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 June 30, 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 August 10, 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 June 30, 2004 3
Condensed Consolidated Statements of Operations for the Three and
Six Months Ended June 30, 2004 and 2003 4
Condensed Consolidated Statements of Cash Flows for the
Three and Six Months Ended June 30, 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 9
Item 3. Controls and Procedures 14
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 15
Signatures 15
2
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Emergent Group Inc. and Subsidiaries
Condensed Consolidated Balance Sheet
June 30,
2004
---------------
ASSETS
Current assets
Cash $ 527,355
Accounts receivable, net of allowance for doubtful
accounts of $28,780 1,330,386
Inventory, net of reserves of $155,876 400,833
Prepaid expenses 143,135
---------------
Total current assets 2,401,709
Property and equipment, net of accumulated depreciation and 1,959,351
amortization of $2,364,031
Goodwill 779,127
Deposits and other assets 118,495
---------------
Total assets $ 5,258,682
===============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Line of credit $ 650,000
Current portion of capital lease obligations 286,085
Current portion of notes payable 503,080
Accounts payable 693,075
Accrued expenses 616,947
---------------
Total current liabilities 2,749,187
Capital lease obligations, net of current portion 120,863
Notes payable, net of current portion 427,494
---------------
Total liabilities 3,297,544
Minority Interest 221,193
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
4,744,551 shares issued and outstanding 189,782
Additional paid-in capital 14,488,090
Accumulated deficit (12,937,927)
---------------
Total shareholders' equity 1,739,945
---------------
Total liabilities and shareholders' equity $ 5,258,682
===============
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 Six Months Ended
June 30, June 30,
--------------------------------------------------------------
2004 2003 2004 2003
-------------- --------------- -------------- ----------------
Revenue $ 2,806,877 $ 2,345,865 $ 5,489,317 $ 4,486,685
Cost of goods sold 1,925,922 1,519,510 3,832,527 2,835,447
-------------- --------------- -------------- ----------------
Gross profit 880,955 826,355 1,656,790 1,651,238
Selling, general, and administrative expenses 773,392 785,764 1,573,366 1,617,987
-------------- --------------- -------------- ----------------
Income from operations 107,563 40,591 83,424 33,251
Other income (expense)
Interest expense (29,287) (54,112) (59,931) (106,628)
Equity in net loss of investment in limited
liability companies - (2,335) - (16,146)
Gain (loss) on disposal of property and equipment 300 6,184 (3,218) 32,451
Other income (expense), net 106,824 10,971 112,304 8,234
-------------- --------------- -------------- ----------------
Total other income (expense) 77,837 (39,292) 49,155 (82,089)
-------------- --------------- -------------- ----------------
Income (loss) before provision for income taxes,
minority interest and extraordinary item 185,400 1,299 132,579 (48,838)
Provision for income taxes - - - -
-------------- --------------- -------------- ----------------
Income (loss) before minority interest and
extraordinary item 185,400 1,299 132,579 (48,838)
Minority interest in net income of consolidated
limited liability companies 52,601 - 82,330 -
-------------- --------------- -------------- ----------------
Income (loss) before extraordinary item 132,799 1,299 50,249 (48,838)
-------------- --------------- -------------- ----------------
Extraordinary item
Gain on forgiveness of debt, net of tax - 1,289 - 104,819
-------------- --------------- -------------- ----------------
Net income $ 132,799 $ 2,588 $ 50,249 $ 55,981
============== =============== ============== ================
Basic and diluted earnings (loss) per share:
Before extraordinary item $ 0.03 $ - $ 0.01 $ (0.03)
Extraordinary item - - - 0.06
-------------- --------------- -------------- ----------------
Basic and diluted earnings per share $ 0.03 $ - $ 0.01 $ 0.03
============== =============== ============== ================
Basic and diluted weighted-average shares outstanding 4,744,551 1,683,945 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
Six Months Ended
June 30,
----------------------------
2004 2003
Cash flows from operating activities ----------- -------------
Net income $ 50,249 $ 55,981
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Loss (gain) on disposal of property and equipment 3,218 (32,451)
Gain on forgiveness of debt - (104,818)
Depreciation and amortization 606,670 377,476
Equity in net (gain) loss of investment in limited liability companies - 16,146
Provision for doubtful accounts (3,822) (4,272)
