unlikely
that the Company will be able to maintain delinquency and loan loss ratios at
their present levels to the extent that the Company's loan portfolio becomes
more seasoned and are not resold by the Company.
ABILITY TO ACQUIRE MORTGAGE ASSETS AT FAVORABLE SPREADS RELATIVE TO
BORROWING COSTS. The Company's net income from mortgage lending will depend
largely on the Company's ability to acquire mortgage assets at favorable spreads
over the Company's borrowing costs. The Company may purchase mortgage assets
from a variety of mortgage bankers, banks, savings and loans, investment banking
firms, home-builders and other firms involved in originating, packaging and
underwriting mortgage loans ("Mortgage Suppliers"). In acquiring mortgage
loans, the Company will compete with REITs, investment banking firms, savings
and loan associations, banks, mortgage bankers, insurance companies, mutual
funds, other lenders, GNMA, FNMA, FHLMC and other entities purchasing mortgage
loans, many of which have greater financial resources than the Company. There
are numerous entities that invest in mortgage loans and others may be organized
in the future. The effect of the existence of additional entities that invest
in mortgage loans may be to increase competition for the available supply of
mortgage loans suitable for purchase by the Company. There can be no assurance
that the Company will be able to acquire sufficient mortgage loans from Mortgage
Suppliers at spreads above the Company's cost of borrowings. In addition, there
can be no assurance that Mortgage Suppliers will continue to originate suitable
types of mortgage loans or that changes in market conditions or applicable laws
will not affect the availability of suitable mortgage loans.
DEPENDENCE ON WAREHOUSE FINANCING. The Company relies significantly upon
its access to warehouse credit facilities in order to fund new originations and
purchases. The Company has a $3,000,000 warehouse line of credit with Impac
Warehouse Lending Group, Inc., a division of Impac Mortgage Holdings, Inc.
(formerly called Imperial Credit Industries, Inc.)("Impac"). There was
$7,029,738 extended by Impac on the warehouse line at September 30, 1997,
substantially in excess of the contractual commitment with Impac, based upon and
oral agreements and understandings with Impac. The Company expects to be able
to maintain its existing warehouse line of credit (or to obtain replacement or
additional financing) as the current arrangements expire or become fully
utilized; however, there can be no assurance that such financing will be
obtainable on favorable terms, if at all. To the extent that the Company is
unable to maintain an adequate warehouse line of credit, the Company may have to
curtail loan origination and purchasing activities, which could have a material
adverse effect on the Company's operations and financial condition. The Company
also has a master commitment with Impac Funding Corporation to purchase
$50,000,000 of jumbo and conforming residential mortgages from the Company which
has been fulfilled, and the Company has exercised its option for an additional
$50,000,000 commitment. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Liquidity and Capital Resources."
PREPAYMENT RISKS ON MORTGAGE ASSETS. Mortgage prepayment rates vary from
time to time and may cause changes in the amount of the Company's net cash
flows. To the extent that prepayments occur, the yield on the Company's
mortgage loans would be affected as well as the Company's net cash flows.
Prepayments of adjustable-rate mortgage loans included in or underlying
mortgage-backed securities generally increase when then-current mortgage
interest rates fall below the interest rates on such adjustable-rate mortgage
loans. Conversely, prepayments of such mortgage loans generally decrease when
then-current mortgage interest rates exceed the interest rate on the mortgage
loans included in or underlying such mortgage-backed securities. Prepayment
experience also may be affected by the geographic location of the properties
securing the mortgage loans included in or underlying mortgage-backed
securities, the assumability of such mortgage loans, the ability of the borrower
to convert to a fixed-rate loan, conditions in the housing and financial markets
and general economic conditions.
6
<PAGE>
RISK OF LOSS ON MORTGAGE ASSETS. The Company may include privately-
issued pass-through certificates backed by pools of adjustable-rate single
family and multi-family mortgage loans and other real estate-backed mortgage
loans in its investment portfolio. Because principal and interest payments on
privately issued pass-through certificates are typically not guaranteed by the
United States government or an agency of the United States government, such
securities generally are structured with one or more types of credit
enhancement. Such forms of credit enhancement are structured to provide
protection against risk of loss due to default on the underlying mortgage loan,
or bankruptcy, fraud and special hazard losses, such as earthquakes. Typically,
third parties insure against these types of losses, and the Company would be
dependent upon the credit worthiness of the insurer for credit-rating, claims
paying ability of the insurer and timeliness of reimbursement in the event of a
default on the underlying obligations. Furthermore, the insurance coverage for
various types of losses is limited in amount, and losses in excess of the
limitation would be the responsibility of the Company.
The Company may also purchase mortgage loans issued by GNMA, FNMA or
FHLMC. Each of these entities provides guarantees against risk of loss for
securities issued by it. In the case of GNMA, the timely payment of principal
and interest on its certificates is guaranteed by the full faith and credit of
the United States government. FNMA guarantees the scheduled payments of
interest and principal and the full principal amount of any mortgage loan
foreclosed or liquidated on its obligations. FHLMC guarantees the timely
payment of interest and ultimate collection of principal on its obligations,
while with respect to certificates issued by FNMA and FHLMC, payment of
principal and interest of such certificates are guaranteed only by the
respective entity and not by the full faith and credit of the United States
government.
DEPENDENCE UPON LICENSED TECHNOLOGY. The Company's V.I.P. mortgage
software system which is used by it and its licensees to originate mortgage
loans is substantially dependent upon technology licensed to the Company from
Intel(R) Corporation ("Intel"), and other technology companies. Although the
primary business of the Company is mortgage lending, the V.I.P. mortgage
software of the Company is instrumental in the marketing, origination and
processing of its mortgage loans. The V.I.P. system is linked to the ProShare
software system developed by Intel that provides direct video conferencing and
interaction between prospective borrowers (and others) and the prospective
mortgage lender, including the Company. The V.I.P. system also incorporates
licensed technology from other vendors. Because the Company does not
independently conduct research and development activities regarding its
software, the Company is dependent upon software technology of others to develop
and enhance its V.I.P. mortgage software system. The failure to maintain these
relationships or to enter into new relationships with technology companies would
inhibit improvements to its mortgage software and may reduce its ability to
effectively compete in the origination and processing of mortgage loans.
DEPENDENCE ON WHOLESALE BROKERS AND OTHERS. The Company depends in part
on independent mortgage brokers, financial institutions, realtors(R) and
mortgage bankers for its originations and purchases of mortgage loans. The
Company's competitors also seek to establish relationships with such independent
mortgage brokers, financial institutions, realtors(R) and mortgage bankers, none
of whom is contractually obligated to continue to do business with the Company.
In addition, the Company expects the volume of wholesale loans that it
originates and purchases to increase. The Company's future results may become
more exposed to fluctuations in the volume and cost of its wholesale loans
resulting from competition from other originators and purchasers of such loans,
market conditions and other factors. See "Business -- Employees".
LACK OF CONTROL OVER PASS-THROUGH ENTITIES. If the Company purchases
interests in various pass-through entities, it will itself be in the position of
a "holder" of shares of such entities including, real estate investment trusts,
other trusts or partnerships, or a holder of other types of pass-through
interests. Therefore, the Company will be relying exclusively on the management
capabilities of the general partners, managers and trustees of those entities
for the management and investment decisions made on their behalf. In
particular, except for voting rights on certain matters, the Company will have
no control over the operations of the pass-through entities in which it
purchases interests, including all matters relating to the operation,
management, investment decisions, income and expenses of such entities,
including decisions with respect to actions to be taken to collect amounts owed
to such entities. If such managers, trustees or general partners take actions
or make decisions which are adverse to a pass-through entity or the Company, it
may not be cost-efficient for the Company to challenge such actions or
decisions. Moreover, if the Company does not become a substituted owner of such
interests, it would not have the right to vote on matters on which other
interest owners in such entities have a right to vote or otherwise challenge
management decisions. Finally, should any of such managers, trustees or general
partners experience financial difficulties for any reason, the entities in which
the Company invests could be adversely affected, thereby adversely affecting the
value of the Company's investments.
7
<PAGE>
BALLOON PAYMENTS. Mortgage loans, other than those representing mortgage
loans on single-family residential, may represent "balloon" obligations,
requiring no payments of principal over the term of the indebtedness with a
"balloon" payment of all of the principal due at maturity. "Balloon" payments
will probably require a sale or refinancing of properties at the time they are
due.
No assurance can be given that the borrowers will have sufficient assets
to pay off the indebtedness when due, or that sufficient liquidity will be
generated from the disposition or refinancing of the properties to enable the
owner to pay the principal or interest due on such mortgage loans.
DEFAULT, FORECLOSURE AND DIFFICULTY IN SALE OF THE SECURED PROPERTIES.
If a mortgaged property is not sold by the maturity date of the underlying
mortgage loan, the borrower may have difficulty in paying the outstanding
balance of such mortgage loan and may have to refinance the property. The
borrower may also experience difficulty in refinancing the property if that
becomes necessary due to unfavorable interest rates or the unavailability of
credit.
If any amounts under a mortgage loan are not paid when due, the Company
may foreclose upon the property of the borrower. In the event of such a default
which requires the Company to foreclose upon a property or otherwise pursue its
remedies in order to protect the Company's investment, the Company will seek to
obtain a purchaser for the property upon such terms as the Company deems
reasonable. However, there can be no assurance that the amount realized upon
any such sale of the underlying property will result in financial profit or
prevent loss to the Company. In addition, because of potential adverse changes
in the real estate market, locally or nationally, the Company may be forced to
own and maintain the property for a period of time to protect the value of its
investment. In that event, the Company may not be able to receive any cash flow
from such mortgage loan and the Company would be required to pay such sums as
may be necessary to maintain and manage the property.
ENVIRONMENTAL MATTERS. The Company has not been required to perform any
investigation or clean up activities, nor has it been subject to any
environmental claims. There can be no assurance, however, that this will remain
the case in the future.
In the course of its business, the Company has acquired and may acquire
in the future properties securing loans that are in default. Although the
Company primarily lends to owners of residential properties, there is a risk
that the Company could be required to investigate and clean up hazardous or
toxic substances or chemical releases at such properties after acquisition by
the Company, and may be held liable to a governmental entity or to third parties
for property damage, personal injury and investigation and cleanup costs
incurred by such parties in connection with the contamination. In addition, the
owner or former owners of a contaminated site may be subject to common law
claims by third pies based on damages and costs resulting from environmental
contamination emanating from such property.
USURY LAWS. The amount of interest payable by a borrower to the Company
may exceed the rate of interest permitted under the California Usury Law and the
usury laws of other states. Although the Company does not intend to make or
invest in mortgage loans with usurious interest rates, there are uncertainties
in determining the legality of interest rates. Such limitations, if applicable,
may decrease the yield on the Company's investments.
With respect to the interest rate charged by the Company to borrowers in
the State of California, the Company will be relying upon the exemption from its
usury law which provides that loans that are made or arranged by a licensed real
estate broker and which are secured by a lien on real property are exempt from
the usury law. The Company intends to use licensed real estate brokers to
arrange the mortgage loans so that no violation of the applicable usury law
would take place. Additionally, if any employee or director of the Company or
its subsidiaries is a licensed real estate broker in the State of California,
the Company may use such person to arrange all or a portion of the mortgage
loans to qualify for the usury exemption.
The consequences for failing to abide by the usury law include forfeiture
of all interest payable on the loan, treble damages with respect to excessive
interest actually paid, and criminal penalties. The Company believes that
because of the applicable exemptions and the provisions of California Civil Code
1917.005 exempting lenders who originate loan transactions from the California
usury laws, no violation of the California Usury Law will occur. The Company
shall attempt to rely on similar exemptions in other states if necessary but
there is no guarantee that it will be able to do so.
8
<PAGE>
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
origination, 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.
PROPRIETARY RIGHTS AND LICENSING. The Company's success is dependent
upon proprietary technology. The Company may rely 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 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 respect to current of future products.
In addition, the Company relies on certain software that it licenses from
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.
RISK FACTORS RELATING TO THIS OFFERING
POSSIBLE LACK OF LIQUIDITY AND NO ASSURANCE OF A PUBLIC MARKET. There is
presently a limited market for the Common Stock of the Company and there can be
no assurance that a broad and active market will develop. There is no assurance
that an active or stable public market for the Common Stock will ever develop.
There may be restrictions upon the transferability of the Common Stock in
certain state jurisdictions. Stockholders should seek the advice of their
personal legal counsel before offering their stock for resale to any person.
POSSIBLE VOLATILITY OF STOCK PRICE; EFFECT OF FUTURE OFFERINGS ON MARKET
PRICE OF COMMON STOCK. The market price of the Common Stock of the Company may
experience fluctuations that are unrelated to the Company's operating
performance. In particular, the price of the Common Stock may be affected by
general market price movements as well as developments specifically related to
the mortgage industry such as, among other things, interest rate movements. In
addition, the Company's operating income on a quarterly basis is significantly
dependent upon the successful completion of the Company's loan sales in the
market, and the Company's inability to complete these transactions in a
particular quarter may have a material adverse impact on the Company's results
of operations for that quarter and could, therefore, negatively impact the price
of the Common Stock.
9
<PAGE>
The Company may increase its capital by making additional private or
public offerings of its Common Stock, securities convertible into its Common
Stock, preferred stock or debt securities. The actual or perceived effect of
such offerings, the timing of which cannot be predicted, may be the dilution of
the book value or earnings per share of the Common Stock outstanding, which may
result in the reduction of the market price of the Common Stock and affect the
Company's ability to access the capital markets.
SHARES ELIGIBLE FOR FUTURE SALE. Certain outstanding shares of the
Company's Common Stock and warrants presently outstanding are "restricted
securities" and under certain circumstances may in the future be sold in
compliance with Rule 144 adopted under the Securities Act of 1933, as amended,
or some other exemption from registration under the Securities Act of 1933.
Future sales of those shares if they are registered or sold under Rule 144 or
other exemption could depress the market price of the Common Stock in the public
market. However, there can be no assurance that Rule 144 or any other specific
exemption may be available in the future. See "Shares Available for Future
Sale".
DIVIDENDS NOT LIKELY. There can be no assurance that the operations of
the Company will result in sufficient revenues to enable the Company to operate
at profitable levels or to generate positive cash flow. For the foreseeable
future, it is anticipated any earnings which may be generated from operations of
the Company will be used to finance the growth of the Company and that cash
dividends will not be paid to stockholders. See "Dividends."
COMPLIANCE WITH FEDERAL AND STATE SECURITIES LAWS. The Company has
offered and sold its securities in the past, and may offer and sell its
securities in the future, and may sponsor or act as general partner or otherwise
with regard to registered or unregistered offerings of securities. These
securities were and may be offered and sold in reliance upon exemptions
available pursuant to the Securities Act of 1933, as amended. There can be no
assurance that such offerings qualified or will qualify under such exemptive
provisions due to, among other things, the adequacy of disclosure and the manner
of distribution of the offering, similar offerings conducted by the Company or
its affiliates in the past and in the future or the retroactive change in any
securities laws or regulations. If, and to the extent suits for rescission are
brought against the Company and successfully concluded for failure to register
other offerings made by the Company under the Securities Act of 1933, or for
acts or omissions constituting certain prohibited practices under the Securities
Exchange Act of 1934, both the capital and assets of the Company could be
adversely affected, thus jeopardizing the ability of the Company to operate
successfully. A similar risk exists as a result of the application of state
securities laws of those states in which securities are offered or sold.
Furthermore, the time and capital of the Company could be expended on defending
an action by investors or by state or federal securities commissions even if the
Company is ultimately exonerated.
ABSENCE OF INDEPENDENT MANAGING UNDERWRITER. Under federal securities
laws, underwriters of securities offered to the public may be expected to take
such steps as may be necessary to ensure that the information contained in the
offering documents is accurate and complete. These steps are typically taken by
a "lead underwriter" or "dealer manager" who participates in the preparation of
the offering documents. Since there is no lead underwriter or dealer manager in
the issuance of the Common Stock of the Company, stockholders and prospective
stockholders must rely on the Company regarding the information contained in
this Prospectus.
