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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-Q
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Quarterly Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the Third Quarter Ended September 30, 2001
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Commission File Number: 0-21475
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EMERGENT GROUP INC.
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(Exact name of registrant as specified in its charter)
Nevada 93-1215401
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(State of jurisdiction of Incorporation) (I.R.S. Employer Identification No.)
375 Park Avenue
New York, NY 10152-3699
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(Address of principal executive offices)
(212) 813-9700
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(Registrant's telephone number)
Not Applicable
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(Former name, address and fiscal year, if changed since last report)
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Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 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 |_|
As of November 13, 2001, the registrant had a total of 49,806,959 shares
of Common Stock outstanding.
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EMERGENT GROUP INC.
FORM 10-Q Quarterly Report
Table of Contents
Page
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets as of September 30, 2001
(unaudited) and December 31, 2000 3
Unaudited Condensed Consolidated Statements of Operations for the
Three and Nine Months Ended September 30, 2001 and for the Period
From Inception (March 8, 2000) to September 30, 2000 4
Unaudited Condensed Consolidated Statement of Stockholders' Equity
for the Three and Nine Months Ended September 30, 2001 5
Unaudited Condensed Consolidated Statements of Cash Flows for the
Nine Months Ended September 30, 2001 and for the Period From
Inception (March 8, 2000) to September 30, 2000 6
Notes to the Unaudited Condensed Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations 13
Item 3. Quantitative and Qualitative Disclosure About Market Risk 15
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 16
Signatures 17
2
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
EMERGENT GROUP INC.
Condensed Consolidated Balance Sheets
(in thousands, except share data)
September 30, 2001 December 31, 2000
------------------ -----------------
(unaudited)
ASSETS
Cash and cash equivalents $ 217 $ 751
Investments 150 3,218
Accounts receivable, net 1,585 25
Inventory, net 1,059 --
Prepaid expenses 176 --
-------- -------
Total current assets 3,187 3,994
Property and equipment, net 10,815 306
Intangible assets, net 3,676 222
Due from related party -- 467
Other assets 308 196
-------- -------
Total assets $ 17,986 $ 5,185
======== =======
LIABILITIES and STOCKHOLDERS' EQUITY
Current portion of long-term debt 2,079 --
Current portion of capital leases 1,142 --
Accounts payable 995 --
Accrued expenses 808 122
Note payable - bank 1,112 --
Note payable - other 360 --
Other liabilities 598 --
-------- -------
Total current liabilities 7,094 122
Long-term debt 1,515 --
Long-term portion of capital leases 1,715 --
Deferred income taxes 2,453 --
-------- -------
Total liabilities 12,777 122
Commitments and contingencies
STOCKHOLDERS' EQUITY
Preferred Stock, $.001 par value, 10,000,000
authorized, none issued or outstanding -- --
Common Stock, $.001 par value, 100,000,000 authorized,
49,806,959 and 44,173,280, issued and outstanding 50 44
Additional paid-in capital 12,199 8,629
Accumulated deficit (7,040) (3,610)
-------- -------
Total stockholders' equity 5,209 5,063
-------- -------
Total liabilities and stockholders' equity $ 17,986 $ 5,185
======== =======
The accompanying notes are an integral part of these
condensed consolidated balance sheets.
3
EMERGENT GROUP INC.
Unaudited Condensed Consolidated Statements of Operations
(in thousands, except earnings per share)
Period from
Nine Months inception
Three Months Ended Ended (March 8,) to
September 30, September 30,
--------------------- -------------------------
2001 2000 2001 2000
-------- -------- -------- --------
Net revenue $ 2,770 $ -- $ 2,770 $ --
Cost of revenue 1,448 -- 1,448 --
Depreciation expense 575 -- 648 13
-------- -------- -------- --------
Gross profit 747 -- 674 (13)
Expenses:
Selling 387 -- 387 --
General and administrative 422 284 1,285 480
-------- -------- -------- --------
Operating loss (62) (284) (998) (493)
Realized loss on investments 930 -- 2,401 --
Unrealized loss (gain) on
trading investments -- 662 (137) 1,774
Interest expense 212 -- 212 --
Other expense (income), net 4 -- (44) --
-------- -------- -------- --------
Loss before income taxes (1,208) (946) (3,430) (2,267)
Income tax benefit -- -- -- --
-------- -------- -------- --------
Net loss $ (1,208) $ (946) $ (3,430) $ (2,267)
======== ======== ======== ========
EARNINGS PER SHARE DATA:
Net loss per share - basic and diluted $ (0.02) $ (0.02) $ (0.07) $ (0.06)
Weighted average number of
common shares outstanding 49,501 41,276 45,969 40,431
The accompanying notes are an integral part of these condensed
consolidated financial statements.
4
EMERGENT GROUP INC.