Minority interest in net income 82,330 -
(Increase) decrease in
Accounts receivable 2,403 1,041,693
Inventory (56,940) (70,003)
Due from related party - (742,157)
Prepaid expenses (41,974) (2,362)
Deposits and other assets 13,699 8,693
Increase (decrease) in
Accounts payable 164,712 5,190
Accrued expenses (170,380) (290,260)
Cash flows from operating activities ----------- -------------
Net cash provided by operating activities 650,165 258,856
Cash flows from operating activities ----------- -------------
Cash flows from investing activities
Cash paid to limited liability companies (76,192) (56,968)
Contributions from new members to limited liability companies 37,500 -
Purchase of property and equipment (353,642) (183,561)
Proceeds from the sale of property and equipment 1,782 35,583
Purchase of customer list and covenant not-to-compete - (50,000)
Cash flows from operating activities ----------- -------------
Net cash used in investing activities (390,552) (254,946)
Cash flows from operating activities ----------- -------------
Cash flows from financing activities
Proceeds from private placement of subordinated notes - 1,000,000
Payments on capital lease obligations (93,346) (355,738)
Borrowings under line of credit 50,000 -
Payments on line of credit (150,000) (108,700)
Payments on notes payable (229,243) (215,476)
Cash flows from operating activities ----------- -------------
Net cash provided by (used in) financing activities (422,589) 320,086
Cash flows from operating activities ----------- -------------
Net increase (decrease) in cash (162,976) 323,996
Cash, beginning of period 690,331 957,242
Cash flows from operating activities ----------- -------------
Cash, end of period $ 527,355 $ 1,281,238
=========== =============
Supplemental disclosures of cash flow information:
Interest paid $ 67,382 $ 94,917
=========== =============
Supplemental disclosures of non-cash investing and financing activities -
During the six months ended June 30, 2004 the Company purchased property
and equipment of $79,606 through installment loans.
During the six months ended June 30, 2003 the Company billed $500,905 to
affilitated limited liability companies for management fees. The Company
also incurred expenses on behalf of such companies.
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 equipment and
technician services on a per procedure basis to hospitals, outpatient
surgery centers, and physicians' offices. 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 and six months ended June
30, 2004 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
Nos. 46 and 46R, "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 June 30, 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 $104,819
in the consolidated statements of operations for the six months ended June
30, 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
June 30, 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
7
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.
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. This statement is not
applicable to the company.
3. DEBT OBLIGATIONS
At June 30, 2004 we have a bank loan (the "Bank Term Loan") outstanding in
the amount of $299,775, which is included in the current portion of notes
payable in the accompanying balance sheet. The loan agreement, as amended,
provides for monthly principal payments of $16,667; plus interest at the
prime rate plus 2.00%. In addition, we have an outstanding bank line of
credit (the "Bank Line of Credit") with a borrowing base of $750,000 with
the same lender. The Bank Line of Credit is collateralized by accounts
receivable and provides for interest at the prime rate, plus 2.00%. The
Bank Line of Credit agreement provides for borrowings of up to 75% of
eligible accounts receivable, as defined. As of June 30, 2004, we owed
$650,000 under the Bank Line of Credit. In addition, the amended agreement
requires the pay down of the Bank Line of Credit to $500,000 by October 1,
2004.
The Bank Term Loan and Bank Line of Credit agreements 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 these credit
facilities as discussed herein, as of June 30, 2004 we were not in
compliance with certain covenants and provisions of the original loan
agreements, however, the lender has provided waivers for such
non-compliance up to and including the maturity date of January 31, 2005.
Both the Bank Term Loan and Bank Line of Credit are classified as current
liabilities in the accompanying consolidated balance sheet as of June 30,
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 June 30,
2004 our outstanding restructured debt and lease obligations amounted to
$570,757 and $222,987, 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 June 30, 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 June 30, 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.