WARRANTS AND OPTIONS. The Company has adopted a stock option plan for
its officers, employees and directors for 1,250,000 shares of its Common Stock.
As of February 12, 1998, there have been 445,000 shares of Common Stock
granted as stock bonuses by the Company under the Plan. There are 805,000
shares of Common Stock available for grants of stock options, SAR's of stock
bonuses.
As of February 12, 1998, there are total outstanding warrants to
purchase 956,250 shares of Common Stock of the Company that are exercisable
at prices ranging from $1.85 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 or 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".
10
<PAGE>
NOTE: In addition to such risks, businesses are often subject to risks
not foreseen or fully appreciated by management. In reviewing this Prospectus,
it should be kept in mind that other possible risks may exist.
CAPITALIZATION
The following table sets forth the capitalization of the Company as of
September 30, 1997 (audited).
<TABLE>
<CAPTION>
SEPTEMBER 30, 1997
------------------
<S> <C>
Short-term debt:
Borrowings under warehouse line of credit............... $ 7,029,738
Notes payable, capital leases, current portion.......... 251,954
-----------
$ 7,281,692
===========
Notes payable, capital leases, net of current portion........ $ 20,515
Preferred Stock, no par value:
Authorized, 5,000,000 shares,
648,648 shares issued and outstanding(1).................... 1,009,000
Common Stock, no par value:
Authorized, 30,000,000 shares,
Issued and outstanding, 7,535,942 shares.................... $ 6,955,482
Common Stock to be issued.................................... $ 160,875
Common Stock subscribed...................................... $ (100,000)
Retained deficit............................................. $(6,345,616)
-----------
Total Shareholders' Equity................................... $ 1,679,741
-----------
Total Capitalization......................................... $ 8,981,948
===========
</TABLE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion is intended to assist in an understanding of the
Company's financial position for the fiscal years September 30, 1997 and
September 30, 1996 and the results of its operations for the periods then ended.
GENERAL
The Company, formerly called "Pacific International, Inc.", a Hawaii
corporation, was incorporated in 1960, and was originally organized to acquire
and manage developed and undeveloped real estate. However, the Company had not
conducted significant operations for a number of years until it agreed to
acquire substantially all of the assets and assume certain liabilities of
Sterling Alliance Group, Ltd. ("SAG") in December, 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 the
acquisition merger being that of the Selling Stockholder.
The principal business of the Company is the origination and processing
of residential mortgage loans using a service which the Company calls Video
InteractiveMortgage Process ("VIP"). Mortgages originated and/or purchased by
the Company have been resold primarily to Impac Funding Corporation, a division
of [IMPERIAL CREDIT INDUSTRIES, INC.]; although mortgages in the future may be
held
11
<PAGE>
for investment, sold to third parties, or securitized and issued as mortgage
backed securities. The Company recently entered into a correspondent lending
relationship with ContiMortgage Corporation regarding home equity mortgage loans
secured by a second deed of trust or second mortgage. See "Liquidity and Capital
Resources", below.
The Company recently commenced the origination of mortgage loans on
commercial properties. The Company has entered into agreements to sell its
commercial loans to IMH Commercial Holdings, Inc., a REIT organized by Impac
Mortgage Holdings, Inc.
The Company originates loans through its executive office in Costa Mesa,
California and through its branch offices located in California, Colorado,
Connecticut, Florida, Nevada and Texas. The Company's strategy of originating,
as compared to purchasing, a substantial portion of its loan volume, results in
the generation of increased origination fees, service release fees, and other
fees which is the principal source of revenue to the Company. However, the
Company also purchases loans from unaffiliated and qualified mortgage bankers,
and originates loans referred by unaffiliated mortgage brokers. The Company
sells all of its mortgage loans, and does not retain any servicing rights.
Fiscal year ended September 30, 1997 compared with the fiscal year ended
- ------------------------------------------------------------------------
September 30, 1996
- ------------------
RESULTS OF OPERATIONS. The following table sets forth certain operating
information regarding the Company:
YEAR ENDED YEAR ENDED
SEPTEMBER 30, 1996 SEPTEMBER 30, 1997
------------------ ------------------
Mortgage loan revenues and product
sales................................ $ 276,419 $ 4,156,193
Operating expenses:
Loan original costs, commissions and
other fees....................... $ -- $ 2,331,815
General and administrative $ 3,375,244 $ 4,347,247
expense............................ $ 31,056 $ 71,461
Depreciation........................ ---------- ----------
Total operating expenses................ $ 3,406,300 $ 6,750,523
Loss from operations.................... $ (3,159,517) $ (2,594,330)
Other income (expenses)................. $ (67,081) $ 44,105
---------- ----------
Loss before income taxes................ $ (3,226,598) $ (2,550,225)
Income taxes............................ $ 1,600 $ 1,600
---------- ----------
Net Loss................................ $ (3,228,198) $ (2,551,825)
========== ==========
Net loss per share...................... (.89) $ (.42)
REVENUES. Revenues increased 1,404% to $4,156,193 in fiscal 1997 from
$276,419 in 1996. Revenues were generated from the loan process services and
product sales. During fiscal 1997, the Company funded residential mortgage
loans of $139,851,291 compared to approximately $26,487,000 during fiscal 1996,
an increase of approximately 528%.
LOAN ORIGINATIONS AND PURCHASES. Mortgage volume increased 311% to
$316,187,800 during the year ended September 30, 1997, from $101,612,900 during
the year ended September 30, 1996. This increase in mortgage loan volume
appears to be continuing primarily due to the expansion of the Company's
marketing activities and the opening of additional retail offices.
12
<PAGE>
OPERATING EXPENSES. Operating expenses increased 98% to $6,750,523 in
fiscal 1997 from $3,406,300 in 1996. This increase can be attributable to
increased activity in the loan processing segment of the business and the
acquisition of additional computer equipment.
NET LOSS FROM OPERATIONS. The net loss from operations decreased 18% to
$2,594,330 in fiscal 1997 as compared with $3,159,517 in 1996 due primarily to
the increase in revenues in 1997 over 1996.
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, 1997 and 1996 totaled
$377,240 and $96,846, respectively.
CAPITAL EXPENDITURES, CAPITAL RESOURCES AND LIQUIDITY
CASH FLOWS. The following summary table presents comparative cash flows
of the Company for the periods indicated.
<TABLE>
<CAPTION>
YEAR ENDED
SEPTEMBER 30,
-------------
1996 1997
------------- -------------
<S> <C> <C>
Net cash used in operating activities.......... $ (1,085,286) $ (8,194,411)
Net cash used in investing activities.......... $ (171,644) $ (67,808)
Net cash provided by financing activities...... $ 1,231,254 $ 8,323,233
</TABLE>
LIQUIDITY AND CAPITAL RESOURCES. The Company's capital resources have
historically been provided by cash from operations, by the sale of its
securities and by short term loans. The Company's ability to implement its
business strategy will depend upon its ability to continue to establish
alternative long-term financing arrangements, maintain sufficient financing
under warehousing facilities upon acceptable terms and to access the public or
private capital markets in connection with the issuance of its equity or debt
securities. There can be no assurance that such financing will be available to
the Company on favorable terms, if at all. If such financing were not available
or the Company's capital requirements exceed anticipated levels, then the
Company would be required to obtain additional financing. The Company cannot
presently estimate the amount and timing of additional financing requirements
because such requirements are dependent upon, among other things, the growth of
the Company. If the Company were unable to raise such additional capital, its
results of operations and financial condition would be adversely affected.
During fiscal 1997, the Company increased its liquidity and capital by
its sale of 648,649 shares of its 8% Convertible Preferred Stock, Series A and a
warrant to purchase 150,000 shares of Common Stock of the Company, for
$1,200,000; $313,188 realized from the exercise of warrants to purchase common
stock; and $137,500 from the sale of Common Stock. During January 1998, the
Company further increased its liquidity by the sale of $600,000 of notes that
are convertible into 433,333 shares of Common Stock at $2.375 per share.
The Company anticipates that it may continue operating on a negative cash
flow basis as long as it continues its rapid growth rate. The Company's primary
operating cash requirements include the funding or payment of: (i) originations
and purchases of mortgage loans; (ii) fees and expenses incurred in connection
with the origination and purchase of mortgage loans; (iii) interest expense
incurred on borrowings under its warehouse facilities; (iv) capital
expenditures; and (v) other operating and administrative expenses. The Company
funds these cash requirements primarily through capital market transactions,
warehouse financing and other corporate borrowings.
At September 30, 1997, the Company had current assets of $7,808,152 and
current liabilities of $7,991,923, resulting in working capital deficit of
($183,771) as compared to a working capital deficit of $(529,482) at September
30, 1996. Working capital increased by $345,711.
13
<PAGE>
Net cash used in operating activities increased to ($8,194,411) for the
year ended September 30, 1997, from ($1,085,286) for the year ended September
30, 1996, or a difference of $7,109,125. The increase in net cash used in
operating activities was primarily attributable to the increase of in mortgage
loans held for sale.
During fiscal 1997, the Company completed the opening of four (4)
additional branch retail offices, located in Las Vegas, Nevada; Houston, Texas;
Daytona Beach, Florida and Ft. Lauderdale, Florida.
The Company has increased the amount of its outstanding liabilities to
$11,342,843 from $688,879 during the year ended September 30, 1997, an increase
of $10,653,964. This outstanding indebtedness is due primarily to the warehouse
line of credit of $7,029,738 and deferred gain on sale of land of $3,200,000. An
undeveloped property continues to be subject to a deed of trust in the amount of
$65,000.
As of September 30, 1997, the Company has indebtedness payable to
unrelated parties in the total amount of approximately $7,274,379, including a
$65,000 deed of trust amount on its undeveloped land. The Company believes that
this remaining indebtedness will be paid primarily from its cash flow from
operations, sale of mortgages and proceeds from the sale of its equity
securities.
The warehouse lines of credit of the Company are available for the
funding of loans which will be sold not only to Impac Funding Corporation, but
also to other investors, including Resource Bancshares Mortgage Group, Inc., The
Mortgage Authority, Inc., First Union National Bank of North Carolina, and
Resource Bancshares Mortgage Group, Inc. During the time period following
funding of a loan, but prior to resale of the loan, the Company realizes either
interest income or expense depending upon the note rate for the underlying
mortgage vis a vis the interest rate on the warehouse line of credit, i.e.,
presently, prime + 1/2%.
The Company relies significantly upon its access to warehouse credit
facilities in order to fund new originations and purchases of mortgages. The
Company has a $3,000,000 warehouse line of credit. The Company expects to be
able to extend and maintain its existing warehouse lines of credit (or to obtain
replacement or additional financing) as the current arrangements expire or
become fully utilized; however, there can be no assurance that such financing
will be obtainable on favorable terms, if at all. To the extent that the
Company is unable to maintain its warehouse lines of credit, the Company may
have to curtail loan origination and purchasing activities, which could have a
material adverse effect on the Company's operations and financial condition.
MARKET PRICE
Market for Common Equity. The Common Stock of the Company is currently
------------------------
quoted in the over-the-counter market on the electronic bulletin board
maintained by the National Association of Securities Dealers, Inc. under the
symbol "EMBU".
When the trading price of the Company's Common Stock is below $5.00 per
share, the Common Stock is considered to be "penny stocks" that are subject to
rules promulgated by the Securities and Exchange Commission (Rule 15g-1 through
15g-9) under the Securities Exchange Act of 1934. These rules impose
significant requirements on brokers under these circumstances, including: (a)
delivering to customers the Commission's standardized risk disclosure document;
(b) providing to customers current bid and offers; (c) disclosing to customers
the brokers-dealer and sales representatives compensation; and (d) providing to
customers monthly account statements.
For several years prior to January 1, 1996, the market price of the
Common Stock of the Company was either nominal or non-existent because the
Company had no substantial assets and had little or no operations. However,
after the Company entered into an acquisition agreement regarding the purchase
of certain assets of Sterling Alliance Group, Ltd. in December 1995, the Common
Stock of the Company began actively trading.
The following table sets forth the range of high and low closing bid
prices per share of the Common Stock as reported by National Quotation Bureau,
L.L.C. for the periods indicated.
14
<PAGE>
YEAR ENDED DECEMBER 31, 1996: HIGH BID(1)(2) LOW BID(1)(2)
- ----------------------------- -------------- -------------
1st Quarter $ 21.00 $ 1.00
2nd Quarter $ 15.00 $ 7.50
3rd Quarter $ 12.00 $ 3.25
4th Quarter $ 5.125 $2.375
YEAR ENDED DECEMBER 31, 1997:
- -----------------------------
1st Quarter $ 3.75 $2.125
2nd Quarter $ 3.25 $1.375
3rd Quarter $3.3125 $1.375
4th Quarter $ 3.25 $ 1.75
(1) The Company is unaware of the factors which resulted in the significant
fluctuations in the bid prices per share during the periods being
presented, although it is aware that there is a thin market for the Common
Stock, that there are frequently few shares being traded and that any sales
significantly impact the market.
(2) During September, 1996, the Company effectuated a one for four (1:4)
reverse stock split. The above prices for the first three quarters of 1996
have been revised to reflect this split.
On February 12, 1998, the closing bid and ask prices of the Common Stock
of the Company were $1.8125 bid and $2.031 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 February
___, 1998, there were approximately 11 broker-dealers publishing quotes for
the Common Stock of the Company.
As of February 2, 1998, there were 8,691,142 shares of Common Stock
issued and outstanding which were held by approximately 687 holders of record;
162,162 shares of 8% Convertible Preferred Stock, Series A held by one owner of
record and 675,000 shares of 10% convertible Preferred Stock, Series B, which
are not traded in any market.
DIVIDENDS
The Company has not paid any dividends on its Common Stock and does not
expect to do so in the foreseeable future. The Company intends to apply its
earnings, if any, in expanding its operations and related activities. The
payment of cash dividends in the future will be at the discretion of the Board
of Directors and will depend upon such factors as earnings levels, capital
requirements, the Company's financial condition and other factors deemed
relevant by the Board of Directors, and is subject to the dividend rights of the
8% Convertible Preferred Stock, Series A of the Company to the extent such
shares are not converted into the Common Stock of the Company. In addition, the
Company's ability to pay dividends may be limited under future loan agreements
of the Company which restrict or prohibit the payment of dividends.
BUSINESS
GENERAL. The Company, a Hawaii corporation, was incorporated in 1960, and
was originally organized to acquire and manage developed and undeveloped real
estate. However, the Company had not conducted any significant operations for a
number of years until it agreed to acquire substantially all of the assets and
assume certain liabilities of Sterling Alliance Group, Ltd. (the "Selling
Stockholder") in December 1995, including all of the issued and outstanding
capital stock of EMB Mortgage Corporation (formerly named Electronic Mortgage
Banc, Ltd.)("EMB") which is presently a wholly owned subsidiary of the Company.
The Company changed its corporate name from "Pacific International, Inc." to EMB
Corporation during 1996 to reflect the change in the purposes and nature of its
business.
The Company, through EMB, is primarily engaged in the mortgage loan
industry. EMB acquired a license from Virtual Lending Technology, Inc. ("VLT"),
an affiliate of the Company, for its proprietary version of its software which
is part of the Company's software system designed for the origination and
processing of residential mortgage loans that it presently calls Video
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InteractiveMortgage Process ("VIP"). The software is licensed to unaffiliated
third parties for use in their operations. Second, EMB is a residential mortgage
lender on a retail basis directly to consumers and through its licensees, and on
a wholesale basis to mortgage brokers. Mortgages originated by the Company may
be held primarily for investment, or may be sold to third parties, or may be
securitized and issued as mortgage-backed securities.
Although the company, 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.
