UNITED STATES
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, 2006
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 [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rue 12b-2 of the Exchange Act).
Yes [ ] No [X]
Indicate by check mark whether the registrant is a shell company (as
defined in Rue 12b-2 of the Exchange Act).
Yes [ ] No [X]
As of May 10, 2006, the registrant had a total of 5,452,610 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, 2006 (unaudited) 3
Condensed Consolidated Statements of Income for the Three Months
Ended March 31, 2006 and 2005 (unaudited) 4
Condensed Consolidated Statements of Cash Flows for the Three Months
Ended March 31, 2006 and 2005 (unaudited) 5
Notes to Condensed Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 11
Item 3. Controls and Procedures 14
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 15
Item 2. Changes in Securities 15
Item 3. Defaults Upon Senior Securities 15
Item 4. Submissions of Matters to a Vote of Security Holders 15
Item 5. Other Information 15
Item 6. Exhibits 15
Signatures 16
2
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Emergent Group Inc. and Subsidiaries
Condensed Consolidated Balance Sheet
March 31,
2006
---------------
ASSETS (unaudited)
Current assets
Cash $ 588,828
Accounts receivable, net of allowance for doubtful
accounts of $20,487 2,045,935
Inventory, net of reserves of $77,402 666,766
Prepaid expenses 140,258
---------------
Total current assets 3,441,787
Property and equipment, net of accumulated depreciation and
amortization of $4,063,538 2,370,251
Goodwill 1,193,915
Other intangible assets, net of accumulated amortization of
$71,411 194,875
Deposits and other assets 161,713
---------------
Total assets $ 7,362,541
===============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Current portion of capital lease obligations $ 615,725
Current portion of notes payable 437,129
Line of credit -
Accounts payable 899,630
Accrued expenses 1,060,842
---------------
Total current liabilities 3,013,326
Capital lease obligations, net of current portion 866,841
Notes payable, net of current portion 270,303
---------------
Total liabilities 4,150,470
Minority interest 338,392
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
5,451,631 shares issued and outstanding 218,065
Additional paid-in capital 14,866,025
Deferred compensation, net of accumulated amortization of $51,403 (162,902)
Accumulated deficit (12,047,509)
---------------
Total shareholders' equity 2,873,679
---------------
Total liabilities and shareholders' equity $ 7,362,541
===============
The accompanying notes are an integral part of these
condensed financial statements.
3
Emergent Group Inc. and Subsidiaries
Condensed Consolidated Statements of Income
(Unaudited)
Three Months Ended
March 31,
---------------------------------
2006 2005
---------------- ----------------
Revenue $ 3,990,817 $ 2,922,523
Cost of goods sold 2,439,680 1,968,948
---------------- ----------------
Gross profit 1,551,137 953,575
Selling, general, and administrative expenses 976,328 799,134
---------------- ----------------
Income from operations 574,809 154,441
Other income (expense)
Interest expense (46,741) (34,382)
Gain on disposal of property and equipment 1,300 9,401
Other income, net 30,577 5,980
---------------- ----------------
Total other income (expense) (14,864) (19,001)
---------------- ----------------
Income before provision for income taxes
and minority interest 559,945 135,440
Provision for income taxes (23,864) -
---------------- ----------------
Income before minority interest 536,081 135,440
Minority interest in income of consolidated
limited liability companies (72,086) (30,162)
---------------- ----------------
Net income $ 463,995 $ 105,278
================ ================
Basic earnings per share $ 0.09 $ 0.02
================ ================
Diluted earnings per share $ 0.08 $ 0.02
================ ================
Basic weighted average shares outstanding 5,451,631 4,744,551
================ ================
Diluted weighted-average shares outstanding 5,816,939 4,744,551
================ ================
The accompanying notes are an integral part of these
condensed financial statements.
