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U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-KSB
[X] Annual report under Section 13 or 15(d) of the Securities Exchange Act of
1934 for the fiscal year ended September 30, 1999
[ ] Transition report under 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
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(Name of small business issuer in its charter)
Hawaii 95-3811580
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(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
3200 Bristol Avenue, 8/th/ Floor, Costa Mesa, California 92626
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(Address of principal executive offices)
Issuer's telephone number: (714) 437-0738
Securities registered under Section 12(b) of the Exchange Act:
Title of each class Name of each exchange on which registered
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N/A N/A
Securities registered under Section 12(g) of the Exchange Act:
Common Stock, no par value
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 X No ___
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Check if there is no disclosure of delinquent filers in response to
Item 405 of Regulation S-B is not contained in this form, and no disclosure will
be contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB. [ X ]
The issuer's revenues for its most recent fiscal year: $2,904,127
The aggregate market value of voting stock held by non-affiliates of
the registrant as of December 31, 1999:
Common stock, no par value: $3,420,991
The number of shares of the registrant's common stock outstanding
as of December 31, 1999: 28,140,955 shares
Documents incorporated by reference: Certain exhibits to the Forms 10-
KSB for the fiscal years ended September 30, 1996, September 30, 1997 and
September 30, 1998, and the Registration Statement on Form SB-2 (File No. 333-
21719) and amendments thereto of the registrant are incorporated herein by
reference.
Transitional Small Business Disclosure Format:
Yes _______ No X
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PART I
Item 1. Description of Business.
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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.
As of September 30, 1999, the principal business of the Company was
the origination and processing of residential mortgages. Mortgages originated
by the Company, through its wholly owned subsidiary, American Residential
Funding, Inc. ("AMRES") were primarily brokered to various mortgage lenders.
The Company also engaged in the origination and processing of commercial
mortgage loans.
As of October 1, 1998, the Company, through its wholly owned
subsidiary, EMB Mortgage Corporation ("EMB Mortgage"), originated loans through
its executive office in Costa Mesa, California, and through its branch offices
located in Sherman Oaks, California, Denver, Colorado, Dallas, Texas and Daytona
Beach, Florida. The Company's strategy of originating, as compared to
purchasing, a substantial portion of its loan volume resulted in the generation
of origination fees, service release fees, and other fees which were the
principal source of revenue to the Company. The Company sold all of its
mortgage loans, and did not retain any servicing rights.
Beginning in July 1998, the Company had begun to consolidate its
operations in order to reduce overhead costs and to strengthen its quality
control of the loans being underwritten and funded by the Company. Between July
1998 and September 30, 1998, the Company closed its branch offices in Las Vegas,
Nevada, Houston, Texas and Ft. Lauderdale, Florida.
Beginning in October 1998, the Company was informed by Impac Funding
Corporation ("IMPAC"), the purchaser of a majority of the Company's mortgage
loans, that IMPAC, due to problems associated with its resale of loans through
mortgage securitizations, was intending to restrict the number of loans that it
would purchase from the Company. In addition, IMPAC advised the Company that its
underwriting guidelines would be tightened and its pricing to the Company would
be changed. As a result of these events, on December 22, 1998, the Company was
forced to terminate the majority of the staff of EMB Mortgage at its Costa Mesa,
California office. EMB Mortgage, since December 31, 1998, has not utilized any
warehouse lines of credit to fund loans for resale, but has continued to employ
a small staff to originate, process and broker loans to various mortgage
lenders.
On or about December 31, 1998, the Company sold it Daytona Beach,
Florida office to the management of the branch office. In January 1999, the
Company closed its offices in Dallas, Texas and Sherman Oaks, California. In
March 1999, the Company sold the assets
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comprising the Denver operations to management located in Denver. As a result,
as of March 1999, the only office of the Company was located in Costa Mesa,
California.
In May 1999, the Company acquired all of the issued and outstanding
stock of two mortgage companies: American Residential Funding, Inc. a Nevada
corporation ("AMRES") and Residential Mortgage Corporation, a Nevada corporation
("RMC").
At the time of the acquisition, AMRES operated four company-owned
offices and licenses 10 Net Branch offices, all of which were located in
Southern California. With respect to company-owned offices, AMRES pays all
operational expenses and retains all of the income generated from that office. A
Net Branch differs in that AMRES entered into an agreement with an independent,
third party mortgage or real estate broker, licensing it to use the AMRES name
and to operate an AMRES-branded branch. The owner-manager of the Net Branch pays
all expenses of the Net Branch, including a payment to AMRES of a pre-
established fee for each closed mortgage loan. All net income is retained by and
all net loss is borne by, the Net Branch owner-manager. The amount of the fee
paid to AMRES varies depending upon the loan type and amount. In addition, AMRES
receives various costs for associated with the loans which are charged to the
borrower(s). AMRES currently intends to expand its business through the
development of additional Net Branch offices. As of September 30, 1999, AMRES
had four Company owned offices located in Southern California. In addition, it
had approximately 50 Net Branch offices which were located in Southern
California, Hawaii, Arizona and Florida.
