SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
___________________________________
FORM 10-QSB
___________________________________
Quarterly Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the Quarterly Period Ended March 31, 2004
Commission File Number: 0-21475
EMERGENT GROUP INC.
(Exact name of registrant as specified in its charter)
Nevada 93-1215401
(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)
___________________________________
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 May 6, 2004, the registrant had a total of 4,744,551 shares of Common
Stock outstanding.
EMERGENT GROUP INC.
FORM 10-QSB Quarterly Report
Table of Contents
Page
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheet as of March 31, 2004 3
Condensed Consolidated Statements of Operations for the Three Months
Ended March 31, 2004 and 2003 4
Condensed Consolidated Statements of Cash Flows for the
Three Months Ended March 31, 2004 and 2003 5
Notes to the Condensed Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 10
Item 3. Controls and Procedures 13
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 14
Item 2. Changes in Securities 14
Item 3. Defaults Upon Senior Securities 14
Item 4. Submissions of Matters to a Vote of Security Holders 14
Item 5. Other Information 14
Item 6. Exhibits and Reports on Form 8-K 14
Signatures 16
2
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Emergent Group Inc. and Subsidiaries
Condensed Consolidated Balance Sheets
March 31,
2004
-------------
ASSETS
Current assets
Cash ....................................................... $ 621,042
Accounts receivable, net ................................... 1,246,390
Inventory, net ............................................. 316,547
Prepaid expenses ........................................... 81,094
-------------
Total current assets ................................. 2,265,073
Property and equipment, net ..................................... 2,073,359
Goodwill, net ................................................... 779,127
Deposits and other assets, net .................................. 140,357
-------------
Total assets .................................................... $ 5,257,916
=============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Line of credit ............................................. $ 750,000
Current portion of capital lease obligations ............... 291,642
Current portion of notes payable ........................... 549,191
Accounts payable ........................................... 607,082
Accrued expenses ........................................... 654,158
-------------
Total current liabilities ............................... 2,852,073
Capital lease obligations, net of current portion ............... 145,142
Notes payable, net of current portion ........................... 479,461
-------------
Total liabilities .................................... 3,476,676
Minority Interest ............................................... 174,093
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
4,744,551shares issued and outstanding .................. 189,782
Additional paid-in capital ................................. 14,488,090
Accumulated deficit ........................................ (13,070,725)
-------------
Total shareholders' equity ........................ 1,607,147
-------------
Total liabilities and shareholders' equity ..................... $ 5,257,916
=============
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
March 31,
------------ ------------
2004 2003
------------ ------------
Revenue .............................................. $ 2,682,440 $ 2,140,820
Cost of goods sold ................................... 1,906,605 1,315,937
------------ ------------
Gross profit ......................................... 775,835 824,883
Selling, general, and administrative expenses ........ 799,974 832,223
------------ ------------
Income (Loss) from operations ........................ (24,139) (7,340)
Other income (expense)
Interest expense ................................ (30,644) (52,516)
Equity in net loss of investment in limited
liability companies ......................... - (13,811)
Gain (loss) on disposal of property and equipment (3,518) 26,267
Other income (expense), net ..................... 5,480 (2,737)
------------ ------------
Total other income (expense) ............. (28,682) (42,797)
------------ ------------
Income (loss) before provision for income taxes,
minority interest and extraordinary item ........ (52,821) (50,137)
Provision for income taxes ........................... - -
------------ ------------
Income (loss) before minority interest and
extraordinary item .............................. (52,821) (50,137)
Minority interest in net income of consolidated
limited liability companies ..................... (29,729) -
------------ ------------
Income (loss) before extraordinary item .............. (82,550) (50,137)
------------ ------------
Extraordinary item
Gain on forgiveness of debt, net of tax ......... - 103,530
------------ ------------
Net income (loss) .................................... $ (82,550) $ 53,393
============ ============
Basic and diluted earnings (loss) per share:
Before extraordinary item ....................... $ (0.01) $ (0.03)
Extraordinary item .............................. (0.02) 0.06
------------ ------------
Basic and diluted earnings (loss) per share .......... $ (0.02) $ 0.03
============ ============
Basic and diluted weighted-average shares outstanding 4,744,551 1,683,945
============ ============
The accompanying notes are an integral part of
these condensed financial statements.