RESIDENTIAL MORTGAGE LENDER
GENERAL. EMB has been a retail mortgage broker regarding residential
mortgage loans for approximately four years, and commenced its business as a
wholesale mortgage banker, approximately one year ago. EMB recently commenced
retail mortgage lending operations regarding commercial properties. 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 Impac Funding Corporation, a
division of Impac Mortgage Holdings, Inc. ("Impac"), a national mortgage lender.
Initially, EMB underwrites and funds its mortgage loans through a wholesale line
of credit from Impac Warehouse Lending Group Inc., and then resells such loans
to Impac. In the future, the Company intends to develop associations with other
mortgage lenders to participate in the secondary marketing of mortgages. EMB
expects to negotiate servicing fees for servicing its mortgage loans, or to
obtain service release fees upon the resale of mortgages. The Company may also
package and resell mortgage loans as asset-backed securities in the future.
LOAN STANDARDS. Mortgage loans made by EMB will be loans with fixed or
adjustable rates of interest secured by first mortgages, deeds of trust or
security deeds on residential properties with original principal balances that
do not exceed 95% of the value of the mortgaged properties, unless such loans
are FHA-insured or VA-guaranteed. Generally, each mortgage loan having a
loan-to-value ratio, as of the cut-off-date, in excess of 80%, or which is
secured by a second or vacation home, will be covered by a Mortgage Insurance
Policy, FHA Insurance Policy or VA Guaranty insuring against default all or a
specified portion of the principal amount thereof.
The Company recently commenced the origination of home equity loans in an
amount of up to 125% of a property's appraised value. Home equity loans are
secured by a second mortgage or second deed of trust. Home equity loans
originated or purchased by the Company are presently sold to ContiMortgage
Corporation, a subsidiary of ContiFinancial Corporation.
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
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that the lender (i) make certain representations and warranties to the Company
which shall be the basis for certain of the Company's representations and
warranties to the trustee; (ii) agree to repurchase any mortgage loan which is
discovered at any time not to be in conformance with such representations and
warranties, if such defect cannot be cured within 60 days of discovery of such
breach; and (iii) agree to provide the Company within 10 days of request the
credit file for any mortgage loan the Company desires to audit for compliance
with the terms of the Company's loan purchase program. It is anticipated that
the Company will select for audit certain of the credit files after purchase of
the related mortgage loans.
The Company's underwriting standards are intended to evaluate the
prospective mortgagor's credit standing and repayment ability, and the value and
adequacy of the proposed mortgaged property as collateral. In the loan
application process, prospective mortgagors will be required to provide
information regarding such factors as their assets, liabilities, income, credit
history, employment history and other related items. Each prospective mortgagor
will also provide an authorization to apply for a credit report which summarizes
the mortgagor's credit history. With respect to establishing the prospective
mortgagor's ability to make timely payments, the Company will require evidence
regarding the mortgagor's employment and income, and of the amount of deposits
made to financial institutions where the mortgagor maintains demand or savings
accounts. In some instances, mortgage loans may be made by the Company under a
Limited Documentation Origination Program. For a mortgage loan to qualify for
the Limited Documentation Origination Program, the prospective mortgagor must
have a good credit history and be financially capable of making a larger cash
down payment in a purchase, or be willing to finance less of the appraised
value, in a refinancing, than would otherwise be required by the Company.
Currently, only mortgage loans with certain loan-to-value ratios will qualify
for the Limited Documentation Origination Program. If the mortgage loan
qualifies, the Company waives some of its documentation requirements and
eliminates verification of income and employment for the prospective mortgagor.
The Limited Documentation Origination Program has been implemented relatively
recently and accordingly its impact, if any, on the rates of delinquencies and
losses experienced on the mortgage loans so originated cannot be determined at
this time.
The Company's underwriting standards generally follow guidelines
acceptable to FNMA and FHLMC. The Company's underwriting policies may be varied
in appropriate cases. In determining the adequacy of the property as collateral,
an independent appraisal is made of each property considered for financing. The
appraiser is required to inspect the property and verify that it is in good
condition and that construction, if new, has been completed. The appraisal is
based on the appraiser's judgment of values, giving appropriate weight to both
the market value of comparable homes and the cost of replacing the property.
Certain states where the mortgaged properties may be located are "anti-
deficiency" states where, in general, lenders providing credit on one to four-
family properties must look solely to the property for repayment in the event of
foreclosure. See "Certain Legal Aspects of the Mortgage Loans-Anti-Deficiency
Legislation and Other Limitations on Lenders". The Company's underwriting
standards in all states (including anti-deficiency states) require that the
underwriting officers be satisfied that the value of the property being
financed, as indicated by the independent appraisal, currently supports and is
anticipated to support in the future the outstanding loan balance, and provides
sufficient value to mitigate the effects of adverse shifts in real estate
values.
LENDER WARRANTIES AND INDEMNIFICATION OF THE COMPANY. With respect to the
mortgage loans sold by it, each lender will make representations and warranties
to the Company which the Company deems sufficient to permit it to make its
representations and warranties in respect of such mortgage loans to the Trustee
and the certificateholders under the Pooling Agreement. Additional
representations and warranties will be made by each lender which has been
delegated the responsibility to underwrite mortgage loans on behalf of the
Company. See "-Credit, Appraisal and Underwriting Standards" above. Each lender
will also make certain other representations and warranties regarding mortgage
loans sold by it.
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.
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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.
COMMERCIAL LOANS
The Company recently commenced the origination of mortgage loans on
commercial properties. The Company presently intends to sell its commercial
mortgage loans to IMH Commercial Holding, Inc., a REIT organized by Impac
Mortgage Holdings, Inc.
CURRENT MARKETS AND EXPANSION PLANS
The Company is licensed to originate loans and/or is presently exempt
from such requirements in 33 states through its six retail offices. The Company
believes that its strategy of originating loans through a retail branch office
network represents the most profitable loan origination strategy due to the
significant level of loan origination and other fees. Additionally, such a
strategy allows the Company to maintain its underwriting quality standards when
compared to competitors that rely primarily on independent mortgage brokers.
Although the Company is presently licensed to originate loans in 26
states, it has historically concentrated its business in California. While this
concentration has recently declined significantly, California remains a
significant part of the Company's business and has contributed approximately 70%
and 95% of the Company's total loan originations and purchases for the years
ended September 30, 1997 and year ended September 30, 1996, respectively.
Expansion outside California began in late 1996 when the Company began to
establish or acquire additional branch offices.
CERTAIN LEGAL ASPECTS OF MORTGAGE LOANS
GENERAL. The mortgages originated by the Company and its licensed
affiliates will be either mortgages or deeds of trust, depending upon the
prevailing practice in the state in which the property subject to a mortgage
loan is located. A mortgage creates a lien upon the real property encumbered by
the mortgage. It is not generally prior to liens for real estate taxes and
assessments. Priority between mortgages depends on their terms and generally on
the order of filing with a state or county office. There are two parties to a
mortgage, the mortgagor, who is the borrower and homeowner (the "Mortgagor"),
and the mortgagee, who is the lender. Under the mortgage instrument, the
Mortgagor delivers to the mortgagee a note or bond and the mortgage. Although a
deed of trust is similar to a mortgage, a deed of trust formally has three
parties, the borrower-homeowners called the trustor (similar to a Mortgagor), a
lender (similar to a mortgagee) called the beneficiary, and a third-party
grantee called the Trustee. Under a deed of trust, the borrower grants the
property, irrevocably until the debt is paid, in trust, generally with a power
of sale, to the Trustee to secure payment of the obligation. The Trustee's
authority under a deed of trust and the mortgagee's authority under a mortgage
are governed by law, the express provisions of the deed of trust or mortgage,
and, in some cases, the directors of the beneficiary.
FORECLOSURE. Foreclosure of a deed of trust is generally accomplished by
a non-judicial Trustee's sale under a specific provision in the deed of trust
which authorizes the Trustee to sell the property to a third party upon any
default by the borrower under the terms of the note or deed of trust. In some
states, the Trustee must record a notice of default and send a copy to the
borrower-trustor and to any person who has recorded a requests for a copy of a
notice of default and notice of sale. In addition, the Trustee must provide
notice in some states to any other individual having an interest in the real
property, including any junior lienholders. The borrower, or any other person
having a junior encumbrance on the real estate, may, during a reinstatement
period, cure the default by paying the entire amount in arrears plus the costs
and expenses incurred in enforcing the obligation. Generally, state laws require
that a copy of the notice of sale be posted on the property and sent to all
parties having an interest in the real property.
Foreclosure of a mortgage is generally accomplished by judicial action.
The action is initiated by the service of legal pleadings upon all parties
having an interest in the real property. Delays in completion of the foreclosure
may occasionally result from difficulties in locating necessary parties
defendant. Judicial foreclosure proceedings are often not contested by any of
the parties
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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.
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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.
INTERACTIVE MORTGAGE SOFTWARE. The software of the Company is an
interactive video-based computer software system that is designed to facilitate
mortgage loan applications and their prompt approval directly with mortgage
lenders, to prepare and submit applications for title and property insurance,
credit review, title research and escrow ordering and review. The system is
linked to the ProShare(R) software system developed by Intel(R) Corporation that
provides direct videoconferencing and interaction between the prospective
borrower/real estate agent and mortgage lenders. The software has been modified
and adapted to operate with the exclusive software applications of the Company.
The software provides the opportunity to prospective borrowers to review
and evaluate a broad range of available mortgages of varying interest rates and
terms from various lenders, and to select those specifically suited to their
financial objective for further analysis. The software then enables the
borrower/agent to complete a loan application of the selected mortgage lender,
permits an immediate review of the borrower's credit history and qualifications,
and facilitates prompt approval of the loan application by EMB's staff
underwriters or through the automated underwriting systems employed by Fannie
Mae and Freddie Mac, the primary secondary-market purchasers of mortgages. Thus,
in approximately one hour, a borrower can receive loan approval, subject only to
verification of financial information and appraisal of the subject property. The
software also permits the contemporaneous ordering and review of preliminary
title reports and escrow instructions. A remote printer creates hard copies of
documents for signing by the borrower.
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The computer system of EMB is installed with Intel's Pentium(R) operating
system utilizing Intel's ProShare video conferencing system which permits the
borrower to see and talk directly to the loan officer for a personal pre-
qualification interview from any remote location. The interview may conclude
with the complete loan application being submitted and approved.
The Company is continuing the development and refinement of its V.I.P.
software system and continuing evaluation of electronic information gathering
and communication equipment. The Company intends to continue to focus on its
technology and marketing relationship with Intel Corporation. This relationship
has accelerated the development of the Company's software and has enhanced its
marketing program through exhibitions, trade shows and seminars with real estate
brokers, credit unions, residential real estate developers, mortgage brokers,
and others. An objective of the Company is to become a leader in advanced
mortgage software and video communications to facilitate mortgage loans. To the
extent that the Company achieves its objective in this technological area, the
Company believes that it will complement and increase its mortgage lending
business.
LICENSES OF V.I.P. The Company licenses its V.I.P. mortgage software
system to real estate brokerage firms, credit unions, real estate developers,
mortgage brokers and others. As of September 30, 1997, EMB had approximately 400
licenses and mortgage broker/representatives who are served by 17 Company loan
officers. Each licensee has its own computer systems with the Company's software
and ProShare software with videoconferencing capability.
The direct relationship with real estate brokers, credit unions, land
developers and other organizations enables the Company to establish point-of-
sale opportunities to originate and process mortgage loans. The business of the
licensee is improved because of the substantial savings of time and effort in
securing pre-qualification of their customers for mortgage financing and for
prompt loan approvals, and also provides an opportunity to enhance the quality
and timeliness of its services to its customers. Because the mortgage services
of EMB are available seven days a week, the licensees always have on-line access
to current interest rates and fees which can be downloaded at any time to any
computer utilized by a licensee. Similarly, the status of loans and processing
or underwriting can be determined at any time. The borrower or his agent at any
remote site can also utilize the Company's software to connect with escrow,
title or credit reporting agencies with the Intel video conferencing system.
This one-stop electronic and video connection between and among all of the
important parties to a residential real estate transaction is a highly efficient
and convenient system for the licensee and provides prompt quality service for
the borrower.
PRICING. The Company's software is priced based on a number of factors,
including the application configuration, the modules licensed and the number of
licensed users. The list price for licenses of the software is presently $500
with a $100 fee for additional office sites. The Company also charges an
additional continuing license fee calculated on each loan originated by the
licensee equal to 50% to 70% of the loan origination fee and yield spread
pricing of each loan, depending upon the loan production volume of the
licensee's office. The Company may offer discounts to customers based on the
scope of the customer's commitment and other commercial considerations.
Additionally, the Company may in the future offer new or different
configurations at significantly lower or higher prices.
STRATEGIC RELATIONSHIPS. The Company believes that, in order to provide
comprehensive component and supplier management solutions, it will be necessary
to develop, maintain and enhance close associations with vendors of hardware,
software, database, and professional services. The Company has established
marketing and strategic relationships with Intel Corporation. The Company's
relationship with Intel Corporation has enabled it to integrate its software
with standard hardware platforms. The Company meets regularly with Intel
Corporation to enhance integration between their complementary products and the
Company's software. The Company believes this relationship can enhance the
Company's ability to deliver mortgage software that support customers' existing
management architecture and that is tailored to the specific requirements of the
mortgage industry. Although the Company seeks to maintain a close relationship
with Intel Corporation, if the Company is unable to develop and retain
effective, long-term relationships with other third parties, the Company's
competitive position could be adversely affected.
LEGISLATIVE AND REGULATORY MATTERS
Members of Congress and government officials have from time to time
suggested the elimination of the mortgage interest deduction for federal income
tax purposes, either entirely or in part, based on borrower income, type of loan
or principal amount. Because
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certain Company's loans may be made to borrowers for the purpose of
consolidating consumer debt or financing other consumer needs, the competitive
advantages of tax deductible interest, when compared with alternative sources of
financing, could be eliminated or seriously impaired by such government action.
Accordingly, the reduction or elimination of these tax benefits could have a
material adverse effect on the demand for loans offered by the Company.
The Company's domestic business is subject to extensive regulation,
supervision and licensing by federal, state and local governmental authorities
and is subject to various laws and judicial and administrative decisions
imposing requirements and restrictions on a substantial portion of its
operations. The Company's consumer lending activities are subject to the Federal
Truth-in-Lending Act and Regulation Z (including the Home Ownership and Equity
Protection Act of 1994), the Federal Equal Credit Opportunity Act and Regulation
B, as amended ("ECOA"), the Fair Credit Reporting Act of 1970, as amended, the
Federal Real Estate Settlement Procedures Act ("RESPA") and Regulation X, the
Fair Housing Act, the Home Mortgage Disclosure Act and the Federal Debt
Collection Practices Act, as well as other federal and state statutes and
regulations affecting the Company's activities. The Company is also subject to
the rules and regulations of and examinations by the Department of Housing and
Urban Development ("HUD") and state regulatory authorities with respect to
originating, processing, underwriting, selling, securitizing and servicing
loans. These rules and regulations, among other things, impose licensing
obligations on the Company, establish eligibility criteria for mortgage loans,
prohibit discrimination, provide for inspections and appraisals of properties,
require credit reports on loan applicants, regulate assessment, collection,
foreclosure and claims handling, investment and interest payments on escrow
balances and payment features, mandate certain disclosures and notices to
borrowers and, in some cases, fix maximum interest rates, fees and mortgage loan
amounts. Failure to comply with these requirements can lead to loss of approved
status, termination or suspension of servicing contracts without compensation to
the servicer, demands for indemnifications or mortgage loan repurchases, certain
rights of rescission for mortgage loans, class action lawsuits and
administrative enforcement actions.
Although the Company believes that it has systems and procedures to
facilitate compliance with these requirements and believes that it is in
compliance in all material respects with applicable local, state and federal
laws, rules and regulations, there can be no assurance that more restrictive
laws, rules and regulations will be adopted in the future that could make
compliance more difficult or expensive.