4
Emergent Group Inc. and Subsidiaries
Condensed Consolidated Statements of Cash Flows
(Unaudited)
March 31,
------------------------------------
2006 2005
------------------------------------
Cash flows from operating activities
Net income $ 463,995 $ 105,278
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 269,348 299,854
Amortization of finance fees 3,348 -
Gain on disposal of property and equipment and other (1,300) (9,401)
Provision for doubtful accounts - (2,006)
Minority interest in income 72,086 30,162
Other income (17,000) -
(Increase) decrease in
Accounts receivable (154,522) (89,136)
Inventory 3,505 (14,738)
Prepaid expenses 17,268 (30,663)
Deposits and other assets (61,262) (14,146)
Increase (decrease) in
Accounts payable 261,334 132,400
Accrued expenses 68,262 (7,221)
------------------------------------
Net cash provided by operating activities 925,062 400,383
------------------------------------
Cash flows from investing activities
Purchase of property and equipment (96,027) (57,865)
Cash paid to members of limited liability companies (73,115) (42,291)
Proceeds from the sale of property and equipment 5,050 11,539
------------------------------------
Net cash used in investing activities (164,092) (88,617)
------------------------------------
Cash flows from financing activities
Payments on capital lease obligations (139,642) (73,371)
Payments on dividends declared (512,861) -
Borrowings under line of credit 3,954,691 -
Repayments on line of credit (3,954,691) -
Payments on notes payable, net (105,016) (96,180)
------------------------------------
Net cash used in financing activities (757,519) (169,551)
------------------------------------
Net increase in cash 3,451 142,215
Cash, beginning of period 585,377 351,595
------------------------------------
Cash, end of period $ 588,828 $ 493,810
====================================
Supplemental disclosures of cash flow information:
Interest paid $ 47,468 $ 35,738
====================================
The accompanying notes are an integral part of these
condensed financial statements.
5
EMERGENT GROUP INC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. BUSINESS
Emergent Group Inc. ("Emergent") is the parent company of PRI Medical
Technologies, Inc., its wholly owned and only operating subsidiary. PRI
Medical Technologies, Inc. primarily conducted its business through its
wholly owned subsidiary Physiologic Reps ("PRI") until March 2005 at which
time PRI was merged into PRI Medical Technologies, Inc. ("PRI Medical").
Emergent and PRI Medical are referred to collectively hereinafter as the
"Company." PRI Medical provides mobile laser/surgical services, along with
technical support, on a per procedure basis to hospitals, out-patient
surgery centers, and physicians' offices.
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, 2005. 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,
2006 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. Also, 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 four limited liability companies under the full
consolidation method. 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.
Accounts Receivable and Concentration of Business and Credit Risks
------------------------------------------------------------------------
We market our services primarily to hospitals and out-patient centers
located in California, Nevada, Utah, Colorado, Arizona and New York. Our
equipment rental and technician services are subject to competition from
other similar businesses. Our accounts receivable represent financial
instruments with potential credit risk. We offer credit terms and credit
limits to most of our customers based on the creditworthiness of such
customers. However, we retain the right to place such customers on credit
hold should their account become delinquent. We maintain an allowance for
doubtful accounts for estimated losses should customers fail to make
required payments. In addition, we monitor the age of customer account
balances, historical bad debt experience, customer creditworthiness,
customer specific information, and changes in payment patterns when making
estimates of the collectibility of trade receivables. Accounts receivable
are written off when all collection attempts have failed. Our allowance for
doubtful accounts will be increased if circumstances warrant. Based on the
information available, management believes that our net accounts receivable
are collectible.
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.
6
Stock-Based Compensation
------------------------
In December 2004, the FASB issued SFAS No. 123(R),"Share-Based Payment".
SFAS 123(R) amends SFAS No. 123,"Accounting for Stock-Based Compensation",
and APB Opinion 25,"Accounting for Stock Issued to Employees." SFAS
No.123(R) requires that the cost of share-based payment transactions
(including those with employees and non-employees) be recognized in the
financial statements. SFAS No. 123(R) applies to all share-based payment
transactions in which an entity acquires goods or services by issuing (or
offering to issue) its shares, share options, or other equity instruments
(except for those held by an ESOP) or by incurring liabilities (1) in
amounts based (even in part) on the price of the entity's shares or other
equity instruments, or (2) that require (or may require) settlement by the
issuance of an entity's shares or other equity instruments. This statement
is effective for public companies qualifying as SEC small business issuers
for the fiscal year beginning after December 15, 2005.
Effective January 1, 2006, we adopted Statement of Financial Accounting
Standards ("SFAS") No. 123R, Share-Based Payment, using the modified
prospective method. Under this method, compensation cost recognized during
the three months ended March 31, 2006 includes compensation cost for all
share-based payments granted prior to, but not yet vested as of January 1,
2006, based on the grant date fair value estimated in accordance with the
original provisions of SFAS No. 123 amortized over the remaining vesting
period for such options. There were no options granted during the quarter
ended March 31, 2006. The implementation of the provisions of SFAS No. 123R
on January 1, 2006 resulted in additional compensation costs of $3,079 for
the quarter ended March 31, 2006. Basic and diluted earnings per share of
$.09 and $0.08 did not change as a result of implementing SFAS No. 123R. In
addition, the implementation of SFAS No. 123R did not have a significant
impact on our financial position, results of operations or cash flows.