5. RELATED PARTY TRANSACTIONS
During the three and six months ended June 30, 2003 the Company billed
$210,465 and $500,905, respectively, 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. As of
June 30, 2004, in accordance with the Financial Accounting Standards Board
Interpretation Nos. 46 and 46R, "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.
8
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 $7,569 and
$8,894 for the three months ended June 30, 2004 and 2003, respectively, and
$15,551 and $14,632 for the six months ended June 30, 2004 and 2003,
respectively.
6. Subsequent Event
On August 3, 2004, a director of the Company, Mr. Daniel Yun, resigned from
the Board of Directors for personal reasons. The Company had no
disagreement with Mr. Yun on any matter relating to its operations,
policies or practices.
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., 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 equipment and technician services on a per procedure basis to
hospitals, outpatient surgery centers, and physicians' offices. PRI Medical also
provides other medical equipment on a limited rental basis to hospitals and
surgery centers although this business is being phased out.
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
9
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.
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 Six Months Ended
June 30, June 30,
-------------------------------- -------------------------------
2004 % 2003 % 2004 % 2003 %
------------- ---- ------------- ---- ------------ ---- ------------- ----
Revenue $ 2,806,877 100% $ 2,345,865 100% $ 5,489,317 100% $ 4,486,685 100%
Cost of goods sold 1,925,922 69% 1,519,510 65% 3,832,527 70% 2,835,447 63%
------------- ---- ------------- ---- ------------ ---- ------------- ----
Gross profit 880,955 31% 826,355 35% 1,656,790 30% 1,651,238 37%
Selling, general, and administrative expenses 773,392 14% 785,764 33% 1,573,366 29% 1,617,987 36%
------------- ---- ------------- ---- ------------ ---- ------------- ----
Income from operations 107,563 17% 40,591 2% 83,424 2% 33,251 1%
Other income (expense) 77,837 3% (39,292) -2% 49,155 1% (82,089) -2%
------------- ------------- ------------ -------------
Income (Loss) before provision for income taxes,
minority interest and extraordinary item 185,400 20% 1,299 0% 132,579 2% (48,838) -1%
Provision for income taxes - 0% - 0% - 0% - 0%
------------- ---- ------------- ---- ------------ ---- ------------- ----
Net income (loss) before minority interest 185,400 20% 1,299 0% 132,579 2% (48,838) -1%
and extraordinary item
Minority interest in net income of consolidated
limited liability companies 52,601 2% - 0% 82,330 1% - 0%
------------- ---- ------------- ---- ------------ ---- ------------- ----
Income (loss) before extraordinary item 132,799 1,299 50,249 (48,838)
------------- ---- ------------- ---- ------------ ---- ------------- ----
Extraordinary item
Gain on forgiveness of debt, net of tax - 0% 1,289 0% - 0% 104,819 2%
------------- ---- ------------- ---- ------------ ---- ------------- ----
Net income $ 132,799 20% $ 2,588 0% $ 50,249 2% $ 55,981 1%
============= ==== ============= ==== ============ ==== ============= ====
Comparison of the Three Months Ended June 30, 2004 to June 30, 2003
We generated revenues of $2,806,877 in 2004 compared to $2,345,865 in 2003. The
increase in revenues of $461,012 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.
Revenues from advanced surgical procedures increased by 98% to $1,132,196 in
2004 from $573,255 in 2003. The increase in revenues from advanced surgical
procedures is primarily from one specific type of laser procedure referred to as
10
"Greenlight." Total revenues from surgical and cosmetic services represented
approximately 87% and 12%, respectively, of total revenues for 2004 and 81% and
16% for 2003, 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 $1,925,922 or 69% of revenues in 2004 compared to
$1,519,510 or 65% of revenues in 2003. 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 $406,412 in 2004 is
primarily related to an increase in disposable costs due to the increase in
revenues from our advanced surgical procedures, and higher depreciation and
amortization costs due to equipment purchases in recent quarters. 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 generally lower from advanced procedures compared to
our core surgical business.