Prior to its acquisition by the Company in May 1999, RMC had not
actively engaged in business for approximately one year. The Company has
reactivated RMC's warehouse lines of credit of RMC and renewed RMC's approvals
with the various government and government-affiliated lenders: FHA, VA, FNMA
("Fannie Mae") and FHLMC ("Freddie Mac"). The Company intends for RMC to operate
as a traditional mortgage banker, funding loans brokered to it by AMRES and
other independent mortgage brokers. In addition, the RMC currently operates and
Internet-based, direct-to-consumer retail mortgage operation.
Residential Mortgage Lender
General. The Company, through its wholly-owned subsidiary, EMB
Mortgage, had, since 1995, engaged in business as a retail mortgage broker. In
1997, it commenced its operations as a wholesale mortgage banker. As of
September 1998, EMB Mortgage originated its own loans and those of its licensees
on a retail basis and provided wholesale lending services to approved mortgage
brokers. Its primary correspondent lending relationship was with IMPAC, a
national mortgage lender. EMB Mortgage underwrote and funded its mortgage loans
through a wholesale line of credit from an affiliate of IMPAC, IMPAC Warehouse
Lending Group Inc., and then resold such loans to IMPAC. Beginning in October
1998, EMB was advised by IMPAC that it intended to restrict the dollar volume of
loans purchased from EMB Mortgage due to the financial instability of the
mortgage loan securitization market. At that time, IMPAC also modified its
underwriting guidelines to make funded loans somewhat less risky for investors.
As a result, EMB Mortgage was forced to consolidate its operations,
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further completing the closure or sale of all branch offices and reducing its
staff in its Costa Mesa, California headquarters office.
In May 1999, the Company acquired AMRES and RMC. Subsequent to May
1999, AMRES and RMC have been the principal operating mortgage subsidiaries of
the Company. It is the intent of the Company for AMRES to operate primarily as a
mortgage broker through an expansion of its existing company-owned and Net
Branch operations. At present, RMC is operating as a mortgage broker. Upon
obtaining all necessary government approvals, the Company intends for RMC to
function as a wholesale mortgage banker, funding loans for AMRES and for third-
party mortgage brokers.
Loan Standards. Mortgage loans made by AMRES and RMC are 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, generally, 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 date of the loan, 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 of all or a specified portion of the principal amount thereof.
The mortgage loans are "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, one 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 non-owner occupied residence. The mortgaged property may not be a mobile home.
In general, no mortgage loan has expected to have an original
principal balance less than $30,000. While most loans will be less than
$700,000, loans of up to $2,000,000 may be funded through their 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 loans.
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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.
Each mortgage broker agrees 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 borrower, any failure to disclose any
matter that makes any such representation and warranty misleading, or any
inaccuracy in information furnished by the borrower to the Company.
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Upon the breach of any misrepresentation or warranty made by a
borrower, the Company may require the mortgage broker to repurchase the related
mortgage loan.
Title Insurance Policies. 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 established by FNMA.
Current Markets and Expansion Plans
The Company believes that its strategy of originating loans through
the AMRES Net Branch relationships represents the most profitable loan
origination strategy due to the significant level of loan origination and other
fees. The AMRES Net Branch system, in turn, may provide RMC with wholesale loan
funding opportunities. Additionally, such a strategy allows the Company to
maintain its underwriting quality standards when compared to competitors that
rely primarily on independent mortgage brokers. The Company also intends to
offer direct-to-consumer retail mortgage lending by means of the Internet. Loans
originated from this source will be brokered through AMRES or funded directly by
RMC.
At the present time nearly all of the loans originated by the Company are for
properties located in California. While California properties will always remain
a significant part of the Company's business, the Company anticipates that the
development of the AMRES Net Branch network will dilute the share of mortgages
attributable to properties located in California.
Certain Legal Aspects of Mortgage Loans
General. The mortgages originated by the Company and its licensed
affiliates are 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 does not, generally, have priority over 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-homeowner 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 directions 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
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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. Judicial foreclosure proceedings are often not contested by any of the
parties. 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 expired.
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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 a secured mortgage lender to realize upon collateral and/or enforce a
deficiency judgment. For example, with respect to federal bankruptcy law, a
court with federal bankruptcy jurisdiction may permit a debtor through his or
her Chapter 11 or Chapter 13 rehabilitative plan to cure a monetary default in
respect of a mortgage loan on a debtor's residence by paying arrears within a
reasonable time period and reinstating the original Mortgage Loan payment
schedule even though the lender accelerated the mortgage loan and final judgment
of foreclosure had been entered in state court (provided no sale of the
residence had yet occurred) prior to the filing of a debtor's petition. Some
courts with federal bankruptcy jurisdiction have approved plans based on the
particular facts of the reorganization case, that effected the curing of a
mortgage loan default by paying arrearages over a number of years.
Courts with federal bankruptcy jurisdiction have also indicated that
the terms of a mortgage loan secured by property of the debtor may be modified.
These courts have suggested that such modification may include reducing the
amount of each monthly payment, changing the rate of interest, altering the
repayment schedule, and reducing the lender's security interest to the value of
the residence, thus leaving the lender a general unsecured creditor for the
difference between the value of the residence and the outstanding balance of the
loan.