OWNERSHIP OF REAL ESTATE
GENERAL. The Company does not intend to be a real estate company. All
real property owned by the Company is held for sale and not for development
purposes. The financial statements of the Company presently reflect land held
for sale as an asset at $843,000 as of September 30, 1996, and at $43,000 as of
June 30, 1997. See Note A to Financial Statements. The Company sold its 61 acre
property in Monterey County, California during December 1996, for $4,000,000,
receiving a payment of $800,000 and an installment contract for $3,200,000, as
described below. The Company may also hold real estate for sale from time to
time as a result of its foreclosure on mortgage loans that may become in
default.
UNDEVELOPED LAND AND WATER RIGHTS. The Company previously owned
approximately 61 acres of undeveloped real property with extensive water and
electrical improvements, and extensive water producing wells, located on Paris
Valley Road in the San Ardo area of Monterey County, California. This property
was appraised at an estimated market value of the fee simple interest as of
April 20, 1996, at $3,860,000. The property is located close to Highway 101, a
major California highway. The area is rural in nature, used primarily for cattle
and sheep raising and agricultural purposes, including vineyards and wineries to
the north and to the south. The property is comprised of two parcels separated
by Paris Valley Road. The zoning for the property is for agriculture/grazing in
the lower half, and for heavy mineral extraction on the upper half. The water
and electrical improvements provide primarily for farming use. Because of the
producing water wells on the property, commercial water production for
agricultural use is available to provide adjacent farms with excess water. The
property formerly produced crude oil; but such wells have been shut-in and the
power plant substation, natural gas pipeline system, pumps, tanks and used pipe
on the property are considered obsolete. The water producing wells, as described
in the appraisal, are capable of producing approximately 2,700,000 gallons per
24 hour production period. The water is naturally replenished annually from the
run-off of the surrounding mountains. Because this property was held for resale,
the Company made no efforts nor expended any material funds to commercially
develop or market the water resources of the property. Effective December 30,
1996, this property was sold by the Company for $4,000,000, payable by a
downpayment of $800,000, and an installment
22
<PAGE>
contract for $3,200,000, with annual payments amortized over 20 years, due and
payable in 10 years. The Company received the $800,000 down payment on December
31, 1996.
The Company has an 4.89 acre undeveloped property in Riverside County,
California, that was appraised as of December 7, 1994, at a value of $170,000.
This property is held subject to a Trust Deed Note dated March 15, 1995, in the
principal amount of $65,000. This property owned by the Company is held for
resale and not for development purposes. The Company may also hold real estate
for sale from time to time as a result of its foreclosure on mortgage loans that
may become in default.
TRADE NAMES AND SERVICE MARKS
The Company intends to register its service marks "EMB" and other marks
on the principal register of the United States Patent and Trademark Office. The
Company intends to register its service marks in such states as it deems
necessary and desirable. These names and marks are to be licensed to licensees
under license agreement provisions strictly regulating their use.
The Company will devote substantial time, effort and expense toward
developing name recognition and goodwill for its tradenames for its operations.
The Company intends to maintain the integrity of its trade names, service marks
and other proprietary names against unauthorized use and to protect the
licensees' use against claims of infringement and unfair competition where
circumstances warrant. Failure to defend and protect such trade name and other
proprietary names and marks could adversely affect the Company's sales of
licenses under such trade name and other proprietary names and marks. The
Company knows of no current materially infringing uses.
EXECUTIVE OFFICES
The Company currently leases its executive offices located at 3200
Bristol, 8th Floor, Costa Mesa, California 92626. The lease covers approximately
15,000 square feet at a monthly rental of approximately $16,024 per month during
its initial year, which increases to $18,937 per month during the second year,
$20,394 per month in the third year, and $21,851 per month during the fourth and
fifth year of the lease. The lease expires in 2002. The Company believes that
its facilities are adequate for its needs, and that, should it be needed,
suitable additional or alternative space will be available in the future on
commercially reasonable terms.
EMPLOYEES
As of January 31, 1998, the Company employed a total of 127 persons. Of
the total, 40 officers and employees are employed at the principal executive
offices of the Company of which 12 were engaged in sales and marketing, 15 loan
processing support staff, 4 were in product development and technical support
and 9 were in finance and administration. There were 87 employees in the 7
branch offices of the Company of which 21 were engaged in sales and marketing,
51 in loan processing support, and 15 in administration. In addition to its
retail branch office employees, the Company has approximately 400 mortgage
broker representatives in the State of Florida who are licensed real estate
agents that originate mortgage loans on a commission basis as wholesale buyers.
None of the Company's employees are represented by a labor union with respect to
his or her employment by the Company.
The Company has experienced no organized work stoppages and believes its
relationship with its employees is good. The Company believes that its future
success will also depend to a significant extent upon its ability to attract,
train and retain highly skilled technical, management, sales, marketing and
consulting personnel. Competition for such personnel in the computer software
and mortgage industry in the United States is intense. The Company has from time
to time experienced difficulty in locating candidates with appropriate
qualifications. There can be no assurance that the Company will be successful in
attracting or retaining such personnel, and the failure to attract or retain
such personnel could have a material adverse effect on the Company's business or
results of operations.
23
<PAGE>
BANKING ARRANGEMENTS
The Company is considering 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.
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The current directors and executive officers of the Company are as ows:
Name(1)(2) Age Position
- ---------- --- --------
Joseph K. Brick 59 Director, and Vice President of
EMB Mortgage Corporation
Bruce J. Brosky(3) 43 Director and Vice President-
Marketing and Public Relations
William V. Perry(3)(4) 74 Director and Executive Vice
President, and President of EMB
Mortgage Corporation
Ann L. Petersen 59 Director
Michael P. Roth 58 Director and Vice President
James E. Shipley(3)(4) 61 Director and President
B. Joe Wimer(4) 42 Director, Secretary and
Treasurer
- ----------------------
(1) The Company presently has no executive committee, nominating committee or
audit committee of the Board of Directors. (2) The officers of the Company
hold office until their successors are elected and qualified, or until their
death, resignation or removal.
(3) Member of the Company's Stock Option Committee. See "1996 Stock Option, SAR
and Stock Bonus Plan", below.
(4) Member of the Company's Compensation Committee. See "Compensation
Committee", below.
The background and principal occupations of each director and utive
officer of the Company are as follows:
Mr. Brick became a director of the Company at the 1997 Annual Meeting of
Stockholders in March 1997. In January 1997, he became the President of EMB
Mortgage Corporation, the principal operating subsidiary of the Company until
May 1997, when he became the Vice President of EMB Mortgage Corporation. From
May 1981 to January 1997, Mr. Brick was a mortgage portfolio consultant
regarding the evaluation of commercial, multi-family and residential mortgage
products, and the servicing and conversion of mortgage portfolios. From August
1988 to April 1991, he was employed by Countrywide Funding Corporation and
managed its mortgage operations for all states east of the Mississippi. From
1984 to 1987, he was employed by Money Market Mortgage Corporation as operations
manager for its eastern region for commercial, multi-family and residential
mortgages. From 1983 to 1984, Mr. Brick was employed by M & I Mortgage
Corporation as its Vice President and Production Manager and supervised its
start-up of a national bank's mortgage subsidiary. Mr. Brick attended Marquette
University.
Mr. Brosky has been a director and Vice President-Marketing and Public
Relations of the Company since April 29, 1996, and became a director of the
Company on May 21, 1996. From 1993 to 1995, he was the Director of Marketing of
ERA Sterling Real Estate. From 1993 to the present, Mr. Brosky has been the
Director of Marketing and Public Relations of Sterling Alliance Group, Ltd. From
1984 to 1992, Mr. Brosky was employed by GTE of California as operator services
supervisor, CAG analyst and systems analyst. Mr. Brosky received a B.A. degree
from the University of Dubuque in 1978, and received a MBA degree from Loras
College in 1979.
24
<PAGE>
Mr. Perry has been the Executive Vice President of the Company since
April 29, 1996, and became a director of the Company on May 21, 1996. He is also
the Chairman of the Board and President of EMB Mortgage Corporation, a wholly
owned subsidiary of the Company. From 1994 to the present, he has been a
director and Vice President of Sterling Alliance Group, Ltd. From October 1993
to the present, Mr. Perry has been associated with ERA Sterling Real Estate.
From 1990 to October 1993, he was a director and Vice President of Ameri-West
Funding, Inc., engaged in residential, multi-family and commercial mortgages.
From 1988 to 1990, Mr. Perry was the President of First Marine Mortgage Company.
From 1985 to 1987, he was the Chief Financial Officer of Mobile Medical Group,
Inc.; and was the Chief Financial Officer and a director of Oceanic Opera, Inc.
from 1984 to 1985. From 1970 to 1984, Mr. Perry was engaged in the real estate
brokerage business with several real estate brokerage companies. From 1962 to
1970, he was an electronics engineer with Lockheed Missle and Space Corporation.
Mr. Perry graduated from Pacific States University in 1948 with a degree in
electrical engineering.
Mrs. Petersen became a director of the Company on November 25, 1992. She
is a resident of Hawaii and has been a housewife since being married in 1958.
She attended Marquette University for two years. Mrs. Petersen is an active
volunteer in various charitable organizations, including the American Cancer
Association.
Mr. Roth became a director of the Company at the 1997 Annual Meeting of
the Stockholders of the Company in March 1997, and became a Vice President of
the real estate division of the Company on June 16, 1997. From 1993 to the
present, he has been the Assistant Branch Manager and Sales Associate with
Coldwell Banker Real Estate, Inc., a real estate brokerage company, at its
branch office in South Laguna, California. From 1981 to 1992, Mr. Roth was the
President of Food Service Concept Marketing Inc., a marketing consulting firm.
From 1975 to 1981, he was the Vice President Management Supervisor of Wells,
Rich, Green Advertising. From 1974 to 1975, Mr. Roth was a Vice President of
Shakey's Pizza Parlors. From 1969 to 1975, he was Vice President of Marketing of
Bonanza Steakhouses, and was President of its International Division. From 1963
to 1968, Mr. Roth was engaged in franchise marketing for McDonald's Corporation
in charge of marketing in 12 western states and Hawaii. Mr. Roth received a B.S.
degree from U.C.L.A. in 1962.
Mr. Shipley has been a director of the Company since January 15, 1996,
and became the President of the Company on April 29, 1996. From 1993 to the
present, he has been a director and the President of Sterling Alliance Group,
Ltd., an affiliate of the Company which recently sold substantially all of its
assets and operations to the Company in exchange for Common Stock. He was the
Managing Director of EMB Mortgage Corporation, a wholly owned subsidiary of the
Company engaged in the real estate mortgage business, from October 1993 to April
1996. Mr. Shipley has served as the Managing Director of ERA Sterling Real
Estate, a real estate brokerage firm, from 1987 to the present. From 1968 to
1987, he was engaged in the real estate development business with several
companies. In 1988, Mr. Shipley became subject to two felony convictions for
forgery endorsement of a check and appropriation of property entrusted to him in
the Superior Court of the State of California. Mr. Shipley received a Bachelor
of Science degree from Eastern Illinois University in 1960.
Mr. Wimer has been the Secretary and Treasurer of the Company since April
29, 1996, and became a director of the Company on May 21, 1996. From April 1993
to September 1995, he was the director of business promotion of City Lights
Escrow, Inc.; and from October 1992 to April 1993, was the owner and President
of Better Service Escrow, Inc. From October 1990 to October 1992, Mr. Wimer was
employed by Escrow Masters Inc. regarding business promotion; and held a similar
position with Melrose Escrow Inc. from 1988 to October 1990. In each of these
positions, he was also responsible for all banking and money management
functions. From 1985 to 1988, he was the Chief Financial Officer of Sierra
Mortgage Corporation. Mr. Wimer attended California State University-Fullerton
and Clark College.
NEW NOMINEES TO BOARD OF DIRECTORS
The following persons have been nominated to be elected as directors of
the Company at the annual meeting of shareholders scheduled for March, 1998:
Mr. James M. Cunningham was the National Marketing Director of AFR,
Incorporated in Dallas, Texas, from October 1996 to January 1998. From February
1993 to October 1996, he was the President of Dealer Vehicle Conduit, Inc., a
company engaged in
25
<PAGE>
the secondary marketing of sub-prime new and used car debt instruments for car
dealers. From August 1989 to December 1992, Mr. Cunningham was Chief Executive
Officer and President of FSA Holdings, Inc. and subsidiaries that were engaged
in financial services and mortgage lending. From May 1986 to April 1989, he was
the Chief Executive Officer and President of Builder Mortgage Services Company.
From January 1985 to April 1986, Mr. Cunningham was the President of Franklin
First Mortgage Co. Mr. Cunningham received a B.S. degree in finance and
accounting from St. Louis University in 1965.
Mr. Donald E. Hannabarger, 71, is currently retired. From 1984 to 1989,
he was Director-Scheduling and Material Control of the Convair Division of
General Dynamics Corporation; and was the managing director of a subsidiary in
Mexco and another subsidiary near El Centro, California from 1989 to 1992. From
1983 to 1984, Mr. Hannabarger was a management consultant with Ivanhoe
Consulting and Financial. From 1973 to 1982, he held various executive positions
with Ford Motor Co. Mr. Hannabarger graduated with a B.S. -- Industrial
Engineering degree from the University of Illinois in 1948, and received a
M.B.A. -- Production Management degree from the University of Chicago in 1950.
Mr. Mandel Gomberg, 73, has been the Treasurer of Development Management
Group, Inc., a residential real estate development company in Chicago, Illinois,
since 1988. From 1985 to 1988, he was a partner with Angell, Kaplan, Zaidman &
Gomberg, a certified public accounting firm. From 1977 to 1985, Mr. Gomberg was
a partner with S.D. Leidesdorf & Co., a certified public accounting firm. Mr.
Gomberg graduated from the University of Illinois with a M.S. degree in 1948.
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 during the fiscal year ended September 30, 1997.
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, 1997.
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. At September 30, 1997, the
Company has reserved a total of 1,250,000 shares of Common Stock for issuance
under the Company's 1996 Stock Option, SAR and Stock Bonus Plan (the "Plan"). As
of February 12, 1998, the Company had granted stock bonuses covering 445,000
shares of Common Stock under the Plan. Stock Options, SAR's and Stock Bonuses
may be granted to employees (including officers), consultants, advisors and
directors, although only employees and directors and officers who are also
employees may receive "incentive stock options" intended to qualify for certain
tax treatment. The exercise price of non-qualified stock options must equal at
least 85% of the fair market value of the Common Stock on the date of grant, and
in the case of incentive stock options must be no less than the fair market
value. Options granted under the Plan are immediately exercisable but generally
vest over four years and must be exercised within 10 years. The members of the
Stock Option Committee that administer the Plan are presently James E. Shipley,
Bruce J. Brosky and William V. Perry.
401(k) PLAN. In August 1997, the Company adopted a Section 401(k)
Retirement Savings Plan (the "401(k) Plan"). The 401(k) Plan is a tax-qualified
plan covering Company employees who, as of the enrollment eligibility dates
under the 401(k) Plan, have completed at least six months of service with the
Company and elect to participate in the 401(k) Plan. The Company may make
discretionary matching cash contributions to each participant based upon his or
her elective deferrals in a percentage determined by the Company prior to the
end of each plan year, and may make additional contributions in its sole
judgment. All employee contributions are fully vested at all times and
contributions by the Company to the 401(k) Plan vest over a six-year period
based upon years of service. Benefits will normally be distributed to an
employee upon (i) the employee reaching age 65, (ii) the employee's retirement
with the Company, (iii) the employee's death or disability, (iv) the termination
of the employee's employment with the Company, or (v) the termination of the
401(k) Plan.
26
<PAGE>
BOARD COMPENSATION. Directors of the Company may be compensated by the
Company for meeting attendance by an annual directors' fee of $2,500, and are
entitled to reimbursement for their travel expenses. From time to time,
directors who are not employees of the Company, will receive grants of options
to purchase the Company's Common Stock or stock bonuses. The Company does not
pay additional amounts for committee participation or special assignments of the
Board of Directors.