Prior to January, we accounted for employee stock options grants in
accordance with APB No. 25, and had adopted only the disclosure provisions
of SFAS No. 123, Accounting for Stock-Based Compensation. Accordingly, no
stock based compensation expense was recognized for the three months ended
March 31, 2005 as all options were granted with a price based on the fair
value of such options on the grant date. For the three months ended March
31, 2005, had we adopted the fair value recognition provisions of SFAS No.
123 to account for our employee stock options for the we would have
recognized compensation expense of $1,342, which assumes that the fair
value of such options, as prescribed by SFAS No. 123, was amortized to
expense over the vesting period of such options. The total fair value of
the 73,000 options granted during the three months ended March 31, 2005
were estimated at $26,831 at the date of grant using the Black-Scholes
valuation model assuming volatility of 150%, a risk free interest rate of
3.5%, no annual dividends and expected lives of seven years.
The 2002 Employee Benefit and Consulting Services Compensation Plan (the
"2002 Plan") was adopted in 2002 for the purpose of providing incentives to
key employees, officers, and consultants of the Company who provide
significant services to the Company. As of March 31, 2006, there are
650,000 common shares authorized for grant under the 2002 Plan. However,
325,000 shares of the 650,000 shares represent an increase authorized by
the Company's Board of Directors subject to shareholder approval. Options
will not be granted for a term of more than ten years from the date of
grant. Generally, options will vest evenly over a period of five years, and
the 2002 Plan expires in March 2012. Since shareholder approval was not
obtained on or before April 1, 2003, all incentive stock options granted
under the 2002 Plan have automatically become non-statutory stock options,
and the Board is limited to granting non-statutory stock options under the
2002 Plan. As of March 31, 2006, the number of shares reserved for future
awards was 244,663.
A summary of the Company's outstanding options and activity is as follows:
Weighted Average
Number of Shares Exercise Price
---------------- -------------
Outstanding at January 1, 2006 431,099 $ 1.45
Options Granted - $ -
Options Canceled - $ -
Options Exercised - $ -
----------------
Outstanding at March 31, 2006 431,099 $ 1.45
================
Exercisable at March 31, 2006 280,277 $ 1.84
================
7
The weighted-average remaining contractual life of the options outstanding
at March 31, 2006 is 7.33 years. The exercise prices for the options
outstanding at March 31, 2006 ranged from $0.40 to $162.16, and information
relating to these options is as follows:
Weighted- Weighted-
Weighted- Average Average
Average Exercise Exercise
Stock Remaining Price of Price of
Range of Stock Options Options Contractual Options Options
Exercise Prices Outstanding Exercisable Life Outstanding Exercisable
- ------------------------------------------------------------------------------------------------
$ 0.40 417,589 266,767 7.62 years $ 0.40 $ 0.40
$ 2.00 - 8.00 4,000 4,000 7.00 years $ 5.00 $ 5.00
$ 20.00 - 51.00 9,339 9,339 5.75 years $ 38.66 $ 38.66
$ 162.16 171 171 1.29 years $ 162.16 $ 162.16
------------- --------------
$ 0.40 - 162.16 431,099 280,277 7.33 years $ 1.45 $ 1.84
============= ==============
As of March 31, 2006, the total unrecognized fair value compensation cost
related to unvested stock options was $50,454, which is to be recognized
over a remaining weighted average period of approximately 4.10 years.
Earnings Per Share
------------------
The Company utilizes SFAS No. 128, "Earnings per Share." Basic earnings per
share is computed by dividing earnings available to common shareholders by
the weighted-average number of common shares outstanding. Diluted earnings
per share is computed similar to basic earnings per share except that the
denominator is increased to include the number of additional common shares
that would have been outstanding if the potential common share equivalents
had been issued and if the additional common shares were dilutive. Common
equivalent shares are excluded from the computation if their effect is
anti-dilutive.