The Internal Revenue Code of 1986, as amended, provides priority to
certain tax liens over the lien of a mortgage. In addition, substantive
requirements are imposed upon mortgage lenders in connection with the
origination and the servicing of mortgage loans by numerous Federal and some
state consumer protection laws. These laws include the federal Truth-In-Lending
Act, Real Estate Settlement Procedures Act, Equal Credit Opportunity Act, Fair
Credit Billing Act, Fair Credit Reporting Act, and related statutes. These
federal laws impose specific statutory liabilities upon lenders who originate
mortgage loans and who fail to comply with the provisions of the law. In some
cases, this liability may affect assignees of the mortgage loans.
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Enforceability of Certain Provisions. Certain of the mortgage loans
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 from
the legal effect of a default under the loan documents. Examples of judicial
remedies that have been fashioned include 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 maintain the property adequately 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 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 do 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.
Mortgage Software and Technology
AMRES currently uses loan origination software developed by an
independent third party, which is accessible by its Company-owned offices and at
Net Branch offices through an Intranet system. This software can quickly review
the underwriting guidelines for a vast number of loan products, including those
offered by Fannie Mae and Freddie Mac and select the appropriate loan product
for the borrower. The software then allows the routing of pertinent information
to the automated underwriting systems employed by Fannie Mae and
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Freddie Mac, the primary secondary-market purchasers of mortgages, and the
automated systems of independent lenders such as IndyMac. Thus, in less than 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.
The AMRES Intranet system allows Net Branch offices around-the-clock
access to the system. Loan officers can also access the AMRES Intranet utilizing
Intel(R) Corporation's ProShare(R) video conferencing system which permits the
loan officer or borrower to see and talk directly to an underwriting staff
member or other individuals involved in the mortgage loan transaction.
The Company intends to continue the development and refinement of its
software and Intranet systems 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
delivery system 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 electronic 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.
Customer Service and Support. The Company's customer service and
support organization provides Net Branch owners with on-line technical support,
training, consulting and implementation services. These services consist of the
following:
Customer Education and Training. The Company offers training courses
designed to meet the needs of end users, integration experts and system
administrators. The Company also trains customer personnel who in turn may train
end-users in larger deployments. Training classes are provided at the customers'
offices or on-line with an on-line tutorial. No fees are charged the to Net
Branch for these services.
System Maintenance and Support. The Company offers telephone,
electronic mail and facsimile customer support through its central technical
support staff at the Company's headquarters. The Company also provides customers
with product documentation and release notes that describe features in new
products, known problems and workarounds, and application notes.
Sales and Marketing. As of October 1, 1998, the Company marketed and
sold its mortgage banking services primarily through a direct sales force based
in Costa Mesa, California. The Company's sales and marketing organization
consisted of approximately 25 employees as of October 1, 1998. As of October 1,
1998, the Company had regional marketing representatives based in California,
Colorado, Connecticut, Florida, Nevada, Texas and Connecticut. To support its
sales force, the Company conducts a number of marketing programs, which includes
public relations, telemarketing, seminars, and trade shows.
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Following the scaling back of the operations of EMB Mortgage and the
acquisition of AMRES and RMC, the Company markets its mortgage loan products
through its four Company-owned offices in Southern California and 50 Net Branch
offices in California, Hawaii, Arizona and Florida. The sales efforts of the
Company to market its Net Branch opportunities are located primarily in the
Company's Costa Mesa, California headquarters office.
The Company's strategy is to expand its marketing efforts to reach a
broad customer base in its targeted mortgage industry. The Company's field sales
force conducts multiple presentations and demonstrations of the Company's
mortgage products and Net Branch opportunities to users at the customer site as
a part of the direct sales effort.
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. Through its technology
subsidiary, Ameritelecon, Inc., the Company has established marketing and
strategic relationships with Intel Corporation, White Pine Software and Data
Telemark, among others. The Company's relationships with these technology firms
have enabled it to integrate mortgage software with standard hardware platforms
for its own needs. In addition, these strategic relationships have allowed
Ameritelecom to market the products of these strategic partners to other third-
party technology users, specifically in the area of ISDN and satellite
encryption, video conferencing and computer hardware. The Company believes these
relationships can enhance the Company's ability to create revenues through the
sales and marketing efforts of Ameritelecon to independent users of these
technologies. In addition, these relationships allow the Company's mortgage
subsidiaries to deliver mortgage solutions that support their customers'
existing management architecture while being tailored to the specific
requirements of the mortgage industry. Although the Company seeks to maintain a
close relationship with Intel Corporation and the other strategic partners, if
the Company is unable to develop and retain effective, long-term relationships
with other third parties, the Company's competitive position could be adversely
affected.
Research and Development. The Company has committed resources for its
mortgage product delivery system development. Research and development efforts
are directed at increasing the effectiveness of the electronic delivery of
mortgage products and improving the overall performance of the Company's
operating subsidiaries.
The Company's future success may depend, in part, upon its ability to
enhance its current electronic mortgage product delivery systems and to develop
and introduce new systems on a timely basis that keep pace with technological
developments, emerging industry standards and the increasingly sophisticated
needs of its customers. There can be no assurance that the Company will be
successful in developing or marketing such systems enhancements or new systems
that respond to technological change or evolving industry standards, nor that
the Company will not experience difficulties that could delay or prevent the
successful development, introduction and marketing of these products or
enhancements which will adequately meet the requirements of the marketplace and
achieve market acceptance. If the
<PAGE>
Company is unable, for technological or other reasons, to develop and introduce
new systems or enhancements, the Company's business, financial condition or
results of operations could be materially adversely affected.
