SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-QSB
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Quarterly Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the Quarterly Period Ended September 30, 2003
Commission File Number: 0-21475
EMERGENT GROUP INC.
(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.)
932 Grand Central Ave.
Glendale, CA 91201
(Address of principal executive offices)
(818) 240-8250
(Registrant's telephone number)
Not Applicable
(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 12, 2003, the registrant had a total of 4,209,924 shares of
Common Stock outstanding. All share and per share information in this Form
10-QSB give retroactive effect to a one-for-forty reverse stock split, effective
August 29, 2003.
EMERGENT GROUP INC.
FORM 10-QSB Quarterly Report
Table of Contents
Page
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets as of September 30, 2003 and
December 31, 2002 3
Condensed Consolidated Statements of Operations for the
Three and Nine Months Ended September 30, 2003 and 2002 4
Condensed Consolidated Statements of Cash Flows for the
Nine Months Ended September 30, 2003 and 2002 5
Notes to the Condensed Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 13
Item 3. Controls and Procedures 18
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 19
Item 2. Changes in Securities 19
Item 3. Defaults Upon Senior Securities 19
Item 4. Submissions of Matters to a Vote of Security Holders 20
Item 5. Other Information 20
Item 6. Exhibits and Reports on Form 8-K 20
Signatures 21
2
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Emergent Group Inc. and Subsidiaries
Condensed Consolidated Balance Sheets
September 30, December 31,
2003 2002
-------------- --------------
ASSETS
Current assets
Cash $ 974,732 $ 957,242
Accounts receivable, net 1,229,660 1,306,055
Due from related parties, net -- 121,543
Inventory, net 347,543 295,069
Prepaid expenses 321,645 265,062
Income tax receivable -- 4,830
-------------- --------------
Total current assets 2,873,580 2,949,801
Equity investment in limited liability companies 26,233 31,134
Property and equipment, net 1,814,538 1,888,688
Goodwill, net 779,127 779,127
Deposits and other assets, net 143,469 133,022
-------------- --------------
Total assets $ 5,636,947 $ 5,781,772
============== ==============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Line of credit $ 1,000,000 $ 1,108,700
Current portion of capital lease obligations 392,695 677,973
Current portion of notes payable 623,949 807,908
Due to related parties, net 93,232 --
Accounts payable 475,278 544,835
Accrued expenses 651,925 1,053,243
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Total current liabilities 3,237,079 4,192,659
Capital lease obligations, net of current portion 217,875 368,618
Notes payable, net of current portion 526,108 657,833
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Total liabilities 3,981,062 5,219,110
Shareholders' equity
Preferred stock, $0.001 par value, non-voting 10,000,000
shares authorized, no shares issued and outstanding -- --
Common stock, $0.04 par value, 100,000,000 shares authorized
4,209,924 and 1,622,945 shares issued and outstanding 168,357 64,918
Committed stock, 61,000 shares -- 2,440
Additional paid-in capital 14,398,860 13,541,784
Accumulated deficit (12,911,332) (13,046,480)
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Total shareholders' equity 1,655,885 562,662
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Total liabilities and shareholders' equity $ 5,636,947 $ 5,781,772
============== ==============
The accompanying notes are an integral part of these condensed financial statements.
3
Emergent Group Inc. and Subsidiaries
Condensed Consolidated Statements of Operations
Three Months Ended Nine Months Ended
September 30, September 30,
2003 2002 2003 2002
------------ ------------ ------------ ------------
Revenue $ 2,529,005 $ 2,150,222 $ 7,015,689 $ 6,850,567
Cost of goods sold 1,630,501 1,359,082 4,465,948 4,165,276
------------ ------------ ------------ ------------
Gross profit 898,504 791,140 2,549,741 2,685,291
Selling, general, and administrative expenses 784,939 947,831 2,408,861 2,663,382
------------ ------------ ------------ ------------
Income (Loss) from operations 113,565 (156,691) 140,880 21,909
Other income (expense)
Realized (loss) on investment securities -- -- -- (1,732,573)
Interest expense (37,855) (94,657) (144,484) (377,217)
Equity in net earnings (losses) of investment
in limited liability companies 2,767 7,243 (13,379) 13,417
Gain (loss) on disposal of property and equipment 8,292 (3,683) 40,743 209,139
Other income (expense), net (8,958) (12,062) 5,213 80,296
------------ ------------ ------------ ------------
Total other income (expense) (35,754) (103,159) (111,907) (1,806,938)
------------ ------------ ------------ ------------
Income (loss) before provision for income taxes
and extraordinary item 77,811 (259,850) 28,973 (1,785,029)
Provision for income taxes -- -- -- --
------------ ------------ ------------ ------------
Income (loss) before extraordinary item 77,811 (259,850) 28,973 (1,785,029)
Extraordinary item
Gain on forgiveness of debt, net of tax 1,358 209,694 106,176 1,260,077
------------ ------------ ------------ ------------
Net income (loss) $ 79,169 $ (50,156) $ 135,149 $ (524,952)
============ ============ ============ ============
Income (Loss) Per Share Data:
Before extraordinary item $ 0.03 $ (0.20) $ 0.01 $ (1.35)
Extraordinary item 0.00 0.16 0.05 0.95
------------ ------------ ------------ ------------
Basic and diluted income per share $ 0.03 $ (0.04) $ 0.06 $ (0.40)
============ ============ ============ ============
Weighted-average shares outstanding 2,580,685 1,326,125 1,986,143 1,326,125
============ ============ ============ ============
The accompanying notes are an integral part of these condensed financial statements.
4
Emergent Group Inc. and Subsidiaries
Condensed Consolidated Statements of Cash Flows
Nine Months Ended
September 30,
2003 2002
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Cash flows from operating activities
Net income (loss) $ 135,149 $ (524,952)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Gain on disposal of property and equipment (40,743) (209,139)
Gain on forgiveness of debt (106,176) (1,260,077)
Realized loss on investment securities - 1,732,573
Depreciation and amortization 578,992 457,499
Write-off of loan fees, net - 88,576
Equity in net (gain) loss of investment in limited liability companies 13,379 (13,631)
Provision for doubtful accounts (14,996) 5,444
(Increase) decrease in
Accounts receivable 1,261,816 1,564,979
Inventory (52,474) 45,363
Due from related party 959,070 (879,328)
Prepaid expenses (56,583) (83,133)
Deposits and other assets 9,450 4,734
Increase (decrease) in
Accounts payable (113,794) (302,585)
Accrued expenses (285,142) 225,421
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Net cash provided by operating activities 369,808 851,744
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Cash flows from investing activities
Cash paid to limited liability companies (86,700) (26,034)
Purchase of property and equipment (345,797) (38,404)
Proceeds from the sale of property and equipment 42,510 293,012
Purchase of customer list and covenant not-to-compete (50,000) -
Proceeds from the sale of securities, net - 267,427
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Net cash provided by (used in) investing activities (439,987) 496,001
------------ ------------
Cash flows from financing activities
Proceeds from private placement of subordinated notes, net 948,074 -
Payments on capital lease obligations (436,021) (304,586)
Payments on line of credit (108,700) -
Payments on notes payable (315,684) (287,170)
Net change in book overdraft - (146,427)
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Net cash provided by (used in) financing activities 87,669 (738,183)
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Net increase in cash 17,490 609,562
Cash, beginning of period 957,242 482,165
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Cash, end of period $ 974,732 $ 1,091,727
============ ============
Supplemental disclosures of cash flow information:
Interest paid $ 138,332 $ 171,230
============ ============
The accompanying notes are an integral part of these condensed financial statements.