Condensed Consolidated Statement of Stockholders' Equity (unaudited)
(in thousands)
Common Additional Total
Shares Common Paid-In Accumulated Stockholders'
Outstanding Stock Capital Deficit Equity
----------- ------ ------- ----------- -------------
Balances - December 31, 2000 44,173 $44 $ 8,629 $(3,610) $ 5,063
Shares issued for MRM merger 5,634 6 3,239 -- 3,245
Options issued for MRM merger -- -- 316 -- 316
Warrants and options issued
to non-employees -- -- 15 -- 15
Net loss -- -- -- (3,430) (3,430)
------ --- ------- ------- -------
Balances - September 30, 2001 49,807 $50 $12,199 $(7,040) $ 5,209
====== === ======= ======= =======
The accompanying notes are an integral part of these condensed
consolidated financial statements.
5
EMERGENT GROUP INC.
Condensed Consolidated Statements of Cash Flows (unaudited)
(in thousands)
Nine Months Ended
September 30,
----------------------
2001 2000
-------- -------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (3,430) $(2,267)
Adjustments to reconcile net loss to net cash used in operating activities:
Unrealized (gain) loss on investments, net (137) 1,774
Depreciation and amortization 888 13
Realized loss on investments 2,401 --
Issuance of options 14 --
Decrease (increase) in:
Accounts receivable 107 --
Inventories (121) --
Prepaid expenses (53) --
Due from related party 467 261
Other assets (55) (1,167)
(Decrease) increase in accounts payable and accrued expenses (695) 66
-------- -------
Net cash used in operating activities (614) (1,320)
Cash flows from investing activities:
Purchase of fixed assets (32) --
Purchase of investments (656) (4,130)
Sale of investments 500 --
-------- -------
Net cash used in investing activities (188) (4,130)
Cash flows from financing activities:
Advance on future stock subscription agreement 598 --
Contributions by members -- 7,500
Borrowings on notes payable - bank 91 --
Borrowings on notes payable - other 278 --
Principal payments on long-term debt (594) --
Principal payments on capital lease obligations (105) --
-------- -------
Net cash provided by financing activities 268 7,500
-------- -------
Net change in cash and cash equivalents (534) 2,050
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 751 --
-------- -------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 217 $ 2,050
======== =======
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Contribution of investments by stockholder's $ -- $ 1,173
======== =======
Cash paid for interest $ 243 $ --
======== =======
Acquisition of MRM:
Fair value of assets acquired 11,814 $ --
Less: issuance of common stock and options (3,561) --
-------- -------
Notes payable and liabilities assumed $ 8,253 $ --
======== =======
The accompanying notes are an integral part of these condensed
consolidated financial statements.
6
EMERGENT GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
1. BACKGROUND AND FORMATION
The Company had initially commenced operations as Emergent Ventures, LLC
("Venture"), a Delaware Corporation, on March 8, 2000, which was formed to
invest primarily in global private equity opportunities in information
technology, health care and medical technology companies. Venture's equity
capitalization consisted of a contribution of $1,173,125 in securities by
Emergent Management Company, LLC ("Manager"), for a fifty-eight percent
(58%) interest of Venture and a contribution of $7,500,000 in cash by
other members in return for the remaining forty-two percent (42%) interest
of Venture.
In August 2000, Venture consummated the transactions contemplated by the
Equity Transfer Transaction ("Transfer"), all pursuant to an Equity
Transfer and Reorganization Agreement ("Agreement"), by and among Dynamic
International Ltd. ("Dynamic"), certain of its shareholders and Venture.
Pursuant to and in accordance with the Agreement and immediately prior to
the consummation of the Transfer, Dynamic transferred all of its assets
and liabilities (other than outstanding bank debt in the amount of
$250,000) to a wholly-owned subsidiary of Dynamic named Dynamic
International, Inc. Dynamic International, Inc. acquired the transferred
assets, assumed the remaining liabilities and indemnified Dynamic against
any liabilities relating to or arising out of the transferred assets and
the assumed liabilities. In conjunction with the Transfer, Dynamic
International, Inc. was spun-off from Dynamic as a separate entity.
Pursuant to the Agreement, Venture contributed substantially all of its
assets to Dynamic in exchange for the issuance of approximately 39,755,178
shares of Dynamic common stock to the members of Venture. Dynamic
subsequently changed its name to Emergent Group Inc. ("Company") The
Company retained Dynamic's State of Incorporation in Nevada and it's
Federal Tax Identification Number.
For financial accounting purposes, the Transfer was accounted for as a
re-capitalization by the Company as the accounting acquiror and with
Dynamic as the accounting acquiree. After the Transfer, the former members
of Venture became the beneficial owners of approximately 39,755,178 shares
of Dynamic's common stock, representing approximately ninety percent (90%)
interest in Dynamic. Each of the Directors of Dynamic resigned immediately
prior to the consummation of the Transfer. The beneficial owners of the
Manager were elected as directors and executive officers of the Company.
The Company recorded goodwill as a result of the Transfer amounting to
$250,000, which is being amortized over three years.