Competition. The Company will continue to 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 real estate investment trusts. Many of the Company's
competitors have greater financial resources than the Company.
Proprietary Rights and Licensing. The Company's success is dependent,
to a degree, 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 to
protect its proprietary rights. The Company may seek to protect its electronic
mortgage product delivery systems, 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 systems or to obtain and
use information that the Company regards as proprietary. While the Company is
not aware that any of its systems infringe 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 or future products. Certain
components of the electronic mortgage products delivery system currently
employed by the Company are not proprietary to the Company and other competitors
may acquire such components and develop similar or enhanced systems for the
electronic delivery of mortgage products to mortgage brokers and borrowers.
In addition, the Company relies on certain software that it licenses
from third parties, including software which is used in conjunction with the
Company's mortgage products delivery systems. 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 of
contracts with Net Branch operations until equivalent software can be identified
and licensed or developed and integrated with the Company's product offerings.
Any such delay or cancellation could materially adversely affect the Company's
business, financial condition or results of operations.
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 may acquire 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
<PAGE>
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 parties based on damages and costs resulting from
environmental contamination emanating from such property.
Trade Names and Service Marks
The Company has filed various applications to register its service
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.
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.
Employees
As of September 30, 1999, the Company employed a total of 28 persons.
Of the total, 16 officers and employees were employed at the principal executive
offices of the Company in Costa Mesa, California, of whom 3 were engaged in
sales and marketing, 3 were in the loan operations staff, 1 was in product
development and technical support and 9 were in finance and administration.
There were 12 employees in the four branch offices of the Company, of whom 7
were engaged in loan operations, and 5 in finance and administration. None of
the Company's employees are represented by a labor union with respect to his or
her employment by the Company.
Item 2. Description of Property.
-----------------------
Executive Offices. The Company currently leases its executive offices
located at 3200 Bristol, 8/th/ Floor, Costa Mesa, California 92626. The lease
covers approximately 15,000 square feet at a monthly rental of approximately
$20,394 per month. The rental obligation increases to $21,851 per month
commencing in May 2000. The lease expires in 2002. The Company believes that its
new facilities are in excess of its current needs, however, management believes
that these premises will be suitable for its intended operations.
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
<PAGE>
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 are provided 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 water. The property
formerly also 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 sale, 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 down payment of
$800,000, and an installment contract for $3,200,000, with annual payments
amortized over 20 years, due and payable in 10 years. The Company received the
$800,000 down payment on December 31, 1996 and a payment of $422,867 for
principal and interest in December 1997. On June 30, 1998, the Company and the
purchaser of the property agreed to rescind the transaction. As a result, on
August 15, 1998, ownership of the property reverted to the Company. As
consideration for the rescission, the Company returned the first installment
payment of $422,867 and issued a convertible note as reimbursement of the
initial down payment of $800,000, plus a severance fee of $200,000, for an
aggregate of $1,000,000. The note accrues interest at fifteen percent (15%) with
principal and interest all due and payable on September 1, 2000.
The Company has a 4.89 acre undeveloped parcel of 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 Note secured by Deed of
Trust dated March 15, 1995, in the principal amount of $65,000. The Note was due
and payable in March 1999. The Company and the lender have agreed to extend the
Note on a month by month basis. This property is held by the Company for sale
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.
Item 3. Legal Proceedings.
-----------------
On or about November 17, 1998, the Company entered into a Stipulated
Judgment in the matter of Yamaichi International (America) Inc., vs. EMB
----------------------------------------------
Corporation, USDC, Southern District of New York, Case No. 98-7152 (DLC). The
- -----------
lawsuit arose out of the obligation of the Company to pay rent for its branch
corporate office in New York City. The total amount of the judgment was
$186,000. As of September 30, 1999, the Company has paid approximately $7,100
toward the judgment.
<PAGE>
On or about August 4, 1999, a judgment was entered against the Company
in the matter of Resource Bancshares Mortgage Group, Inc. vs. EMB Mortgage
---------------------------------------------------------
Corporation, Circuit Court for Palm Beach County, Florida, Case No. 99-2106-AO.
- -----------
The amount of the judgment was $129,518.57, and arose out of a mortgage loan
which Resource Bancshares Mortgage Group, Inc. ("RBMG") had requested the
Company to repurchase due to underwriting deficiencies. The mortgage loan in
question had been underwritten by Republic Mortgage Insurance Company and/or
RMIC Corporation (collectively, "RMIC") pursuant to a contract underwriting
agreement by and between RMIC and the Company. This agreement provided for RMIC
to provide certain remedies, including indemnification, to the Company in the
event of the failure of the RMIC underwriters to underwrite the Company's
mortgage loans in accordance with investor guidelines. The effectiveness of the
indemnification provisions of the agreement is dependent upon the result of
negotiations between the Company and RMIC, as further discussed in the following
paragraph.