5
Emergent Group Inc. and Subsidiaries
Condensed Consolidated Statements of Cash Flows
(continued)
Supplemental disclosures of non-cash investing and financing activities -
During the nine months ended September 30, 2003 and 2002 the Company billed
$ 619,245 and $776,942 , respectively, to a related party for management
fees. The Company also incurred expenses on behalf of the related party.
In September 2003, property and equipment valued at $125,878 was
transferred to the Company from a related party as partial payment for
amounts due in connection with management fees and other costs.
During the quarter ended September 30, 2003 the Company converted $1
million of its convertible subordinated notes into 2.5 million shares of
its common stock. In addition, the company issued 25,000 shares of common
stock to the note holders in lieu of cash for accrued interest on such
notes.
The accompanying notes are an integral part of these condensed financial
statements.
6
EMERGENT GROUP INC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BUSINESS
Emergent Group Inc. ("Emergent") is the parent company of PRI Medical
Technologies, Inc. (formerly Medical Resources Management, Inc.) ("PRIM"),
its wholly owned and only operating subsidiary. Emergent acquired PRIM in
July 2001 as per an Agreement and Plan of Reorganization of Merger ("Merger
Agreement"), dated January 23, 2001. PRIM primarily conducts its business
through its wholly owned subsidiary Physiologic Reps ("PRI"). Emergent,
PRIM and PRI are referred to collectively hereinafter as the "Company." PRI
is a provider of mobile surgical equipment on a fee for service basis to
hospitals, surgical care centers and other health care providers. PRI also
provides technical support required to ensure the equipment is working
correctly. PRI provides a limited amount of non-surgical equipment on a
rental basis to hospitals and surgery centers, although PRI began winding
down this area of business in early 2002 in order to focus on its core
surgical equipment rental/services business.
2. BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements of
Emergent 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 10-K for the year
ended December 31, 2002. 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 months and nine months
ended September 30, 2003 and 2002 are not necessarily indicative of the
results to be expected for any other interim period or any future fiscal
year.
The Company's only operating subsidiary, PRIM 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, 2003 and December 31, 2002 the Company had working capital
deficits of $363,499 and $1,242,858, respectively. Although the Company
achieved positive operating results before extraordinary item for the
three-months and nine-months ended September 30, 2003, we incurred a loss
before extraordinary item for the year ended December 31, 2002 of
$(4,227,193). There can be no assurances that the Company will continue to
achieve positive operating results in future periods. 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.
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 generally accepted accounting principles requires
management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported
amounts of income (loss) and expenses during the reporting period. Actual
results could differ significantly from those estimates.
7
Inventory
Inventory consists of finished goods primarily used in connection with the
delivery of our mobile surgical equipment rental and services business.
Inventory is stated at the lower of cost or market, on a first-in,
first-out basis.
Earnings (Loss) Per Share
The Company computes earnings (loss) per share in accordance with SFAS No.
128, "Earnings Per Share." Under the provisions of SFAS No. 128, basic net
income (loss) per common share ("Basic EPS") is computed by dividing net
income (loss) per common share by the weighted average number of common
shares outstanding. Diluted net income (loss) per common share ("Diluted
EPS") is computed by dividing net income (loss) by the weighted average
number of common shares and dilutive common share equivalents then
outstanding. SFAS No. 128 requires the presentation of both Basic EPS and
Diluted EPS on the face of the condensed consolidated statements of
operations.
Reclassifications
Certain amounts in the prior periods have been reclassified to conform to
the presentation for the three and nine months ended September 30, 2003.
The financial information included in this quarterly report should be read
in conjunction with the consolidated financial statements and related notes
thereto in the Company's Annual Report on Form 10-K for the year ended
December 31, 2002.
Recent Accounting Pronouncements
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities." This statement addresses
financial accounting and reporting for costs associated with exit or
disposal activities and nullifies Emerging Issues Task Force ("EITF") Issue
No. 94-3, "Liability Recognition for Certain Employee Termination Benefits
and Other Costs to Exit an Activity (including Certain Costs Incurred in a
Restructuring)." This statement requires that a liability for a cost
associated with an exit or disposal activity be recognized when the
liability is incurred. Under EITF Issue 94-3, a liability for an exit cost,
as defined, was recognized at the date of an entity's commitment to an exit
plan. The provisions of this statement are effective for exit or disposal
activities that are initiated after December 31, 2002 with earlier
application encouraged. This statement is not applicable to the Company.
In October 2002, the FASB issued SFAS No. 147, "Acquisitions of Certain
Financial Institutions." SFAS No. 147 removes the requirement in SFAS No.
72 and Interpretation 9 thereto, to recognize and amortize any excess of
the fair value of liabilities assumed over the fair value of tangible and
identifiable intangible assets acquired as an unidentifiable intangible
asset. This statement requires that those transactions be accounted for in
accordance with SFAS No. 141, "Business Combinations," and SFAS No. 142,
"Goodwill and Other Intangible Assets." In addition, this statement amends
SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived
Assets," to include certain financial institution-related intangible
assets. The Company does not expect adoption of SFAS No. 147 to have a
material impact on its financial position or results of operations.
In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based
Compensation - Transition and Disclosure," an amendment of SFAS No. 123.
SFAS No. 148 provides alternative methods of transition for a voluntary
change to the fair value based method of accounting for stock-based
employee compensation. In addition, SFAS No. 148 amends the disclosure
requirements of SFAS No. 123 to require more prominent and more frequent
disclosures in financial statements about the effects of stock-based
compensation. This statement is effective for financial statements for
fiscal years ending after December 15, 2002. SFAS No. 148 will not have any
impact on the Company's financial statements as management does not have
any intention to change the fair value method.
In January 2003, the FASB issued FASB Interpretation No. 46, "Consolidation
of Variable Interest Entities." FIN 46 clarifies the application of
Accounting Research Bulletin No. 51, Consolidated Financial Statements, and
requires the consolidation of certain entities in which equity investors do
not have the characteristics of a controlling financial interest or do not
have sufficient equity for the entity to finance its activities without
additional subordinated financial support from other parties. Management
has deferred its decision to consolidate its equity investments in limited
liability companies due to the deferral of FIN 46 for the period ending
after December 15, 2003. is currently evaluating the impact of the
consolidation of its interest in the limited liability companies on the
Company's financial position and results of operations.
