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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-QSB
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Quarterly Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the Quarterly Period Ended March 31, 2003
Commission File Number: 0-21475
EMERGENT GROUP INC.
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(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)
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Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports) and (2) has been subject to such
filing requirements for the past 90 days. Yes [ X ] No [ ]
As of May 12, 2003, the registrant had a total of 67,357,815 shares of Common
Stock outstanding.
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EMERGENT GROUP INC.
FORM 10-QSB Quarterly Report
Table of Contents
Page
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets as of March 31, 2003 (unaudited)
and December 31, 2002 3
Unaudited Condensed Consolidated Statements of Operations for the Three
Months Ended March 31, 2003 and 2002 4
Unaudited Condensed Consolidated Statements of Cash Flows for the Three
Months Ended March 31, 2003 and 2002 5
Notes to the Unaudited 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 15
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 15
Item 2. Changes in Securities 15
Item 3. Defaults Upon Senior Securities 16
Item 4. Submissions of Matters to a Vote of Security Holders 16
Item 5. Other Information 16
Item 6. Exhibits and Reports on Form 8-K 16
Signatures 16
2
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Emergent Group Inc. and Subsidiaries
Condensed Consolidated Balance Sheets
March 31, December 31,
2003 2002
------------ ------------
ASSETS (unaudited)
Current assets
Cash $ 811,517 $ 957,242
Accounts receivable, net 1,010,695 1,306,055
Due from related parties, net 105,970 121,543
Inventory, net 330,393 295,069
Prepaid expenses 219,316 265,062
Income tax receivable -- 4,830
------------ ------------
Total current assets 2,477,891 2,949,801
Equity investment in limited liability companies 17,323 31,134
Property and equipment, net 1,788,787 1,888,688
Goodwill, net 779,127 779,127
Deposits and other assets, net 115,510 133,022
------------ ------------
Total assets $ 5,178,638 $ 5,781,772
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Line of credit $ 1,108,700 $ 1,108,700
Current portion of capital lease obligations 484,806 677,973
Current portion of notes payable 720,236 807,908
Accounts payable 508,784 544,835
Accrued expenses 833,966 1,053,243
------------ ------------
Total current liabilities 3,656,492 4,192,659
Capital lease obligations, net of current portion 291,429 368,618
Notes payable, net of current portion 614,662 657,833
------------ ------------
Total liabilities 4,562,583 5,219,110
Shareholders' equity
Preferred stock, $0.001 par value, non-voting 10,000,000
shares authorized, no shares issued and outstanding -- --
Common stock, $0.001 par value, 100,000,000 shares authorized
67,357,815 and 64,917,791shares issued and outstanding 67,358 64,918
Committed stock, 2,440,024 shares -- 2,440
Additional paid-in capital 13,541,784 13,541,784
Accumulated deficit (12,993,087) (13,046,480)
------------ ------------
Total shareholders' equity 616,055 562,662
------------ ------------
Total liabilities and shareholders' equity $ 5,178,638 $ 5,781,772
============ ============
The accompanying notes are an integral part of these condensed
financial statements.
3
Emergent Group Inc. and Subsidiaries
Condensed Consolidated Statements of Operations
Three Months Ended
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March 31,
2003 2002
------------ ------------
(unaudited)
Revenue $ 2,140,820 $ 2,502,521
Cost of goods sold 1,315,937 1,414,533
------------ ------------
Gross profit 824,883 1,087,988
Selling, general, and administrative expenses 832,223 870,694
------------ ------------
Income (Loss) from operations (7,340) 217,294
Other income (expense)
Interest expense (52,516) (153,748)
Equity in net earnings (losses) of investment in
limited liability companies (13,811) 7,222
Gain on disposal of property and equipment 26,267 81,268
Other income (expense), net (2,737) 86,563
------------ ------------
Total other income (expense) (42,797) 21,305
------------ ------------
Income (loss) before provision for income taxes
and extraordinary item (50,137) 238,599
Provision for income taxes -- --
------------ ------------
Income (loss) before extraordinary item (50,137) 238,599
Extraordinary item
Gain on forgiveness of debt, net of tax 103,530 226,517
------------ ------------
Net income (loss) $ 53,393 $ 465,116
============ ============
Income (Loss) Per Share Data:
Before extraordinary item $ (0.00) $ 0.004
Extraordinary item 0.00 0.004
------------ ------------
Basic and diluted income per share $ 0.00 $ 0.01
============ ============
Weighted-average shares outstanding 67,357,815 53,044,821
============ ============
The accompanying notes are an integral part of these condensed
financial statements.