The Company and RMIC are currently engaged in litigation, Republic
--------
Mortgage Insurance Corporation and RMIC Corporation vs. EMB Mortgage
- --------------------------------------------------------------------
Corporation, Forsyth County, North Carolina Superior Court, Civil Action No. 98
- -----------
CVS 11380 and a judgment was filed in favor of RMIC in April 1999. This lawsuit
arises out of fees allegedly owed RMIC by the Company for underwriting services
provided by RMIC to the Company in its Daytona Beach, Florida office. Management
of the Company believes that RMIC and/or Joseph K. Brick, former Vice President
of the Company and former manager of its Daytona Beach operations, may be liable
to indemnify the Company for the losses incurred by the Company in connection
with the mortgage loan which is the basis for the RBMG litigation and any other
potential losses involving loans underwritten by RMIC at the Daytona Beach
office. The Company and RMIC are currently engaged in settlement discussions
which, the Management of the Company believes, will result in RMIC assuming such
liability.
The Company and Joseph K. Brick are currently engaged in litigation,
Joseph K. Brick vs. EMB Corporation, Circuit Court, Seventh Judicial District,
- -----------------------------------
Volusia County, Florida, Case no. 99-30669 CICI. The Company has filed a Motion
to dismiss the complaint for failure to state a cause of action and for lack of
jurisdiction. If granted, the Company intends to initiate proceedings against
Mr. Brick and others in the State of California.
In September 1999, the Company entered into a Stipulation for Judgment
in the matter of Southern Pacific Thrift & Loan vs. EMB Corporation, et al.,
-----------------------------------------------------------
Orange County, California Superior Court, Case no. 807620. The case arose out
- -------------
of money due IMPAC Warehouse Lending Group, Inc., on a pledge account towards
the warehouse line of credit in favor of EMB Mortgage Corporation. The agreement
provides for payment by the Company to Southern Pacific Thrift & Loan of the sum
of $100,431.13. At present the Company has paid $25,000.00 toward such sum.
The Company is not engaged in any other 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.
<PAGE>
Item 4. Submission of Matters to a Vote of Security Holders.
---------------------------------------------------
No matters were submitted during the fourth quarter of the fiscal
year ended September 30, 1999, of the Company.
PART II
Item 5. Market for Common Equity and Related Stockholder Matters.
--------------------------------------------------------
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 stock" 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.
Fiscal Year Ended September 30, 1998:
- ------------------------------------
1st Quarter............................... $ 3.25 $ 1.75
2nd Quarter............................... $2.5156 $1.2031
3rd Quarter............................... $1.6250 $ .8125
4th Quarter............................... $1.4062 $ .6562
Fiscal Year Ended September 30, 1999:
- ------------------------------------
1st Quarter............................... $ .20 $ .44
2nd Quarter............................... $ .84 $ .21
3rd Quarter............................... $ 2.69 $ .63
4th Quarter............................... $ 2.47 $ .59
<PAGE>
(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.
On December 31, 1999, the closing bid and asked prices of the Common
Stock of the Company were $0.22 bid and $0.24 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 December
31, 1999, there were approximately 19 broker-dealers publishing quotes for the
Common Stock of the Company.
As of December 31, 1999, there were 28,140,955 shares of Common Stock
issued and outstanding which were held by approximately 692 holders of record;
13,514 shares of 8% Series A Convertible Preferred Stock held by one owner of
record which are not traded in any market; and 97,500 shares of 10% Series B
Convertible Preferred Stock held by one owner of record 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 and 10% Convertible Preferred Stock,
Series B 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.
Item 6. Management's Discussion and Analysis or Plan of Operation
General
EMB Mortgage, which, prior to May 1999, was the Company's principal operating
subsidiary, was a specialty finance company engaged in the business of
originating and selling residential mortgage loans secured by one-to-four family
residences. In the first quarter of fiscal 1998, the Company aggressively
expanded its mortgage banking operations through its acquisition of all of the
capital stock of Investment Consultants, Inc., doing business as Equityline,
Inc. ("ICI"), in Denver, Colorado, and the acquisition of certain of the assets
of Deposit Guaranty Mortgage, in Dallas, Texas. In addition, it also opened a
branch office in Sherman Oaks, California. The Company increased its funding
consistently in fiscal 1998 peaking at $40,000,000 in closed loans for the month
of July 1998. In late August 1998, an already competitive industry was impacted
by increased bond yields and disrupted financial markets. Due to this increase
in mortgage interest rates and disruption of financial markets, the primary
purchaser of mortgage loans from EMB Mortgage modified its underwriting
guidelines and restricted the purchase of loans. As a result, on December 22,
1998, the Company laid-off
<PAGE>
approximately 50 employees, which reduced its headcount to approximately 32
employees. Effective January 1, 1999, the Company substantially ceased its
mortgage banking operations with the exception of its Denver office and limited
operations in its Costa Mesa office. The Company terminated its acquisition
agreement with ICI in March 1999 and ceased its operations in Denver as of such
date. Pursuant to the agreement with management of the Denver office, management
of the Denver office retained the 400,000 shares of common stock issued to them
in connection with the acquisition as well as the assets acquired. The Company
retained all of the capital stock of ICI, including certain liabilities.
During September 1999, the Company completed its cessation of operating under
the name EMB Mortgage. The Company was licensed to fund mortgages in
approximately 30 states. By law, EMB Mortgage was required to renew its licenses
with the various state agencies. Management has determined not to renew these
licenses and to allow the state approvals to terminate upon their respective
annual expiration dates.
In May 1999, the Company acquired the issued and outstanding common stock of
AMRES and RMC in order to resume business in the originating of consumer loans.