4
Emergent Group Inc. and Subsidiaries
Condensed Consolidated Statements of Cash Flows
Three Months Ended
March 31,
---------- ----------
2004 2003
---------- ----------
Cash flows from operating activities
Net income (loss) ........................................................ $ (82,550) $ 53,393
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Loss (gain) on disposal of property and equipment .................... 3,518 (26,267)
Gain on forgiveness of debt .......................................... - (103,530)
Depreciation and amortization ........................................ 296,874 186,412
Equity in net (gain) loss of investment in limited liability companies - 13,811
Provision for doubtful accounts ...................................... (2,198) 10,827
Minority interest in net income ...................................... 29,729 -
(Increase) decrease in
Accounts receivable ............................................... 84,775 735,803
Inventory ......................................................... 27,346 (35,324)
Due from related party ............................................ - (416,181)
Prepaid expenses .................................................. 25,879 45,746
Deposits and other assets ......................................... (8,068) 9,830
Increase (decrease) in
Accounts payable .................................................. 78,719 (43,862)
Accrued expenses .................................................. (134,059) (115,747)
---------- ---------
Net cash provided by operating activities ..................................... 319,965 314,911
---------- ---------
Cash flows from investing activities
Cash paid to limited liability companies ................................. (37,300) (11,700)
Purchase of property and equipment ....................................... (192,281) (76,708)
Net proceeds from the sale of property and equipment ..................... 1,481 28,972
---------- ----------
Net cash provided by (used in) investing activities ........................... (228,100) (59,436)
---------- ----------
Cash flows from financing activities
Payments on capital lease obligations .................................... (63,510) (270,356)
Payments on notes payable ................................................ (97,644) (130,844)
---------- ----------
Net cash provided by (used in) financing activities ........................... (161,154) (401,200)
---------- ----------
Net decrease in cash .......................................................... (69,289) (145,725)
Cash, beginning of period ..................................................... 690,331 957,242
---------- ----------
Cash, end of period ........................................................... $ 621,042 $ 811,517
========== ==========
Supplemental disclosures of cash flow information:
Interest paid ............................................................ $ 37,316 $ 48,115
========== ==========
Supplemental disclosures of non-cash investing and financing activities -
During the quarter ended March 31, 2004 the Company purchased
property and equipment of $46,084 through capital leases.
During the quarter ended March 31, 2003 the Company billed
$290,440 to a related party for management fees.
The accompanying notes are an integral part of
these condensed financial statements.
5
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. ("PRI
Medical"), its wholly owned and only operating subsidiary. Emergent
acquired PRI Medical in July 2001. PRI Medical primarily conducts its
business through its wholly owned subsidiary Physiologic Reps ("PRI").
Emergent, PRI Medical and PRI are referred to collectively hereinafter as
the "Company." PRI Medical provides mobile laser/surgical services on a per
procedure basis to hospitals, out-patient surgery centers, and physicians'
offices. The lasers are provided with technical support to ensure that they
operate correctly. PRI Medical also provides other medical equipment on a
limited rental basis to hospitals and surgery centers although this
business is being phased out.
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-KSB for the year
ended December 31, 2003. 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 ended March 31,
2004 and 2003 are not necessarily indicative of the results to be expected
for any other interim period or any future fiscal year.
Principles of Consolidation
The consolidated financial statements include the accounts of Emergent and
its wholly owned subsidiaries. In addition, as of December 31, 2003 in
accordance with the Financial Accounting Standards Board Interpretation No.
46, "Consolidation of Variable Interest Entities" the Company has accounted
for its equity investments in two limited liability companies under the
full consolidation method. The Company previously utilized the equity
method of accounting for its investments in such entities. All significant
inter-company transactions and balances have been eliminated through
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, 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.
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. There were no dilutive common share equivalents outstanding as
of March 31, 2004 and 2003.