4
Emergent Group Inc. and Subsidiaries
Condensed Consolidated Statements of Cash Flows
Three Months Ended
--------------------------------
March 31,
2003 2002
--------------- ---------
(Unaudited)
Cash flows from operating activities
Net income $ 53,393 $ 465,116
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Gain on disposal of property and equipment (26,267) (81,268)
Gain on forgiveness of debt (103,530) (226,515)
Depreciation and amortization 186,412 153,171
Equity in net gain of investment in limited liability companies 13,811 (7,223)
Provision for doubtful accounts 10,827 5,444
(Increase) decrease in
Accounts receivable 735,803 380,574
Inventory (35,324) (8,996)
Due from related party (416,181) (287,585)
Prepaid expenses 45,746 (11,848)
Deposits and other assets 9,830 1,401
Increase (decrease) in
Accounts payable (43,862) (158,503)
Accrued expenses (115,747) 180,683
--------- ---------
Net cash provided by (used in) operating activities 314,911 404,451
--------- ---------
Cash flows from investing activities
Cash paid to limited liability companies (11,700)
Purchase of property and equipment (76,708) (8,383)
Net Proceeds from the sale of property and equipment 28,972 111,835
--------- ---------
Net cash provided by (used in) investing activities (59,436) 103,452
--------- ---------
Cash flows from financing activities
Net change in book overdraft -- (137,501)
Payments on capital lease obligations (270,356) (89,000)
Payments on notes payable (130,844) (110,891)
--------- ---------
Net cash used in financing activities (401,200) (337,392)
--------- ---------
Net increase (decrease) in cash (145,725) 170,511
Cash, beginning of period 957,242 482,165
--------- ---------
Cash, end of period $ 811,517 $ 652,676
========= =========
Supplemental disclosures of cash flow information:
Interest paid $ 48,115 $ 66,936
========= =========
Supplemental disclosures of non-cash investing and financing activities -
During the quarter ended March 31, 2003 and 2002 the Company billed $ 290,440
and $288,000, respectively, to a related party for management fees . The Company
also incurred expenses on behalf of the related party.
The accompanying notes are an integral part of these condensed
financial statements.
5
EMERGENT GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
1. BUSINESS
Emergent Group Inc. ("Emergent") is the parent company of Medical Resources
Management, Inc. ("MRM"), its wholly owned and only operating subsidiary.
Emergent acquired MRM in July 2001 as per an Agreement and Plan of
Reorganization of Merger ("Merger Agreement"), dated January 23, 2001. MRM
primarily conducts its business through its wholly owned subsidiary
Physiologic Reps ("PRI"). Emergent, MRM and PRI are referred to collectively
hereinafter as the "Company." PRI is a provider of mobile surgical equipment
on a fee for service basis to hospitals, surgical care centers and other
health care providers. PRI also provides technical support required to
ensure the equipment is working correctly. PRI provides a limited amount of
non-surgical equipment on a rental basis to hospitals and surgery centers,
although PRI began winding down this area of business in early 2002 in order
to focus on its core surgical equipment rental/services business.
2. BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements of
Emergent have been prepared pursuant to the rules of the Securities and
Exchange Commission ("SEC"). Certain information and footnote disclosures
normally included in financial statements prepared in accordance with
accounting principles generally accepted in the United States have been
condensed or omitted pursuant to such rules and regulations. These unaudited
condensed consolidated financial statements should be read in conjunction
with the audited consolidated financial statements and notes thereto
included in the Company's Annual Report on Form 10-K for the year ended
December 31, 2002. In the opinion of management, the accompanying unaudited
condensed consolidated financial statements reflect all adjustments, which
are of a normal recurring nature, necessary for a fair presentation of the
results for the periods presented.
The results of operations presented for the three months ended March 31,
2003 and 2002 are not necessarily indicative of the results to be expected
for any other interim period or any future fiscal year.
The Company's only operating subsidiary, MRM, has historically incurred
operating losses. The consolidated financial statements have been prepared
on a going-concern basis, which contemplates the realization of assets and
satisfaction of liabilities in the normal course of business. As of March
31, 2003 and December 31, 2002 the Company had working capital deficits of
approximately $1.2 million. For the three months ended March 31, 2003 and
year ended December 31, 2002, the Company reported net losses before
extraordinary items of $(50,137) and $(4,227,193), respectively. There can
be no assurances that the Company will achieve positive operating results in
future periods. The financial statements do not include any adjustments to
reflect the possible future effects on the recoverability and classification
of assets or the amounts and classification of liabilities that may result
from the outcome of this uncertainty.
Principles of Consolidation
The condensed consolidated financial statements include the accounts of all
majority-owned subsidiaries. All significant intercompany transactions have
been eliminated in consolidation.
Use of Estimates
The preparation of the condensed consolidated financial statements in
accordance with generally accepted accounting principles requires management
to make estimates and assumptions that affect the reported amounts of assets
and liabilities and disclosure of contingent assets and liabilities at the
date of the financial statements and the reported amounts of income (loss)
and expenses during the reporting period. Actual results could differ
significantly from those estimates.
6
Inventory
Inventory consists of finished goods primarily used in connection with the
delivery of our mobile surgical equipment rental and services business.
Inventory is stated at the lower of cost or market, on a first-in, first-out
basis.
Earnings (Loss) Per Share
The Company computes earnings (loss) per share in accordance with SFAS No.
128, "Earnings Per Share." Under the provisions of SFAS No. 128, basic net
income (loss) per common share ("Basic EPS") is computed by dividing net
income (loss) per common share by the weighted average number of common
shares outstanding. Diluted net income (loss) per common share ("Diluted
EPS") is computed by dividing net income (loss) by the weighted average
number of common shares and dilutive common share equivalents then
outstanding. SFAS No. 128 requires the presentation of both Basic EPS and
Diluted EPS on the face of the condensed consolidated statements of
operations.
Reclassifications
Certain amounts in the prior period have been reclassified to conform to the
presentation for the three months ended March 31, 2003. The financial
information included in this quarterly report should be read in conjunction
with the consolidated financial statements and related notes thereto in the
Company's Annual Report on Form 10-K for the year ended December 31, 2002.
