<PAGE>
U.S. Securities and Exchange Commission
Washington, D.C. 20549
Form 10-QSB
[X] QUARTERLY REPORT PURSUANT SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended December 31, 1998
[_] TRANSITION REPORT PURSUANT SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ______________ to ________________
Commission File Number: 1-11883
EMB CORPORATION
---------------
(Name of small business issuer as
specified in its charter)
Hawaii 95-3811580
------ ----------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
ncorporation or organization)
3200 Bristol Street, Eighth Floor, Costa Mesa, California 92626
----------------------------------------------------------------
(Address of principal executive offices)
(714) 437-0738
--------------
(Issuer's telephone number)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes [_] No [X]
Applicable only to issuers involved in bankruptcy proceedings during the
preceding five years
Check whether the registrant filed all documents and reports required to be
filed by Section 12, 13 or 15(d) of the Exchange Act after the distribution of
securities under a plan confirmed by court. Yes [_] No [_]
Applicable only to Corporate Issuers
State the number of shares outstanding of each of the issuer's classes of common
equity, as of the last practicable date: 27,640,955 as of November 1, 1999.
Transitional Small Business Disclosure Format (Check One): Yes [_] No [X]
<PAGE>
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
2
<PAGE>
EMB CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
December 31, 1998
(unaudited)
<TABLE>
<CAPTION>
ASSETS
<S> <C>
Current assets:
Cash $ 130,000
Restricted cash 68,992
Accounts receivable, net 375,950
Mortgage loans held for sale 9,132,754
Other current assets 272,067
------------
Total current assets 9,979,763
Property and equipment, net 1,254,324
Related party receivable 502,763
Land held for sale 843,000
Investment in joint venture 292,842
Goodwill, net 926,262
Other assets 147,860
------------
$ 13,946,814
============
LIABILITIES AND SHAREHOLDERS' DEFICIT
Current liabilities:
Accounts payable $ 1,558,951
Line of credit 9,134,564
Accrued expenses 728,899
Payroll taxes payable 2,360,630
Related party payable 442,801
Current portion of notes payable 635,920
Current portion of capital lease obligation 134,497
Other current liabilities 146,242
------------
Total current liabilities 15,142,504
Capital lease obligations, net of current portion 180,753
Notes payable, net of current portion 75,000
Convertible notes payables 1,700,000
------------
Total liabilities 17,098,257
------------
Shareholders' deficit:
Series A convertible preferred stock, no par value;
5,000,000 shares authorized, 84,594 shares issued and
outstanding 131,185
Series B convertible preferred stock, no par value;
shares authorized, 500,000 shares issued and
outstanding 931,750
Common stock, no par value; 30,000,000 shares
authorized, 11,608,945 shares issued and outstanding 12,420,720
Accumulated deficit (16,635,098)
------------
Total shareholders' deficit (3,151,443)
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$ 13,946,814
============
</TABLE>
See accompanying notes to consolidated financial statements
3
<PAGE>
EMB CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT of OPERATIONS
For the Three Months Ended December 31, 1998 and 1997
<TABLE>
<CAPTION>
1998 1997
---------- ----------
(unaudited)
<S> <C> <C>
Revenues -
Loan origination and other fees, net of commitment fees $ 3,493,990 $1,180,443
Operating expenses:
Loan origination costs, commissions and other fees 1,981,483 476,682
General and administrative 2,874,506 1,590,737
------------ ----------
4,855,989 2,067,419
------------ ----------
Loss from operations (1,361,999) (886,976)
Other income (expense):
Interest income (expense) (99,766) 384,858
Other (241) 38,867
----------- ----------
(100,007) 423,725
------------ ----------
Net loss $(1,462,006) $ (463,251)
============ ==========
Basic and dilutive earnings per common share $(0.13) $(0.06)
============ ==========
</TABLE>
See accompanying notes to consolidated financial statements
4
<PAGE>
EMB CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT of SHAREHOLDERS' DEFICIT
For the Three Months Ended December 31, 1998
(unaudited)
<TABLE>
<CAPTION>
Series A Convertible Series B Convertible
Preferred Preferred Common Stock Accumulated Shareholders'
Shares Amount Shares Amount Shares Amount Deficit Deficit
--------- ---------- -------- --------- ---------- ----------- ------------- --------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balances, September