The Company has previously announced that it intends to transition itself
into a medical technology operating company that has a primary objective
of launching an innovative national distribution platform leveraging its
access to physician practice groups and healthcare facilities utilizing
acquisitions of medical technology companies and employing strategic
partner relationships with other companies in the medical technology,
equipment and distribution industry. The Company believes that its initial
acquisition, completed in July 2001, will provide the platform to
facilitate the Company's goals and execution of its business plan. The
Company plans to leverage its historical merchant banking resources to
identify and acquire and/or enter into strategic partnering relationships
with medical technology companies with large market opportunities and
whose operations are currently restricted by the lack of effective
distribution channels or access to capital markets.
In July 2001, the Company completed its acquisition of Medical Resources
Management, Inc. ("MRM") as per the Agreement and Plan of Reorganization
of Merger (The "Merger Agreement") dated January 2001. As required by the
terms of the Merger Agreement, the Company exchanged 5,633,667 shares of
its Common Stock, which represents 11% of the total post-merger
outstanding shares, for all the issued and outstanding Common Stock of MRM
at a conversion ratio of 0.37 per share of MRM Common Stock. Based on the
average of the Company's closing stock price for the 10 days prior to the
acquisition, the purchase price for MRM was $3,245,000. Additionally, the
Company issued options to acquire 564,784 shares of its common stock in
exchange for all of the outstanding MRM options at the time of the merger.
The options exchanged have a fair value of approximately $316,000. The
Company assumed approximately $8,253,000 in existing MRM debt and capital
lease obligations. These obligations have interest rates ranging from 6.3%
to 25.5% and are repayable over a one to five year period. The Company's
transaction costs incurred in completing the merger amounted to
approximately $336,000. Goodwill of approximately $3,421,000 resulted from
the merger. The transaction has
7
been accounted for under the purchase method of accounting. MRM is
headquartered in Glendale, California and operates as a wholly owned
subsidiary of the Company.
MRM is a leading provider of medical and surgical equipment outsourcing
solutions for the healthcare industry. MRM supplies surgical laser
equipment, cryotherapy equipment, electromagnetic imaging equipment, and
mobile lithotripsy equipment, all in conjunction with certified
technicians who support the equipment, physicians, and staff in the
operating room. These services are provided on a "fee per case" basis to
hospitals, outpatient surgery centers and physician practice groups.
MRM's business model addresses the increasingly capital constrained
environment that many of its customers face. With the high cost of
purchasing new medical technologies and training/retaining staff to
operate such equipment, many healthcare facilities seek outsourcing
solutions that minimize their risks and capital costs. In addition, MRM
allows its customers to gain exposure to the latest medical technologies
without making long-term commitments to any specific vendors or types of
equipment.
2. BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements of
Emergent Group Inc. have been prepared pursuant to the rules of the
Securities and Exchange Commission ("SEC"). Certain information and
footnote disclosures normally included in financial statements prepared in
accordance with accounting principles generally accepted in the United
States have been condensed or omitted pursuant to such rules and
regulations. These unaudited condensed consolidated financial statements
should be read in conjunction with the audited consolidated financial
statements and notes thereto included in the Company's Annual Report on
Form-10K, as well as MRM's audited financial statements for the fiscal
year ended October 31, 2000 included in the Company's S-4/A filing on May
8, 2001. In the opinion of management, the accompanying unaudited
condensed consolidated financial statements reflect all adjustments, which
are of a normal recurring nature, necessary for a fair presentation of the
results for the periods presented.
The results of operations presented for the three and nine months ended
September 30, 2001 and for the period from inception (March 8, 2000) to
September 30, 2000 and the three months ended September 30, 2000, are not
necessarily indicative of the results to be expected for any other interim
period or any future fiscal year.
The Company's operating subsidiary, MRM, has historically incurred
operating losses. The consolidated financial statements have been prepared
on a going-concern basis, which contemplates the realization of assets and
satisfaction of liabilities in the normal course of business. As of
September 30, 2001, the Company had a working capital deficit of $ 3.9
million. As of October 31, 2000, MRM's previous fiscal year end, MRM had a
working capital deficit of $4.5 million. For the three months ended
September 30, 2001, the Company incurred a net loss of $1.2 million of
which $136,000 is attributable to MRM. For the year ended October 31, 2000
MRM incurred a net loss of $1.6 million. The financial statements do not
include any adjustments to reflect the possible future effects on the
recoverability and classification of assets or the amounts and
classification of liabilities that may result from the outcome of this
uncertainty.
It is the Company's intention to bring MRM to profitability as quickly as
possible. Therefore, prior to the closing of the acquisition, the Company,
in conjunction with MRM's then management had implemented a plan of cost
reductions and revenue enhancements including, but not limited to, the
following:
1) Personnel reductions of approximately 20%.
2) Salaried employee pay reductions ranging from 8-35%.
3) Increased use of variable/incentive pay for sales staff.