SECURITY OWNERSHIP OF MANAGEMENT.
The total number of shares of Common Stock of the Company beneficially
owned by each of the officers and directors, and all of such directors and
officers as a group, and their percentage ownership of the outstanding capital
stock of the Company as of February 2, 1998, are as follows :
<TABLE>
<CAPTION>
SHARES PERCENT OF
MANAGEMENT BENEFICIALLY OUTSTANDING
SHAREHOLDERS(1) OWNED(1) COMMON STOCK
--------------- ------------ ------------
<S> <C> <C>
Joesph K. Brick.................................................................. 50,000 0.57%
1420 North Atlantic Avenue
Suite 1704
Daytona Beach, Florida 32118
Bruce J. Brosky.................................................................. 88,763 0.9%
3200 Bristol, 8th Floor
Costa Mesa, California 92626
William V. Perry................................................................. 290,470(2) 3.55%
3200 Bristol, 8th Floor
Costa Mesa, California 92626
Ann L. Petersen.................................................................. 6,250 0.08%
Star Route 5080
Keaau, Hawaii 96749
Michael P. Roth.................................................................. 0 0%
300 Bristol, 8th Floor
Costa Mesa, California 92626
James E. Shipley................................................................. 813,375(3) 9.94%
3200 Bristol, 8th Floor
Costa Mesa, California 92626
B. Joe Wimer..................................................................... 6,250 0.08%
3200 Bristol, 8th Floor
Costa Mesa, California 92626
Directors and officers as a group
(7 persons, including the above)................................................ 1,255,108 14.4 %
========= ======
</TABLE>
- ---------------------
(1) Except as otherwise noted, it is believed by the Company that all persons
have full voting and investment power with respect to the shares, except as
otherwise specifically indicated. Under the rules of the Securities and
Exchange Commission, a person (or group of persons) is deemed to be a
"beneficial owner" of a security if he or she, directly or indirectly, has
or shares the power to vote or to direct the voting of such security, or the
power to dispose of or to direct the disposition of such security.
Accordingly, more than one person may be deemed to be a beneficial owner of
the same security. A person is also deemed to be a beneficial owner of any
security which that person has the right to acquire within 60 days, such as
warrants or options to purchase the Common Stock of the Company.
27
<PAGE>
(2) Represents shares of the Company 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.
(3) Represents shares of the Company owned by World Trends Financial, Ltd., a
corporation beneficially owned by Mr. Shipley.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Effective March 12, 1997, the Company issued a promissory note in the
principal amount of $100,000 to James E. Shipley for advances made to the
Company. The note bears interest at 7% per annum and is due on March 12, 1998.
Mr. Shipley also made additional advances to the Company. As a result, the
Company was indebted to Mr. Shipley in the amount of $130,405 as of September
30, 1997.
During the fiscal year ended September 30, 1996 and 1997, the Company
incurred unreimbursed expenses regarding ERA Sterling Alliance Real Estate, a
real estate brokerage company owned by the family of James E. Shipley, a
director and officer of the Company, in the amount of $129,687 and $166,212,
respectively.
During the fiscal year ended September 30, 1997, the Company made loans
to Bruce J. Brosky, a director and Vice President of the Company in the total
amount of $77,000, with interest at 7% per annum.
INDEMNIFICATION OF DIRECTORS AND OFFICERS
As permitted by Section 415-48.5 of the Hawaii Business Corporation Law,
the Restated Articles of Incorporation and By-Laws of the Company provide for
the indemnification of the directors and officers of the Company to the fullest
extent permitted by the Hawaii General Corporation Law. These provisions
generally permit indemnification of directors and officers against certain
costs, liabilities and expenses of any threatened, pending or completed action,
suit or proceeding that any such person may incur by reason of serving in such
positions, except that a Hawaii corporation has no power to eliminate or limit
the personal liability of a director: (1) for any breach of the director's duty
of loyalty to the corporation or its shareholders; (2) for any act or omission
of the director not performed in good faith, or which involves intentional
misconduct or knowing violation of law, or which constitutes a wilful or
reckless disregard of the director's fiduciary duty; (3) for the director's
wilful or negligent violation of any provision of this chapter regarding payment
of dividends or stock purchase or redemption; or (4) for any transaction from
which the director received an improper benefit. Any determination that
indemnification of a director or an officer is, unless ordered by a court, must
be made (i) by the Company's stockholders, (ii) by the Company's Board of
Directors by a majority vote of a quorum consisting of directors who were not
parties to the act, suit or proceeding, (iii) if a majority vote of quorum
consisting of directors who were not parties to the act, suit or proceeding so
orders, by independent legal counsel in a written opinion, or (iv) if a quorum
consisting of directors who where not parties to the act, suit or proceeding
cannot be obtained, by independent legal counsel in a written opinion. The
Restated Articles of Incorporation, By-Laws, and the Hawaii Business Corporation
Law further provide that such indemnification is not exclusive of any other
rights to which such directors, officers or persons controlling the Company
pursuant to the foregoing provisions.
These provisions do not eliminate the liability of a director for
violations of federal securities laws, nor do they limit the rights of the
Company or the shareholders, in appropriate circumstances, to seek equitable
remedies such as injunctive or other forms of non-monetary relief. However, such
remedies may not be effective in all cases.
Insofar as indemnification for liabilities arising under the Securities
Act of 1933 (the "Act") may be permitted to directors, officers and controlling
persons of the Company, the Company has been advised that in the opinion of the
Securities and Exchange Commission such indemnification is against public policy
as expressed in the Act and is, therefore, unenforceable.
28
<PAGE>
PRINCIPAL STOCKHOLDERS
The following table sets forth information with respect to the beneficial
ownership of the Company's Common Stock and Preferred Stock by each shareholder
who beneficially owns more than five percent (5%) of the Company's capital
stock, the number of shares beneficially owned by each and the percent of
outstanding capital stock so owned of record as of February 2, 1998. It is
believed by the Company that all persons listed have sole voting and investment
power with respect to their shares, except as otherwise indicated.
<TABLE>
<CAPTION>
SHARES PERCENT OF
NAME AND ADDRESS BENEFICIALLY OUTSTANDING
OF BENEFICIAL OWNER TITLE OF CLASS OWNED CAPITAL STOCK
------------------- -------------- ------------ -------------
<S> <C> <C> <C>
Sterling Alliance Group, Ltd. Common Stock 3,375,000 38.8%
3200 Bristol Avenue, 8th Floor
Costa Mesa, CA 92626
David Berman Common Stock 510,000 5.9%
3200 Bristol Avenue., 8th Floor
Costa Mesa, CA 92626
Boca Raton, FL 33433
Technik & Trade, Inc. Common Stock 1,000,000 11.5%
Philip Lynch
Inter Alia Holding Co.
23200 Chagrin Blvd., #107
Beachwood, Ohio 44122
Rory P. Hughes Common Stock 496,125 5.8%
3200 Bristol, 8th Floor
Costa Mesa, California 92626
James E. Shipley Common Stock 813,375 9.4%
World Trends Financial, Ltd.
508 Easy Street
Las Vegas, Nevada 89707
Cede & Co. Common Stock 1,292,824 14.9%
P.O. Box 222
Bowling Green Station
New York, New York 10274
Millenco, L.P.(1) Preferred Stock and 1,077,477 11.1%
111 Broadway, 20th Floor Warrant
New York, New York 10006
</TABLE>
- ----------------------------
(1) Represents 162,162 shares of 8% Convertible Preferred Stock, Series A of the
Company which is convertible into the Common Stock of the Company, 500,000
shares of 10% convertible Preferred Stock, Series B, a warrant to purchase
150,000 shares of Common Stock at $1.85 per share, and a warrant to purchase
400,000 shares of Common Stock at $2.375 per share.
29
<PAGE>
CONFLICTS OF INTEREST
Certain of the present officers and directors of the Company invest
independently in securities, either individually or through entities in which
they have an interest or with which they are associated. See "Management." Such
officers and directors have invested in securities for their own accounts and
have engaged in related activities. Participation by such persons in these
activities in the future may pose inherent conflicts of interest, including
corporate opportunity, time and effort.
With regard to future situations, the Board of Directors of the Company
has adopted a policy statement regarding conflicts of interest between the
Company and its officers, directors owning more than 5% of the Company's Common
Stock, employees and members of their immediate families. The policy states that
the Board considers it a potential conflict with the Company's interests for
such persons to take any of the following actions, among others, without
disclosure to and approval by the Board of Directors: (i) to serve as an
officer, director, employee or be a principal shareholder of, or to receive
income from, any enterprise doing business with or competing with the Company;
(ii) to speculate or deal in securities purchased or sold by the Company; (iii)
to own an interest in any enterprise doing business with or competing with the
Company, other than an interest in less than 1% of the securities of a publicly
held company or in securities of banks or savings associations; (iv) participate
in the development of any corporation in which the Company has acquired an
interest after the date of this Memorandum; or (v) otherwise to benefit from
their position with the Company or to deprive the Company of an opportunity to
benefit with respect to any transactions between such persons and any business
organization other than the Company.
The foregoing policy does not apply to directors owning less than 5% of
the Company's Common Stock or consultants who are not officers or employees of
the Company. However, such persons are subject to fiduciary responsibilities as
directors or agents of the Company. Officers and directors of the Company may be
presented with opportunities which give rise to apparent conflicts of interest
which can be resolved only through the exercise of judgment by such officers and
directors consistent with their fiduciary duties to the Company arising under
Hawaii statutory law and general corporate law.
The Company has a right of first refusal on all opportunities to
participate in the purchase of securities which may be presented to its officers
and employees after the date of this Memorandum that are consistent with the
investment objectives of the Company. With respect to all directors of the
Company, including those who are not officers, employees or owners of 5% or more
of the Company's Common Stock, fiduciary obligations exist under Hawaii law
prohibiting them from taking advantage of corporate opportunities and from
otherwise benefitting by reason of their position on the Company's Board of
Directors. In the event any director becomes aware of an opportunity in which he
knows the Company would be interested, he is obligated to make the Company aware
of that opportunity and to offer it to them on the same terms as it may have
been offered to him. Any transactions that take place between any director and
the Company or the affiliate of any director and the Company shall be approved
by the Board of Directors without the involvement of the interested director and
will be approved only if the terms are deemed to be no less favorable to the
Company than could be expected in a transaction with an unaffiliated third
party.
As a result of the foregoing policies, all corporate opportunities
presented to officers and directors are to be disclosed to the Board of
Directors. When the Board of Directors of the Company is presented with a
specific situation under the foregoing policy, it will make a judgment as to
whether a specific activity should be approved in a manner that is consistent
with their fiduciary obligations to resolve such situations in the best
interests of the Company. However, due to capital limitations or other factors
which the Board may consider in making these judgments, the Board may approve a
director's or officer's participation in a securities or other related business
opportunity in which the Company will not participate.
The Board of Directors of the Company will make every effort to minimize
any conflicts of interest and, to the extent that any person may be placed in a
position of such conflict by virtue of a personal interest in a transaction with
the Company, the Board will request that he not participate in any decision
making process with regard to the transaction.
30
<PAGE>
DESCRIPTION OF CAPITAL STOCK
DESCRIPTION OF SECURITIES.
GENERAL. The Company is authorized to issue 30,000,000 shares of Common
Stock, no par value per share, and 5,000,000 shares of Preferred Stock. There
are presently 162,162 shares of 8% Convertible Preferred Stock, Series A issued
and outstanding and 675,000 shares of 10% Convertible Preferred Stock, Series B,
issued and outstanding. As of February 2, 1998, there were 8,691,142 shares of
Common Stock issued and outstanding held by 687 stockholders of record.
COMMON STOCK. Holders of Common Stock are entitled to receive ratably
such dividends as may be declared by the Board of Directors, out of funds
legally available, without any preference. Holders of Common Stock are entitled
to one vote per share. Cumulative voting is not allowed for purposes of the
election of directors. Thus, the holders of more than 50% of the shares voting
for directors can elect all directors. The holders of the Common Stock of the
Company have no preemptive rights to purchase new issues of the securities of
the Company.
At the present time, the Company does not intend to pay any dividends on
its Common Stock. See "Dividends."
Upon liquidation or dissolution of the Company, holders of Common Stock
are entitled to receive pro rata, either in cash or in kind, all of the assets
of the Company after payment of debts, subject to the rights of the holders of
the outstanding Preferred Stock of the Company. There are no redemption,
conversion or preemptive rights attached to the Common Stock.
PREFERRED STOCK. The Board of Directors has the authority, without action
by the stockholders, to designate and issue up to 5,000,000 shares of Preferred
Stock in one or more series and to designate the dividend rate, voting rights
and other rights, preferences and restrictions of each series any or all of
which may be greater than the rights of the Common Stock.
The Company has authorized two classes of Preferred Stock, of which there
are 162,162 shares of its 8% Convertible Preferred Stock, Series A ("Series A
Preferred Stock") and of which there are 675,000 shares of its 10% Convertible
Preferred Stock, Series B ("Series B Preferred Stock") presently issued and
outstanding. Dividends are payable in arrears upon the conversion of the
preferred stock by the issuance of shares of Common Stock of the Company.
The shares of Preferred Stock have voting rights and are entitled to the
number of votes equal to the number of shares of Common Stock into which they
are convertible, and have the right to vote together with the holders of Common
Stock as a single class. In the event of the liquidation of the Company, the
holders of the Series B Preferred Stock have a liquidation preference over the
holders of Common Stock and any junior series of Preferred Stock and will be
entitled to receive $1.50 per share. After receipt of this liquidation
preference, the holders of the Series B Preferred Stock and Common Stock shall
be entitled to distributions, if any, pro rata based upon the number of shares
held by each assuming the conversion of the Series B Preferred Stock. Upon
receipt of notice of a holder's exercise of their right to convert their
Preferred Stock, the Company has the option to redeem such shares. The terms of
the Preferred Stock are subject to adjustment upon the occurrence of certain
events. The holders of Series B Preferred Stock also have registration rights
upon conversion into Common Stock of the Company.
The effect of the issuance of any other shares of preferred stock upon
the rights of holders of the Common Stock may not be determined until the Board
of Directors specifies the rights of the holders of such Preferred Stock. Such
effects might include, among other things, restricting dividends on the Common
Stock, diluting the voting power of the Common Stock, impairment of the
liquidation rights of the Common Stock and delaying or preventing a change in
control of the Company without further action by the stockholders.
WARRANTS AND OPTIONS. There are presently outstanding warrants to
purchase up to 956,250 shares of the Common Stock of the Company exercisable at
prices ranging from $1.85 to $3.00 per share.
The Company has a stock option and stock bonus plan which covers
1,250,000 shares of the Common Stock of the Company. As of February 12, 1998,
stock bonuses covering 445,000 shares of Common Stock have been granted and
issued under the Plan. There are 805,000 shares remaining for the grant of
future stock options, SAR's or stock bonuses.
31
<PAGE>
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.
SHARES AVAILABLE FOR FUTURE SALE
As of February ___, 1998, the Company had outstanding (or reserved for
issuance upon the conversion of its outstanding shares of Series A and Series B
Preferred Stock, for the exercise of outstanding warrants, and for securities
available to be granted under the Company's 1996 Stock Option, SAR and Stock
Bonus Plan (the "1996 Plan")) 11,491,535 shares of Common Stock. A substantial
portion of such shares of Common Stock are or will be freely tradeable by
persons, other than "affiliates" of the Company, without restriction under the
Securities Act of 1933.