Recent Accounting Pronouncements
In 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. The Company
does not expect adoption of SFAS No. 145 to have a material impact, if any,
on its financial position or results of operations.
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated
with Exit or Disposal Activities." This statement addresses financial
accounting and reporting for costs associated with exit or disposal
activities and nullifies Emerging Issues Task Force ("EITF") Issue No. 94-3,
"Liability Recognition for Certain Employee Termination Benefits and Other
Costs to Exit an Activity (including Certain Costs Incurred in a
Restructuring)." This statement requires that a liability for a cost
associated with an exit or disposal activity be recognized when the
liability is incurred. Under EITF Issue 94-3, a liability for an exit cost,
as defined, was recognized at the date of an entity's commitment to an exit
plan. The provisions of this statement are effective for exit or disposal
activities that are initiated after December 31, 2002 with earlier
application encouraged. This statement is not applicable to the Company.
In October 2002, the FASB issued SFAS No. 147, "Acquisitions of Certain
Financial Institutions." SFAS No. 147 removes the requirement in SFAS No. 72
and Interpretation 9 thereto, to recognize and amortize any excess of the
fair value of liabilities assumed over the fair value of tangible and
identifiable intangible assets acquired as an unidentifiable intangible
asset. This statement requires that those transactions be accounted for in
accordance with SFAS No. 141, "Business Combinations," and SFAS No. 142,
"Goodwill and Other Intangible Assets." In addition, this statement amends
SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived
Assets," to include certain financial institution-related intangible assets.
The Company does not expect adoption of SFAS No. 147 to have a material
impact, 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
7
more frequent disclosures in financial statements about the effects of
stock-based compensation. This statement is effective for financial
statements for fiscal years ending after December 15, 2002. SFAS No. 148
will not have any impact on the Company's financial statements as management
does not have any intention to change the fair value method.
3. DEBT OBLIGATIONS AND PLAN OF RESTRUCTURE
During 2002 we were in default on most of our note and lease obligations due
to delinquent principal and interest payments. In order to avoid ceasing our
operations or a possible bankruptcy filing and in an effort to improve our
financial condition, during the first quarter of 2002 we began the process
of renegotiating substantially all of our outstanding debt, lease, and trade
obligations with our key creditors. As of December 31, 2002 we had
substantially completed our debt restructuring efforts. The restructured
debt and lease obligation agreements provide in some cases for the return of
equipment used to collateralize such obligations, if applicable, and certain
periodic and monthly installments for the balance of such obligations.
Generally, in the event of default by the Company we are required to repay
all amounts previously forgiven and all amounts then outstanding are
accelerated and become immediately due and payable. In addition, for the
three months ended March 31, 2003 and 2002, we recorded net gains on
forgiveness of vendor debt in the amount of $103,530 and $226,517,
respectively. As of the filing date of this Quarterly Report on Form 10-QSB,
we are in compliance with the terms and conditions of our renegotiated debt
agreements. However, as of March 31, 2003 the Company continues to be in
default under certain note and lease obligations with aggregate principal
balances outstanding of approximately $162,000. We intend to continue
negotiations with these creditors until these disputes are resolved and
satisfactory resolutions are reached. No assurances can be given that these
negotiations will be completed on terms satisfactory to the Company, if at
all.
At March 31, 2003 we had a bank loan (the "Bank Term Loan") outstanding in
the amount of $549,775. The loan agreement, as amended, provides for monthly
payments of principal of $16,667 and interest at the prime rate plus 4.00%.
As of December 31, 2002 and March 31, 2003 we were in default under certain
provisions of the loan agreement and as a result all principal and interest
were accelerated and became immediately due and payable. In April 2003, the
lender agreed to extend the term of the loan to March 2004 under the same
terms and conditions as described herein. We also have an outstanding bank
line of credit (the "Bank Line of Credit") in the amount of $1,108,700 with
the same lender. This Bank Line of Credit provides for interest at the prime
rate, plus 2.75%, with borrowings based upon eligible accounts receivable as
defined. The amount outstanding under the Bank Line of Credit exceeded the
eligible borrowing base as of December 31, 2002 and March 31, 2003 and the
Company was in default under certain provisions of the credit agreement. As
a result this facility is not available for use as of the filing date of
this Quarterly Report on Form 10-QSB. In April 2003 the lender agreed to
amend the Bank Line of Credit to provide for an extension of the due date to
September 2003 and a principal payment of $108,700. The other terms and
condition of the loan remain the same.
The Bank Line of Credit and Bank Term Loan prohibit the payment of cash
dividends and require us to maintain certain levels of net worth and to
generate certain ratios of cash flows to debt service. Notwithstanding the
modified terms and conditions of the Bank Line of Credit and Bank Term Loan
as discussed above, as of March 31, 2003 and as of the filing date of this
Form 10-QSB, we were not in compliance with certain financial covenants of
such agreements. As a result, we have classified all of the bank loan
facilities as current liabilities in the accompanying balance sheet as of
March 31, 2003.
4. LEGAL PROCEEDINGS
Stonepath Group, Inc.
In October 2000, a related party of the Company (the "plaintiff") commenced
an action on behalf of the Company against Stonepath Group, Inc. and two of
its officers in the United States District Court for the Southern District
of New York. The action was for negligence and fraud under the federal
securities laws and common law to recover its investment in Stonepath. On
April 15, 2002, the court dismissed the plaintiff's amended Complaint
without leave to amend. The Company has filed an appeal of the court's
decision and this appeal is pending.