4) Introduction of "piece rate" pay plan to technician staff.
5) Price increases of 10-15% to non-contract customers.
6) Engaged experienced industry consultants that can provide
highly focused support to the existing management and aid in
the execution of the Company's business plan.
The implementation of these various initiatives has had a significant
impact upon reducing the operating losses of MRM, as demonstrated in the
quarter ended September 30, 2001. Efforts continue to achieve further
operating efficiencies and revenue growth to bring MRM to profitability.
The Company's management believes that based on its current operating
results, successful implementation of its cost reduction and revenue
enhancement plan at MRM and the aforementioned financing activities, the
Company's cash and cash equivalents will be sufficient to meet its
operating and debt service requirements for at least the next 12 months.
Management intends to raise capital to fund the future operations and
growth of MRM. In addition, management is in current negotiations to
extend the existing line of credit. Until these transactions occur, there
can be no assurance that the Company will have sufficient liquidity to
fund operations. Accordingly, our auditors may conclude that a report
modification for going concern relating to the auditor's report on the
December 31, 2001 financial statements may be appropriate.
Principles of Consolidation
The condensed consolidated financial statements include the accounts of
all majority-owned subsidiaries. All significant intercompany transactions
have been eliminated in consolidation.
Use of Estimates
The preparation of the condensed consolidated financial statements in
accordance with accounting principles generally accepted in the United
States requires management to make estimates and assumptions that affect
the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements
and the reported amounts of income and expenses during the reporting
period. Actual results could differ from those estimates.
Reclassifications
Certain prior period amounts have been reclassified to conform to the
current period's presentation.
8
3. RELATED PARTY TRANSACTIONS
The Company has engaged in related party transactions with its controlling
stockholder, certain members of management, certain of its directors and
other entities controlled by the same beneficial owners of the Company. As
of September 30, 2001, 46% of the Company was owned by Emergent Management
Company, LLC. From the Company's inception on March 8, 2000 through
December 31, 2000, another entity controlled by the same beneficial owners
of Emergent Management Company, LLC paid a majority of the Company's
operating expenses. Prior to the offset described below, this related
entity owed the Company $1,045,000, an increase of $506,000 from June 30,
2001, primarily due to various expenses paid on its behalf by the Company
and the sale of all the Company's leasehold improvements at their net book
value due to the Company's relocation to California. As part of the
Company's on-going financing, certain members of management had lent the
Company $1,045,000. At its discretion, the Company has the right of offset
for the amount it owes to related party shareholders' against the amount
that the Company is due from a related entity. During September 2001, the
Company exercised it right of offset and eliminated the balances. The
Company believes these aforementioned transactions are similar to those
that would be entered into with an unrelated party.
4. ACQUISITION
Effective July 6, 2001, the Company completed its acquisition of MRM as
per the Merger Agreement. As required by the terms of the Merger
Agreement, the Company exchanged 5,633,667 shares of its Common Stock for
all the issued and outstanding Common Stock of MRM at a conversion ratio
of 0.37. Based on the average of the Company's closing stock price for the
ten days prior to the acquisition, the purchase price for MRM was
$3,245,000. Additionally, the Company issued options to acquire 564,784
shares of its common stock in exchange for all of the outstanding MRM
options at the time of the merger. The options exchanged have a fair value
of approximately $316,000. The Company assumed approximately $8,253,000 in
existing MRM debt and capital lease obligations. These obligations have
interest rates ranging from 6.3% to 25.5% and are repayable over a one to
five year period. The Company's transaction costs incurred in completing
the merger amounted to approximately $336,000. Goodwill of approximately
$3,421,000 resulted from the merger. The transaction has been accounted
for under the purchase method of accounting in accordance with Statements
of Financial Accounting Standards No. 141 and No 142. The Company has used
July 1, 2001 as the effective date of the recording the transaction.
Results of MRM's operations for the period July 1, through July 6, 2001
were not material.
The following pro forma results of operations are presented to illustrate
the effect of the acquisition on the historical operating results of for
the nine months ended September 30, 2001 and the three and nine months
ended September 30, 2000. These pro forma results of operations give
effect to the acquisition as if it occurred as of January 1, 2001 and
2000. The pro forma results of operations are based on management's
current estimates and may not be indicative of the results of operations
that actually would have occurred if the transaction had been completed at
the dates indicated.