8
In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement 133 on
Derivative Instruments and Hedging Activities." SFAS No. 149 amends and
clarifies accounting and reporting for derivative instruments and hedging
activities under SFAS No. 133, "Accounting for Derivative Instruments and
Hedging Activities." SFAS No. 149 is effective for derivative instruments
and hedging activities entered into or modified after June 30, 2003, except
for certain forward purchase and sale securities. For these forward
purchase and sale securities, SFAS No. 149 is effective for both new and
existing securities after June 30, 2003. The adoption of SFAS No. 149 has
no material impact on the Company's financial position or results of
operations as of September 30, 2003.
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and Equity."
SFAS No. 150 establishes standards for how an issuer classifies and
measures in its statement of financial position certain financial
instruments with characteristics of both liabilities and equity. In
accordance with the standard, financial instruments that embody obligations
for the issuer are required to be classified as liabilities. SFAS No. 150
will be effective for financial instruments entered into or modified after
May 31, 2003 and otherwise will be effective at the beginning of the first
interim period beginning after June 15, 2003. The adoption of SFAS 150 is
not expected to have any impact on the Company's financial position or
results of operations.
3. DEBT OBLIGATIONS AND PLAN OF RESTRUCTURE
During 2002 we were in default on most of our note and lease obligations
due to delinquent principal and interest payments. In an effort to avoid
ceasing our operations or a possible bankruptcy filing and in an effort to
improve our financial condition, during the first quarter of 2002 we began
the process of renegotiating substantially all of our outstanding debt,
lease, and trade obligations with our key creditors. As of December 31,
2002 we had substantially completed our debt restructuring efforts. The
restructured debt and lease obligation agreements provide in some cases for
the return of equipment used to collateralize such obligations, if
applicable, and certain periodic and monthly installments for the balance
of such obligations. Generally, in the event of default by the Company we
are required to repay all amounts previously forgiven and all amounts then
outstanding are accelerated and become immediately due and payable. In
addition, for the nine months ended September 30, 2003 and 2002, we
recorded net gains on forgiveness of debt in the amount of $106,176 and
$1,260,077, respectively. As of the filing date of this Quarterly Report on
Form 10-QSB, we are in compliance with the terms and conditions of our
renegotiated debt agreements.
At September 30, 2003 we had a bank loan (the "Bank Term Loan") outstanding
in the amount of $449,775. The loan agreement, as amended, provides for
monthly payments of principal of $16,667 and interest at the prime rate
plus 4.00%. As of December 31, 2002 and September 30, 2003 we were in
default under certain provisions of the original loan agreement (such
defaults were waived by the lender, effective October 1, 2003) and as a
result all principal and interest are shown as current liabilities in the
accompanying balance sheets. In April 2003, the lender agreed to extend the
term of the loan to March 2004 under the same terms and conditions as
described herein. We also have an outstanding bank line of credit (the
"Bank Line of Credit") in the amount of $1,000,000 with the same lender.
This Bank Line of Credit provides for interest at the prime rate, plus
2.75%, with borrowings based upon eligible accounts receivable as defined.
The amount outstanding under the Bank Line of Credit exceeded the eligible
borrowing base as of December 31, 2002 and September 30, 2003 and the
Company was in default under certain provisions of the original credit
agreement (such defaults were waived by the lender, effective October 1,
2003). As a result this facility is not available for use as of September
30, 2003. In April 2003 the lender agreed to amend the Bank Line of Credit
to provide for an extension of the due date to September 2003. The
amendment to the line of credit provided for a pay down of $108,700 upon
execution of the amendment. The other terms and condition of this credit
facility remain the same.
Effective October 1, 2003, the Bank Term Loan and Bank Line of Credit
agreements were amended to extend the due date to April 30, 2004 and to
amend other provisions of the original loan agreements (see note 8 below).
The Bank Line of Credit and Bank Term Loan prohibit the payment of cash
dividends and require us to maintain certain levels of net worth and to
generate certain ratios of cash flows to debt service. Notwithstanding the
modified terms and conditions of the Bank Line of Credit and Bank Term Loan
as discussed above, as of September 30, 2003, we were not in compliance
with certain financial covenants of such agreements. As a result, we have
classified all of the bank loan facilities as current liabilities in the
accompanying balance sheet as of September 30, 2003.
4. LEGAL PROCEEDINGS
9
Stonepath Group, Inc.
In October 2000, a related party of the Company (the "plaintiff") commenced
an action on behalf of the Company against Stonepath Group, Inc. and two of
its officers in the United States District Court for the Southern District
of New York. The action was for negligence and fraud under the federal
securities laws and common law to recover its investment in Stonepath. On
April 15, 2002, the court dismissed the plaintiff's amended Complaint
without leave to amend. The Company has filed an appeal of the court's
decision and this appeal is pending.
Citicorp Vendor Finance, Inc.
On April 25, 2002, Citicorp Vendor Financial, Inc. ("Citicorp") filed suit
against PRI and PRIM for breach of contract in Superior Court of
California, County of Los Angeles. This lawsuit sought to recover $655,916
plus interest and late charges in connection with amounts due under certain
equipment lease agreements. The Company reached a settlement with Citicorp
in November 2002, whereby, the Company agreed to pay Citicorp a total of
$400,000 in full settlement of the claim in various installments, with the
balance being paid in full by March 1, 2004. As part of the settlement,
Citicorp has agreed that PRI may sell the equipment under the equipment
lease agreement but must transmit to Citicorp all proceeds from the sale in
excess of $225,000. In January 2003, the Company paid $175,000 to Citicorp
from proceeds received from equipment sales in December 2002. The
settlement further stipulates in event of non-payment, Citicorp can
petition the court for an entry of judgment against PRI. The Company is
current in making all required payments under the settlement agreement.
General Electric
Beginning in 1999, the Company's subsidiaries entered into 39 personal
property sales contracts to purchase from General Electric certain medical
imaging equipment. The total amount the Company owed to General Electric as
of May 21, 2002 was $2,399,487. The Company reached a settlement with
General Electric in June 2002 and entered into a Stipulation of Settlement
for entry of judgment which would be filed in Superior Court of the State
of California, County of Los Angeles only if there is a default which is
not cured. Pursuant to the settlement agreement, the Company agreed to
return certain equipment to General Electric and to make sixty (60) monthly
payments of $18,013 for a total of $1,080,781. In the event the Company
fails to make all required payments when due, and an event of default
occurs which is not cured, the Company would owe General Electric the
original amounts due at the date of settlement under 39 personal sales
contracts. The Company is current in making all required payments under the
settlement agreement and substantially all of the equipment has been
returned. . In addition to the matters noted above, from time to time, we
may become involved in litigation arising out of operations in the normal
course of business. As of September 30, 2003, we are not a party to any
pending legal proceedings the adverse outcome of which could reasonably be
expected to have a material adverse effect on our operating results or
financial position.