Citicorp Vendor Finance, Inc.
On April 25, 2002, Citicorp Vendor Financial, Inc. filed suit against PRI
and MRM for breach of contract in Superior Court of California, County of
Los Angeles. This lawsuit seeks to recover $655,916 plus interest and
8
late charges in connection with amounts due under certain equipment lease
agreements. The Company reached a settlement with Citicorp in November 2002,
whereby, the Company agreed to pay Citicorp a total of $400,000 in full
settlement of the claim in various installments, with the balance being paid
in full by March 1, 2004. As part of the settlement, Citicorp has agreed
that PRI may sell the equipment under the equipment lease agreement but must
transmit to Citicorp all proceeds from the sale in excess of $225,000. In
January 2003, the Company paid $175,000 to Citicorp from proceeds received
from equipment sales in December 2002. The settlement further stipulates in
event of non-payment, Citicorp can petition the court for an entry of
judgment against PRI. The Company is current in making all required payments
under the settlement agreement.
General Electric
Beginning in 1999, the Company's subsidiaries entered into 39 personal
property sales contracts to purchase from General Electric certain medical
imaging equipment. The total amount the Company owed to General Electric as
of May 21, 2002 was $2,399,487. The Company reached a settlement with
General Electric in June 2002 and entered into a Stipulation of Settlement
for entry of judgment which would be filed in Superior Court of the State of
California, County of Los Angeles only if there is a default which is not
cured. Pursuant to the settlement agreement, the Company agreed to return
certain equipment to General Electric and to make sixty (60) monthly
payments of $18,013 for a total of $1,080,781. In the event the Company
fails to make all required payments when due, and an event of default occurs
which is not cured, the Company would owe General Electric the original
amounts due at the date of settlement under 39 personal sales contracts. The
Company is current in making all required payments under the settlement
agreement and substantially all of the equipment has been returned.
.
Charlotte Taylor
In December 2001, Charlotte Taylor commenced a legal proceeding in the
Superior Court of the State of California, County of Orange, against the
Company, Anaheim General Hospital and a surgeon named Jay Shree Vyas M.D.
alleging compensatory and general damages for medical negligence and product
liability in the amount to be proved at trial plus reasonable attorneys'
fees, interest on the sum of damages awarded, costs of suit and such other
amount as the Court deems just and proper. Plaintiff alleges that while she
was under anesthesia, Defendants sought to use an instrument called a
morcelator which did not function properly and allegedly caused her harm.
The Company has reported this legal proceeding to its insurance company and
management believes that the outcome of this proceeding will be covered by
insurance, except for any applicable deductible. The Company intends to
vigorously defend this lawsuit.
Paige Amans
On October 18, 2002, a former employee of the Company commenced a legal
proceeding in the Superior Court of California, County of Los Angeles
against the Company, its subsidiaries, and a former officer of the Company.
The Complaint contains three causes of action as follows: (1) discrimination
on the basis of her sex in violation of the California Fair Employment and
Housing Act (California Government Code Section 12940); breach of contract;
and breach of the implied covenant of good faith and fair dealing. Plaintiff
alleges that she was discriminated against in the terms and conditions of
her employment, transferred, and ultimately wrongfully terminated because of
her sex (female) and due to alleged favoritism towards another female
employee at the Company. Plaintiff also claims that her termination breached
an implied contract of employment to terminate her only for "good cause",
including violation of the implied covenant of good faith and fair dealing
inherent in contracts. The Plaintiff seeks actual, incidental,
consequential, and general damages in an unspecified amount, punitive
damages, costs and attorneys' fees. The Company disputes the merit of
Plaintiff's Complaint and intends to vigorously defend against this lawsuit.
In addition to the matters noted above, from time to time, we may become
involved in litigation arising out of operations in the normal course of
business. As of March 31, 2003, we are not a party to any pending legal
proceedings the adverse outcome of which could reasonably be expected to
have a material adverse effect on our operating results or financial
position.
5. RELATED PARTY TRANSACTIONS
In February 2003, the Company entered into a non-exclusive consulting agreement
with a former officer of MRM. The agreement provides for a term of twelve months
commencing on February 1, 2003. In connection with this agreement, the Company
issued the consultant 250,000 options to purchase the Company's common stock.
The
9
options expire in ten years and provide for an exercise price of $.01 per share.
Compensation expense related to the options is not material and no compensation
expense was recognized during the quarter ended March 31, 2003.
In December 2002, the Company entered into a consulting agreement with its
former Chief Executive Officer and his company, JIMA Management. The agreement
related to the provision of consulting services during the period from July 2001
to March 2002 in exchange for a monthly fee of $10,000, payable in 2003. During
the three months ended March 31, 2003, the Company recorded consulting expense
of $3,000 and paid $20,000 on amounts accrued in 2001 and 2002 with regard to
such services rendered.
During the three months ended March 31, 2003 and 2002 the Company billed
$290,440 and $288,000, respectively, to a related party for management fees. The
Company also incurred expenses on behalf of the related party.