The Company has reserved an aggregate of 1,250,000 shares of Common Stock
for issuance under the 1996 Plan (File No. 333-45283). The Company has filed a
registration statement on Form S-8 with respect to the shares of Common Stock
issuable under the 1996 Plan. Shares of Common Stock covered by such
registration statement on Form S-8 upon the exercise of options granted under
the 1996 Plan or issued as stock bonuses will be available for sale in the
public market without restriction to the extent that they are held by persons
who are not affiliates of the Company and, to the extent that they are held by
affiliates, pursuant to Rule 144 under the Securities Act, without observance of
the holding period requirement.
The Company's Common Stock trades in the over-the-counter (Electronic
Bulletin Board) under the Symbol "EMBU". No prediction can be made as to the
effect, if any, that future sales of shares, or the availability of shares for
future sale, will have on the market price prevailing from time to time. Sales
of substantial amounts of Common Stock, or the perception that such sales could
occur, may affect adversely prevailing market prices of the Common Stock. See
"Risk Factors -- Market for Common Stock".
LEGAL PROCEEDINGS
In November 1997, the Company was named as a defendant in a civil action
filed by Greenhouse Group, Inc. in the Superior Court of the State of
California, Orange County (Case No. 786468). The plaintiff alleged that the
Company breached a contract with the plaintiff which was to provide public
relations and marketing services for 200,000 shares of the common stock of the
Company. The plaintiff is seeking $540,000 in damages, interest and costs. The
Company has denied the allegations of the plaintiff, and intends to vigorously
defend this civil action.
32
<PAGE>
The Company is not engaged in any other material legal proceedings except
litigation in the ordinary course of its business. In the opinion of management,
the amount of ultimate liability with respect to those proceedings will not be
material to the Company's financial position or results of operations.
LEGAL MATTERS
The validity of the securities offered hereby will be passed upon for the
Company by the law firm of Stephen A. Zrenda, Jr., P.C., Oklahoma City,
Oklahoma.
EXPERTS
The consolidated financial statements of the Company at September 30,
1997, appearing in this Prospectus and Registration Statement have been audited
by Harlan & Boettger, LLP, independent auditors, as set forth in their report
thereon appearing elsewhere herein and in the Registration Statement, and are
included in reliance upon such report given upon the authority of such firm as
experts in accounting and auditing.
ADDITIONAL INFORMATION
The Company has filed with the Securities and Exchange Commission a
Registration Statement (which term shall include all amendments thereto) on Form
SB-2 (No. 333-21719) under the Securities Act with respect to the Common Stock
offered hereby. This Prospectus, which constitutes a part of the Registration
Statement does not contain all of the information set forth in the Registration
Statement, certain items of which are contained in exhibits to the Registration
Statement as permitted by the rules and regulations of the Commission. For
further information with respect to the Company and the Common Stock offered
hereby, reference is made to the Registration Statement, including the exhibits
thereto, and the financial statements and notes filed as a part thereof.
Statements made in this Prospectus concerning the contents of any document
referred to herein are not necessarily complete. With respect to each such
document filed with the Commission as an exhibit to the Registration Statement,
reference is made to the exhibit for a more complete description of the matter
involved. The Registration Statement, including the exhibits thereto and the
financial statements and notes filed as a part thereof, as well as such reports
and other information filed with the Commission, may be inspected without charge
at the public reference facilities maintained by the Commission at Room 1024,
450 Fifth Street, N.W., Washington, D.C. 20549 and at the regional offices of
the Commission located at 7 World Trade Center, 13th Floor, Judiciary Plaza, New
York, New York 10048 and Citicorp Center, 500 West Madison Street, Suite 1400,
Chicago, Illinois 60661. Copies of all or any part thereof may be obtained from
the Commission upon the payment of certain fees prescribed by the Commission.
The Company is subject to the reporting requirements of the Securities
Exchange Act of 1934 and in accordance therewith files reports and other
information with the Commission (File No. 0-11883). Reports and other
information can be inspected and copied at the public reference facilities of
the Commission at 450 Fifth Street, N.W., Washington D.C. 20549; at its
Northeast Regional Office, Suite 1300, 7 World Trade Center, New York, New York
10048; and at its Midwest Regional Office, Citicorp Center, 500 West Madison
Street, Suite 1400, Chicago, Illinois 60661-2511. Copies of such material can be
obtained from the Public Reference Section at prescribed rates. The Company
intends to furnish its stockholders with annual reports containing audited
financial statements and such other periodic reports as the Company may
determine to be appropriate or as may be required by law.
33
<PAGE>
EMB CORPORATION AND SUBSIDIARY
AUDITED FINANCIAL STATEMENTS
AS OF SEPTEMBER 30, 1997 AND 1996
<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, 1997 AND 1996 F-2
CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE YEARS ENDED
SEPTEMBER 30, 1997, 1996 AND 1995 F-3
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT) FOR THE YEARS ENDED
SEPTEMBER 30, 1997, 1996 AND 1995 F-4
CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED SEPTEMBER 30, 1997,
1996 AND 1995 F-5
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS F-6 - F-19
</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, 1997 and 1996, and the
related consolidated statements of operations, shareholders' equity (deficit),
and cash flows for the years ended September 30, 1997, 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, 1997 and 1996, and the results of their
operations and their cash flows for the years ended September 30, 1997, 1996 and
1995, in conformity with generally accepted accounting principles.
Harlan & Boettger, LLP
San Diego, California
December 3, 1997
F-1
<PAGE>
EMB CORPORATION AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
ASSETS September 30,
September 30, 1996
1997 (As restated)
------------ --------------
<S> <C> <C>
CURRENT ASSETS
Cash $ 61,409 $ 395
Restricted cash (Note J) 34,000 -
Accounts receivable (net of allowance of $17,958 and $0, respectively) 8,890 14,582
Mortgage loans held for sale (Note K) 7,092,238 -
Inventory - 35,324
Notes receivable - officers (Note D) 227,600 -
Current portion of note receivable (Notes G and H) 165,574 14,000
Prepaid expenses and other (Note C) 218,441 -
----------- -----------
TOTAL CURRENT ASSETS 7,808,152 64,301
PROPERTY AND EQUIPMENT, net (Note F) 462,992 149,363
NOTE RECEIVABLE, less current portion (Notes G and H) 3,161,133 -
RELATED PARTY RECEIVABLE (Note M) 166,212 129,687
LAND HELD FOR SALE (Note G) 43,000 843,000
INTANGIBLE ASSETS, net (Note I) 105,885 -
OTHER ASSETS (Note J) 1,275,210 4,128
----------- -----------
$13,022,584 $ 1,190,479
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 539,488 $ 195,374
Warehouse line of credit (Note K) 7,029,738 -
Bank overdrafts - 27,177
Accrued expenses 170,743 48,886
Notes payable - current portion (Note L) 227,487 293,793
Capital lease obligations - current portion (Note O) 24,467 28,553
----------- -----------
TOTAL CURRENT LIABILITIES 7,991,923 593,783
RELATED PARTY PAYABLE (Note M) 130,405 -
NOTES PAYABLE, net of current portion (Note L) 17,154 65,000
CAPITAL LEASE OBLIGATIONS, net of current portion (Note O) 3,361 30,096
DEFERRED GAIN (Note H) 3,200,000 -
----------- -----------
TOTAL LIABILITIES 11,342,843 688,879
----------- -----------
COMMITMENTS AND CONTINGENCIES (Note O) - -
SHAREHOLDERS' EQUITY
Preferred stock, no par value, 5,000,000 shares authorized; 648,648
and 0 shares issued and outstanding, respectively 1,009,000 -
Common stock, no par value, 30,000,000 shares authorized;
7,535,942 and 5,311,817 shares issued and outstanding, respectively 6,955,482 3,910,391
Common stock to be issued 160,875 585,000
Common stock subscribed (net of allowance of $187,875 and $0, respectively) (100,000) (200,000)
(Note X)
Retained deficit (6,345,616) (3,793,791)
----------- -----------
TOTAL SHAREHOLDERS' EQUITY 1,679,741 501,600
----------- -----------
$13,022,584 $ 1,190,479
=========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-2
<PAGE>
EMB CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Years ended September 30,
---------------------------------------
1996
1997 (As restated) 1995
----------- ----------- ----------
<S> <C> <C> <C>
REVENUES
Loan origination and other fees, net of commitment fees $ 4,156,193 $ 244,874 $ 97,400
Product sales - 31,545 -
----------- ----------- ----------
TOTAL REVENUES 4,156,193 276,419 97,400
COST OF SALES - 29,636 -
----------- ----------- ----------
Gross profit 4,156,193 246,783 97,400
----------- ----------- ----------
OPERATING EXPENSES
Loan origination costs, commissions and other fees 2,331,815 - -
General and administrative 4,347,247 3,375,244 531,818
Depreciation and amortization 71,461 31,056 2,662
----------- ----------- ----------
TOTAL OPERATING EXPENSES 6,750,523 3,406,300 534,480
----------- ----------- ----------
LOSS FROM OPERATIONS (2,594,330) (3,159,517) (437,080)
----------- ----------- ----------
OTHER INCOME (EXPENSES)
Interest income 15,146 - -
Interest expense (36,979) (64,393) (2,164)
Other 65,938 (2,688) 9,989
----------- ----------- ----------
TOTAL OTHER INCOME (EXPENSES) 44,105 (67,081) 7,825
----------- ----------- ----------
LOSS BEFORE INCOME TAXES (2,550,225) (3,226,598) (429,255)
Provision for income taxes (Note N) 1,600 1,600 800
----------- ----------- ----------
NET LOSS $(2,551,825) $(3,228,198) $ (430,055)
=========== =========== ==========
NET LOSS PER COMMON SHARE $(.42) $(.89) $(.29)
=========== =========== ==========
WEIGHTED AVERAGE NUMBER OF SHARES
OUTSTANDING 6,114,176 3,641,421 1,469,225
=========== =========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-3
<PAGE>
EMB CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT)
<TABLE>
<CAPTION>
Common Common Total
Common Stock Preferred Stock Stock Stock to be Retained Shareholders'
------------ ----------------
Shares Amounts Shares Amount Subscribed Issued Deficit Equity (Deficit)
------ ------- ------ ------ ---------- ------ ------- ----------------
<S> <C> <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 Sterling
Alliance Group, Ltd. 1,158,650 - - - - - - -
Shares to be issued for
services - - - - - 585,000 - 585,000
Net loss - - - - - - (3,228,198) (3,228,198)
---------- ---------- ------- ---------- --------- ---------- ---------- ----------
BALANCE, SEPTEMBER 30, 1996 5,311,817 $3,910,391 - $ - $(200,000) $ 585,000 $(3,793,791) $ 501,600
(As restated)
Proceeds from sale of
shares 50,000 137,500 - - - - - 137,500
Shares issued for services 991,750 1,456,903 - - - (585,000) - 871,903
Shares issued for exercise
of warrants 96,250 140,938 - - - - - 140,938
Warrants exercised
for subscription receivable 86,125 172,250 - - (212,875) - - (40,625)
Shares issued for
investment in joint venture 1,000,000 1,137,500 - - - - - 1,137,500
Proceeds from private
placement of preferred stock
net of issuance costs - - 648,648 1,009,000 - - - 1,009,000
Shares to be issued for
services - - - - - 160,875 - 160,875
Payment of stock
subscription receivable - - - - 125,000 - - 125,000
Set up bad debt reserve - - - - 187,875 - - 187,875
Net loss - - - - - - (2,551,825) (2,551,825)
---------- ---------- ------- ---------- --------- ---------- ---------- ----------
BALANCE, SEPTEMBER 30, 1997 7,535,942 $6,955,482 648,648 $1,009,000 $(100,000) $ 160,875 $(6,345,616) $ 1,679,741
========== ========== ======= ========== ========= ========== =========== ===========
</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
1997 (As restated) 1995
-------------- ------------- -----------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $ (2,551,825) $(3,228,198) $(430,055)
Adjustments to reconcile net loss to net cash
used in operating activities:
Common stock issued for services 785,236 1,315,209 162,250
Common stock to be issued for services 53,625 585,000 -
Related party note payable issued for services 63,750 - -
Increase in reserves 493,833 - -
Depreciation and amortization 71,461 31,056 2,662
Changes in operating assets and liabilities:
(Increase) decrease in:
Restricted cash (129,809) - -
Accounts receivable (12,266) (14,582) -
Inventory 35,324 (35,324) -
Mortgage loans held for sale (7,092,238) - -
Prepaid expenses and other assets (350,297) (2,951) (1,177)
Increase in:
Accounts payable 316,937 217,867 349
Accrued expenses 121,858 46,637 1,449
----------- ----------- ---------
NET CASH USED IN OPERATING ACTIVITIES (8,194,411) (1,085,286) (264,522)
----------- ----------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of property and equipment (377,240) (96,846) (6,720)
Payment for land purchase - - (10,000)
Purchases of intangible assets (113,736) - -
Loans made on notes receivable - officers (227,600) - -
Loans made on notes receivable (112,707) - (14,000)
Loans made on related party receivable (36,525) (74,798) (29,092)
Proceeds from sale of land held for investment 800,000 - -
----------- ----------- ---------
NET CASH USED IN INVESTING ACTIVITIES (67,808) (171,644) (59,812)
----------- ----------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds on line of credit, net 7,029,738 - -
Proceeds from issuance of notes payable - 268,893 355,776
Payments under capital lease obligations (30,821) (17,300) -
Payments on borrowings (154,777) (38,253) -
Proceeds from sale of common stock 278,438 1,017,914 -
Proceeds from related party borrowings 66,655 - -
Proceeds from preferred stock private placement (net of issuance costs) 1,009,000 - -
Proceeds from common stock subscribed 125,000 - -
----------- ----------- ---------
NET CASH PROVIDED BY FINANCING ACTIVITIES 8,323,233 1,231,254 355,776
----------- ----------- ---------
NET INCREASE (DECREASE) IN CASH 61,014 (25,676) 31,442
CASH, BEGINNING 395 26,071 (5,371)
----------- ----------- ---------
CASH, ENDING $ 61,409 $ 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 B). The historical and on-going
financial statements primarily represent the assets, liabilities and
operations which were acquired from SAG.
The Company has an interactive software system for the origination and
processing of mortgage loans which it calls Video Interactive Mortgage
Process ("VIP"). This system has been linked to the ProShare video personal
conferencing 200 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. The Company has sales offices located in the western,
southeastern, and southern regions of the United States.
Basis of Consolidation
The consolidated financial statements include the accounts of EMB
Corporation and its subsidiary company (together, "the Company") after
elimination of material intercompany accounts and transactions.
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.
Significant Estimates
Management uses estimates and assumptions in preparing financial
statements. Those estimates and assumptions affect the reported amounts of
assets and liabilities, the disclosure of contingent assets and
liabilities, and reported revenues and expenses. Significant estimates used
in preparing these financial statements include the valuation allowance for
deferred tax assets, reserves for interest receivable relating to the note
receivable and the common stock subscribed, deferred loan origination
costs, and discounted value of restricted stock issued for services and
investment in joint venture. It is at least reasonably possible that a
change in the estimates will occur in the near term.
A. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
Cash
F-6
<PAGE>
EMB CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Cash includes cash on hand and cash in checking and savings accounts. The
balance, at times, may exceed federally insured limits. At September 30,
1997 the Company exceeded the insured limits by an immaterial amount.
Mortgage Loans Held for Sale
Mortgage loans held for sale represent the Company's security interest in
mortgage loans funded on their Imperial Warehouse Lending Group, Inc. line
of credit, which have not yet been purchased by ICI Funding (ICI), in
accordance with their Master Repurchase Agreement. (See Note K). Such
purchases are typically made within 10 days from the date the Company funds
a loan.
Mortgage loans held for sale are stated at lower of cost or market
determined on an aggregate loan basis. Market value for mortgage loans
covered by investor commitments is based on commitment prices. Mortgage
loans held for sale include deferred loan origination costs of $62,750 and
$0 at September 30, 1997 and 1996, respectively. Credit is granted to
individuals located throughout the United States. The loans are
collateralized and secured by first deeds on real property. The interest
rates on these mortgage loans are at market, which generally ranges from
7.0% to 9.5%.