5. PURCHASE OF BUSINESS AND COVENANT NOT-TO-COMPETE
In May 2003, the Company entered into an agreement with the owner
("Seller") of a small mobile cosmetic laser company located in the Los
Angeles area to purchase (the "Agreement") its customer list as well as a
covenant not-to-compete. The purchase price of $50,000 was paid in June
2003 and was allocated to the customer list and covenant not-to-compete.
Such payment is being amortized on a straight-line basis over five years.
The Company also agreed to make additional payments to the Seller for a
period of eighteen months based on future revenues resulting from the
acquired customer list. The additional payments were not material during
the period ended September 30, 2003. Such amounts are being amortized on a
straight-line basis over five years from the date of purchase.
6. REVERSE STOCK SPLIT
On August 5, 2003, a majority of the Company's stockholders approved an
Amendment to the Company's Articles of Incorporation to (i) reduce the
number of outstanding shares of Common Stock through a one-for-40 reverse
stock split, effective at the opening of business on August 29, 2003 to
record holders at the close of business on August 28, 2003 and (ii) a
proportionately increase the par value of the Company's Common Stock from
$.001 par
10
value to $.04 par value per share. All stockholders of record have been
requested to exchange every 40 shares of Common Stock, $.001 par value for
one new share of Common Stock, $.04 par value. The number of shares
outstanding and earnings (loss) per share for all periods presented in the
accompanying financial statements have been adjusted to reflect the reverse
stock-split.
7. RELATED PARTY TRANSACTIONS
In February 2003, the Company entered into a non-exclusive consulting
agreement with a former officer of PRIM. The agreement provides for a term
of twelve months commencing on February 1, 2003. In connection with this
agreement, the Company issued the consultant 6,250 (post-split) options to
purchase the Company's common stock. The options expire in ten years and
provide for an exercise price of $0.40 per share. Compensation expense
related to the options is not material and no compensation expense was
recognized during the nine months ended September 30, 2003.
In December 2002, the Company entered into a consulting agreement with its
former Chief Executive Officer and his company, JIMA Management. The
agreement related to the provision of consulting services during the period
from July 2001 to March 2002 in exchange for a monthly fee of $10,000,
payable in 2003. During the three and nine months ended September 30, 2003,
the Company recorded consulting expense of $3,000 and $9,000, respectively,
and paid $30,000 and $90,000, respectively, on amounts accrued in 2001 and
2002 with regard to such services rendered.
During the nine months ended September 30, 2003 the Company billed $619,245
to a related party for management and other fees. Such fees amounted to
$776,942 for the nine months ended September 30, 2002. The Company also
incurred expenses on behalf of the related party.
In November 2002, the Company entered into a settlement agreement with the
former Chief Executive Officer/Chairman/President of PRIM. The terms of the
agreement provide for payments by the Company totaling $42,000. Pursuant to
the agreement the Company paid $25,000 in November 2002 and made a final
payment of $17,000 during March 2003 in exchange for the full release of
all obligations under the January 2000 employment agreement, which was
subsequently amended in both August and November 2001. The Company has no
further obligations under this agreement.
Transactions with BJH Management
In January 2003, the Company incurred consulting fees and reimbursed
expenses of $36,548 and $3,389, respectively, for services provided by BJH
Management, a consulting company ("BJH") which is owned by the Company's
current Chairman and Chief Executive Officer who assumed this position,
effective February 1, 2003. The Company's Chairman and Chief Executive
Officer maintains his office in New York, in connection with this
arrangement, the Company reimbursed BJH for office and related expenses
totaling $8,309 and $26,329, respectively, for the three and nine months
ended September 30, 2003.
Between December 30, 2002 and September 30, 2003, the Company issued
348,575 (post-split) shares of its Common Stock to BJH, which represented
17.5% of the Company's fully diluted shares outstanding as of the issuance
date, as defined in the Stock Issuance Agreement between the Company and
BJH. In addition, in October 2003, BJH Management exercised its
anti-dilution rights under the Stock Issuance Agreement and received
additional common shares (see note 8).
On December 30, 2002, the Company entered into two, 18-month employment
agreements with the one officer and one associate of BJH. The agreements
were to appoint a new Chairman and Chief Executive Officer, and President
for annual compensations of $175,000 and $161,000, respectively, beginning
in January 2003. The officer positions were assumed on February 1, 2003.
The agreements also provide for milestone bonuses up to $75,000 each, plus
a percentage of pre-tax profits should certain targets be achieved. No
bonus amounts have been accrued through September 30, 2003 under these
agreements.
Private Placement of Convertible Subordinated Promissory Notes
In June 2003, the Company raised $1,000,000 from the private placement of
its Subordinated Promissory Notes (the "Notes") as more fully described in
its Form 8-K dated June 27, 2003. The Company incurred offering costs of
$51,926 in connection with the private placement. Such Notes were generally
sold in increments of $20,000 (50 units) each. Certain officers and
directors of the Company and members of law firms who have acted in a legal
capacity to the Company purchased Notes totaling $700,000. Notes totaling
$300,000
11
were purchased by other accredited investors. The Notes provide for
interest at 6% per annum payable at the earlier of maturity, conversion or
redemption. Pursuant to the terms and conditions of the Notes, the Notes
were automatically converted into shares of the Company's common stock (100
million pre-split shares or 2,500,000 post split shares) on August 29,
2003, the effective date of a one for forty reverse split of the Company's
common stock. The Company issued an additional 25,000 post-split common
shares in lieu of payment of cash for accrued interest on such Notes of
which 17,500 shares were issued to the officers, directors and members of
law firms who have acted in a legal capacity to the Company based on the
shares they purchased in the private placement.
8. SUBSEQUENT EVENTS
In October 2003, BJH exercised its anti-dilution rights under the Stock
Issuance Agreement whereby the Company issued 535,606 common shares to BJH
as a result of the private placement transaction. BJH concurrently assigned
such shares to its sole shareholder and one associate who are also officers
of the Company. In lieu of payment for the exercise, the Company issued
such shares to BJH in return for its agreement to terminate any further
anti-dilution rights over the remaining term of the Stock Issuance
Agreement. The exercise price for such shares of $107,121 will be expensed
during the fourth quarter of 2003.
In October 2003, the Company entered into an amended loan agreement with
its primary lender to extend the Company's term loan and line of credit
agreements to April 30, 2004. The term loan agreement, as amended, among
other things, provides for reduced monthly interest payments at the prime
rate plus 2%, and monthly principal payments of $16,667. The line of
agreement, as amended, provides for, among other things, reduced monthly
interest payments equal to prime plus 2%, a principal payment of $250,000
on the effective date of the amendment, and re-establishes the credit line
at an amount equal to 75% of eligible receivables, as defined. In addition,
the loan agreements, as amended, waive compliance with all financial
covenants through and including December 31, 2003.