At present, AMRES is closing approximately $17,000,000 in residential loans
monthly. The Company will require substantial cash to fund its operations and
satisfy certain obligations, and there are no assurances that the Company will
be able to expand the operations of AMRES, or commence the operations of RMC.
Both RMC and AMRES are obtaining approvals and licensing with various federal
and state agencies in order to do business in a number of states.
Item 7. Financial Statements.
--------------------
Information with respect to this Item is set forth in "Index to
Financial Statements".
Item 8. Changes In and Disagreements with Accountants on Accounting and
---------------------------------------------------------------
Financial Disclosure.
--------------------
On May 20, 1998, the Company dismissed its independent accountants,
Harlan & Boettger. The reports of Harlan & Boettger for the fiscal years ended
September 30, 1996 and September 30, 1997 contained no adverse opinion,
disclaimers of opinion nor were they modified as to uncertainty, audit scope or
accounting principles. The decision to dismiss the firm of Harlan & Boettger was
made by the Board of Directors of the Company. At no time during the engagement
of Harlan & Boettger as independent accountants for the Company were there any
disagreements, whether or not resolved, on any matter of accounting principles
or practices, financial statement disclosure or auditing scope of procedure.
Disclosure of this dismissal was first contained in the Form 10-QSB for the
period ended March 31, 1998, which was filed by the Company with the Securities
and Exchange Commission on May 21, 1998. On May 20, 1998, the Company, as
required by Item 304 (a) (3) of Regulation S-B, advised Harlan & Boettger of
this disclosure. At no time has Harlan & Boettger responded to the Company
concerning this disclosure nor, to the best knowledge of the Company, has Harlan
& Boettger responded directly to the Securities and Exchange Commission
concerning this disclosure.
<PAGE>
On May 20, 1998, the Company engaged the firm of Corbin & Wertz of
Irvine, California as independent accountants for the Company. Prior to May 20,
1998, neither the Company, nor anyone on its behalf, had consulted with Corbin &
Wertz concerning the accounting principles of any specific completed or
contemplated transaction, any type of audit opinion on the Company's financial
statements nor any other material factor which was considered by the Company in
reaching a decision as to any accounting, auditing or financial reporting issue.
On January 13, 1999, the Company's independent accountants, Corbin &
Wertz of Irvine, California resigned. At the time of their resignation, Corbin
& Wertz had not prepared any reports nor rendered any other services for the
Company. At no time during the engagement of Corbin & Wertz as independent
accountants for the Company were there any disagreements, whether or not
resolved, on any matter of accounting principles or practices, financial
statement or disclosure or auditing scope or procedure. Disclosure of this
resignation was first contained, together with the response and concurrence of
Corbin & Wertz to this disclosure, in Form 8-K filed with the Securities and
Exchange Commission on or about January 26, 1999.
On January 22, 1999, the Company engaged the firm of McKennon Wilson &
Morgan LLP, of Irvine, California, as independent accountants for the Company.
Prior to January 22, 1999, neither the Company, nor anyone on its behalf, had
consulted with McKennon Wilson & Morgan LLP concerning the accounting principles
of any specific completed or contemplated transaction, any type of audit opinion
on the Company's financial statements nor any other material factor which might
be considered by the Company in reaching a decision as to any accounting,
auditing or financial reporting issue.
PART III
Item 9. Directors, Executive Officers, Promoters and Control Persons;
-------------------------------------------------------------
Compliance with Section 16(a) of the Exchange Act.
--------------------------------------------------
The directors and executive officers of the Company are as follows:
<TABLE>
<CAPTION>
Name(1)(2) Age Position
- ---------- --- --------
<S> <C> <C>
William V. Perry(3)(4) 75 Director, Executive Vice President
and Secretary, and President of EMB
Mortgage Corporation
Ann L. Petersen 61 Director
James E. Shipley(3)(4) 63 Director, President and Principal
Financial and Accounting Officer
</TABLE>
<PAGE>
(1) The Company presently has no executive committee, nominating committee or
audit committee of the Board of Directors.
(2) The officers of the Company hold office until their successors are elected
and qualified, or until their death, resignation or removal.
(3) Member of the Company's Stock Option Committee. See "1996 Stock Option,
SAR and Stock Bonus Plan", below.
(4) Member of the Company's Compensation Committee. See "Compensation
Committee", below.
The background and principal occupations of each director and
executive officer of the Company are as follows:
Mr. 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. On
December 16, 1999 he was appointed Secretary of the Company. He is also the
Chairman of the Board and President of EMB Mortgage. From 1994 to March 20,
1999, he was a director and Vice President of Sterling Alliance Group, Ltd.
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 Missile 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 not been employed outside of the house since
1958. She attended Marquette University for two years.
Mr. Shipley has been a director of the Company since January 15, 1996,
and became the President of the Company on April 29, 1996. On March 1, 1999, he
was elected Principal Financial and Accounting Officer. From 1993 to July 2,
1998 he was a director and President of Sterling Alliance Group, Ltd., an
affiliate of the Company which sold substantially all of its assets and
operations to the Company in exchange for Common Stock. He was the Managing
Director of EMB Mortgage 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. Mr. Shipley received a Bachelor of
Science degree from Eastern Illinois University in 1960.
Compliance with Section 16(a) of Securities Exchange Act of 1934. 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 Securities Exchange Act of 1934 during the
fiscal year ended September 30, 1999.