30, 1998 107,297 $166,465 500,000 $931,750 10,550,308 $11,749,076 $(15,173,092) $(2,325,801)
Shares issued
for services
and settlements - - - - 481,263 343,511 - 343,511
Shares issued
in connection
with joint
venture - - - - 450,000 292,842 - 292,842
Shares issued
for conversion
of A preferred (22,703) (35,280) - - 127,374 35,280 - -
Net loss - - - - - - (1,462,006) (1,462,006)
------- -------- -------- --------- ---------- ----------- ------------ -----------
Balances, December
31, 1998 84,594 $131,185 500,000 $931,750 11,608,945 $12,420,709 $(16,635,098) $(3,151,454)
See accompanying notes to consolidated financial statements
</TABLE>
5
<PAGE>
EMB CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT of CASH FLOWS
For the Three Months Ended December 31, 1998 and 1997
<TABLE>
<CAPTION>
1998 1997
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(unaudited)
<S> <C> <C>
Cash flows from operating activities:
Net loss $(1,462,006) $ (463,251)
Adjustments to reconcile net loss to net cash
used in operating activities:
Common stock issued for services 343,511 -
Related party note payable issued for services - 38,866
Depreciation and amortization 76,840 19,625
Changes in operating assets and liabilities:
Accounts receivable (122,927) (95,984)
Notes receivable - (319,407)
Mortgage loans held for sale 5,397,834 (14,291,756)
Other current assets 83,272 323,473
Other assets (30,755) -
Accounts payable 777,607 704,455
Accrued liabilities 251,699 155,691
Payroll taxes payable 354,236 -
Other liabilities (388,788) (2,422,652)
----------- ------------
Net cash provided by (used in) operating activities 5,280,523 (16,350,940)
----------- ------------
Cash flows from investing activities:
Purchases of property and equipment (47,761) (389,957)
Cash received from acquisitions 16,607 -
Proceeds from sale of land held for investment - 422,867
----------- ------------
Net cash used in investing activities (31,154) 32,910
----------- ------------
Cash flows from financing activities:
Proceeds (Repayments) on line of credit, net (5,423,849) 16,078,269
Payments under capital lease obligations (155,313) -
Proceeds from issuance of notes payable 326,354 418,832
Proceeds from related party borrowings 108,478 -
Proceeds from issuance of Preferred - 350,000
----------- ------------
Net cash provided by financing activities (5,144,330) 16,847,101
----------- ------------
Net increase in cash 105,039 529,071
Cash at beginning of period 24,961 61,409
----------- ------------
Cash at end of period $ 130,000 $ 590,480
=========== ============
</TABLE>
See accompanying notes to consolidated financial statements
6
<PAGE>
EMB CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Three Months Ended December 31, 1998
NOTE 1. BASIS OF PRESENTATION:
Unaudited Interim Financial Statements
In the opinion of management, the accompanying financial statements contain all
adjustments (which include only normal recurring adjustments) necessary to
present fairly the balance sheet of EMB Corporation and subsidiaries as of
December 31, 1998, and the results of their operations and their cash flows for
the three months ended December 31, 1998 and 1997, respectively. These
consolidated financial statements include the accounts of EMB Corporation and
its subsidiary companies (together "the Company").
Going Concern
Through December 31, 1998 and continuing in fiscal 1999, the Company has
incurred significant losses. At December 31, 1998, the Company has a working
capital deficit of $5.2 million, which includes approximately a $2.4 million
liability to federal and state agencies for employee and employer payroll taxes.
The Company dramatically reduced its operation on or about December 22, 1998 to
significantly reduce the losses from operations. The Company has been
relatively inactive in fiscal 1999. Management is currently funding its
operations through loans from affiliates and/or officers. The Company requires
immediate proceeds from a financing or from the sale of its land to meet its
current obligations. Management is seeking private equity and debt capital, as
well as seeking to find a buyer for its land in Monterey County, California.
There are no assurances that proceeds from the sources discussed above will be
available on acceptable terms or available at all. These factors raise
substantial doubt about the Company's ability to continue as a going concern.
The accompanying financial statements do not include any adjustments that might
result from the outcome of this uncertainty.
Certain prior period amounts have been reclassified to conform to current period
presentation. These reclassifications have no effect on previously reported net
losses.