12
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Forward-Looking Statements
The information contained in this Form 10-QSB 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, 2002
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," "Risk Factors" 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-QSB 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 Form 10-QSB. Certain statements contained in Management's Discussion
and Analysis, particularly in "Liquidity and Capital Resources," and
elsewhere in this Form 10-QSB 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) possible loss of significant customer(s), (c) the
Company's ability to meet the terms and conditions of its renegotiated debt
and lease obligations, and (d) 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
Emergent Group Inc. ("Emergent") is the parent company of PRI Medical
Technologies, Inc. ("PRIM") (formerly Medical Resources Management, Inc.),
its wholly owned and only operating subsidiary. PRIM primarily conducts its
business through its wholly owned subsidiary Physiologic Reps ("PRI").
Emergent Group Inc., PRIM and PRI are referred to collectively hereinafter
as the "Company." All references to PRIM include PRI unless the context
indicates otherwise. PRI is a provider of mobile surgical equipment, on a
fee for service basis to hospitals; surgical care centers, and other health
care providers. PRI provides mobile lasers and other surgical equipment
with technical support required to ensure the equipment is working
correctly. PRI also provides a limited amount of non-surgical equipment on
a rental basis to hospitals and surgery centers, although PRI is winding
down this area of business in order to focus on its core surgical equipment
rental/services business.
Critical Accounting Policies
Our discussion and analysis of our financial conditions and results of
operations are based upon our financial statements, which have been
prepared in accordance with generally accepted accounting principles in the
United States. The preparation of financial statements require managers to
make estimates and disclosures on the date of the financial statements. On
an on-going basis, we evaluate our estimates including, but not limited to,
those related to revenue recognition. We use authoritative pronouncements,
historical experience and other assumptions as the basis for making
judgments. Actual results could differ from those estimates. We believe
that the following critical accounting policies affect our more significant
judgments and estimates in the preparation of our financial statements.
Revenue Recognition. We are required to make judgments based on historical
experience and future expectations, as to the realizability of goods and
services billed to our customers. These judgments are required to assess
the propriety of the recognition of revenue based on Staff Accounting
Bulletin ("SAB") No. 101, "Revenue Recognition," and related guidance. We
make such assessments based on the following factors: (a) customer-specific
information, and (b) historical experience for issues not yet identified.
13
Inventory Valuation. We are required to make judgments based on historical
experience and future expectations, as to the realizability of our
inventory. We make these assessments based on the following factors: (a)
existing orders and usage, (b) age of the inventory, and (c) historical
experience.
Property and Equipment. We are required to make judgments based on
historical experience and future expectations, as to the realizability of
our property and equipment. We made these assessments based on the
following factors: (a) the estimated useful lives of such assets, (b)
technological changes in our industry, and (c) the changing needs of our
customers.
Results of Operations
The following table sets forth certain selected unaudited condensed
consolidated statement of operations data for the periods indicated in
dollars and as a percentage of total net revenues. 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.
Three Months Ended Nine Months Ended
September 30, September 30,
2003 % 2002 (1) % 2003 % 2002 (1) %
------------ ---- ------------ ---- ------------ ---- ------------ ----
Revenue $ 2,529,005 100% $ 2,150,222 100% $ 7,015,689 100% $ 6,850,567 100%
Cost of goods sold 1,630,501 64% 1,359,082 63% 4,465,948 64% 4,165,276 61%
------------ ---- ------------ ---- ------------ ---- ------------ ----
Gross profit 898,504 36% 791,140 37% 2,549,741 36% 2,685,291 39%
Selling, general, and administrative expenses 784,939 31% 947,831 44% 2,408,861 34% 2,663,382 39%
------------ ---- ------------ ---- ------------ ---- ------------ ----
Income (loss) from operations 113,565 4% (156,691) -7% 140,880 2% 21,909 0%
Other income (expense) (35,754) -1% (103,159) -5% (111,907) -2% (1,806,938) -26%
------------ ---- ------------ ---- ------------ ---- ------------ ----
Loss before provision for income taxes
and extraordinary item 77,811 3% (259,850) -12% 28,973 0% (1,785,029) -26%
Provision for income taxes -- 0% -- 0% -- 0% -- 0%
------------ ---- ------------ ---- ------------ ---- ------------ ----
Net income (loss) before extraordinary item 77,811 3% (259,850) -12% 28,973 0% (1,785,029) -26%
==== ==== ==== ====
Extraordinary item
Gain on forgiveness of debt, net of tax 1,358 0% 209,694 10% 106,176 0% 1,260,077 18%
------------ ---- ------------ ---- ------------ ---- ------------ ----
Net income (loss) $ 79,169 3% $ (50,156) -2% $ 135,149 $ 0 $ (524,952) -8%
============ ==== ============ ==== ============ ==== ============ ====
(1) Certain amounts for the period ended September 30, 2002 have been
reclassified to conform to the current year presentation.
Comparison of the Three Months Ended September 30, 2003 to September 30,
2002
We generated revenues of $2,529,005 in 2003 compared to $2,150,222 in 2002.
The increase in revenues of $378,783 in 2003 compared to 2002 is primarily
related to an increase in revenues from our advanced surgical procedures,
offset by decreases in revenues from cosmetic services and medical rentals.
Revenues from surgical and cosmetic services represented approximately 86%
and 12%, respectively, of total revenues for 2003 and 78% and 16% for 2002,
respectively. Revenues from medical equipment rentals comprised
approximately 1% and 5% of revenues for 2003 and 2002, respectively.
Medical rental revenues, in terms of absolute dollars and as a percentage
of total revenues, are expected to continue to decrease in future periods
as we wind down this area of our business in order to focus on our core
mobile surgical equipment rental and service business.
Cost of goods sold was $1,630,501 or 64% of revenues in 2003 compared to
$1,359,082 or 63% of revenues in 2002. Cost of goods sold include payroll
and related expenses for technicians, cost of disposables used in providing
surgical and cosmetic services, depreciation and amortization and other
expenses primarily related to delivery of our mobile surgical equipment
rental and technical services. The increase in cost of goods sold of
$271,419 in 2003 is primarily related to an increase in disposable costs
due to the increase in revenues from our advanced surgical procedures. The
cost of disposables used for advanced surgical procedures are higher in
terms of
14
absolute dollars than the cost of disposables for base surgical procedures.
Such increases in costs were partially offset by decreases in payroll and
related expenses.
Gross margin was $898,504 in 2003 or 36% of net revenues compared to
$791,140 in 2002 or 37% of revenues. Gross margins will vary
period-to-period depending upon a number of factors including mix of
services, pricing, cost of disposables consumed in rendering our services,
and contractual agreements. The decline in gross margin during 2003 is
generally related to the higher overall cost of disposables and higher
depreciation charges in 2003 compared to 2002.
Selling, general, and administrative expenses were $784,939 in 2003
compared to $947,831 in 2002. Such costs include payroll and related
expenses, insurance and rents. The overall decrease of $162,892 is
generally related to cost control procedures implemented during early 2003
and late 2002.