<PAGE>
Item 10. Executive Compensation.
----------------------
The following table sets forth the compensation required to be
reported pursuant to Item 402 of Regulation S-B. No other executive officer or
director of the Company received compensation in excess of $100,000 during its
fiscal year ended September 30, 1999. In addition, the Chief Executive Officer,
James E. Shipley, did have not other compensation required to be reported other
than that set forth herein.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
Name and Principal Position Fiscal Year Salary
--------------------------- ----------- ------
<S> <C> <C>
James E. Shipley, CEO 1997 $ 0
1998 $45,000
1999 $ 0
</TABLE>
Compensation Committee. The Compensation Committee of the Board of
Directors is comprised of Messrs. James E. Shipley and William V. Perry. The
Committee makes decisions regarding the Company's employee stock plan and makes
decisions concerning salaries and incentive compensation for the executive
officers, employees and consultants of the Company.
1996 Stock Option, SAR and Stock Bonus Plan. The Company has reserved
shares of Common Stock for issuance under the Company's 1996 Stock Option, SAR
and Stock Bonus Plan (the "Plan"), as amended. At September 30, 1999, no
options or stock bonuses covering shares of Common Stock had been granted and
issued under the Plan to any employees, officers or directors. During fiscal
year 1999, the Company issued 3,964,000 shares of common stock as stock bonuses
in consideration of various consulting agreements with third parties, and as
payment for legal fees and costs incurred by the Company. These stock bonuses
were issued pursuant to that certain Registration Statement on Form S-8 which
became effective on January 30, 1998. During fiscal year 1999, a total of
3,500,000 options to purchase Common Stock were issued in connection with
certain acquisition agreements. The members of the Stock Option Committee that
administer the Plan are presently James E. Shipley 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
<PAGE>
termination of the employee's employment with the Company, or (v) the
termination of the 401(k) Plan. As of January 1, 1999, the Company terminated
the 401(k) Plan with respect to additional contributions and/or new
participants. The 401(k) Plan continues to be in effect for employees and former
employees who have not elected to withdraw their accounts. As of September 30,
1999, there were 14 remaining participants in the 401(k) Plan.
Board Compensation. Directors of the Company may be compensated by
the Company for meeting attendance by a monthly directors' fee of $2,000, 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.
Item 11. Security Ownership of Certain Beneficial Owners and Management.
--------------------------------------------------------------
The total number of shares of Common Stock of the Company beneficially
owned by each of the officers and directors, and all of such directors and
officers as a group, and their percentage ownership of the outstanding capital
stock of the Company as of September 30, 1999, are as follows:
<TABLE>
<CAPTION>
Shares Percent of
Management Beneficially Outstanding
Shareholders(1) Owned(1) Stock
--------------- -------- -----
<S> <C> <C>
William V. Perry............................ 290,470(2) 1.10%
3200 Bristol, 8/th/ Floor
Costa Mesa, California 92626
Ann L. Petersen............................. 6,250 0.02%
Star Route 5080
Keaau, Hawaii 96749
James E. Shipley............................ 813,375(4) 3.08%
3200 Bristol, 8/th/ Floor
Costa Mesa, California 92626
Vincent Reinhart............................ 2,600,000(3) 9.87%
3200 Bristol, 8/th/ Floor
Costa Mesa, California 92626
Directors and officers as a group
(4) persons, including the above)........... 3,710,095 14.08%
========= =====
</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.
<PAGE>
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 the right to acquire within 60 days, such as
warrants or options to purchase the Common Stock of the Company.
(2) Represents shares of the 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 AMRES Holdups, LLC, a
corporation beneficiary owned by Mr. Reinhart. Mr. Reinhart is President
of the Company's subsidiaries, American Residential Funding, Inc. and
Residential Mortgage Corporation.
(4) Represents shares of the Company owned by World Trends Financial,
Ltd., a corporation beneficially owned by Mr. Shipley.
Security Ownership of Certain Beneficial Owners
The following table sets forth information with respect to the beneficial
ownership of each class of equity securities of the Company by each shareholder
who beneficially owns more than five percent (5%) of each class of the Company's
equity securities, the number of shares beneficially owned by each and the
percent of such class of equity securities so owned of record as of September
30, 1999. The Company has three outstanding classes of equity securities:
Common Stock, Series A preferred stock and Series B preferred stock. 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>
Name and Address Amount and Nature
Of of Beneficial Percent of Class of
Beneficial Owner Title of Class Ownership Equity Securities
----------------- -------------- --------- -----------------
<S> <C> <C> <C>
Sterling Alliance Group, Ltd. (1) Common Stock 3,375,000 12.81%
575 Anton Blvd., Suite 300
Costa Mesa, California 92626
AMRES Holdings, LLC Common Stock 2,600,000 9.87%
4425 Atlantic Ave., Ste. A-15
Long Beach, California 90807
Millenco, L.P. 8% Conv. 13,514 100%
111 Broadway, 20/th/ Floor Preferred Stock,
New York, New York 10006 Series A
10% Conv. 97,500 100%
Preferred Stock,
Series B
</TABLE>
(1) Sterling Alliance Group, Ltd., ("SAG") is a Colorado corporation. Certain
directors and officers of the Company are stockholders.