Information in this report should be read in conjunction with the Company's
consolidated financial statements as stated in its report on Form 10-KSB for the
fiscal year ended September 30, 1998. The accompanying financial information is
not necessarily indicative of the results for the year ended September 30, 1999.
NOTE 2. LOSS PER COMMON SHARE
Basic and dilutive loss per common share is based on the weighted average number
of common shares outstanding during the period. Outstanding options and
warrants have not been included in the calculation of the weighted average
shares outstanding since their effects are anti-dilutive.
7
<PAGE>
EMB CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Three Months Ended December 31, 1998
NOTE 3 - WAREHOUSE LINE OF CREDIT
The Company had an agreement with a national lender whereby the lender extended
a $25 million warehouse line of credit to the Company solely for the purpose of
funding residential mortgage loans. Interest was charged based on the lender's
referenced prime rate plus 0.5% per annum. The outstanding balance on December
31, 1998, was $9.1 million and during the second quarter of 1999, the obligation
was fully satisfied upon termination of the agreement.
The Company also had a master commitment with such lender totaling $150 million
during fiscal 1998 which was subsequently increased to $500 million. The master
commitment allowed the Company to fund loans of jumbo and conforming residential
first and second mortgages, and sell the loans to the lender. The master loan
commitment was terminated concurrently with the warehouse line of credit above.
NOTE 4. SHAREHOLDERS' DEFICIT
During the three months ended December 31, 1998, certain holders of the Series A
Convertible Preferred and Series B Convertible Preferred elected to convert
certain of their interests into common stock. As a result, the Company had
84,594 of its Series A Convertible Preferred Stock and 500,000 shares of its
Series B Convertible Preferred Stock issued and outstanding as of December 31,
1998.
During the three month period ended December 31, 1998 the Company issued 481,263
shares of common stock valued at $343,511 to certain consultants and advisors
for services provided.
NOTE 5. SUBSEQUENT EVENTS
Refer to the Company's Annual Report on Form 10-KSB for the year ended September
30, 1998, for events subsequent to December 31, 1998.
8
<PAGE>
PART II - OTHER INFORMATION
ITEM 1. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS.
GENERAL
In fiscal 1998 the Company expanded its mortgage banking operations through its
acquisition of Investment Consultants, Inc. ("ICI"). In fiscal 1999, the Company
ceased its mortgage banking operations of EMB and divested itself of ICI due to
an economic downturn in the mortgage banking industry. Later in fiscal 1999, the
Company recommenced its mortgage banking operations through acquisitions of
American Residential Funding ("AMRES") and Residential Mortgage Corporation
("RMC"). Effective September 1999, EMB Mortgage was no longer in operation.
LOAN ORIGINATIONS AND PURCHASES
The Company decreased its funded mortgage loan volume to $72,894,881 during the
three month period ended December 31, 1998, as compared to $82,198,522 for the
three month period ended December 31, 1997, representing a decrease of 11%.
This decrease in mortgage loan volume appears to be continuing primarily due to
the general downturn of the mortgage industry in December 1998.
RESULTS OF OPERATIONS
Three months ended December 31,1998 compared with three months ended December
31,1997:
Mortgage loan revenues, net of commitment fees, increased 196% to $3,493,990 in
the three month period ended December 31, 1998, from $1,180,443 in 1997.
Revenues were generated primarily from loan processing and resale of mortgage
loans. The increase in revenues was (1) attributable to the expansion of the
Company's marketing activities outside the State of California and (2) the sale
of loans funded during the three month ended September 30, 1998, which amounted
to $101,208,959. This was an increase of $34,316,138 from the prior year's
three months ended September 30, 1997.
Loan origination costs, commissions and other fees increased 316% to $1,981,483
during the three months ended December 31, 1998 versus 1997, and such costs
represented 57% and 40% of revenues, respectively. The increase in these
expenses is due to the increase in loan mortgage activity in 1998 versus 1997.
General and administrative expenses increased 81% to $2,874,706 in the three
month period ended December 31, 1998 from $1,590,737 in 1997. This increase is
principally attributable to increased activity in its mortgage loan processing
business, an increase in employees, the costs of establishing six (6) additional
mortgage loan offices and certain consulting expenses. Included in general and
administrative expenses are consulting fees satisfied through the issuance of
common stock amounting to $343,511 and $160,875 during the three months ended
December 31, 1998 and 1997, respectively.