Recent Accounting Pronounments
------------------------------
In May 2005, the FASB issued Statement of Financial Accounting Standards
(SFAS) No. 154, "Accounting Changes and Error Corrections", an amendment to
Accounting Principles Bulletin (APB) Opinion No. 20, "Accounting Changes",
and SFAS No. 3, "Reporting Accounting Changes in Interim Financial
Statements". Though SFAS No. 154 carries forward the guidance in APB No. 20
and SFAS No. 3 with respect to accounting for changes in estimates, changes
in reporting entity, and the correction of errors, SFAS No. 154 establishes
new standards on accounting for changes in accounting principles, whereby
all such changes must be accounted for by retrospective application to the
financial statements of prior periods unless it is impracticable to do so.
SFAS No. 154 is effective for accounting changes and error corrections made
in fiscal years beginning after December 15, 2005, with early adoption
permitted for changes and corrections made in years beginning after May
2005. The Company implemented SFAS No. 154, effective January 1, 2006,
which did not have a material impact upon the Company's financial position,
results of operations or cash flows.
In February 2006, the FASB issued Statement of Financial Accounting
Standards No. 155, "Accounting for Certain Hybrid Financial Instruments"
("SFAS 155"), which amends SFAS No. 133, "Accounting for Derivatives
Instruments and Hedging Activities" ("SFAS 133") and SFAS No. 140,
"Accounting for Transfers and Servicing of Financial Assets and
Extinguishment of Liabilities" ("SFAS 140"). SFAS 155 amends SFAS 133 to
narrow the scope exception for interest-only and principal-only strips on
debt instruments to include only such strips representing rights to receive
a specified portion of the contractual interest or principle cash flows.
SFAS 155 also amends SFAS 140 to allow qualifying special-purpose entities
to hold a passive derivative financial instrument pertaining to beneficial
interests that itself is a derivative instrument. The Company is currently
evaluating the impact of this new Standard, but believes that it will not
have a material impact on the Company's financial position, results of
operations or cash flows.
3. DEBT OBLIGATIONS
On May 25, 2005, the Company entered into a two-year agreement with a new
lender to provide a revolving credit line (the "Revolver") and term note
(the "Term Note") of up to $1,000,000 collateralized by accounts receivable
8
and certain fixed assets (collectively referred to herein as the "Credit
Facility"). Advances under the Revolver are based on 80% of each eligible
receivable, as defined. Borrowings under the Revolver and Term Note bear
interest at the prime rate (7.75% as of March 31, 2006), plus 2%. The
Credit Facility also provides for payment of a monthly collateral
management fee equal to 20 basis points (0.02%) on the average daily
outstanding balances under the Credit Facility. In addition, the Credit
Facility provides for an annual fee equal to 1% of the capital availability
amount, as defined, upon closing and on each anniversary of the closing
date. The Company incurred loan and closing costs of $26,785 in connection
with the negotiation and execution of the Credit Facility which is being
amortized over the loan term of 24 months.
On May 27, 2005, the Company borrowed a total of $805,218 under the Credit
Facility to pay off amounts owed under the Company's bank line of credit
(the "Bank Line of Credit") of $654,184 and bank term loan (the "Bank Term
Loan") of $151,034, both of which were due on or before May 31, 2005. As of
March 31, 2006, total borrowings outstanding under the Credit Facility
amounted to $106,016 all of which was outstanding under the Term Note. The
Company has $893,984 of borrowing availability under the Credit Facility as
of March 31, 2006.
The terms and conditions of the Credit Facility included limited guarantees
from three executive officers and one director of the Company. In
connection with providing such limited guarantees to the lender, the
guarantors were issued an aggregate of 260,000 shares of the Company's
common stock, of which an aggregate of 196,000 are being issued to the
executive officers, and 64,000 shares to one outside director. The
guarantors have each entered into an agreement with the Company to return
the shares that they received in consideration of their limited guarantee
in the event the guarantor on his own volition breaches (other than a
breach that is cured within the terms of the limited guarantee agreement)
or terminates his own respective limited guarantee, prior to the payment in
full of the Company's obligations to the lender or the voluntary release
from the limited guarantees by the lender. The Company recorded deferred
compensation costs of $104,000 in connection with the issuance of common
stock for the limited guarantees, which is being amortized to compensation
expense over the guarantee period of 24 months.
As of March 31, 2006 we have certain outstanding debt and lease obligations
amounting to $241,832 and $57,896, respectively, which require additional
principal payments of up to $187,500, in the event of default. As of March
31, 2006 and the filing of this Quarterly Report on Form 10-QSB we were in
compliance with the terms and conditions of such debt and lease agreements.
The Company incurred net interest expense of $46,741 and $ 34,382 for the
three months ended March 31, 2006 and 2005, respectively.