Other income (expense) was $(35,754) in 2003 compared to $(103,159) in
2002. The net decrease in other income (expense) of $67,405 is primarily
related to a decrease in net interest expense of $56,802. Interest expense
is primarily related to PRIM's notes and lease obligations. The decrease of
$56,802 in net interest expense is principally related to a decrease in our
outstanding debt and lease obligations as a result of debt restructuring
efforts initiated in early 2002, as discussed elsewhere in this Form
10-QSB, and principal payments on debt and lease obligations in 2003.
Gain on forgiveness of debt was $1,358 for 2003 compared to $209,694 in
2002. We began our debt restructuring efforts during the first quarter of
2002 resulting in gains on forgiveness of debt for the quarter ended
September 30, 2002. Our major restructuring efforts were substantially
completed as of December 31, 2002; therefore, gains from such activity
decreased accordingly in 2003.
Net income was $79,169 in 2003 compared to a loss of $(50,156) in 2002. No
provision for income taxes is provided for in 2003 and 2002 due to the
availability of net operating loss carryforwards.
Comparison of the Nine Months Ended September 30, 2003 to September 30,
2002
We generated revenues of $7,015,689 in 2003 compared to $6,850,567 in 2002.
The increase in revenues of $165,122 in 2003 compared to 2002 is primarily
related to increases in revenues from our advanced surgical procedures.
Revenues from surgical and cosmetic services represented approximately 84%
and 14%, respectively, of total revenues for 2003 and 73% and 18% for 2002,
respectively. Revenues from medical equipment rentals comprised
approximately 2% and 7% of revenues for 2003 and 2002, respectively.
Medical rental revenues, in terms of absolute dollars and as a percentage
of total revenues, are expected to continue to decrease in future periods
as we wind down this area of our business in order to focus on our core
mobile surgical equipment rental and service business.
Cost of goods sold was $4,465,948 or 64% of revenues in 2003 compared to
$4,165,276 or 61% of revenues in 2002. Cost of goods sold include payroll
and related expenses for technicians, cost of disposables used in providing
surgical and cosmetic services, depreciation and amortization and other
expenses primarily related to delivery of our mobile surgical equipment
rental and technical services. The increase in cost of goods sold of
$300,672 in 2003 is primarily related to an increase in disposable costs
due to the increase in revenues from our advanced surgical procedures, an
increase in depreciation expense as a result of equipment purchases during
the nine months ended September 30, 2003 and increases in repairs and
maintenance costs for medical equipment and vehicles. The cost of
disposables used for advanced surgical procedures are higher in terms of
absolute dollars than the cost of disposables for base surgical procedures.
Such increases in costs were offset by decreases in payroll and related
expenses.
Gross margin was $2,549,741 in 2003 or 36% of net revenues compared to
$2,685,291 in 2002 or 39% of revenues. Gross margins will vary
period-to-period depending upon a number of factors including mix of
services, pricing, cost of disposables consumed in rendering our services,
and contractual agreements. The decline in gross margin during 2003 is
generally related to the higher overall cost of disposables and higher
depreciation charges in 2003 compared to 2002. In addition, gross margins
on the medical equipment rental business was higher in 2002 given the
equipment impairment write-downs in 2001 and 2002, resulting in lower
depreciation charges against such revenues in 2002. Revenue from medical
equipment rentals for 2003 and 2002 was $138,642 and $489,982,
respectively.
Selling, general, and administrative expenses were $2,408,861 in 2003
compared to $2,663,382 in 2002. Such costs include payroll and related
expenses, insurance and rents. The overall decrease of $254,521 is
generally related to cost control procedures implemented during early 2003
and late 2002 and the fact that certain general and administrative costs
15
incurred in connection our restructuring efforts in 2002 were not incurred
in 2003.
Other income (expense) was $(111,907) in 2003 compared to $(1,806,938) in
2002. The decrease in other income and (expense) of $1,695,031 primarily
relates to a realized loss on investments of $1,732,573 in 2002 while no
such loss was incurred in 2003. Emergent was essentially a merchant banking
firm prior to its acquisition of PRIM in July 2001. Emergent ceased such
activities concurrent with its acquisition of PRIM in July 2001 in order to
focus on PRIM's mobile surgical equipment rental and services business. The
realized loss in 2002 related to the sale and/or write-off of several
investments made by Emergent in connection with its merchant banking
activities in 2000. In addition, other income (expense) includes net
interest expense of $144,484 in 2003 compared to $377,217 in 2002. Interest
expense primarily relates to PRIM's note and lease obligations. The
decrease in net interest expense is principally related to a decrease in
our outstanding debt and lease obligations as a result of debt
restructuring efforts initiated in early 2002, as discussed elsewhere in
this Form 10-QSB, and principal payments on debt and lease obligations in
2003. Also included in other income (expense) are gains on disposal of
property and equipment of $40,743 for 2003 compared to $209,139 in 2002. As
discussed herein, we began to wind down our medical equipment rental
business in late 2001 and continued these efforts through 2002 in order to
focus resources on development of our mobile surgical equipment rental and
services business. In this regard we began to dispose of our medical rental
equipment in 2002. As of September 30, 2003 this activity is substantially
complete and gains from the disposal of property and equipment decreased
accordingly.
Gain on forgiveness of debt was $106,176 for 2003 compared to $1,260,077 in
2002. We began our debt restructuring efforts during the first quarter of
2002 resulting in gains on forgiveness of debt for the nine months ended
June 30, 2002. Our major restructuring efforts were substantially completed
as of December 31, 2002; therefore, gains from such activity decreased
accordingly in 2003. We anticipate that such gains, if any, will continue
to decrease in the future.
Net income was $135,149 in 2003 compared to a loss of $(524,952) in 2002.
No provision for income taxes is provided for in 2003 and 2002 due to the
availability of net operating loss carryforwards.
Liquidity and Capital Resources
The accompanying condensed consolidated financial statements have been
prepared on a going-concern basis that contemplates the realization of
assets and satisfaction of liabilities in the normal course of our
business. During the year ended December 31, 2002, the Company was in
default on most of its note and lease obligations due to delinquent
principal and interest payments. In effort to avoid ceasing our operations
or a possible bankruptcy filing, and in an effort to improve our financial
condition, during the first quarter of 2002 we began the process of
renegotiating substantially all of our outstanding debt, lease, and trade
obligations with our key creditors. As of December 31, 2002 the
restructuring efforts were substantially completed whereby we have
renegotiated outstanding note and lease obligations with our major
creditors. The restructured debt and lease obligation agreements provide in
some cases for the return of equipment used to collateralize such
obligations, if applicable, and certain periodic and monthly installments
for the balance of such obligations. Generally, in the event of default by
the Company we are required to repay all amounts previously forgiven and
all amounts then outstanding are accelerated and become immediately due and
payable. In addition, as of December 31, 2002 we have renegotiated
outstanding trade debt with most of our major vendors. For the nine months
September 30, 2003 we recorded a gain of $106,176 on forgiveness of vendor
debt. As of the filing date of this Quarterly Report on Form 10-QSB, we are
in compliance with the terms and conditions of our renegotiated debt
agreements.