In November 2002, the Company entered into a settlement agreement with the
former Chief Executive Officer/Chairman/President of MRM. The terms of the
agreement provide for payments by the Company totaling $42,000. Pursuant to the
agreement the Company paid $25,000 in November 2002 and made a final payment of
$17,000 during March 2003 in exchange for the full release of all obligations
under the January 2000 employment agreement, which was subsequently amended in
both August and November 2001. The Company has no further obligations under this
agreement.
Transactions with BJH Management
In January 2003, the Company incurred consulting fees and reimbursed expenses of
$36,548 and $3,389, respectively, for services provided by BJH Management, a
consulting company ("BJH") which is owned by the Company's current Chairman and
Chief Executive Officer who assumed this position, effective February 1, 2003.
The Company's Chairman and Chief Executive Officer maintains his office in New
York, in connection with this arrangement, the Company reimbursed BJH for office
and related expenses totaling $5,738 for the months of February and March 2003.
Between December 30, 2002 and March 31, 2003, the Company issued 13,942,994
shares of its Common Stock to BJH, which represented 17.5% of the Company's
fully diluted shares outstanding, as defined in the Stock Issuance Agreement
between the Company and BJH.
On December 30, 2002, the Company entered into two, 18-month employment
agreements with the one officer and one associate of BJH. The agreements were to
appoint a new Chairman and Chief Executive Officer, and President for annual
compensations of $175,000 and $161,000, respectively, beginning in January 2003.
The officer positions were assumed on February 1, 2003. The agreements also
provide for milestone bonuses up to $75,000 each, plus a percentage of pre-tax
profits should certain targets be achieved.
6. SUBSEQUENT EVENTS
As discussed elsewhere in this Form 10-QSB the Company maintains two credit
facilities, one term loan and one line of credit, with its primary lender. In
April 2003, the lender agreed to extend the term loan and line of credit
agreements to March 2004 and September 2003, respectively. The terms and
conditions of the term loan remain unchanged. The amendment to the line of
credit provides for a principal pay down of $108,700 upon execution of the
amendment. The other terms and conditions of the line of credit agreement remain
the same.
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-K for the year ended December 31, 2002 and such
information presumes that readers have access to, and will have read, the
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," "Risk Factors" and other information contained in such Form 10-K
and other Company filings with the Securities and Exchange Commission ("SEC").
This Quarterly Report on Form 10-QSB contains forward-looking statements within
the meaning of Section 27A of the Securities Act of 1933, as amended, and
Section 21E of the Securities Exchange Act of 1934, as amended. These
forward-looking statements involve risks and uncertainties, and actual results
could be significantly different than those discussed in this Form 10-QSB.
Certain statements contained in Management's Discussion and Analysis,
particularly in "Liquidity and Capital Resources," and elsewhere in this Form
10-QSB are forward-looking statements. These statements discuss, among other
things, expected growth, future revenues and future performance. Although we
believe the expectations expressed in such forward-looking statements are based
on reasonable assumptions within the bounds of our knowledge of our business, a
number of factors could cause actual results to differ materially from those
expressed in any forward-looking statements, whether oral or written, made by us
or on our behalf. The forward-looking statements are subject to risks and
uncertainties including, without limitation, the following: (a) changes in
levels of competition from current competitors and potential new competition,
(b) possible loss of significant customer(s), (c) the Company's ability to meet
the terms and conditions of its renegotiated debt and lease obligations, and (d)
changes in availability or terms of working capital financing from vendors and
lending institutions. The foregoing should not be construed as an exhaustive
list of all factors that could cause actual results to differ materially from
those expressed in forward-looking statements made by us. All forward-looking
statements included in this document are made as of the date hereof, based on
information available to the Company on the date thereof, and the Company
assumes no obligation to update any forward-looking statements.
Overview
Emergent Group Inc. ("Emergent") is the parent company of Medical Resources
Management, Inc. ("MRM"), its wholly owned and only operating subsidiary. MRM
primarily conducts its business through its wholly owned subsidiary Physiologic
Reps ("PRI"). Emergent Group Inc., MRM and PRI are referred to collectively
hereinafter as the "Company." All references to MRM include PRI unless the
context indicates otherwise. PRI is a provider of mobile surgical equipment, on
a fee for service basis to hospitals; surgical care centers, and other health
care providers. PRI provides mobile lasers and other surgical equipment with
technical support required to ensure the equipment is working correctly. PRI
also provides a limited amount of non-surgical equipment on a rental basis to
hospitals and surgery centers, although PRI is winding down this area of
business in order to focus on its core surgical equipment rental/services
business.
Critical Accounting Policies
Our discussion and analysis of our financial conditions and results of
operations are based upon our financial statements, which have been prepared in
accordance with generally accepted accounting principles in the United States.
The preparation of financial statements require managers to make estimates and
disclosures on the date of the financial statements. On an on-going basis, we
evaluate our estimates including, but not limited to, those related to revenue
recognition. We use authoritative pronouncements, historical experience and
other assumptions as the basis for making judgments. Actual results could differ
from those estimates. We believe that the following critical accounting policies
affect our more significant judgments and estimates in the preparation of our
financial statements.
Revenue Recognition. We are required to make judgments based on historical
experience and future expectations, as to the realizability of goods and
services billed to our customers. These judgments are required to assess the
propriety of the recognition of revenue based on Staff Accounting Bulletin
("SAB") No. 101, "Revenue Recognition," and related guidance. We make such
assessments based on the following factors: (a) customer-specific information,
and (b) historical experience for issues not yet identified.