4. COMMITMENTS AND CONTINGENCIES
Legal Matters
-------------
Byong Y. Kwon, Plaintiff against Daniel J. Yun, Emergent Group Inc.,
Emergent Capital Investment Management, LLC, Metedeconk Holdings, LLC,
Voyager Advisors, LLC, Millennium Tradition Limited (f/k/a Millennium
Heritage, Limited), Emergent Management Company, LLC, Endurance Advisors,
Limited, SK Networks Co., Ltd. (f/k/a SK Global Co., Ltd.), Hye Min Kang,
John Does 1-2 and Richard Roes 1-2 (collectively the "Defendants").
Plaintiff's complaint against the Defendants named above is a civil
lawsuit, which was signed by the clerk on February 2, 2005. This action is
brought in the United States District Court, Southern District of New York
by Plaintiff against the Company, a former director, Daniel Yun, and other
parties to recover money damages for alleged fraud, negligent
misrepresentations and aiding and abetting fraud. The Amended Complaint
alleges that the factual basis involving the action against the Company
involves alleged false representations to Plaintiff to induce him to leave
his then employment in 2001 and accept the Company's and another named
Defendant's alleged offer of employment. Plaintiff seeks compensatory
damages and punitive damages each in the amount of not less than $2,100,000
together with interest thereon, reasonable attorneys' fees and other
specific relief against Defendants other than the Company. Management has
denied the Plaintiff's allegations against the Company and intends to
vigorously defend this lawsuit. During the quarter ended March 31, 2006,
there were no material developments in this matter.
9
Equipment Agreement
--------------------
In March 2006 we entered into an agreement with a medical equipment
supplier to rent certain surgical equipment for evaluation purposes for the
period from March 1, 2006 to June 30, 2006. The rental agreement provides
an option to purchase such equipment on or before June 30, 2006. The
agreement requires the Company to make deposits of $75,000 during the
evaluation period. Such deposits are subject to forfeiture should we decide
not to exercise our right under the agreement to purchase such equipment.
The deposits will be either refunded or applied against the purchase price
should we decide to exercise our right to purchase the equipment.
5. RELATED PARTY TRANSACTIONS
Transactions with BJH Management
--------------------------------
The Company's Chairman and Chief Executive Officer maintains his primary
office in New York. In this regard, the Company reimbursed BJH Management,
LLC, a company owned by the Company's Chairman and Chief Executive Officer,
for office rent and related expenses totaling $9,458 and $8,299 for the
three months ended March 31, 2006 and 2005, respectively.
6. LIMITED LIABILITY COMPANIES
In connection with expanding its business in certain commercial and
geographic areas, PRI Medical will at times help to form Limited Liability
Companies ("LLCs") in which it will acquire a minority interest and offer
the remaining interest to other investors. These LLCs acquire certain
equipment for use in their respective business activities which generally
focus on surgical procedures. As of March 31, 2006 PRI Medical holds
minority equity interests in four LLCs which conduct business in California
and Colorado. During 2005, PRI Medical helped to form two new LLCs, which
subsequently raised total capital of $200,000 from investors. In late 2005,
PRI Medical, on behalf of such LLCs, acquired two surgical lasers for
$650,000. The LLCs finalized lease financing of $600,000 for such equipment
in January 2006. The cost of the equipment is included in property and
equipment and the related lease payable is included in capital lease
obligations payable in the accompanying balance sheet as of March 31, 2006.
The investors in each LLC agreed to provide individual proportionate lease
guarantees based on their respective ownership percentages in the LLCs. PRI
Medical provided corporate guarantees to the financing company in
connection with such lease financing. In addition, the investors in each
LLC agreed to indemnify PRI Medical against losses, if any, incurred in
connection with its guarantees.
In accordance with the Financial Accounting Standards Board Interpretation
No. 46R, "Consolidation of Variable Interest Entities" the Company
accounted for its equity investments in its LLCs under the full
consolidation method whereby transactions between the Company and LLCs have
been eliminated through consolidation.
10
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Forward-Looking Statements
The information contained in this Form 10-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, 2005 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
effectively integrate new and changing medical technologies into to its product
and service offerings, (d) the Company's ability to meet the terms and
conditions of its debt and lease obligations, and (e) 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., its wholly owned and only operating subsidiary. PRI Medical
Technologies, Inc. primarily conducted its business through its wholly owned
subsidiary Physiologic Reps ("PRI") until March 2005 at which time PRI was
merged into PRI Medical Technologies, Inc. ("PRI Medical"). Emergent and PRI
Medical are referred to collectively hereinafter as the "Company." PRI Medical
provides mobile laser/surgical services, along with technical support on a per
procedure basis to hospitals, out-patient surgery centers, and physicians'
offices.