Gross margin was $880,955 in 2004 or 31% of net revenues compared to $826,355 in
2003 or 35% 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. In
addition, depreciation and amortization charges included in cost of goods sold
increased by $129,549 in 2004 compared to 2003 primarily as a result of
equipment purchases in recent quarters. These factors, among others, resulted in
the decrease of 4% in our gross margin rate in 2004 compared to 2003.
Selling, general, and administrative expenses were $773,392 in 2004 compared to
$785,764 in 2003. Such costs include payroll and related expenses, insurance and
rents. The overall decrease of $12,372 is generally related to our ongoing
efforts to effectively monitor and control costs.
Other income (expense) was $77,837 in 2004 compared to $(39,292) in 2003. The
net increase in other income (expense) of $117,129 is primarily related to an
increase in other income of $85,000 from the sale of an investment in common
stock of an unrelated entity, which had been written off in prior years. In
addition, net interest expense decreased by $24,488 in 2004 compared to 2003.
Interest expense is primarily related to PRI Medicals notes and lease
obligations. The decrease of $24,488 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.
The minority interest in net income of limited liability companies of $52,601 in
2004 relates to the consolidation of two entities in which we hold equity
investment interests. As of June 30, 2004, in accordance with the Financial
Accounting Standards Board Interpretation Nos. 46 and 46R, "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 June 30, 2003 we recorded equity in income of $2,335 from our
ownership interest in LLCs, which is included in other income (expense) in the
accompanying consolidated statement of operations.
Gain on forgiveness of debt was $-0- for 2004 compared to $1,289 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 was $132,799 in 2004 compared to net income of $2,588 in 2003. No
provision for income taxes is provided for in 2004 and 2003 due to the
availability of net operating loss carryforwards.
11
Comparison of the Six Months Ended June 30, 2004 to June 30, 2003
We generated revenues of $5,489,317 in 2004 compared to $4,486,685 in 2003. The
increase in revenues of $1,002,632 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.
Revenues from advanced surgical procedures increased by 157% to $2,174,245 in
2004 from $847,215 in 2003. The increase in revenues from advanced surgical
procedures is primarily from one specific type of laser procedure referred to as
"Greenlight." Total revenues from surgical and cosmetic services represented
approximately 86% and 13%, respectively, of total revenues for 2004 and 83% and
15% for 2003, respectively. Revenues from medical equipment rentals comprised
approximately 1% and 2% 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 $3,832,527 or 70% of revenues in 2004 compared to
$2,835,447 or 63% of revenues in 2003. 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 $997,080 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, an increase in
payroll costs for technicians, and an increase in repair and maintenance costs
for our laser equipment. 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 generally lower
from advanced procedures compared to our core surgical business.
Gross margin was $1,656,790 in 2004 or 30% of net revenues compared to
$1,651,238 in 2003 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 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. In addition, depreciation and amortization charges included in cost of
goods sold increased by $129,549 in 2004 compared to 2003 primarily as a result
of equipment purchases in recent quarters. These factors, among others, resulted
in the decrease of 7% in our gross margin rate in 2004 compared to 2003.
Selling, general, and administrative expenses were $1,573,366 in 2004 compared
to $1,617,987 in 2003. Such costs include payroll and related expenses,
insurance and rents. The overall decrease of $44,621 is generally related to our
ongoing efforts to effectively monitor and control costs.
Other income (expense) was $49,155 in 2004 compared to $(82,089) in 2003. The
net increase in other income (expense) of $131,244 is primarily related to an
increase in other income of $85,000 from the sale of an investment in common
stock of an unrelated entity, which had been written off in prior years. In
addition, net interest expense decreased by $46,698 in 2004 compared to 2003.
Interest expense is primarily related to PRI Medicals notes and lease
obligations. The decrease of $46,698 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.
The minority interest in net income of limited liability companies of $82,330 in
2004 relates to the consolidation of two entities in which we hold equity
investment interests. As of June 30, 2004, in accordance with the Financial
Accounting Standards Board Interpretation Nos. 46 and 46R, "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 six
months ended June 30, 2003 we recorded equity in net loss of $16,146 from our
ownership interest in LLCs, which is included in other income (expense) in the
accompanying consolidated statement of operations.