11
Inventory Valuation. We are required to make judgments based on historical
experience and future expectations, as to the realizability of our inventory. We
make these assessments based on the following factors: (a) existing orders and
usage, (b) age of the inventory, and (c) historical experience.
Property and Equipment. We are required to make judgments based on historical
experience and future expectations, as to the realizability of our property and
equipment. We made these assessments based on the following factors: (a) the
estimated useful lives of such assets, (b) technological changes in our
industry, and (c) the changing needs of our customers.
Results of Operations
The following table sets forth certain selected unaudited condensed consolidated
statement of operations data for the periods indicated in dollars and as a
percentage of total net revenues. The following discussion relates to our
results of operations for the periods noted and are not necessarily indicative
of the results expected for any other interim period or any future fiscal year.
In addition, we note that the period-to-period comparison may not be indicative
of future performance.
Three Months Ended
March 31,
----------------------------------------
2003 % 2002 (1) %
----------- --- ----------- ---
Revenue $ 2,140,820 100% $ 2,502,521 100%
Cost of goods sold 1,315,937 61% 1,414,533 57%
----------- --- ----------- ---
Gross profit 824,883 39% 1,087,988 43%
Selling, general, and administrative expenses 832,223 39% 870,694 35%
----------- --- ----------- ---
Income (loss) from operations (7,340) 0% 217,294 9%
Other income (expense) (42,797) -2% 21,305 1%
----------- --- ----------- ---
Loss before provision for income taxes
and extraordinary item (50,137) -2% 238,599 10%
Provision for income taxes -- 0% -- 0%
----------- --- ----------- ---
Net income (loss) before extraordinary item (50,137) -2% 238,599 10%
Extraordinary item
Gain on forgiveness of debt, net of tax 103,530 5% 226,517 9%
----------- --- ----------- ---
Net income (loss) $ 53,393 2% $ 465,116 19%
----------- --- ----------- ---
(1) Certain amounts for the period ended March 31, 2002 have been reclassified
to conform to the current year presentation.
Comparison of the Three Months Ended March 31, 2003 to March 31, 2002
We generated revenues of $2,140,820 in 2003 compared to $2,502,521 in 2001. The
decrease in revenues of $361,701 in 2003 compared to 2002 primarily relate to
decreases in cosmetic and surgical revenues of $196,160, and medical rental
revenues of $183,617, offset by an increase in net revenues from advanced
surgical procedures of $78,770. Revenues from surgical and cosmetic services
represented approximately 81% and 16%, respectively, of total revenues for 2003
and 67% and 20% for 2002, respectively. Revenues from medical equipment rentals
comprised approximately 3% and 9% of revenues for 2003 and 2002, respectively.
Medical rental revenues, in terms of absolute dollars and as a percentage of
total revenues, are expected to continue to decrease in future periods as we
wind down this area of our business in order to focus on our core mobile
surgical equipment rental and service business.
Cost of revenues was $1,315,937 or 61% of revenues in 2003 compared to
$1,414,533 or 57% of revenues in 2001. Cost of revenues 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 decrease in cost of revenues of $98,596 in 2003 is
primarily related to an overall decrease cost of sales expenses due to the
decline in revenues as discussed above, offset by an
12
increase in depreciation expense of $33,241 and liability insurance costs of
$21,456. The increase in depreciation expense is due to equipment purchases in
December 2002 and January 2003 and to the depreciation of accessories.
Gross margin was $824,883 in 2003 or 39% of net revenues compared to $1,087,988
in 2002 or 43% of revenues. Gross margins will vary period-to-period depending
upon a number of factors including mix of services, pricing, cost of disposables
consumed in rendering our services, and contractual agreements. The decline in
gross margin during 2003 is generally related to lower overall sales volume
during 2003 compared to 2002. Many cost components included in the cost of sales
are fixed in nature; therefore, such components will increase as a percentage of
cost of goods when revenues decline.
Selling, general, and administrative expenses were $832,223 in 2003 compared to
$870,694 in 2002. Such costs include payroll and related expenses, insurance and
rents. The overall decrease of $38,471 was generally related to cost control
efforts implemented during 2002 and early 2003.
Net interest expense of $52,516 was incurred in 2003 compared to $154,748 in
2002. Interest expense primarily relates to MRM's note and lease obligations.
The decrease in net interest expense is principally related to a decrease in our
outstanding debt and lease obligations as a result of debt restructuring efforts
initiated in early 2002, as discussed elsewhere in this Form 10-QSB.
The gain on disposal of property and equipment was $26,267 for the quarter ended
March 31, 2003 compared to $81,268 in 2002. As discussed herein, we began to
wind down our medical equipment rental business in late 2001 in order to focus
resources on development of our mobile surgical equipment rental and services
business. In this regard we began to dispose of our medical rental equipment. As
of March 31, 2003 this activity is substantially complete and gains (losses)
from the disposal of property and equipment are expected to decrease in future
periods.
Other income (expense) for 2003 was $(2,737) compared to $86,563 in 2002. Other
income and expense include such non-recurring items as insurance
proceeds/refunds, sales tax refunds and other miscellaneous income and expense
amounts. In 2002 we recognized a gain of $60,000 on an insurance settlement
related to damaged equipment while no such gain was recorded in 2003.