Critical Accounting Policies
Our discussion and analysis of our financial condition 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 requires 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, inventory valuation and property and equipment. 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. Revenue is recognized when the services are performed and
billable. 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.
11
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
statements of income data for the periods indicated in dollars and as a
percentage of total 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.
March 31,
---------------------------------------
2006 % 2005 %
-------------- -- -------------- ---
Revenue $ 3,990,817 100% $2,922,523 100%
Cost of goods sold 2,439,680 61% 1,968,948 67%
-------------- --- -------------- ---
Gross profit 1,551,137 39% 953,575 33%
Selling, general, and administrative expenses 976,328 24% 799,134 27%
-------------- --- -------------- ---
Income from operations 574,809 14% 154,441 5%
Other income (expense) (14,864) 0% (19,001) -1%
-------------- --- -------------- ---
Income before provision for income
taxes and minority interest 559,945 14% 135,440 5%
Provision for income taxes (23,864) 0% - 0%
-------------- --- ------------- ---
Net income before minority interest 536,081 14% 135,440 5%
-- ---
Minority interest in income of consolidated
limited liability companies (72,086) 2% (30,162) 1%
-------------- --- -------------- ---
Net income $ 463,995 12% $ 105,278 4%
============== === ============== ===
Comparison of the Three Months Ended March 31, 2006 to March 31, 2005
The Company generated revenues of $3,990,817 in 2006 compared to $2,922,523 in
2005. The increase in revenues in 2006 of $1,068,294, or 37% is related to an
increase in revenues from our higher-priced surgical procedures, to revenues
generated from certain customers of an acquired competitor in November 2005, and
to the full impact of certain price increases implemented in early 2005. In
November 2005 we acquired certain operating assets and customer lists from a
competitor which contributed to the increase in revenues for 2006. Revenues for
2006 include revenues of $462,020 from four consolidated limited liability
companies while 2005 includes revenues of $166,776 from two such companies.
Revenues from our surgical and cosmetic procedures represented approximately 92%
and 8% of total revenues for 2006 and 88% and 12% for 2005, respectively.
Cost of goods sold was $2,439,680 in 2006 or 61% of revenues compared to
$1,968,948 or 67% in 2005. Costs of good sold primarily consist of payroll costs
and related expenses for technicians, cost of disposables consumed, insurance
costs and other operating costs incurred in rendering mobile medical equipment
and technician services. The overall increase in cost of goods sold of $470,732
or 24% for 2005 is generally due to increases in disposable costs and payroll
and related costs offset by a decrease in depreciation expense. Disposable costs
increased as a result of a change in the mix of surgical procedures rendered to
customers whereby a greater number of procedures were performed in 2006 compared
to 2005 that required more expensive disposable items while payroll costs
increased as a result of the increase in the number of surgical and cosmetic
procedures performed in 2006. Depreciation and amortization expense decreased
due to the fact that certain assets became fully depreciated in mid-2005 and
such decreases in depreciation were not entirely offset by depreciation from
newly acquired assets. The net change in other cost categories included in cost
of goods sold remained relatively unchanged in 2006 compared to 2005.
12
Gross profit from operations was $1,551,137 in 2006 compared to $953,575 in
2005. Gross profit as a percentage of revenues was 39% in 2006 compared to 33%
for 2005. The improvement in our gross profit margin in 2006 is primarily due to
certain per procedure price increases implemented early 2005 for various
surgical and cosmetic procedures and to the mix of surgical procedures
performed. Profit margins, net of disposable costs, will vary depending on the
type of surgical procedure performed due to the fact that certain procedures
require more expensive disposable items. In addition, gross margin rates will
vary from period to period depending upon various factors including product and
service mix, pricing considerations, and equipment and technician utilization
rates. The gross margin for 2006 is not necessarily indicative of the margins
that may be realized in future periods.
Selling, general, and administrative expenses were $976,328 or 24% of revenues
in 2006 compared to $799,134 or 27% of revenues in 2005. Such costs include,
among others, payroll and related expenses, insurance costs and occupancy costs.
The increase in selling, general and administrative expenses of $177,194 in 2006
is primarily related to increases in selling payroll and commissions, and to
incentive compensation expense.