Gain on forgiveness of debt was $-0- for 2004 compared to $104,819 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.
12
Net income was $50,249 in 2004 compared to $55,981 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 June 30, 2004 we have a bank loan (the "Bank Term Loan") outstanding in the
amount of $299,775, which is included in the current portion of notes payable in
the accompanying balance sheet. The loan agreement, as amended, provides for
monthly principal payments of $16,667; plus interest at the prime rate plus
2.00%. In addition, we have an outstanding bank line of credit (the "Bank Line
of Credit") with a borrowing base of $750,000 with the same lender. The Bank
Line of Credit is collateralized by accounts receivable and provides for
interest at the prime rate, plus 2.00%. The Bank Line of Credit agreement
provides for borrowings of up to 75% of eligible accounts receivable, as
defined. As of June 30, 2004, we owed $650,000 under the Bank Line of Credit. In
addition, the amended agreement requires the pay down of the Bank Line of Credit
to $500,000 by October 1, 2004.
The Bank Term Loan and Bank Line of Credit agreements 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 these credit facilities as discussed herein, as
of June 30, 2004 we were not in compliance with certain covenants and provisions
of the original loan agreements, however, the lender has provided waivers for
such non-compliance up to and including the maturity date of January 31, 2005.
Both the Bank Term Loan and Bank Line of Credit are classified as current
liabilities in the accompanying consolidated balance sheet as of June 30, 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 June 30, 2004 our outstanding restructured
debt and lease obligations amounted to $570,757 and $222,987, 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 June 30, 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 $527,355 at June 30, 2004. Cash
provided by operating activities for the six months ended June 30, 2004 was
$650,165. Cash from operations includes net income of $50,249, depreciation and
amortization of $606,670, minority interest in net income of $82,330 and an
increase in accounts payable of $164,712 offset by a decrease in accrued
expenses of $170,380 and an increase in inventory and prepaid expenses of
$56,940 and $41,974, respectively. Cash used in investing activities was
$390,552 due to the purchase of property and equipment of $353,642 and net cash
payments of $38,692 limited liability companies. Cash used for financing
activities was $$422,589 resulting from payments on lease and debt obligations
of $93,346 and $229,243, respectively, and net repayments on our bank line of
credit of $100,000.
The Company had cash and cash equivalents of $1,281,238 at June 30, 2003. Cash
provided by operating activities for the six months ended June 30, 2003 was
$258,856. Cash from operations includes net income of $55,981, depreciation and
amortization of $377,476 and a decrease in accounts receivable of $1,041,693,
offset by an increase in due from related party of $742,157, a gain on
forgiveness of debt of $104,818 and a net decrease in accounts payable and
accrued expenses of $287,620. Cash used in investing activities was $254,946 due
to the purchase of property and equipment of $183,561, purchase of customer list
and covenant not-to-compete for $50,000 and cash paid to limited liability
companies of $56,968, offset by proceeds from the sale of property and equipment
of $35,583. Cash provided by financing activities was $320,086, which related to
the proceeds of $1,000,000 from the private placement of subordinated notes,
offset by payments of $571,214 on debt and lease obligations and payments of
$108,700 on our line of credit.
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.
13
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.
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 June 30, 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 June 30, 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 second quarter ended June 30, 2004 there were no sales of
unregistered securities.
(d) Rule 463 of the Securities Act is not applicable to the Company.
(e) In the second quarter ended June 30, 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 second quarter ended June 30, 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:
14
(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.
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.
We did not file any reports on Form 8-K during the quarter ended June 30,
2004. However, we filed a report on Form 8-K, dated August 3, 2004, wherein
we disclosed the resignation of a board member, Daniel Yun, for personal
reasons.
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: August 11, 2004 By: /s/ Bruce J. Haber
-------------------
Bruce J. Haber,
Chairman and Chief Executive Officer
Date: August 11, 2004 By: /s/ William M. McKay
--------------------
William M. McKay,
Chief Financial Officer
15