For the Nine Months Ended September 30, 2001
---------------------------------------------------
Pro forma Pro forma
EMGR MRM Adjustments Consolidated
-------- ------- ----------- ------------
Revenue, net $ 2,770 $ 7,397 $ -- $ 10,167
Operating loss (998) (1,098) -- (2,096)
Net loss $ (3,430) $(2,004) $ -- $ (5,434)
======== ======= ===== ========
EARNINGS PER SHARE DATA:
Basic and diluted earnings per share $ (0.07) $ (0.11)
Weighted average common shares 45,969 3,838 49,807
9
For the Nine Months Ended September 30, 2000
---------------------------------------------------
Pro forma Pro forma
EMGR MRM Adjustments Consolidated
-------- ------- ----------- ------------
Revenue, net $ -- $ 8,023 $ -- $ 8,023
Operating loss (493) (373) -- (866)
Net loss $ (2,267) $(1,228) $ -- $ (3,495)
======== ======= ===== ========
EARNINGS PER SHARE DATA:
Basic and diluted earnings per share $ (0.06) $ (0.08)
Weighted average common shares 40,431 5,634 46,065
For the Three Months Ended September 30, 2000
---------------------------------------------------
Pro forma Pro forma
EMGR MRM Adjustments Consolidated
-------- ------- ----------- ------------
Revenue, net $ -- $ 2,418 $ -- $ 2,418
Operating loss (284) (855) -- (1,139)
Net loss $ (946) $(1,132) $ -- $ (2,078)
======== ======= ===== ========
EARNINGS PER SHARE DATA:
Basic and diluted earnings per share $ (0.02) $ (0.04)
Weighted average common shares 41,276 5,634 46,910
10
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Forward-Looking Statements
The information contained in this Form 10-Q and documents incorporated
herein by reference are intended to update the information contained in
the Company's Annual Report on Form 10-K for the year ended December 31,
2000 and such information presumes that readers have access to, and will
have read, the "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and other information contained in
such Form 10-K and other Company filings with the Securities and Exchange
Commission ("SEC").
This Quarterly Report on Form 10-Q contains forward-looking statements
within the meaning of Section 27A of the Securities Act of 1933, as
amended, and Section 21E of the Securities Exchange Act of 1934, as
amended. These forward-looking statements involve risks and uncertainties,
and actual results could be significantly different than those discussed
in this Quarterly Report on Form 10-Q. Certain statements contained in
Management's Discussion and Analysis, particularly in "Liquidity and
Capital Resources," and elsewhere in this Report on Form 10-Q are
forward-looking statements. These statements discuss, among other things,
expected growth, future revenues and future performance. Although we
believe the expectations expressed in such forward-looking statements are
based on reasonable assumptions within the bounds of our knowledge of our
business, a number of factors could cause actual results to differ
materially from those expressed in any forward-looking statements, whether
oral or written, made by us or on our behalf. The forward-looking
statements are subject to risks and uncertainties including, without
limitation, the following: (a) changes in levels of competition from
current competitors and potential new competition, (b) loss of significant
customer(s) and (c) changes in availability or terms of working capital
financing from vendors and lending institutions. The foregoing should not
be construed as an exhaustive list of all factors that could cause actual
results to differ materially from those expressed in forward-looking
statements made by us. All forward-looking statements included in this
document are made as of the date hereof, based on information available to
the Company on the date thereof, and the Company assumes no obligation to
update any forward-looking statements.
Overview
The Company had initially commenced operations as Emergent Ventures, LLC
("Venture"), a Delaware Corporation, on March 8, 2000, which was formed to
invest primarily in global private equity opportunities in information
technology, health care and medical technology companies. Venture's equity
capitalization consisted of a contribution of $1,173,125 in securities by
Emergent Management Company LLC ("Manager"), for a fifty-eight percent
(58%) interest of Venture, and a contribution of $7,500,000 in cash by
other members in return for the remaining forty-two percent (42%) interest
of Venture.
In August 2000, Venture consummated the transactions contemplated by the
Equity Transfer Transaction ("Transfer"), all pursuant to an Equity
Transfer and Reorganization Agreement ("Agreement"), by and among Dynamic
International Ltd. ("Dynamic"), certain of its shareholders and Venture.
Pursuant to and in accordance with the Agreement and immediately prior to
the consummation of the Transfer, Dynamic transferred all of its assets
and liabilities (other than outstanding bank debt in the amount of
$250,000) to a wholly-owned subsidiary of Dynamic named Dynamic
International, Inc. Dynamic International, Inc. acquired the transferred
assets, assumed the remaining liabilities and indemnified Dynamic against
any liabilities relating to or arising out of the transferred assets and
the assumed liabilities. In conjunction with the Transfer, Dynamic
International, Inc. was spun-off from Dynamic as a separate entity.
Pursuant to the Agreement, Venture contributed substantially all of its
assets to Dynamic in exchange for the issuance of approximately 39,755,178
shares of Dynamic common stock to the members of Venture. Dynamic
subsequently changed its name to Emergent Group Inc. The Company retained
Dynamic's State of Incorporation in Nevada and it's Federal Tax
Identification Number.
For financial accounting purposes, the Transfer was accounted for as a
re-capitalization by the Company as the accounting acquiror and with
Dynamic as the accounting acquiree. After the Transfer, the former members
of Venture became the beneficial owners of approximately 39,755,178 shares
of Dynamic's common stock, representing approximately ninety percent (90%)
interest in Dynamic. Each of the Directors of Dynamic resigned immediately
prior to the consummation of the Transfer. The beneficial owners of the
Manager were elected as directors and executive officers of the Company.