Other income (expense) was ($14,864) in 2006 compared to ($19,001) in 2005.
Other income (expense) includes interest expense, gains and losses on disposal
of property and equipment, and other miscellaneous income and expense items. The
net decrease in other income (expense) of $4,137 is primarily related to
miscellaneous income from the write-off of certain vendor obligations relating
to prior years, offset by an increase in net interest expense and a decrease in
gains from the disposals of property and equipment in 2006 compared to 2005.
The minority interest in net income of limited liability companies was $72,086
in 2006 compared to $30,162 in 2005. Minority interest in income relates to the
consolidation of four entities in 2006 and two entities in 2005 in which we hold
an equity investment interest. As of March 31, 2006 and 2005 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.
Net income was $463,995 in 2006 compared to $105,278 in 2005. Provision for
income taxes was ($23,864) in 2006 compared to $-0- in 2005. The Company has net
operating loss carryforwards for both federal and state tax purposes. The
provision for income taxes of ($23,864) as of March 31, 2006 relates to
estimated Alternative Minimum Taxes (AMT) and to minimum state taxes payable.
Basic net income per share for 2006 and 2005 was $0.09 and $0.02, respectively,
while fully diluted net income per share for 2006 and 2005 was $0.08 and $0.02,
respectively. Basic and fully diluted shares outstanding for 2006 were 5,451,631
and 5,816,939, respectively, and 4,744,551 for 2005.
Liquidity and Capital Resources
On May 25, 2005, the Company entered into a two-year agreement with a new lender
to provide a revolving credit line (the "Revolver") and term note (the "Term
Note") of up to $1,000,000 collateralized by accounts receivable and certain
fixed assets (collectively referred to herein as the "Credit Facility").
Advances under the Revolver are based on 80% of eligible receivables, as
defined. Borrowings under the Revolver and Term Note bear interest at the prime
rate (7.75% as of March 31, 2006), plus 2%. The Credit Facility also provides
for payment of a monthly collateral management fee equal to 20 basis points
(0.02%) on the average daily outstanding balances under the Credit Facility. In
addition, the Credit Facility provides for an annual fee equal to 1% of the
capital availability amount, as defined, upon closing and on each anniversary of
the closing date. The Company incurred loan and closing costs of $26,785 in
connection with the negotiation and execution of the Credit Facility which is
being amortized over the loan term of 24 months.
On May 27, 2005, the Company borrowed a total of $805,218 under the Credit
Facility to pay off amounts owed under the Company's bank line of credit (the
"Bank Line of Credit") of $654,184 and bank term loan (the "Bank Term Loan") of
$151,034, both of which were due on or before May 31, 2005. As of March 31, 2006
total borrowings outstanding under the Credit Facility amounted to $106,016 all
of which was outstanding under the Term Note. The Company has $893,984 of
borrowing availability under the Credit Facility as of March 31, 2006.
The terms and conditions of the Credit Facility included limited guarantees from
three executive officers and one director of the Company. In connection with
providing such limited guarantees to the lender, the guarantors were issued an
aggregate of 260,000 shares of the Company's common stock, of which an aggregate
of 196,000 were issued to the executive officers, and 64,000 shares to one
director. The guarantors have each entered into an agreement with the Company to
return the shares that they received in consideration of their limited guarantee
in the event the guarantor on his own volition breaches (other than a breach
that is cured within the terms of the limited guarantee agreement) or terminates
his own respective limited guarantee, prior to the payment in full of the
Company's obligations to the lender or the voluntary release from the limited
guarantees by the lender. The Company recorded deferred compensation costs of
$104,000 in connection with the issuance of common stock for the limited
guarantees, which is being amortized to compensation expense over the guarantee
period of 24 months.
13
As of March 31, 2006 we have certain outstanding debt and lease obligations
amounting to $241,832 and $57,896, respectively, which require additional
principal payments of up to $187,500, in the event of default. As of March 31,
2006 and the filing of this Quarterly Report on Form 10-QSB we were in
compliance with the terms and conditions of such debt and lease agreements.
In March 2006 we entered into an agreement with a medical equipment supplier to
rent certain surgical equipment for evaluation purposes for the period from
March 1, 2006 to June 30, 2006. The rental agreement provides an option to
purchase such equipment on or before June 30, 2006. The agreement requires the
Company to make deposits of $75,000 during the evaluation period. Such deposits
are subject to forfeiture should we decide not to exercise our right under the
agreement to purchase such equipment. The deposits will be either refunded or
applied against the purchase price should we decide to exercise our right
purchase the equipment.