6
Recent Accounting Pronouncements
In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB Statements
No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical
Corrections." SFAS No. 145 updates, clarifies, and simplifies existing
accounting pronouncements. This statement rescinds SFAS No. 4, which
required all gains and losses from extinguishment of debt to be aggregated
and, if material, classified as an extraordinary item, net of related
income tax effect. As a result, the criteria in APB No. 30 will now be used
to classify those gains and losses. SFAS No. 64 amended SFAS No. 4 and is
no longer necessary as SFAS No. 4 has been rescinded. SFAS No. 44 has been
rescinded as it is no longer necessary. SFAS No. 145 amends SFAS No. 13 to
require that certain lease modifications that have economic effects similar
to sale-leaseback transactions be accounted for in the same manner as
sale-lease transactions. This statement also makes technical corrections to
existing pronouncements. While those corrections are not substantive in
nature, in some instances, they may change accounting practice. In
connection with the re-negotiation of certain capital lease agreements,
note payable agreements, and accounts payable liabilities, the Company
recorded an extraordinary gain on forgiveness of debt of $-0- and $103,530
in the consolidated statements of operations for the three months ended
March 31, 2004 and 2003, respectively.
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. The Company does not expect the adoption of SFAS
146 to have a material impact, if any, on its financial position or results
of operations.
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, if any, 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 to the fair value method.
In January 2003 and December 2003, the FASB issued FASB Interpretation No.
46, and FASB No. 46R, respectively, "Consolidation of Variable Interest
Entities," an interpretation of Accounting Research Bulletin No. 51,
"Consolidated Financial Statements." This pronouncement requires the
consolidation of variable interest entities, as defined, and is effective
immediately for variable interest entities created after January 31, 2003,
and for variable interest entities in which an enterprise obtains an
interest after that date. In accordance with this interpretation, as of
March 31, 2004, the Company has included two limited liability companies in
its consolidated financial statements.
In April 2003, the Financial Accounting Standards Board ("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. Management does not expect adoption of SFAS No. 149 to
have a material impact on the Company's financial statements.
7
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. As of March 31, 2004, the
Company does not have preferred stock as a liability.
3. DEBT OBLIGATIONS
At March 31, 2004 we have a bank loan (the "Bank Term Loan") outstanding in
the amount of $349,775, which is included in the current portion of notes
payable in the accompanying balance sheet. The loan was due on March 2,
2004. The loan agreement, as amended, provides for monthly principal
payments of $16,667; plus interest at the prime rate plus 2.00%. As of
December 31, 2003 and March 31, 2004 we were not in compliance with certain
covenants and provisions of the original loan agreement. However, the
lender has provided waivers for such non-compliance. Principal and interest
due as of March 31, 2004 are shown as current liabilities in the
accompanying balance sheets. In April 2004, the lender agreed to extend the
term of the loan to January 31, 2005 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 $750,000 with the same lender. This
Bank Line of Credit is collateralized by accounts receivable and provides
for interest at the prime rate, plus 2.00%. The Line of Credit agreement
provides for borrowings of up to 75% of eligible accounts receivable as
defined. The Bank Line of Credit was fully drawn as of December 31, 2003
and March 31, 2004 and the Company was not in compliance with certain loan
covenants and provisions of the credit agreement, as amended. In April 2004
the Line of Credit agreement was amended to provide for an extension of the
due date to January 31, 2005. In addition, the amended agreement requires
the pay down of the line to $500,000 by October 1, 2004. Other terms and
condition of this credit facility remain the same.
The Bank Term Loan and Line of Credit 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 herein, as of March 31, 2004, we were not in compliance with
certain financial covenants of such agreements for which the lender has
provided waivers. As a result, we have classified all of the bank loan
facilities as current liabilities in the accompanying consolidated balance
sheets as of December 31, 2003 and March 31, 2004.
In 2002 we renegotiated substantially all of our outstanding debt and lease
obligations with our key creditors. The restructured debt and lease
agreements provided for, in some cases, the return of equipment used to
collateralize such obligations, and certain periodic and monthly
installment payments for the balance of such obligations. As of March 31,
2004 our outstanding restructured debt and lease obligations amounted to
$614,661 and $247,823, respectively. In the event of default by the Company
all amounts then outstanding are accelerated and become immediately due and
payable. In addition, in the event of default, certain restructured debt
and lease agreements provide for the payment of additional principal
amounts of up to $187,500, excluding collection costs. As of March 31, 2004
and the filing of this Quarterly Report on Form 10-QSB we were in
compliance with the terms and conditions of our renegotiated debt and lease
agreements.
4. LEGAL MATTERS
From time to time, we may become involved in litigation arising out of
operations in the normal course of business. As of March 31, 2004, 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.
8
5. RELATED PARTY TRANSACTIONS
During the three months ended March 31, 2003 the Company billed $290,440 to
certain limited liability companies in which the Company held an equity
interest for management and other fees. The Company also incurred expenses
on behalf of the related party.