In June 2003, the Company raised $1,000,000 from the private placement of
its Subordinated Promissory Notes (the "Notes") as more fully described in
its Form 8-K dated June 27, 2003. The Company incurred offering costs of
$51,926 in connection with the private placement. Such Notes were generally
sold in increments of $20,000 (50 units) each. Certain officers and
directors of the Company and members of law firms who have acted in a legal
capacity to the Company purchased Notes totaling $700,000. Notes totaling
$300,000 were purchased by other accredited investors. The Notes provided
for interest at 6% per annum payable at the earlier of maturity, conversion
or redemption. Pursuant to the terms and conditions of the Notes, the Notes
were automatically converted into shares of the Company's common stock (100
million pre-split shares or 2,500,000 post split shares) on August 29,
2003, the effective date of a one for forty reverse split of the Company's
common stock. The Company issued an additional 25,000 post-split common
shares in lieu of payment of cash for accrued interest on such Notes of
which 17,500 shares were issued to the officers, directors and members of
law firms who have acted in a legal capacity to the Company based on the
shares they purchased in the private placement.
16
In May 2003, the Company entered into an agreement with the owner
("Seller") of a small mobile cosmetic laser company located in the Los
Angeles area to purchase (the "Agreement") its customer list as well as a
covenant not-to-compete. The purchase price of $50,000 was paid in June
2003 and was allocated to the customer list and covenant not-to-compete.
Such payment is being amortized on a straight-line basis over five years.
The Company also agreed to make additional payments to the Seller for a
period of eighteen months based on future revenues resulting from the
acquired customer list. The additional payments were not material during
the period ended September 30, 2003. Such amounts are being amortized on a
straight-line basis over five years from the date of purchase.
At September 30, 2003 we had a bank loan (the "Bank Term Loan") outstanding
in the amount of $449,775. The loan agreement, as amended, provides for
monthly payments of principal of $16,667 and reduced interest payments at
the prime rate plus 4.00%. As of December 31, 2002 and September 30, 2003
we were in default under certain provisions of the original loan agreement
(such defaults were waived by the lender as of October 1, 2003 in
connection with the amended credit agreement discussed below) and as a
result all principal and interest is shown as current liabilities in the
accompanying balance sheets. In April 2003, the lender agreed to extend the
term of the loan to March 2004 under the same terms and conditions as
described herein. We also have an outstanding bank line of credit (the
"Bank Line of Credit") in the amount of $1,000,000 with the same lender.
This Bank Line of Credit provides for interest at the prime rate, plus
2.75%, with borrowings based upon eligible accounts receivable as defined.
The amount outstanding under the Bank Line of Credit exceeded the eligible
borrowing base as of December 31, 2002 and September 30, 2003 and the
Company was in default under certain provisions of the original credit
agreement (such defaults were waived by the lender as of October 1, 2003 in
connection with the amended loan agreement discussed below). As a result
this facility is not available for use as of September 30, 2003. In April
2003 the lender agreed to amend the Bank Line of Credit to provide for an
extension of the due date to September 2003. The amendment to the line of
credit provided for a pay down of $108,700 upon execution of the amendment.
The other terms and condition of this credit facility remain the same.
Effective October 1, 2003, the Bank Term Loan and Bank Line of Credit
agreements were amended to extend the due dates to April 30, 2004 and to
amend other provisions of the original loan agreements as described herein.
The Bank Term Loan agreement, as amended, among other things, provides for
monthly interest payments at the prime rate plus 2%, and monthly principal
payments of $16,667. The Bank Line of Credit agreement, as amended,
provides for, among other things, monthly interest payments equal to prime
plus 2%, a principal payment of $250,000 on the effective date of the
amendment, and re-establishes the credit line at an amount equal to 75% of
eligible receivables, as defined. In addition, the loan agreements, as
amended, waive compliance with all financial covenants through and
including December 31, 2003.
The Bank Line of Credit and Bank Term Loan prohibit the payment of cash
dividends and require us to maintain certain levels of net worth and to
generate certain ratios of cash flows to debt service. Notwithstanding the
modified terms and conditions of the Bank Line of Credit and Bank Term Loan
as discussed above, as of September 30, 2003, we were not in compliance
with certain financial covenants of such agreements. However, such
covenants were waived by the lender as of October 1, 2003 as discussed in
the preceding paragraph. The Bank Term Loan and Bank Line of Credit are
classified as current liabilities in the accompanying balance sheets as of
September 30, 2003 and December 31, 2002.
The Company had cash and cash equivalents of $974,732 at September 30,
2003. Cash provided by operating activities for the nine months ended
September 30, 2003 was $369,808. Cash from operations includes net income
of $135,149, depreciation and amortization of $578,992 and a decrease in
accounts receivable of $1,216,816, offset by an increase in due from
related party of $959,070, a gain on forgiveness of debt of $106,176 and a
net decrease in accounts payable and accrued expenses of $398,936. Cash
used in investing activities was $439,987 due to the purchase of property
and equipment of $345,797, purchase of customer list and covenant
not-to-compete for $50,000 and cash paid to limited liability companies of
$86,700, offset by proceeds from the sale of property and equipment of
$42,510. Cash provided by financing activities was $87,669, which related
to the net proceeds of $948,074 from the private placement of subordinated
notes, offset by payments of $751,705 on debt and lease obligations and
payments of $108,700 on our line of credit.
The Company had cash and cash equivalents of $1,091,727 at September 30,
2002. Cash provided by operating activities for the nine months ended
September 30, 2002 was $851,744. Cash from operations includes a non-cash
realized loss on investment securities of $1,732,573, depreciation and
amortization expense of $457,499 and a decrease in accounts receivable of
$1,564,979, offset by the net loss of $(524,952), gain on disposal of
property and equipment of $209,139 and gain on forgiveness of debt of
$1,260,077. Cash provided by investing activities was
17
$496,001 primarily from proceeds from the sale of property and equipment of
$293,012 and from the sale of investments of $267,427. Cash used in
investing activities was $738,183, which principally related to payments on
debt and lease obligations of $591,756 and the repayment a bank overdraft
of $146,427.
Our auditors have included an explanatory paragraph relating to our ability
to continue as a going concern as of and for the year ended December 31,
2002, in their Report of Independent Certified Public Accountants which is
included in our Annual Report on Form 10-K. For the year ended December 31,
2002 we incurred a net loss of before extraordinary item of $(4,227,193).
The net loss for 2002 includes an impairment charge for goodwill of
$2,100,955 and a realized loss on investment securities of $1,732,573. Our
accumulated deficit amounted to $(13,046,480) at December 31, 2002. Our
auditors considered these factors, among others, to raise substantial doubt
about our ability to continue as a going concern. Recovery of our assets in
the normal course of business is dependent upon future events, the outcome
of which is indeterminable.