Gain on forgiveness of debt was $103,530 for 2003 compared to $226,517 in 2002.
We began our debt restructuring efforts during the first quarter of 2002
resulting in gains on forgiveness of debt. Our major restructuring efforts were
substantially completed as of December 31, 2002; therefore, gains from such
activity are expected to decrease in future periods.
Net income was $53,393 in 2003 compared to $465,116 in 2002. No provision for
income taxes is provided for in 2003 and 2002 due to the availability of net
operating loss carryforwards.
Liquidity and Capital Resources
The accompanying condensed consolidated financial statements have been prepared
on a going-concern basis that contemplates the realization of assets and
satisfaction of liabilities in the normal course of our business. During the
year ended December 31, 2002, the Company was in default on most of its note and
lease obligations due to delinquent principal and interest payments. In order to
avoid ceasing our operations or a possible bankruptcy filing, and in an effort
to improve our financial condition, during the first quarter of 2002 we began
the process of renegotiating substantially all of our outstanding debt, lease,
and trade obligations with our key creditors. As of December 31, 2002 the
restructuring efforts were substantially completed whereby we have renegotiated
outstanding note and lease obligations with our major creditors. The
restructured debt and lease obligation agreements provide in some cases for the
return of equipment used to collateralize such obligations, if applicable, and
certain periodic and monthly installments for the balance of such obligations.
Generally, in the event of default by the Company we are required to repay all
amounts previously forgiven and all amounts then outstanding are accelerated and
become immediately due and payable. In addition, as of December 31, 2002 we have
renegotiated outstanding trade debt with most of our major vendors. For the
quarter ended March 31, 2003 we recorded gains $103,530 on forgiveness of vendor
debt. As of the filing date of this Quarterly Report on Form 10-QSB, we are in
compliance with the terms and conditions of our renegotiated debt agreements.
However, as of March 31, 2003 the Company continues to be in default under
certain note and lease obligations with aggregate principal balances outstanding
of approximately $162,000. We intend to continue negotiations with these
creditors until these disputes are resolved and satisfactory resolutions are
reached. No assurances can be given that these negotiations will be completed on
terms satisfactory to the Company, if at all.
13
At March 31, 2003 we had a bank loan (the "Bank Term Loan") outstanding in the
amount of $549,775. The loan agreement, as amended, provides for monthly
payments of principal of $16,667 and interest at the prime rate plus 4.00%. As
of December 31, 2002 and March 31, 2003 we were in default under certain
provisions of the loan agreement and as a result all principal and interest were
accelerated and became immediately due and payable. In April 2003, the lender
agreed to extend the term of the loan to March 2004 under the same terms and
conditions as described herein. We also have an outstanding bank line of credit
(the "Bank Line of Credit") in the amount of $1,109,000 with the same lender.
This Bank Line of Credit provides for interest at the prime rate, plus 2.75%,
with borrowings based upon eligible accounts receivable as defined. The amount
outstanding under the Bank Line of Credit exceeded the eligible borrowing base
as of December 31, 2002 and March 31, 2003 and the Company was in default under
certain provisions of the credit agreement. As a result this facility is not
available for use as of the filing date of this Quarterly Report on Form 10-QSB.
In April 2003 the lender agreed to amend the Bank Line of Credit to provide for
an extension of the due date to September 2003 and a principal payment of
$108,700. The other terms and condition of the loan remain the same.
The Bank Line of Credit and Bank Term Loan prohibit the payment of cash
dividends and require us to maintain certain levels of net worth and to generate
certain ratios of cash flows to debt service. Notwithstanding the modified terms
and conditions of the Bank Line of Credit and Bank Term Loan as discussed above,
as of March 31, 2003 and as of the filing date of this Form 10-QSB, we were not
in compliance with certain financial covenants of such agreements. The bank
facilities discussed herein are classified as current liabilities in the
accompanying balance sheet as of March 31, 2003.
The Company had cash and cash equivalents of $811,517 at March 31, 2003. Cash
provided by operating activities for the three months ended March 31, 2003 was
$314,911. Cash from operations includes net income of $53,393, depreciation and
amortization of $186,412 and a decrease in accounts receivable of $735,803,
offset by an increase in due from related party of $416,181, a gain on
forgiveness of debt of $103,530, a decrease in accounts payable and accrued
expenses of $159,609 and a gain on disposal of property and equipment of
$26,267. Cash used in investing activities was $59,436 due to the purchase of
property and equipment of $76,708 and cash paid to limited liability companies,
offset by proceeds from the sale of property and equipment of $28,972. Cash used
in financing activities was $401,200, which related to payments on debt and
lease obligations.
The Company had cash and cash equivalents of $652,676 at March 31, 2002. Net
cash provided by operating and investing activities for the quarter ended March
31, 2002 was $507,903. Such increase in cash primarily related to net income of
$465,116, depreciation and amortization of $153,171 and proceeds from the sale
of property and equipment of $111,835, offset by total gains on forgiveness of
debt and sale of property equipment of $307,783, and an increase in due from
related party of $287,585. Cash used in financing activities was $337,392 due to
principal payments on notes and capital lease obligations of $199,891 and the
repayment of bank overdrafts of $137,501.