Transactions with BJH Management
Effective December 30, 2002, we entered into 18-month employment contracts
with Bruce J. Haber and Louis Buther who are key employees and officers of
the Company. On March 31, 2004, the Company's Board of Directors extended
such contracts to June 30, 2005.
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 also maintains his primary office in New York. In this regard, the
Company reimbursed BJH for office and related expenses totaling $7,982 and
$5,738, respectively, for the three months ended March 31, 2004 and 2003,
respectively.
9
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-KSB for the year ended December 31, 2003
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-KSB 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. ("PRI Medical"), its wholly owned and only operating
subsidiary. PRI Medical primarily conducts its business through its wholly
owned subsidiary, PRI. Emergent, PRI Medical 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 serves both large and small
health care providers and makes mobile surgical services available to its
customers by providing this equipment on a per procedure basis to
hospitals, out patient surgery centers, and physician offices. 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 general equipment on a rental basis to hospitals and surgery
centers, although PRI began winding down this area of business in late 2001
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. 104, "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.
10
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
March 31,
-------------------------------
2004 % 2003 %
------------ --- ------------ ---
Revenue $ 2,682,440 100% $ 2,140,820 100%
Cost of goods sold 1,906,605 71% 1,315,937 61%
------------ --- ------------ ---
Gross profit 775,835 29% 824,883 39%
Selling, general, and administrative expenses 799,974 30% 832,223 39%
------------ --- ------------ ---
Income (loss) from operations (24,139) -1% (7,340) 0%
Other income (expense) (28,682) -1% (42,797) -2%
------------ --- ------------ ---
Loss before provision for income taxes,
minority interest and extraordinary item (52,821) -2% (50,137) -2%
Provision for income taxes - 0% - 0%
------------ --- ------------ ---
Net income (loss) before minority interest
and extraordinary item (52,821) -2% (50,137) -2%
--- ---
Minority interest in net income of consolidated
limited liability companies (29,729) -1% - 0%
------------ --- ------------ ---
Income (loss) before extraordinary item (82,550) (50,137)
------------ ------------
Extraordinary item
Gain on forgiveness of debt, net of tax - 0% 103,530 5%
------------ --- ------------ ---
Net income (loss) $ (82,550) -2% $ 53,393 2%
============ === ============ ===
Comparison of the Three Months Ended March 31, 2004 to March 31, 2003
We generated revenues of $2,682,440 in 2004 compared to $2,140,820 in 2003.
The increase in revenues of $541,620 in 2004 compared to 2003 is primarily
related to an increase in revenues from our advanced surgical procedures,
offset by decreases in revenues from our core surgical services and medical
rentals. Total revenues from surgical and cosmetic services represented
approximately 86% and 13%, respectively, of total revenues for 2004 and 81%
and 16% for 2002, respectively. Revenues from medical equipment rentals
comprised approximately 1% and 3% of revenues for 2004 and 2003,
respectively. Medical rental revenues, in terms of absolute dollars and as
a percentage of total revenues, decreased as a result of our decision to
wind down this area of business in order to focus on our core mobile
surgical equipment rental and service business.
Cost of goods sold was $1,906,605 or 71% of revenues in 2003 compared to
$1,315,937 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
11
$590,668 in 2004 is primarily related to an increase in disposable costs
due to the increase in revenues from our advanced surgical procedures,
higher depreciation and amortization costs due to equipment purchases in
recent quarters and higher repair 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. In addition, gross margins are
lower from advanced procedures compared to our core surgical business.
Gross margin was $775,835 in 2004 or 29% of net revenues compared to
$824,883 in 2003 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 2004 is
generally related to the mix of services provided by the Company. Revenues
generated from advanced surgical procedures are higher in terms of absolute
dollars, however, our gross margins on such procedures are lower than
margins generated from other surgical services. The margins on advanced
procedures are lower due to higher disposable costs per procedure both in
terms of absolute dollars and as a percentage of per procedure revenues.
Revenues from advanced surgical procedures increased 36% in 2004 compared
to 2003. In addition, depreciation and amortization charges included in
cost of goods sold increased by $101,757 in 2004 compared to 2003 primarily
as a result of equipment purchases in recent quarters. These factors, among
others, resulted in the decrease in our gross margin rate in 2004 compared
to 2003.