The Company recorded goodwill as a result of the Transfer amounting to
$250,000, which is being amortized over three years.
11
The Company has previously announced that it intends to transition itself
into a medical technology operating company that has a primary objective
of launching an innovative national distribution platform leveraging its
access to physician practice groups and healthcare facilities utilizing
acquisitions of medical technology companies and employing strategic
partner relationships with other companies in the medical technology,
equipment and distribution industry. The Company believes that its initial
acquisition of MRM, completed in July 2001, will provide the platform to
facilitate the Company's goals and execute its business plan. The Company
plans to leverage its historical merchant banking resources to identify
and acquire and/or enter into strategic partnering relationships with
medical technology companies with large market opportunities and whose
operations are currently restricted by the lack of effective distribution
channels or access to capital markets.
Merger with Medical Resources Management, Inc.
In July 2001, the Company completed its acquisition of MRM as per the
Merger Agreement. As required by the terms of the Agreement, the Company
exchanged 5,633,667 shares of its Common Stock, which represents 11% of
the total post-merger outstanding shares, for all the issued and
outstanding Common Stock of MRM at a conversion ratio of 0.37. Based on
the average of the Company's closing stock price for the 10 days prior to
the acquisition, the purchase price for MRM was $3,245,000. Additionally,
the Company issued options to acquire 564,784 shares of its common stock
in exchange for all of the outstanding MRM options at the time of the
merger. The options exchanged have a fair value of approximately $316,000.
The Company assumed approximately $8,253,000 in existing MRM debt and
capital lease obligations. These obligations have interest rates ranging
from 6.3% to 25.5% and are repayable over a one to five year period. The
Company's transaction costs incurred in completing the merger amounted to
approximately $336,000. Goodwill of approximately $3,421,000 resulted from
the merger. The transaction has been accounted for under the purchase
method of accounting. MRM is located in Glendale, California and operates
as a wholly owned subsidiary of the Company.
MRM is a leading provider of medical and surgical equipment outsourcing
solutions for the healthcare industry. MRM supplies surgical laser
equipment, cryotherapy equipment, electromagnetic imaging equipment, and
mobile lithotripsy equipment, all in conjunction with certified
technicians who support the equipment, physicians, and staff in the
operating room. These services are provided on a "fee per case" basis to
hospitals, outpatient surgery centers and physician practice groups.
MRM's business model addresses the increasingly capital constrained
environment that many of its customers face. With the high cost of
purchasing new medical technologies and training/retaining staff to
operate such equipment, many healthcare facilities seek outsourcing
solutions that minimize their risks and capital costs. In addition, MRM
allows its customers to gain exposure to the latest medical technologies
without making long-term commitments to any specific vendors or types of
equipment.
MRM has approximately 600 active surgical service accounts in California,
Colorado, Nevada and Utah, with a high rate of repeat business form the
customers that it serves. In fiscal 2000, the Company delivered services
in over 13,000 procedures. MRM provides services to many different medical
specialties, including the following:
Dermatology Gynecology
Otolaryngology Orthopedics
Urology Podiatry
Obstetrics Dentistry
Equipment is becoming more specialized for the medical procedures and
technical training of the physicians involved, regarding the use of
equipment. Consequently, this has become a significant part of our
business.
12
Results of Operations
The following table sets forth certain selected unaudited condensed
consolidated income statement data for the periods indicated in thousands
of dollars and as a percentage of total net revenues:
Period from
Nine Months inception
Three Months Ended Ended (March 8,) to
September 30, September 30,
-------------------------------------- ----------------------------------------
2001 2000 2001 2000
---- ---- ---- ----
Net revenue $ 2,770 100 % $ -- -- $ 2,770 100 % $ -- --
Cost of revenue 2,023 73.0 -- -- 2,096 75.7 13 --
Selling, general and
administrative expenses 809 29.2 284 -- 1,672 60.4 480 --
-------------------------------------- ----------------------------------------
Operating loss (62) (2.2) (284) -- (998) (36.0) (493) --
Realized loss on investments 930 33.6 -- -- 2,401 86.7 -- --
Unrealized (loss) gain on
trading investments -- -- 662 -- (137) (4.9) 1,774 --
Interest expense and other income 216 7.8 -- -- 168 6.0 -- --
-------------------------------------- ----------------------------------------
Loss before income taxes (1,208) (43.6) (946) -- (3,430) (123.8) (2,267) --
Income tax benefit -- -- -- -- -- -- -- --
-------------------------------------- ----------------------------------------
Net loss $(1,208) (43.6) $(946) -- $(3,430) (123.8) $(2,267) --
====================================== ========================================
The following discussion relates to our results of operations for the
periods noted and are not necessarily indicative of the results expected
for any other interim period or any future fiscal year. In addition, we
note that the period-to-period comparison may not be indicative of future
performance due to (a) the Company not having any revenues for all of 2000
nor for the six months ended June 30, 2001 until the acquisition of MRM in
July 2001 and (b) the period ended September 30, 2000 reflects only the
period from inception on March 8, 2000.