9
<PAGE>
Interest expense net of interest income for the three months ended December 31,
1998 was $99,766, this is attributable to interest on convertible notes and
other notes payable. Interest income net of interest expense for the three
months ended December 31, 1997 was $384,858. This income was from the first
installment payment on the Monterey land sale being received in fiscal 1998.
This sale was rescinded later in fiscal 1998.
The net loss was $1,462,006 during the three month period ended December 31,
1998, as compared with a loss of $463,251 during the same period of 1997, due
primarily to the increase of the Company's expansion into various markets.
LIQUIDITY AND CAPITAL RESOURCES
The Company's capital resources have historically been provided by cash from
financing activities, primarily from the sale of its preferred stock and
warrants, and through convertible debt instruments and warrants. Due to the
extended losses incurred by the Company, its cash was being depleted rapidly
from operations. At December 31, 1998, the Company had a working capital
deficit of $5.2 million. The Company reduced its operation on or about December
22, 1998 to significantly reduce the losses and cash flows from operations. The
Company began originating loans through its acquisition of AMRES in May 1999.
AMRES is originating approximately $17 million in loans per month. Management is
currently funding its operations through loans from affiliates and/or officers.
No cash flows have been generated through the sale of common or preferred stock,
or convertible debt securities in fiscal 1999 and management does not believe
such capital will be available to them. Management currently believes its sole
source of repayment of its obligations will come from the sale of its land in
Monterey County, California. There are no assurances that the sale will be
completed, if at all. The Company has been in negotiations, however, no
reasonable offers have been tendered to management. These factors raise
substantial doubt about the Company's ability to continue as a going concern.
The accompanying financial statements do not include any adjustments that might
result from the outcome of this uncertainty.
ITEM 2. LEGAL PROCEEDINGS
In December 1998, the Company settled a lawsuit with a prior lessor of rental
space. Under the terms of the judgement the Company is required to pay $176,000
plus interest of 4.2% on the unpaid portion, plus the plaintiffs attorney fees
amounting to $10,000. Such amounts have been included in accrued liabilities at
December 31, 1998. In fiscal 1999, the Company has paid $5,500 in connection
with this obligation.
During December 1998, the Company terminated the majority of their employees due
to ceasing of operations of EMB Mortgage. In most cases the employees were not
given their final wages upon termination. There have been various claims made
by these employees and the labor board has taken action against the Company.
These amounts have been accrued during the three month period ended December 31,
1998.
No additional legal proceedings occurred during the fiscal quarter ended
December 31,1998.
10
<PAGE>
ITEM 3. CHANGES IN SECURITIES
None
ITEM 4. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 5. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted to a vote of the security holders of the Company during
its fiscal quarter ended December 31, 1998.
ITEM 6. OTHER INFORMATION.
Not applicable.
11
<PAGE>
ITEM 7. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits. - None
(b) Reports on Form 8-K.
No reports on Form 8-K were filed by the Company during the fiscal
quarter ended December 31, 1998.
12
<PAGE>
SIGNATURES
In accordance with the requirements of the Securities Exchange Act, the
Registrant caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
EMB CORPORATION
Date: November 12, 1999 By: /s/ JAMES E. SHIPLEY
-------------------------------------------
James E. Shipley
Director, President and Principal Financial
and Accounting Officer
Date: November 12, 1999 By: /s/ WILLIAM V. PERRY
-------------------------------------------
William V. Perry
Director and Executive Vice President
Date: November 12, 1999 By: /s/ MICHAEL P. ROTH
-------------------------------------------
Michael P. Roth
Director
13
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> SEP-30-1999
<PERIOD-START> OCT-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 130,000
<SECURITIES> 0
<RECEIVABLES> 9,508,704
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 9,979,763
<PP&E> 1,574,578
<DEPRECIATION> (320,254)
<TOTAL-ASSETS> 13,946,814
<CURRENT-LIABILITIES> 15,143,504
<BONDS> 1,775,000
0
1,062,935
<COMMON> 12,420,720
<OTHER-SE> (16,635,098)
<TOTAL-LIABILITY-AND-EQUITY> 13,946,814
<SALES> 3,493,990
<TOTAL-REVENUES> 3,493,990
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 4,855,989
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 99,766
<INCOME-PRETAX> (1,462,006)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1,462,006)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,462,006)
<EPS-BASIC> (0.13)
<EPS-DILUTED> (0.13)
</TABLE>