Mortgage Servicing Rights
Included with the mortgage loans that are held for sale is the mortgage
servicing rights which are sold with the mortgage loans.
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. As of
September 30, 1997 the inventory was written off as the equipment and
software were determined to be worthless.
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. In the year of acquisition of property and
equipment, one-half year's depreciation is taken regardless of the actual
date placed into service. 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.
Intangible Assets
Intangible assets subject to amortization include the design and copyright
of the corporate logo and computer software. The logo design and copyright
is amortized on a straight-line basis over twenty years, and the computer
software is amortized on a straight-line basis over five years.
A. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):
F-7
<PAGE>
EMB CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Loan Origination Fees
Loan origination fees and costs are shared with the brokers who bring the
loan to the Company. The Company's portion of the loan origination fee is
included in the loan production revenue when the loan is sold.
Revenue Recognition
Origination fees, service release fees and other fees, net of direct costs,
are deferred and recognized at the time the loan is sold.
Revenue and Cost Recognition - Land Held for Sale
The Company expects that it will from time to time hold real estate for
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.
Deferred Commitment Fees
Deferred commitment fees, included in Prepaid Expenses and Other, consist
of fees paid to permanent investors to ensure the ultimate sale of loans.
Fees paid to permanent investors are recognized as an adjustment to the
sales price when the loans are sold.
Advertising
The Company expenses advertising costs as incurred. Advertising expenses
included in general and administrative expenses were $18,043, $3,085, and
$512, for the fiscal years ended September 30, 1997, 1996, and 1995,
respectively.
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
and net operating loss carryforwards. 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.
A. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):
Stock-Based Compensation
The Company accounts for stock-based compensation in accordance with
Statement of Financial Accounting
F-8
<PAGE>
EMB CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Standards No. 123 (SFAS 123), "Accounting for Stock-Based Compensation."
During the year ended September 30, 1997, the Company issued shares of its
restricted stock, valued at $101,278, to officers and employees for
services rendered. During the years ended September 30, 1997, 1996 and
1995, the Company issued shares of its restricted stock, valued at
$1,456,903, $1,279,460, and $155,250, respectively, to unrelated parties
for services rendered. The value of the shares was based on the fair value
of the stock determined by market prices, discounted for the stock
restriction.
Financial Statement Reclassifications
Certain amounts reflected in the consolidated financial statements for the
years ended September 30, 1996 and 1995 have been reclassified to conform
to the presentation for the year ended September 30, 1997.
B. 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.
C. PREPAID EXPENSES AND OTHER :
Prepaid expenses and other are summarized as follows:
<TABLE>
<CAPTION>
September 30, September 30,
1997 1996
------------- -------------
<S> <C> <C>
Deferred commitment fees $ 193,917 $ -
Other 24,524 -
------------- -------------
Total prepaid expenses and other $ 218,441 $ -
============= =============
</TABLE>
D. NOTES RECEIVABLE - OFFICERS:
The Company has notes receivable from officers totaling $227,600 at
September 30, 1997. These notes bear interest at 7.0% per annum and are
payable in one installment including interest in January 1998 and September
1998. During 1997, interest income on these notes was $10,909.
E. RESTATEMENT:
An error, resulting in the understatement of net loss, common stock to be
issued, operating expenses and retained deficit in the Company's previously
issued financial statements for the year ended September 30, 1996, has
resulted in the restatement of those financial statements. The changes to
retained deficit as of September 30, 1996 and the related statement of
operations for the year then ended are summarized as follows:
Retained
F-9
<PAGE>
EMB CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Deficit Net Loss
------------ ------------
<S> <C> <C>
As previously reported, September 30, 1996 $(3,208,791) $(2,643,198)
Omission of stock for services transaction (585,000) (585,000)
----------- -----------
As restated, September 30, 1996 $(3,793,791) $(3,228,198)
=========== ===========
</TABLE>
The income tax effect of this error was to increase the deferred income tax
asset and the valuation allowance $234,600 at September 30, 1996.
F. PROPERTY AND EQUIPMENT:
Property and equipment are summarized as follows:
<TABLE>
<CAPTION>
September 30, September 30,
1997 1996
------------- -------------
<S> <C> <C>
Machinery and equipment $ 363,041 $ 112,532
Furniture & fixtures 142,552 71,317
Leasehold improvements 55,496 -
------------- -------------
561,089 183,849
Less accumulated depreciation 98,097 34,486
------------- -------------
Property and equipment, net $ 462,992 $ 149,363
============= =============
</TABLE>
G. 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 valued at $4.00 per share as consideration. The land was
subsequently collateralized against a $65,000 note payable (See Note L).
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 valued at $4.00 per share of its
common stock as consideration. This land was sold on December 30, 1996 to
an unrelated party for $4,000,000. The Company received a down payment of
$800,000 and a note receivable for $3,200,000 with interest at 12% per
annum. The Company has reported this sale on the deposit method, recovering
the initial cost of the land with the down payment. Future payments will be
recognized as income when received (see Note H).
H. NOTE RECEIVABLE:
Note receivable at September 30, 1997, consists of $3,200,000 due from the
sale of the Monterey Land for $4,000,000. The note is secured by the
property and payable in nine annual payments of $422,867 commencing
December 1997, including interest at 12% per annum, with a final payment of
remaining principal and any accrued interest due December 2006.
In accordance with Statement of Financial Accounting Standards No. 66 (SFAS
66), "Accounting for Sales of Real Estate", the Company has provided for
the recognition of profit based on the Deposit Method and, accordingly, has
F-10
<PAGE>
EMB CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
recorded a Deferred Gain of $3,200,000 as of September 30, 1997 (see Note
G).
I. INTANGIBLE ASSETS:
Intangible assets are summarized as follows:
<TABLE>
<CAPTION>
September 30, September 30,
1997 1996
------------- -------------
<S> <C> <C>
Logo and copyrights $ 87,371 $ -
Computer software 26,365 -
------------- -------------
113,736 -
Less accumulated amortization 7,851 -
------------- -------------
Intangible assets, net $ 105,885 $ -
============= =============
</TABLE>
J. OTHER ASSETS:
Other assets are summarized as follows:
<TABLE>
<CAPTION>
September 30, September 30,
1997 1996
------------- -------------
<S> <C> <C>
Investment in joint venture $ 1,137,500 $ -
Interest receivable, net of allowance 15,146 -
Deposits - other 26,755 4,128
Restricted cash 129,809 -
Less: current portion, restricted cash (34,000) -
------------- -------------
Total other assets $ 1,275,210 $ 4,128
============= =============
</TABLE>
Investment in joint venture relates to the Company's 50% interest in an
international joint venture to further its real estate mortgage business
throughout Europe, Australia and New Zealand. The Company contributed
1,000,000 restricted common shares to fulfill its investment. The
investment, which was acquired August 29, 1997, is valued at 65% of the
stock's market value per management's estimate of a reasonable discount. As
of December 3, 1997, the Company's capital contribution was being held in
escrow pending finalization of incorporation. However, as of September 30,
1997, the joint venture has commenced operations.
J. OTHER ASSETS: (CONTINUED)
Restricted cash reflects monies held in a certificate of deposit pursuant
to the terms of the Company's lease agreement for its corporate office
space. These monies are being held by the landlord as security for the
Company's adherence to the terms, covenants and conditions of the lease.
The agreement stipulates that $34,000 will be released beginning April 1998
and each year thereafter, provided the Company isn't in default under the
lease. The remaining restricted cash relates to an agreement the Company
has with ICI wherein the Company is required to fund two percent of loan
balances which are being financed by the ICI warehouse credit line but
purchased by another investor. This account is used to fund the Company's
share of these loans.
K. WAREHOUSE LINE OF CREDIT:
F-11
<PAGE>
EMB CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Company has a $3,000,000 line-of-credit with Imperial Warehouse Lending
Group, Inc. (IWLGI) which can be used solely for the purpose of funding
mortgage loans. Borrowings bear interest at Bank of America's prime + .5%.
The line is secured by a personal guarantee and the original mortgage
notes. The Company must maintain an average daily balance of $1,500,000. As
of September 30, 1997 the outstanding balance was $7,029,738, $4,029,738 in
excess of the lending limit. The Company has recorded a corresponding
asset, Mortgage Loans Held For Sale, representing the Company's security
interest in the underlying properties. The line of credit expired September
26, 1997. Since that date, IWLGI has accommodated the Company's credit
needs pending a formal extension of the agreement.
L. NOTES PAYABLE:
<TABLE>
<CAPTION>
Notes payable are summarized as follows:
September 30, September 30,
1997 1996
------------- ------------
<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, unsecured $ 24,375 $ 26,250
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, unsecured 24,375 26,250
Note payable to Howard C. Kuhle, interest at 12%, interest
only payable monthly, principal and any unpaid interest due
March 1998, secured by deed of trust on Riverside County
land 65,000 65,000
Note payable to Baronin Enterprises, Inc., interest at 8%,
principal and any unpaid interest due on demand 50,000
Note payable to Havon Funding, L.P., interest at 10.5%, 24
monthly payments of $480 including interest, unsecured, final
payment including any unpaid interest due November 1998 21,191 -
Various notes payable to unrelated parties, no established
repayment schedule, unsecured, non-interest-bearing 109,700 191,293
------------- ------------
244,641 358,793
Less current portion 227,487 293,793
------------- ------------
Notes payable, net of current portion $ 17,154 $ 65,000
============= ============
</TABLE>
L. NOTES PAYABLE: (CONTINUED)
Aggregate maturities required on long-term debt at September 30, 1997 are
as follows:
<TABLE>
<S> <C>
1998 $227,487
1999 17,154
Thereafter -
--------
$244,641
========
</TABLE>
F-12
<PAGE>
EMB CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
M. RELATED PARTY TRANSACTIONS:
Related party receivable at September 30, 1997 and 1996 consists of non-
interest bearing, unsecured amounts due on demand from a related
corporation of $166,212 and $129,687, respectively.
Related party payable at September 30, 1997 consists of loans (portion non-
interest bearing, due on demand, balance interest at 7% per annum, due
March 1998, all amounts unsecured) made to the Company by a
director/officer and amounts due (unsecured, account payable) to an entity
owned by another director for consulting services of $130,405 and $48,357,
respectively.
N. INCOME TAXES:
As discussed in Note A, the Company accounts for income taxes in accordance
with SFAS 109.
Provisions for income taxes are summarized as follows:
<TABLE>
<CAPTION>
Year ended September 30,
------------------------
1997 1996 1995
------ ------ -----
<S> <C> <C> <C>
Current income taxes $1,600 $1,600 $ 800
Deferred income taxes - - -
------ ------ -----
Provision for income taxes $1,600 $1,600 $ 800
====== ====== =====
</TABLE>
F-13
<PAGE>
EMB CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
N. INCOME TAXES: (CONTINUED)
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, 1997, 1996 and 1995 as follows:
<TABLE>
<CAPTION>
Year ended September 30,
-----------------------------------
1996
1997 (As restated) 1995
------- ------------ ---------
<S> <C> <C> <C>
Deferred tax assets:
Net operating losses $ 2,212,800 $ 1,354,600 $ 120,000
Deferred gain 277,100 - -
Reserves 213,800 - -
----------- ----------- ---------
Gross deferred tax assets 2,703,700 1,354,600 120,000
Valuation adjustment (2,703,700) (1,354,600) (120,000)
----------- ----------- ---------
Net deferred tax assets $ - $ - $ -
=========== =========== =========
</TABLE>
The net change in the valuation allowance from September 30, 1997 to 1996
was $1,349,100 and $1,234,600 from September 30, 1996 to 1995.
The Company has net operating loss carryforwards remaining of approximately
$4,700,000. 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>
<CAPTION>
Federal State
---------- ----------
<S> <C> <C>
2000 $ - $1,314,000
2001 - 958,000
2009 100,000 -
2010 200,000 -
2011 2,500,000 -
2012 1,900,000 -
---------- ----------
$4,700,000 $2,272,000
========== ==========
</TABLE>
O. COMMITMENTS AND CONTINGENCIES:
Operating Leases
The Company leases its office facilities under operating leases from
unrelated third parties which expire at various dates, ranging from one to
five years. Rental expense for the years ended September 30, 1997, 1996 and
1995 was $155,022, $90,132 and $0, respectively.
Minimum future rental payments under the lease agreements are summarized as
follows:
<TABLE>
<S> <C>
1998 $ 333,400
1999 335,700
2000 357,200
2001 262,200
2002 131,100
----------
$1,419,600
==========
</TABLE>
F-14
<PAGE>
EMB CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
O. COMMITMENTS AND CONTINGENCIES: (CONTINUED)
The noncancelable operating leases provide 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,
1997 1996
------------- --------------
<S> <C> <C>
Cost $ 75,949 $ 75,949
Accumulated depreciation (36,382) (23,450)
-------- --------
Net Book Value $ 39,567 $ 52,499
======== ========
</TABLE>
The future minimum lease payments under capitalized leases and the present
value of the net minimum lease payments are as follows:
<TABLE>
<CAPTION>
Year ending September 30,
-------------------------
<S> <C>
1998 $ 28,998
1999 2,916
--------
31,914
Less amount representing interest (4,086)
--------
27,828
Less current portion of capital lease (24,467)
--------
Long-term capital lease obligations $ 3,361
========
</TABLE>
Contingencies
The Company is involved in certain claims and legal proceedings in which
monetary damages and other relief are sought. The Company is vigorously
contesting these claims. However, these claims are preliminary, and their
ultimate outcome cannot presently be predicted. In any event, it is the
opinion of management that any liability of the Company for claims or
proceedings will not materially affect its financial position.
P. SUPPLEMENTAL CASH FLOW INFORMATION:
F-15
<PAGE>
EMB CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Supplemental disclosures of cash flow information are summarized as
follows:
<TABLE>
<CAPTION>
Years ended September 30,
-------------------------------------
1997 1996 1995
------------ --------- ----------
<S> <C> <C> <C>
Cash paid for interest and income taxes:
Interest $ 18,506 $ 52,232 $ 2,164
Income taxes $ 1,600 $ - -
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 $ -
Common stock issued for investment in
joint venture $1,137,500 $ - $ -
</TABLE>
Q. SHAREHOLDERS' EQUITY:
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).
Common stock to be issued relates to remuneration in the form of common
stock, wherein the liability is accruable as of the balance sheet date but
the stock has not been issued.
R. PREFERRED STOCK:
In August 1997, the Company designated 1,066,666 shares of its authorized
preferred stock as Convertible Preferred Stock, Series A (the "Convertible
Preferred"). The Company sold a total of 648,648 shares of Convertible
Preferred (at a price of $1.85 per share) in a private placement that was
consummated in August 1997. As additional consideration, the Company issued
warrants to purchase 150,000 shares of the Company's common stock at an
initial exercise price of $1.85 per share. The Convertible Preferred has a
stated value of $1.85 and is entitled to receive cumulative dividends at an
annual rate of $.148 per share, payable quarterly when and if declared by
the Board of Directors and is convertible, at any time at the option of the
holder, into shares of the Company's common stock at a conversion price
equal to the lesser of (a) $1.85 per share or (b) 75% of the average
closing bid price of the Common Stock during the five trading days
immediately preceding such conversion. In the event of any noticed
conversion of the Convertible Preferred at a conversion price of less than
$1.125 per common share then the Company may, at its option, redeem the
shares of the Convertible Preferred, in whole or in part, at an amount
equal to 117% of the purchase price of the holder's Convertible Preferred
R. PREFERRED STOCK: (CONTINUED)
F-16
<PAGE>
EMB CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
plus an amount equal to accrued and unpaid dividends, if any, to (and
including) the date fixed for redemption, whether or not earned or
declared. Each share of the Convertible Preferred is entitled to vote on
any matter submitted to the shareholders as if the Convertible Preferred
had been converted into common stock, and each share has a liquidation
preference equal to $2.16.