We anticipate that our future liquidity requirements will arise from the
need to finance our accounts receivable and inventories, and from the need
to fund our current debt obligations and capital expenditure needs. The
primary source of funding for such requirements is anticipated to be cash
generated from operations, borrowings under debt facilities, trade payables
and the sale of our capital stock. In June 2003, the Company raised
$1,000,000 in gross proceeds from the sale of our subordinated promissory
notes, the entire principal and accrued interest was converted into a total
of 2,525,000 post split shares of Common Stock on August 29, 2003, the
effective date of our one-for-40 reverse stock split. Additional financing
may be required for our business operations in the future. There can be no
assurances given that we will be able to obtain financing on terms
satisfactory to us, if at all, or that we will have sufficient liquidity to
fund our future operations or fulfill our restructured debt, lease and
vendor obligations. 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.
Item 3. Controls and Procedures
The Company maintains disclosure controls and procedures that are designed
to ensure that information required to be disclosed in the Company's
Exchange Act reports is recorded, processed, summarized and reported within
the time periods specified in the SEC's rules and forms, and that such
information is accumulated and communicated to the Company's management,
including its Chief Executive Officer and Chief Financial Officer, as
appropriate, to allow timely decisions regarding required disclosure based
closely on the definition of "disclosure controls and procedures" in Rule
13a-14(c). In designing and evaluating the disclosure controls and
procedures, management recognized that any controls and procedures, no
matter how well designed and operated, can provide only reasonable
assurance of achieving the desired control objectives, and management
necessarily was required to apply its judgment in evaluating the
cost-benefit relationship of possible controls and procedures.
18
PART II. OTHER INFORMATION
Item 1. Legal Proceedings:
Reference is made to Note 4 of the Notes to Condensed Consolidated
Financial Statements for a description of certain legal proceedings and
settlements that were made to two of these proceedings. During the quarter
ended September 30, 2003, there have been no other material developments
with respect to legal proceedings, except as disclosed in Note 4.
Item 2. Changes in Securities.
(a) Not applicable.
(b) Not applicable.
(c) Recent Sales of Unregistered Securities
During the nine months ended September 30, 2003, the Company made sales or
issuances of unregistered securities listed in the table below. It should
be noted that in April 2003, the Company filed a Form S-8 Registration
Statement to register the issuance of shares of Common Stock pursuant to
its 2002 and 2001 Employee Benefit Plans. Further, the 61,001 shares issued
in the first quarter of 2003 to BJH Management, LLC which is reported in
the table below was to correct a typographical error in an agreement dated
December 30, 2002 and was previously reported in Item 5 of the Company's
Form 10-K for the fiscal year ended December 31, 2002 as part of the
overall issuance of 348,575 shares.
Consideration Received
and Description of
Underwriting or Other If Option, Warrant
Discounts to Market or Convertible
Price or Convertible Exemption from Security, terms of
Security, Afforded to Registration exercise or
Date of Sale Title of Security Number Sold Purchasers Claimed conversion
- -------------- ------------------ -------------- ------------------------- -------------------- ----------------------
02/27/03 Common Stock 61,001 Services rendered; no Section 4(2) Not applicable.
commissions paid
- -------------- ------------------ -------------- ------------------------- -------------------- ----------------------
02/03/03 Common Stock 6,250 Stock Option Plan; no This stock option 10-year Options were
cash received; no plan was granted to
commissions paid registered on a employees, directors
Form S-8 and consultants and
Registration at $.40 per share;
Statement in April Options generally
2003. vest in five equal
annual installments
commencing on the date
of grant expire ten
years from date of
grant.
- -------------- ------------------ -------------- ------------------------- -------------------- ----------------------
06/27/03 Subordinated $ 1,000,000 $1,000,000 paid by Section 4(2), Converted on August
Notes lenders; no commissions Rule 506 29, 2003
paid (1)
- -------------- ------------------ -------------- ------------------------- -------------------- ----------------------
08/29/03 Common Stock 2,525,000 Conversion of Section 3(a)(9)
subordinated notes, no
commissions paid
- -------------- ------------------ -------------- ------------------------- -------------------- ----------------------
Item 3. Defaults Upon Senior Securities
Not applicable.
19
Item 4. Submissions of Matters to a Vote of Security Holders: None
During the quarter ended September 30, 2003, the stockholders took action
by majority consent in lieu of a meeting on August 5, 2003. Of the then
67,357,815 pre-split shares, 35,622,872 pre-split shares voted in favor of each
proposal with no votes against.
Emergent filed an Information Statement with the Securities and Exchange
Commission with respect to the proposals listed below. The Information Statement
was mailed to stockholders of record on July 15, 2003 and stockholders
consisting of its officers and directors holding at least a majority of the
outstanding shares of Common Stock of Emergent submitted to the Secretary of
Emergent their consent to the proposals listed below on August 5, 2003. The
reverse stock split referred to below became effective on the opening of
business on August 29, 2003. The following are the proposals approved by
stockholders by majority consent:
(1) The re-election of Bruce J. Haber, Mark Waldron, Howard Waltman, Daniel
Yun and Matthew K. Fong for a period of one year and until their successors are
elected and shall qualify;
(2) The ratification of the Board's selection of Singer Lewak Greenbaum &
Goldstein LLP as the Company's independent auditors for the year ending December
31, 2003;
(3) An amendment to the Company's Articles of Incorporation and the filing
of said amendment with the Secretary of State of the State of Nevada (a)
changing the par value of the Company's Common Stock from $.001 par value to
$.04 par value; and (b) reducing the number of outstanding shares of Common
Stock through a one-for-40 reverse stock split, effective August 29, 2003, to be
accomplished by all stockholders of record at the close of business on August
28, 2003, being requested to exchange every 40 shares of Common Stock, $.001 par
value, for one new share of Common Stock, $.04 par value;
(4) The ratification of the Company's 2002 Employee and Consulting
Compensation Plan covering 325,000 post-split shares of Common Stock; and
(5) The ratification of the Company's 2001 Stock Option Plan covering
14,625 post-split shares of Common Stock.
Item 5. Other Information:
None.
Item 6. Exhibits and Reports on Form 8-K:
(a) Exhibits
Number Exhibit Description
- ------ -------------------------------------
3.1 Amendment to Articles of Incorporation.*
11.1 Statement re: computation of earnings per share.
See consolidated statement of operations and notes thereto.
99.1 Form of Subordinated Note is hereby incorporated by reference to the
Company's Form 8-K dated June 27, 2003.
99.2 Certification by the Chief Executive Officer pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.*
99.3 Certification by the Chief Financial Officer pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.*
* Filed herewith.
(b) Reports on Form 8-K.
o Current report on Form 8-K dated August 5, 2003, in connection with an
Information Statement mailed to stockholders of record on July 15,
2003.
20
o Current report on Form dated August 28, 2003, in connection with the
Company reverse common stock split, effective August 29, 2003.
No other reports on Form 8-K were filed.
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 13, 2003 By: /s/ Bruce J. Haber
------------------
Bruce J. Haber,
Chairman and Chief
Executive Officer
Date: November 13, 2003 By:/s/ William M. McKay
--------------------
William M. McKay,
Chief Financial Officer