The Company conducted no significant operations prior to its merger with
MRM on July 6, 2001. The unaudited condensed consolidated financial
statements of the company for the three and nine month periods ended
September 30, 2001 reflect a net loss of $1,208,000 and $3,430,000,
respectively, on net revenues of $2,770,000 for both periods.
Comparison of the Nine Months ended September 30, 2001 and September 30,
2000
For the nine months ended September 2001, the Company incurred a net loss
of $(3,430,000) or $(0.07) basic and fully diluted earnings per share,
versus a net loss of $(2,267,000) or $(0.06) basic and fully diluted
earnings per share for the 2000 period. The change is primarily the result
of a realized loss of $2,401,000 due to permanent impairment of
investments in the current period, compared to an unrealized loss on
investments of $1,774,000 in the comparable period for September 2000.
Also, in the current period, the Company had recognized an unrealized gain
of $137,000 on an investment. General and administrative expenses
increased $805,000 primarily attributable to the Company's acquisition of
MRM in July 2001. The Company incurred selling expenses during the 2001
period of $387,000 as a result of MRM's operations, which it did not have
in the prior 2000 period. Depreciation and amortization expenses were
$648,000 in the current period principally attributable to MRM due to its
large fixed asset base versus $13,000 in the prior period.
Comparison of the Three Months ended September 30, 2001 and September 30,
2000
For the three months ended September 2001, the Company incurred a loss of
$(1,208,000) or $(0.02) basic and fully diluted earnings per share, versus
a net loss of $(946,000) or $(0.02) basic and fully diluted earnings per
share
13
for the 2000 period. The change is primarily the result of a realized loss
of $930,000 due to a permanent impairment on an investment in the current
period, as opposed to an unrealized loss on investments of $662,000 in the
comparable period for September 2000. General and administrative expenses
increased $138,000 primarily attributable to the Company's acquisition of
MRM, its wholly owed subsidiary. The Company incurred selling expenses
during the 2001 period of $387,000 as a result of MRM's, which it did not
have in the prior 2000 period. Depreciation and amortization expenses were
$575,000 in the current period principally attributable from MRM due to
its large fixed asset base versus $-0- in the prior period.
Liquidity and Capital Resources
The Company had cash and cash equivalents of $217,000 at September 30,
2001. Cash used in operating activities for the nine months ended
September 30, 2001 was $614,000. This was primarily the result of the net
loss from operations of $3,430,000, which includes non-cash write-downs of
investments of $2,401,000. The use of cash also reflects depreciation and
amortization adjustments of $888,000, an increase in unrealized gain on
trading investments of $137,000 and the net decrease in working capital of
$351,000.
The Company's operating subsidiary, MRM, has historically incurred
operating losses. The consolidated financial statements have been prepared
on a going-concern basis, which contemplates the realization of assets and
satisfaction of liabilities in the normal course of business. As of
September 30, 2001, the Company had a working capital deficit of $ 3.9
million. As of October 31, 2000, MRM's previous fiscal year end, MRM had a
working capital deficit of $4.5 million. For the three months ended
September 30, 2001, the Company incurred a net loss of $1.2 million of
which $136,000 is attributable to MRM. For the year ended October 31, 2000
MRM incurred a net loss of $1.6 million. The financial statements do not
include any adjustments to reflect the possible future effects on the
recoverability and classification of assets or the amounts and
classification of liabilities that may result from the outcome of this
uncertainty.
It is the Company's intention to bring MRM to profitability as quickly as
possible. Therefore, prior to the closing of the acquisition, the Company,
in conjunction with MRM's then management had implemented a plan of cost
reductions and revenue enhancements including, but not limited to, the
following:
1) Personnel reductions of approximately 20%.
2) Salaried employee pay reductions ranging from 8-35%.
3) Increased use of variable/incentive pay for sales staff.
4) Introduction of "piece rate" pay plan to technician staff.
5) Price increases of 10-15% to non-contract customers.
6) Engaged experienced industry consultants that can provide
highly focused support to the existing management and aid in
the execution of the Company's business plan.
The implementation of these various initiatives has had a significant
impact upon reducing the operating losses of MRM, as demonstrated in the
quarter ended September 30, 2001. Efforts continue to achieve further
operating efficiencies and revenue growth to bring MRM to profitability.
The Company's management believes that based on its current operating
results, successful implementation of its cost reduction and revenue
enhancement plan at MRM and the aforementioned financing activities, the
Company's cash and cash equivalents will be sufficient to meet its
operating and debt service requirements for at least the next 12 months.