(2) Represents shares of the common stock of Sterling Alliance Group, Ltd.
which owns 3,375,000 shares of the Common Stock of the Company
<PAGE>
Item 12. 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 $108,195 as of September
30, 1999. In addition, World Trends Financial, Ltd., an entity controlled by
James E. Shipley, has made advances to or on behalf of the Company. As of
September 30, 1999, the Company was indebted to World Trends Financial, Ltd. in
the amount of $806,013.
Item 13. Exhibits and Reports on Form 10-KSB.
-----------------------------------
(a) Exhibits:
--------
3.1 Restated Articles of Incorporation of EMB Corporation are
incorporated by reference to Exhibit 3(i) to the Registrant's
registration statement on Form 10-SB (No. 1-11883), filed with the
Commission on June 28, 1996 (the "Form 10-SB").
3.2 The Bylaws of the Registrant are incorporated by referenced to
Exhibit 3(ii) of Form 10-SB of the Registrant.
10(a) The Asset Acquisition Agreement dated December 16, 1995, with
Sterling Alliance Group, Ltd. is incorporated herein by reference to
Exhibit 10(a) to the Form 10-SB of the Registrant.
10(b) The Appraisal Report dated April 22, 1996, of real property (61
acres) in County of Monterey, California by National Appraisal
Service is incorporated herein by reference to Exhibit 10(b) to the
Form 10-SB of the Registrant.
10(c) The Appraisal Report as of December 7, 1994, of 4.89 acres in Counter
of Riverside, California, by Tyna M. Stopnik is incorporated herein
by reference to Exhibit 10(c) to the Form 10-SB of the Registrant.
10(d) The License Agreement with Virtual Lending Technology, Inc. is
incorporated herein by reference to Exhibit 10(d) to the Form 10-SB
of the Registrant.
10(e) The Seller Agreement between ICI Funding Corporation and EMB Mortgage
Banc, Ltd. is incorporated herein by reference to Exhibit 10(e) to
the Form 10-SB of the Registrant.
10(f) The 1996 Stock Option, SAR and Stock Bonus Plan is incorporated
herein by reference to Exhibit 10(f) to the Form 10-SB of the
Registrant.
<PAGE>
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) Stock Purchase Agreement dated November 1, 1997, regarding
acquisition of Investment Consultants, Inc., is incorporated herein
by reference to Exhibit 10(k) to Form 10-KSB report of the Registrant
for the period ended September 30, 1997 filed on January 13, 1998.
10(l) ICI Master Commitment to purchase loans under ConformPlus program
dated October 21, 1997 is incorporated herein by reference to Exhibit
10(l) to Form 10-KSB report of the Registrant for the period ended
September 30, 1997 filed on January 13, 1998.
10(m) ICI Master Commitment to purchase second deed trust mortgage deeds
dated September 12, 1997 is incorporated herein by reference to
Exhibit 10(m) to Form 10-KSB report of the Registrant for the period
ended September 30, 1997 filed on January 13, 1998.
10(n) ICI Master Commitment to purchase jumbo and conforming residential
mortgages dated September 4, 1997 is incorporated herein by reference
to Exhibit 10(n) to Form 10-KSB report of the Registrant for the
period ended September 30, 1997 filed on January 13, 1998.
10(o) Master agreement for sale of mortgages with ContiMortgage Corporation
is incorporated herein by reference to Exhibit 10(o) to Form 10-KSB
report of the Registrant for the period ended September 30, 1997
filed on January 13, 1998.
10(p) Sale agreement for purchase of mortgage loans with the Mortgage
Authority, Inc. dated April 3, 1997 is incorporated herein by
reference to Exhibit 10(p) to Form 10-KSB report of the Registrant
for the period ended September 30, 1997 filed on January 13, 1998.
10(q) Mortgage loan Seller/Servicer Agreement with First Union National
Bank of North Carolina dated March 16, 1997 is incorporated herein by
reference to
<PAGE>
Exhibit 10(q) to Form 10-KSB report of the Registrant for the period
ended September 30, 1997 filed on January 13, 1998.
10(r) Mortgage Purchase Agreement with Resource Bancshares Mortgage Group,
Inc. dated March 10, 1997 is incorporated herein by reference to
Exhibit 10(r) to Form 10-KSB report of the Registrant for the period
ended September 30, 1997 filed on January 13, 1998.
10(s) Stock Purchase Agreement with Linda K. Gregg dated November 1, 1997,
regarding agreement of Preferred Holding Group, Incorporated is
incorporated herein by reference to Exhibit 10(s) to Form 10-KSB
report of the Registrant for the period ended September 30, 1997
filed on January 13, 1998.
21.1 Description of the subsidiaries of the Registrant is incorporated by
reference to Exhibit 21.1 to Form 10-KSB report of the Registrant for
the period ended September 30, 1998 filed on November 8, 1999.
(b) Reports on Form 8-K. The Registrant did not file any reports on Form
-------------------
8-K during the last quarter of the period covered by this report.
<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) of the Securities Exchange Act
of 1934, the registrant caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
Registrant: EMB Corporation
By: /s/ James E. Shipley
------------------------------
James E. Shipley, President
In connection with the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.
Date: January 13, 2000
By: /s/ James E. Shipley /s/ William V. Perry
-------------------------- -------------------------------------
James E. Shipley William V. Perry
Director, President and Principal Director and Executive Vice President
Financial and Accounting Officer