Our auditors have included an explanatory paragraph relating to our ability to
continue as a going concern as of and for the year ended December 31, 2002, in
their Report of Independent Certified Public Accountants which is included our
Annual Report on Form 10-K. For the year ended December 31, 2002 we incurred a
net loss of $(1,758,439). The net loss for 2002 includes an impairment charge
for goodwill of $2,100,95 and a realized loss on investment securities of
$1,732,573. Our accumulated deficit amounted to $(13,046,480) at December 31,
2002. Our auditors considered these factors, among others, to raise doubt about
our ability to continue as a going concern. Recovery of our assets in the normal
course of business is dependent upon future events, the outcome of which is
indeterminable.
We anticipate that our future liquidity requirements will arise from the need to
finance our accounts receivable and inventories, and from the need to fund our
current debt obligations and capital expenditure needs. The primary source of
funding for such requirements is anticipated to be cash generated from
operations, borrowings under debt facilities and trade payables. The Company has
also formulated a plan of financing its operations, if successful, such plan
could involve significant dilution to stockholders. However, there can be no
assurances given that this plan will be successful on terms satisfactory to us,
if at all, or that we will have sufficient liquidity to fund our future
operations or fulfill our restructured debt, lease and vendor obligations. The
financial statements do not include any adjustments to reflect the possible
future effects on the recoverability and classification of assets or the amounts
and classification of liabilities that may result from the outcome of this
uncertainty.
14
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:
Reference is made to Note 4 of the Notes to Condensed
Consolidated Financial Statements for a description of certain
legal proceedings. During the quarter ended March 31, 2003,
there have been no material developments with respect to legal
proceedings.
Item 2. Changes in Securities.
(a) Not applicable.
(b) Not applicable.
(c) Recent Sales of Unregistered Securities
During the quarter ended March 31, 2003, the Company made the sales or issuances
of unregistered securities listed in the table below. It should be noted that in
April 2003, the Company filed a Form S-8 Registration Statement to register the
issuance of shares of Common Stock pursuant to its 2002 and 2001 Employee
Benefit Plans. Further, the 2,440,024 shares issued in the first quarter of 2003
to BJH Management, LLC which is reported in the table below was to correct a
typographical error in an agreement dated December 30, 2002 and was previously
reported in Item 5 of the Company's Form 10-K for the fiscal year ended December
31, 2002 as part of the overall issuance of 13,942,994 shares.
- -------------- ------------------ -------------- ------------------------- -------------------- ----------------------
Consideration Received
and Description of
Underwriting or Other
Discounts to Market If Option, Warrant
Price or Convertible or Convertible
Security, Afforded to Exemption from Security, terms of
Purchasers Registration exercise or
Date of Sale Title of Security Claimed conversion
Number Sold
- -------------- ------------------ -------------- ------------------------- -------------------- ----------------------
02/27/03 Common Stock 2,440,024 Services rendered; no Section 4(2) Not applicable.
commissions paid
- -------------- ------------------ -------------- ------------------------- -------------------- ----------------------
02/03/03 Common Stock 250,000 Stock Option Plan; no This stock option 10-year Options were
cash received; no plan was granted to
commissions paid registered on a employees, directors
Form S-8 and consultants and
Registration at $.01 per share;
Statement in April Options generally
2003. vest in five
equal annual
installments
commencing on
the date of
grant expire ten
years from date
of grant.
- -------------- ------------------ -------------- ------------------------- -------------------- ----------------------
15
Item 3. Defaults Upon Senior Securities
Not applicable.
Item 4. Submissions of Matters to a Vote of Security Holders: None
During the quarter ended March 31, 2003, no matter was
submitted to a vote of security holders.
Item 5. Other Information:
Not applicable.
Item 6. Exhibits and Reports on Form 8-K:
(a) Exhibits
Exhibit
Number Description
- ---------- ----------------
99.1 Certification by the Chief Executive Officer pursuant to 18
U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
99.2 Certification by the Chief Financial Officer pursuant to 18
U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
(b) Reports on Form 8-K.
On March 5, 2003, Emergent Group Inc. filed a current report on Form
8-K reporting under Item 5 a correction to the number of shares issued
to BJH Management under the Stock Issuance Agreement between Emergent
Group Inc. and BJH Management.
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 12, 2003 By: /s/ Bruce J. Haber
--------------
Bruce J. Haber,
Chairman and Chief Executive Officer
Date: May 12, 2003 By: /s/ William M. McKay
----------------
William M. McKay,
Chief Financial Officer
16
CERTIFICATION
I, Bruce J. Haber, Chief Executive Officer of the Registrant, certify
that:
1. I have reviewed this quarterly report on Form 10-QSB of Emergent
Group Inc.;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by this
quarterly report;
3. Based on my knowledge, the financial statements, and other
financial information included in this quarterly report,
fairly present in all material respects the financial
condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure control and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entitles, particularly
during the period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our evaluation
as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed,
based on our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent functions):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in
this quarterly report whether there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: May 12, 2003 /s/ Bruce J. Haber
Bruce J. Haber,
Chairman and Chief Executive Officer
17
CERTIFICATION
I, William M. McKay, Chief Financial Officer of the Registrant, certify
that:
1. I have reviewed this quarterly report on Form 10-QSB of Emergent
Group Inc.;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by this
quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure control and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entitles, particularly
during the period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our evaluation
as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed,
based on our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent functions):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in
this quarterly report whether there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: May 12, 2003 /s/ William M. McKay
William M. McKay,
Chief Financial Officer
18