The Company had cash and cash equivalents of $588,828 at March 31, 2006. Cash
provided by operating activities for the three months ended March 31, 2006 was
$925,062. Cash generated from operations includes net income of $463,995,
depreciation and amortization of $272,696, minority interest in net income of
$72,086 and an increase in accounts payable and accrued expenses of $329,596;
offset by an increase in accounts receivable of $154,522 and a decrease in
prepaid expenses of $17,268. Cash used in investing activities was $164,092
related to the purchase of property and equipment of $96,027 and to cash
distributions of $73,115 to members of limited liability companies, offset by
net proceeds of $5,050 from the disposition of property and equipment. Cash used
for financing activities was $757,519 from payments on lease and debt
obligations of $139,642 and $105,016, respectively, and payment of dividends on
common stock of $512,861. In addition, during the quarter ended March 31, 2006
we borrowed and repaid $3,954,691 under our line of credit.
The Company had cash and cash equivalents of $493,810 at March 31, 2005. Cash
provided by operating activities for the three months ended March 31, 2005 was
$400,383. Cash from operations includes net income of $105,278, depreciation and
amortization of $299,854, minority interest in net income of $30,162, decreases
in accounts receivable, inventory, prepaid expense, and deposits and other
assets of $148,683 and an increase in accounts payable of $132,400. Cash used in
investing activities was $88,617 due to the purchase of property and equipment
of $57,865 and net cash payments of $42,291 to limited liability companies
offset by net proceeds of $11,539 from the sale of property and equipment. Cash
used for financing activities was $169,551 resulting from payments on lease and
debt obligations of $73,371 and $96,180, respectively.
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 and lease obligations and capital expenditures. The primary sources
of funding for such requirements will be cash generated from operations,
borrowings under debt facilities and trade payables, and raising additional
capital from the sale of equity or other securities. 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-15(e). 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. The Company carried out an
evaluation, under the supervision and with the participation of the Company's
management, including the Company's Chief Executive Officer and the Company's
Chief Financial Officer, of the effectiveness of the design and operation of the
Company's disclosure controls and procedures. Based on the foregoing, the
Company's Chief Executive Officer and Chief Financial Officer concluded that the
Company's disclosure controls and procedures were effective at the reasonable
assurance level at the end of our most recent quarter ended March 31, 2006.
There have been no changes in the Company's disclosure controls and procedures
or in other factors that could affect the disclosure controls subsequent to the
date the Company completed its evaluation.
14
Management has not yet completed, and is not yet required to have completed, its
assessment of the effectiveness of internal control over financial reporting as
required by Section 404 of the Sarbanes-Oxley Act of 2002, as amended.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
See Note 4 to Notes to Condensed Consolidated Financial Statements
included herein for a description of legal matters.
Item 2. Changes in Securities
(a) In the first quarter ended March 31, 2006 there were no sales of
unregistered securities.
(b) Rule 463 of the Securities Act is not applicable to the Company.
(c) In the first quarter ended March 31, 2006 there were no repurchases by
the Company of its Common Stock.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Submissions of Matters to a Vote of Security Holders
In the first quarter ended March 31, 2006 there were no matters
submitted to a vote of security holders.
Item 5. Other Information
None.
Item 6. Exhibits
Except for the exhibits listed below, 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
- --------------------------
10.1 Accounts Receivable Purchase Agreement executed May 25, 2005 by and
among Access Capital, EGI and EGI's wholly-owned subsidiary, PRI Medical
Technologies, Inc.*
10.2 May 2005 Letter Agreement by and among EGI and the limited guarantors,
Bruce J. Haber, Mark Waldron, William M. McKay and Louis Buther*
10.3 May 2005 Amendment to Employment Contract of Bruce Haber*
10.4 May 2005 Amendment of Employment Contract of Louis Buther*
11.1 Statement re: computation of earnings per share. See condensed
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 18 U.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 18 U.S.C. Section
1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002**
------------------------
* Previously filed with Form 8-K on June 2, 2005.
** Filed herewith.
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 15, 2006 By: /s/ Bruce J. Haber
-----------------------
Bruce J. Haber,
Chairman and Chief Executive Officer
Date: May 15, 2006 By: /s/ William M. McKay
--------------------------
William M. McKay,
Chief Financial Officer and Secretary