S. STOCK OPTION, SAR AND STOCK BONUS PLAN:
On April 29, 1996 the Board of Directors approved the "EMB Corporation 1996
Stock Option, SAR and Stock Bonus Plan." Options and SAR's may be granted
to employees and independent consultants. No options and SAR's shall be
exercisable within six months from date of grant or more than ten years
after date of grant. The option price of stock options shall in no event be
less than 85%, and for incentive stock options shall in no event be less
than 100% of the "fair market value" of the stock on the date of grant.
The Company has reserved a total of 250,000 shares of common stock for
issuances under the plan. As of September 30, 1997, no shares have been
granted under the plan.
T. COMMON STOCK WARRANTS:
The following table summarizes common stock warrant activity during the
years ended September 30, 1997 and 1996:
<TABLE>
<CAPTION>
For the years ended
September 30,
-----------------------
1997 1996
--------- --------
<S> <C> <C>
Beginning balance 108,750 -
Issued 286,125 108,750
Exercised (182,375) -
Expired - -
-------- -------
Ending Balance 212,500 108,750
======== =======
</TABLE>
As of September 30, 1997, the exercise price of outstanding warrants range
from $1.85 - $2.00 and the expiration dates range from March 1998 to August
2000.
U. RETIREMENT PLAN:
The Company adopted a 401(k) retirement plan effective August 1, 1997. As
of the adoption date, the plan covers all employees who are at least 21
years of age. Thereafter, an employee must have four months of service and
be at least 21 years of age to be eligible. Under the plan, the employees
may contribute up to 15% of their compensation. The Company holds the right
to make a discretionary contribution. There was no Company contribution for
the year ended September 30, 1997.
V. SIGNIFICANT CUSTOMER:
F-17
<PAGE>
EMB CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
A significant source of revenue for the Company is derived from the resale
of retail mortgage loans to a single national mortgage lender. The Company
sold approximately 90% of its mortgage loans to this one lender for the
year-ended September 30, 1997. There is no receivable balance due from the
lender at September 30, 1997. The line of credit which has been used to
fund these mortgage loans expired on September 26, 1997. The loss of this
line of credit and/or the loss of the national mortgage lender would have a
material adverse affect on the Company's ability to continue in business.
W. FAIR VALUE OF FINANCIAL INSTRUMENTS:
The following disclosure of estimated fair values of financial instruments
as of September 30, 1997 and 1996 is made by the Company using available
market information and appropriate valuation methodologies. However,
considerable judgment is required to interpret market data to develop the
estimates of fair value. Accordingly, the estimates presented herein are
not necessarily indicative of the amounts the Company could realize in a
current market exchange.
<TABLE>
<CAPTION>
September 30, 1997 September 30, 1996
---------------------- --------------------
Carrying Estimated Carrying Estimated
Amount Fair Value Amount Fair Value
---------- ---------- -------- ----------
<S> <C> <C> <C> <C>
Assets
------
Accounts receivable $ 8,890 $ 8,890 $ 14,582 $ 14,582
Mortgage loans held for sale 7,092,238 7,092,238 - -
Notes receivable 3,554,307 3,554,307 14,000 14,000
Liabilities
-----------
Accounts payable 539,488 539,488 195,374 195,374
Bank overdraft - - 27,177 27,177
Notes payable 244,641 244,641 358,793 358,793
Warehouse line of credit 7,029,738 7,029,728 - -
</TABLE>
X. COMMON STOCK SUBSCRIBED:
Common stock subscribed represents the Company's issuance of common stock
to three unrelated parties in exchange for notes receivable. The notes are
unsecured, bear interest at rates ranging from 9% to 10% and are due in
January and February 1998. The Company has fully allowed for two of the
notes as they were non-performing over the original term of the note.
F-18
<PAGE>
EMB CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Y. SUBSEQUENT EVENTS:
In November 1997, the Company entered into a stock purchase agreement
whereby it has agreed to acquire all of the issued and outstanding capital
stock of Investment Consultants, Inc. ("Sellers"), a Colorado corporation.
In exchange for acquiring all of the issued and outstanding capital stock
of Sellers, the Company will issue 400,000 shares of its common stock (the
"Shares"). If, as of the close of the business day eighteen months
following closing of this transaction, the aggregate fair market value of
the Shares is less than $2,000,000 the Sellers may elect one of two
options. Sellers may either elect: (1) that additional common shares are
issued equivalent to the difference between the sum of $2,000,000 and the
aggregate fair market value of the Shares, or (2) to rescind the
transaction, returning the parties to their respective positions prior to
consummation of the proposed transaction.
In November 1997, the Company entered into a stock purchase agreement
whereby it has agreed to purchase all of the outstanding shares of capital
stock of Preferred Holding Group, Inc. ("PHG"), a Colorado corporation. As
consideration for acquiring all of the issued and outstanding capital stock
of PHG, the Company will issue 100,000 shares of its common stock.
F-19
<PAGE>
================================================================================
No person has been authorized in connection with the offering made hereby
to give any information or to make any representations not contained in this
Prospectus and, if given or made, such information or representations must not
be relied upon as having been authorized by the Company or the Selling
Stockholder. This Prospectus does not constitute an offer to sell or a
solicitation of any offer to buy any of the securities offered hereby to any
person or by anyone in any jurisdiction in which it is unlawful to make such
offer or solicitation. Neither the delivery of this Prospectus nor any sales
made hereunder shall, under any circumstances, create any implication that there
has been no change in the affairs of the Company or that the information
contained herein is correct as of any time subsequent to the date hereof.
----------------
TABLE OF CONTENTS
PAGE
----
Summary..............................................................
The Company..........................................................
Use of Proceeds......................................................
Risk Factors.........................................................
Capitalization.......................................................
Management's Discussion and Analysis
of Financial Condition and
Results of Operations..............................................
Market Price.........................................................
Dividends............................................................
Business.............................................................
Management...........................................................
Principal Stockholders...............................................
Conflicts of Interest................................................
Description of Capital Stock.........................................
Shares Available for Future Sale.....................................
Legal Proceedings....................................................
Legal Matters........................................................
Experts..............................................................
Additional Information...............................................
Financial Statements.................................................
UNTIL ___________, 1998 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL DEALERS
EFFECTING TRANSACTIONS IN THE REGISTERED SECURITIES MAY BE REQUIRED TO DELIVER A
PROSPECTUS. THIS IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A
PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD
ALLOTMENTS OR SUBSCRIPTIONS.
================================================================================
================================================================================
4,662,893 SHARES
OF
COMMON STOCK
EMB CORPORATION
-----------------------------
PROSPECTUS
-----------------------------
___________, 1998
================================================================================
<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.
-------------------------------------------
All fees and expenses are payable solely by the Company in connection with
the sale and distribution of the Common Stock registered hereunder which are as
follows:
Securities and Exchange Commission registration fee $ 4,279
*Legal fees and expenses 30,000
*Blue sky fees and expenses 1,500
*Printing and engraving expenses 3,000
*Accounting fees and expenses 5,000
*Transfer agent and registrar fees 1,000
*Miscellaneous 2,000
-------
TOTAL $46,779
=======
--------------------------------
* 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
II-1
<PAGE>
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 .
During October 1996, the Company issued 25,000 shares of Common
Stock in reliance upon Rule 701 under the Act under the terms of the
Compensatory Benefit Plan of the Company to consultants for services.
In June, 1997, the Company issued 100,000 shares of common stock to
Willbro Nominees, Ltd. in exchange for services in reliance upon Section 4(2) of
the Securities Act of 1933.
In July, 1997, the Company issued 12,500 shares of common stock to
Finex Investments, L.L.C. for services in reliance upon Section 4(2) of the
Securities Act of 1933.
During July, 1997, the Company issued 100,000 shares of common
stock to Martin Janis & Company, Inc. for public relations services in reliance
upon Section 4(2) of the Securities Act of 1933.
During July 1997, the Company issued 69,250 restricted shares of
Common Stock as stock bonuses to certain employees; and issued 135,209 shares of
Common Stock in exchange for cancellation of debt in reliance upon Section 4(2)
under the Act.
In August 1997, the Company issued 648,649 shares of its 8%
Convertible Preferred Stock, Series A ("Series A Preferred Stock"), and a
warrant to purchase 150,000 shares of its Common Stock exercisable at $1.85 per
share, for $1,200,000 in a private offering made in reliance upon Rule 506 of
Regulation D under the Act.
During August, 1997, the Company agreed to issue 1,000,000 shares
of common stock as its contribution to a joint venture (Technik & Trade, Inc.),
owned 50% by the Company, to engage in the real estate mortgage business in
Europe, Australia and New Zealand, in reliance upon Section 4(2) of the
Securities Act of 1933.
During fiscal 1997, the Company agreed to issue 360,000 shares of
common stock to Capital Communications Ltd. for public relations services in
reliance upon Section 4(2) of the Securities Act of 1933.
During fiscal 1997, the Company agreed to issue 105,000 shares of
Common Stock to Impac Funding Corporation in consideration of mortgage lending
commitments, in reliance upon Section 4(2) of the Securities Act of 1933.
In January 1998, the Company redeemed 486,486 outstanding shares of
its Series A Preferred Stock. The Company then issued 499,999 shares of its 10%
Convertible Preferred Stock, Series B for $___________ and issued warrants to
purchase 493,500 shares of Common Stock exercisable at $2.375 per share, in a
private placement made in reliance upon Rule 506 to Regulation D under the Act.
During January 1998, the Company sold $600,000 of convertible notes
in reliance upon Regulation S under the Securities Act of 1933. The notes are
convertible into 433,333 shares of Common Stock of the Company at $2.375 per
share.
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.
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<PAGE>
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 Impac 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 Seller Agreement between Impac Funding Corporation and EMB
Mortgage Corporation is incorporated herein by reference to Exhibit
10(k) to the Form SB-2 (No. 333-21719) of the Registrant filed with
the Commission on February 13, 1997 (the "Form SB-2").
10(l) Master Commitment to Purchase Jumbo and Conforming Residential
Mortgages dated January 1, 1997, is incorporated herein by reference
to Exhibit 10(e) to the Form 10-QSB of the Registrant for its fiscal
quarter ended March 31, 1997.
10(m) Marketing and Distribution Agreement dated March 12, 1997, with
Provider Financial Services, Inc. is incorporated herein by
reference to Exhibit 10( ) to Amendment No. 1 to Form SB-2 of the
Registrant.
10(n) Certificate of Designations applicable to the 8% Convertible
Preferred Stock, Series A of the Registrant is incorporated herein
by reference to Exhibit 10(n) to Amendment No. 2 to the Form SB-2 of
the Registrant.
10(o) Stock Purchase Agreement dated November 1, 1997, regarding
acquisition of Investment Consultants, Inc.
10(p) Impac Master Commitment to purchase loans under ConformPlus program
dated October 21, 1997.
10(q) Impac Master Commitment to purchase second deed of trust mortgage
deeds dated September 12, 1997.
10(r) Impac Master Commitment to purchase jumbo and conforming residential
mortgages dated September 4, 1997.
10(s) Master agreement for sale of mortgages with ContiMortgage
Corporation.
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<PAGE>
10(t) Sale agreement for purchase of mortgage loans with the Mortgage
Authority, Inc. dated April 3, 1997.
10(u) Mortgage loan Seller/Servicer Agreement with First Union National
Bank of North Carolina dated March 16, 1997.
10(v) Mortgage Purchase Agreement with Resource Bancshares Mortgage Group,
Inc. dated March 10, 1997.
10(w) Stock Purchase Agreement with Linda K. Gregg dated November 1, 1997,
regarding acquisition of Preferred Holding Group, Incorporated.
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, 1997, which are incorporated by reference
herein is incorporated herein by reference to its Form 10-KSB for
the fiscal year ended September 30, 1997.
16 Letter on changes in certifying accountant is incorporated by
reference to Exhibit 16 of Amendment No. 1 to the Form 10-SB of the
Registrant.
21.1 A description of the subsidiaries of the Registrant is incorporated
herein by reference to Exhibit 21.1 to the Form 10-KSB of the
Registrant for its fiscal year ended September 30, 1997.
23.1* Consent of Harlan & Boettger
23.2* Consent of Stephen A. Zrenda, Jr., P.C.
24.1 Power of Attorney (see signature page to original filing of this
Registration Statement)
27.1 Financial Data Schedule as of September 30, 1997 is incorporated
herein by reference to Exhibit 27 to the Form 10-KSB of the
Registrant for its fiscal year ended September 30, 1997.
----------------------
*Filed herewith
(b) Reports on Form 8-K. The Registrant did not file any reports on Form
-------------------
8-K during the last quarter of its fiscal year ended September 30,
1997.
(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
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<PAGE>
ITEM 28. UNDERTAKINGS.
------------
Insofar as indemnification for liabilities arising under the 1933 Act may be
permitted to directors, officers and controlling persons of the Registrant
pursuant to the 1933 Act or otherwise, the Registrant has been advised that in
the opinion of the Securities and Exchange Commission such indemnification is
against public policy as expressed in the Securities Act and is, therefore,
unenforceable. In the event that a claim for indemnification against such
liabilities (other than the payment by the Registrant of expenses incurred or
paid by a director, officer or controlling person of the Registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the 1933 Act and will be governed by the final
adjudication of such issue.
The undersigned Registrant hereby undertakes:
(1) To file during any period in which offers or sales are being made,
a post-effective amendment to this registration statement;
(i) To include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events arising
after the effective date of the registration statement (or the most recent post-
effective amendment thereof) which, individually or in the aggregate, represent
a fundamental change in the information set forth in the registration statement;
and
(iii) To include any material information with respect to the plan
of distribution not previously disclosed in the registration statement or any
material change to such information in the registration statement.
(2) That, for the purpose of determining any liability under the Securities
Act of 1933, each such post-effective amendment shall be deemed to be a new
registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial bona
fide offering thereof.
(3) To remove from registration by means of a post-effective amendment any
of the securities being registered which remain unsold at the termination of the
offering.
The undersigned Registrant hereby undertakes:
(1) For purposes of determining any liability under the Securities Act of
1933, the information omitted from the form of prospectus filed as part of this
registration statement in reliance upon Rule 430A and contained in a form of
prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4) or 497(h)
under the Securities Act shall be deemed to be part of this registration
statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities Act of
1933, each post-effective amendment that contains a form of prospectus shall be
deemed to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to be
the initial bona fide offering thereof.
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<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 12, 1998.
Registrant: EMB CORPORATION
By: /s/ James E. Shipley
-------------------------------------
James E. Shipley, President
Date: February 12, 1998
<TABLE>
<S> <C>
/s/ James E. Shipley /s/ B. Joe Wimer
- ------------------------------------- --------------------------------------------
James E. Shipley B. Joe Wimer
Director (Chairman) and President Secretary, Treasurer and Director
(Principal Financial and Accounting Officer)
/s/ Bruce J. Brosky /s/ William V. Perry
- ------------------------------------- --------------------------------------------
Bruce J. Brosky William V. Perry
Director and Vice President-Marketing Director and Executive Vice President, and
and Public Relations President of EMB Mortgage Corporation
/s/ Michael P. Roth
- -------------------------------------
Michael P. Roth, Director and
Vice President
</TABLE>
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<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use in Amendment No. 3 to Form SB-2 of our report dated
December 3, 1997, relating to the financial statements of EMB Corporation and
Subsidiary (formerly called Pacific International, Inc.), which is contained
therein.
San Diego, California /s/ Harlan & Boettger, L.L.P.
------------------------------------
February 12, 1998
<PAGE>
EXHIBIT 23.2
CONSENT OF LEGAL COUNSEL
We hereby consent to the use of our name in Amendment No. 3 to the Form SB-2
registration statement of EMB Corporation.
Oklahoma City, Oklahoma STEPHEN A. ZRENDA, JR., P.C.
February 12, 1998
By: /s/ Stephen A. Zrenda, Jr.
---------------------------------
Stephen A. Zrenda, Jr.