Selling, general, and administrative expenses were $799,974 in 2004
compared to $832,223 in 2003. Such costs include payroll and related
expenses, insurance and rents. The overall decrease of $32,249 is generally
related to our ongoing efforts to effectively monitor and control costs.
Other income (expense) was $(28,670) in 2004 compared to $(42,797) in 2003.
The net decrease in other income (expense) of $(14,127) is related to
decreases in net interest expense of $21,872, offset by a decrease in the
gain on sale of property and equipment of $29,785 in 2004 compared to 2003.
Interest expense is primarily related to PRI Medicals notes and lease
obligations. The decrease of $21,872 in net interest expense is principally
related to the decrease in our outstanding debt and lease obligations in
2004 compared to 2003 and a reduction in interest rates on our bank term
loan and line of credit as discussed below.
The minority interest in net income of limited liability companies of
$29,729 in 2004 relates to the consolidation of two entities in which we
hold an equity investment interest. As of December 31, 2003 and March 31,
2004 in accordance with the Financial Accounting Standards Board
Interpretation No. 46, "Consolidation of Variable Interest Entities" the
Company accounted for its equity investments in these entities under the
full consolidation method. The Company previously utilized the equity
method of accounting for such investments. For the three months ended March
31, 2003 we recorded equity in losses of $(13,811) from our ownership
interest in LLCs, which is included in other expense in the accompany
consolidated statement of operations.
Gain on forgiveness of debt was $-0- for 2004 compared to $103,530 in 2003.
The decrease in gain on forgiveness of debt in 2004 is due to the fact that
our major debt restructuring efforts were substantially completed as of
December 31, 2002 and early 2003 and no such activity occurred in 2004.
Net income (loss) was $(82,550) in 2004 compared to net income of $53,393
in 2003. No provision for income taxes is provided for in 2004 and 2003 due
to the availability of net operating loss carryforwards.
Liquidity and Capital Resources
At March 31, 2004 we have a bank loan (the "Bank Term Loan") outstanding in
the amount of $349,775. The loan was due on March 2, 2004. The loan
agreement, as amended, provides for monthly principal payments of $16,667;
plus interest at the prime rate plus 2.00%. As of December 31, 2003 and
March 31, 2004 we were not in compliance with certain covenants and
provisions of the original loan agreement. However, the lender has provided
waivers for such non-compliance. Principal and interest due as of March 31,
2004 are shown as current liabilities in the accompanying balance sheets.
In April 2004, the lender agreed to extend the term of the loan to January
31, 2005 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 $750,000 with the same lender. This Bank Line of Credit is
collateralized by accounts receivable and provides for interest at the
prime rate, plus 2.00%. The Line of Credit agreement provides for
borrowings of up to 75% of eligible accounts receivable as defined. The
Bank Line of Credit was fully drawn as of December 31, 2003 and March 31,
2004 and the Company was not in compliance with certain loan covenants and
provisions of the credit agreement for which the lender has provided
waivers. In April 2004 the Line of Credit agreement was amended to provide
for an extension of the due date to January 31, 2005. In addition, the
amended agreement requires the pay down of the line to $500,000 by October
1, 2004. Other terms and condition of this credit facility remain the same.
12
The Bank Term Loan and Line of Credit 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 herein, as of March 31, 2004, we were not in compliance with
certain financial covenants of such agreements for which the lender has
provided waivers. As a result, we have classified all of the bank loan
facilities as current liabilities in the accompanying consolidated balance
sheets as of December 31, 2003 and March 31, 2004.
In 2002 we renegotiated substantially all of our outstanding debt and lease
obligations with our key creditors. The restructured debt and lease
agreements provided for, in some cases, the return of equipment used to
collateralize such obligations, and certain periodic and monthly
installment payments for the balance of such obligations. As of March 31,
2004 our outstanding restructured debt and lease obligations amounted to
$614,661 and $247,823, respectively. In the event of default by the Company
all amounts then outstanding are accelerated and become immediately due and
payable. In addition, in the event of default, certain restructured debt
and lease agreements provide for the payment of additional principal
amounts of up to $187,500, excluding collection costs. As of March 31, 2004
and the filing of this Quarterly Report on Form 10-QSB we were in
compliance with the terms and conditions of our renegotiated debt and lease
agreements.