Since inception, the Company has utilized its capital contributions and
continued borrowings from related parties to support its operations. In
this light, during July 2001, the Company sold an investment for $500,000,
which was also its original cost. Also, in July 2001, the Company received
an equity advance from a third party of $598,000 contingent upon formal
execution of a Stock Subscription Agreement. For this investment the
company will issue 3,000,000 shares at $0.20 per share during the fourth
quarter of 2001.
Management intends to raise capital to fund the future operations and
growth of MRM. In addition, management is in current negotiations to
extend the existing line of credit. Until these transactions occur, there
can be no assurance that the Company will have sufficient liquidity to
fund operations. Accordingly, our auditors may conclude that a report
modification for going concern relating to the auditor's report on the
December 31, 2001 financial statements may be appropriate.
14
Thereafter, the Company's continued ability to raise or contribute capital
is essential in order for it to continue to execute its business plan. As
such, there can be no assurances that additional capital, whether from
related parties or outside investors will be available or on terms
favorable to the Company, if at all. Without such additional capital the
Company may not be able to continue implementing its business plan or have
sufficient capital available to fund its operating and debt service
requirements.
Recent Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board issued SFAS No.133,
"Accounting for Derivative Instruments and Hedging Activities". This
statement establishes accounting and reporting standards for derivative
instruments, including certain derivative instruments embedded in other
contracts and for hedging activities. SFAS No.133, as amended by SFAS
No.137 and No.138, is effective for all fiscal years beginning after June
15, 2000 and will not require retroactive restatement of prior period
financial statements. This statement requires the recognition of all
derivative instruments as either assets or liabilities in the balance
sheet measured at fair value. Derivative instruments will be recognized as
gains or losses in the period of change. If certain conditions are met
where the derivative instrument has been designated as a fair value hedge,
the hedge items may also be marked to market through earnings, thus
creating an offset. If the derivative is designed and qualifies as a cash
flow hedge, the changes in fair value of the derivative instrument may be
recorded in comprehensive income. The adoption of SFAS No. 133 in 2001 did
not have a material effect on the Company's financial statements.
In April 2000, the Financial Accounting Standards Board ("FASB") issued
FASB Interpretation No. ("FIN") 44, "Accounting for Certain Transactions
involving Stock Compensation: an Interpretation of APB Opinion No. 25".
This pronouncement seeks to interpret the application of APB No. 25,
primarily in relation to modifications to the terms of existing awards and
to the scope of APB No. 25. The adoption of FIN No. 44 did not have a
material impact on the Company's results of operations or its financial
position.
In July 2001, the Financial Accounting Standards Board issued Statements
of Financial Accounting Standards No. 141, "Business Combination" and No.
142, "Goodwill and Other Intangible Assets". SFAS No. 141 requires all
business combinations initiated after June 30, 2001 to be accounted for
using the purchase method. Under SFAS No. 142, goodwill and intangible
assets with indefinite lives are no longer amortized but are reviewed
annually (or more frequently if impairment indicators arise) for
impairment. Separable intangible assets that are not deemed to have
indefinite lives will continue to be amortized over their useful lives
(but with no maximum life). The amortization provisions of SFAS No. 142
apply to goodwill and intangible assets acquired after June 30, 2001. With
respect to goodwill and intangible assets acquired prior to July 1, 2001,
the Company is required to adopt SFAS No. 142 effective January 1, 2002.
The Company believes that the adoption of SFAS No. 142 will not have a
material impact on its financial position or the results of its
operations.
In August 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets", which is effective for the
fiscal years beginning after December 15, 2001 and interim periods within
those fiscal years. SFAS No. 144 establishes an accounting model for
impairment or disposal of long-lived assets to be disposed of by sale. The
Company plans to adopt SFAS No. 144 on January 1, 2002.
Item 3. Quantitative and Qualitative Disclosure About Market Risk
The Company is not exposed to financial market risks from changes in
foreign currency exchange rates or changes in interest rates. The Company
does not use derivative financial instruments.
The Company's debt obligations are primarily fixed rate, with the
exception of its working capital loans. If the Company were to pursue
re-financing of its fixed rate debt or lease obligations, it could
potentially be exposed to changes in interest rates.
15
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits.
None.
(b) Reports on Form 8-K
The Company filed the following reports on Form 8-K during the third
quarter of the year ending December 31, 2001.
Date Report
Date of Report Filed with SEC Items Reported
- -------------- -------------- --------------
July 12, 2001 July 12, 2001 Item 2 - Acquisition or Disposition of Assets
July 12, 2001 September 19, 2001 Item 7 - Financial Statements, Pro Forma Financial
Information and Exhibits (*)
- ----------
(*) Includes the pro forma combining financial statements of Emergent Group Inc.
and Medical Resources Management, Inc.
16
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
EMERGENT GROUP INC.
Date: November 14, 2001 By: /s/ Mark Waldron
-------------------------------------
Mark Waldron, President and
Chief Executive Officer
Date: November 14, 2001 By: /s/ Calvin Yee
-------------------------------------
Calvin Yee, Vice President
Finance and Treasurer
17