The Company had cash and cash equivalents of $621,042 at March 31, 2004.
Cash provided by operating activities for the three months ended March 31,
2004 was $319,965. Cash from operations includes depreciation and
amortization of $296,874, a decrease in accounts receivable of $84,775 and
an increase in accounts payable of $78,719 offset by a decrease in accrued
expenses of $134,059. Cash used in investing activities was $228,100 due to
the purchase of property and equipment of $192,281, and cash paid to
limited liability companies of $37,300, offset by proceeds from the sale of
property and equipment of $1,481. Cash used for financing activities was
$161,154 resulting from payments on lease and debt obligations of $63,510
and $97,644, respectively.
The Company had cash and cash equivalents of $811,517 at March 31, 2003.
Cash provided by operating activities for the three months ended March 31,
2003 was $314,911. Cash from operations includes net income of $53,393,
depreciation and amortization of $186,412 and a decrease in accounts
receivable of $735,803, offset by an increase in due from related party of
$416,181, a gain on forgiveness of debt of $103,530, a decrease in accounts
payable and accrued expenses of $159,609 and a gain on disposal of property
and equipment of $26,267. Cash used in investing activities was $59,436 due
to the purchase of property and equipment of $76,708 and cash paid to
limited liability companies, offset by proceeds from the sale of property
and equipment of $28,972. Cash used in financing activities was $401,200,
which related to payments on debt and lease obligations.
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 expenditures. The primary
sources of funding for such requirements will be cash generated from
operations, raising additional capital from the sale of equity or other
securities, borrowings under debt facilities and trade payables. The
Company believes that it can generate sufficient cash flow from these
sources to fund its operations for at least the next twelve months.
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.
13
PART II. OTHER INFORMATION
Item 1. Legal Proceedings:
We may become involved in litigation arising out of operations in the
normal course of business. As of March 31, 2004, 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. In addition, during the quarter ended March 31, 2004,
there have been no other material developments with respect to an action by
a related party against Stonepath Group, Inc.
Item 2. Changes in Securities.
(a) There were no modifications of instruments defining the rights of
the holders of any class of registered securities.
(b) The rights evidenced by any class of registered securities have
not been materially limited or qualified by the issuance or
modification of any other class of securities.
(c) In the first quarter ended March 31, 2004 there were no sales of
unregistered securities.
(d) Rule 463 of the Securities Act is not applicable to the Company.
(e) In the first quarter ended March 31, 2004 there were no
repurchases by the Company of its Common Stock.
Item 3. Defaults Upon Senior Securities
Management's Discussion and Analysis and Results of Financial
Condition and the Notes to Condensed Consolidated Financial
Statements in Note 3, describes certain debt obligations of the
Company in which it was not in compliance with certain covenants
for which the lender provided waivers of such non-compliance.
Otherwise, the Company is not in material default under any loan
agreements and is not in material default of the payment of
principal or interest that has not been cured within 30 days.
Item 4. Submissions of Matters to a Vote of Security Holders:
In the first quarter ended March 31, 2004 there were no matters
submitted to a vote of security holders.
Item 5. Other Information:
None.
Item 6. Exhibits and Reports on Form 8-K:
(a) Exhibits
Except for the exhibits listed below, all of which are filed
herewith, other required exhibits have been previously filed with
the Securities and Exchange Commission under the Securities
Exchange Act of 1934, as amended.
14
Number Exhibit Description
____________________________________________
11.1 Statement re: computation of earnings per share. See consolidated
statement of operations and notes thereto.
31.1 Certification of Chief Executive Officer Pursuant to Rule 13a-14(a)
under the Securities Exchange Act of 1934, as adopted pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002
31.2 Certification of Chief Financial Officer Pursuant to Rule 13a-14(a)
under the Securities Exchange Act of 1934, as adopted pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002
32.1 Certification of Chief Executive Officer pursuant to 18U.S.C. Section
1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002
32.2 Certification of Chief Financial Officer pursuant to 18U.S.C. Section
1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002
(b) Reports on Form 8-K.
None
15
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: May 14, 2004 By: /s/ Bruce J. Haber
------------------
Bruce J. Haber,
Chairman and Chief Executive Officer
Date: May 14, 2004 By: /s/ William M. McKay
-------------------
William M. McKay,
Chief Financial Officer
16