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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 June 30, 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
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(State of jurisdiction of Incorporation) (I.R.S. Employer Identification No.)
932 Grand Central Ave.
Glendale, CA 91201
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(Address of principal executive offices)
(818) 240-8250
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(Registrant's telephone number)
Not Applicable
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(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 August 11, 2003, the registrant had a total of 67,357,827 shares of
Common Stock outstanding without giving effect to a reverse stock split
effective August 29, 2003.
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EMERGENT GROUP INC.
FORM 10-QSB Quarterly Report
Table of Contents
Page
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets as of June 30, 2003
and December 31, 2002 3
Unaudited Condensed Consolidated Statements of Operations for the Three
and Six Months Ended June 30, 2003 and 2002 4
Unaudited Condensed Consolidated Statements of Cash Flows for the
Six Months Ended June 30, 2003 and 2002 5
Notes to the Condensed Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 12
Item 3. Controls and Procedures 17
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 18
Item 2. Changes in Securities 18
Item 3. Defaults Upon Senior Securities 19
Item 4. Submissions of Matters to a Vote of Security Holders 19
Item 5. Other Information 19
Item 6. Exhibits and Reports on Form 8-K 22
Signatures 22
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
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EMERGENT GROUP INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
JUNE 30, DECEMBER 31,
2003 2002
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ASSETS
CURRENT ASSETS
Cash $ 1,281,238 $ 957,242
Accounts receivable, net 1,142,569 1,306,055
Due from related parties, net 61,803 121,543
Inventory, net 365,072 295,069
Prepaid expenses 267,424 265,062
Income tax receivable -- 4,830
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Total current assets 3,118,106 2,949,801
EQUITY INVESTMENT IN LIMITED LIABILITY COMPANIES 14,988 31,134
PROPERTY AND EQUIPMENT, NET 1,713,075 1,888,688
GOODWILL, NET 779,127 779,127
DEPOSITS AND OTHER ASSETS, NET 155,176 133,022
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TOTAL ASSETS $ 5,780,472 $ 5,781,772
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LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Line of credit $ 1,000,000 $ 1,108,700
Current portion of capital lease obligations 437,695 677,973
Current portion of notes payable 671,573 807,908
Accounts payable 565,096 544,835
Accrued expenses 655,614 1,053,243
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Total current liabilities 3,329,978 4,192,659
CONVERTIBLE SUBORDINATED NOTES PAYABLE - RELATED PARTIES 700,000 --
CONVERTIBLE SUBORDINATED NOTES PAYABLE 300,000 --
CAPITAL LEASE OBLIGATIONS, net of current portion 253,158 368,618
NOTES PAYABLE, net of current portion 578,692 657,833
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Total liabilities 5,161,828 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 64,917,791 shares issued and outstanding 67,357 64,918
Committed stock, 2,440,024 shares -- 2,440
Additional paid-in capital 13,541,786 13,541,784
Accumulated deficit (12,990,499) (13,046,480)
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Total shareholders' equity 618,644 562,662
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TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 5,780,472 $ 5,781,772
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The accompanying notes are an integral part of these condensed financial
statements.
3
EMERGENT GROUP INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
THREE MONTHS ENDED SIX MONTHS ENDED
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JUNE 30, JUNE 30,
2003 2002 2003 2002
------------ ------------ ------------ ------------
Revenue $ 2,345,865 $ 2,197,824 $ 4,486,685 $ 4,700,345
COST OF GOODS SOLD 1,519,510 1,391,662 2,835,447 2,806,195
------------ ------------ ------------ ------------
GROSS PROFIT 826,355 806,162 1,651,238 1,894,150
SELLING, GENERAL, AND ADMINISTRATIVE EXPENSES 785,764 844,863 1,617,987 1,715,557
------------ ------------ ------------ ------------
INCOME (LOSS) FROM OPERATIONS 40,591 (38,701) 33,251 178,593
OTHER INCOME (EXPENSE)
Realized (loss) gain on investment securities -- (1,732,573) -- (1,732,573)
Interest expense (54,112) (128,812) (106,628) (282,560)
Equity in net earnings (losses) of investment
in limited liability companies (2,335) (1,048) (16,146) 6,174
Gain on disposal of property and equipment 6,184 131,554 32,451 212,822
Other income (expense), net 10,971 5,800 8,234 92,363
------------ ------------ ------------ ------------
Total other income (expense) (39,292) (1,725,079) (82,089) (1,703,774)
------------ ------------ ------------ ------------
INCOME (LOSS) BEFORE PROVISION FOR INCOME TAXES
AND EXTRAORDINARY ITEM 1,299 (1,763,780) (48,838) (1,525,181)
PROVISION FOR INCOME TAXES -- -- -- --
------------ ------------ ------------ -----------
INCOME (LOSS) BEFORE EXTRAORDINARY ITEM 1,299 (1,763,780) (48,838) (1,525,181)
EXTRAORDINARY ITEM
Gain on forgiveness of debt, net of tax 1,289 823,866 104,819 1,050,382
------------ ------------ ------------ ------------
NET INCOME (LOSS) $ 2,588 $ (939,914) $ 55,981 $ (474,799)
============ ============ ============ ============
INCOME (LOSS) PER SHARE DATA:
Before extraordinary item $ 0.00 $ (0.033) $ (0.00) $ (0.029)
Extraordinary item 0.00 0.016 0.00 0.020
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BASIC AND DILUTED INCOME PER SHARE $ 0.00 $ (0.02) $ 0.00 $ (0.01)
============ ============ ============ ============
WEIGHTED-AVERAGE SHARES OUTSTANDING 67,357,815 53,044,821 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
Six Months Ended
June 30,
--------------------------
2003 2002
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CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) $ 55,981 $ (474,799)
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Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Gain on disposal of property and equipment (32,451) (212,822)
Gain on forgiveness of debt (104,818) (1,050,382)
Realized loss on investment securities -- 1,732,573
Depreciation and amortization 377,476 312,902
Write-off of loan fees, net -- 76,063
Equity in net (gain) loss of investment in limited liability companies 16,146 (6,174)
Provision for doubtful accounts (4,272) 5,444
(Increase) decrease in
Accounts receivable 1,041,693 1,099,244
Inventory (70,003) 75,282
Due from related party (742,157) (588,743)
Prepaid expenses (2,362) 23,213
Deposits and other assets 8,693 4,734
Increase (decrease) in
Accounts payable 5,190 (430,814)
Accrued expenses (290,260) 223,750
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NET CASH PROVIDED BY OPERATING ACTIVITIES 258,856 789,471
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CASH FLOWS FROM INVESTING ACTIVITIES
Cash paid to limited liability companies (56,968) (25,801)
Purchase of property and equipment (183,561) (24,911)
Proceeds from the sale of property and equipment 35,583 267,837
Purchase of customer list and covenant not-to-compete (50,000) --
Proceeds from the sale of securities, net -- 267,427
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Net cash provided by (used in) investing activities (254,946) 484,552
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CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from private placement of subordinated notes 1,000,000 --
Payments on capital lease obligations (355,738) (225,279)
Payments on line of credit (108,700) --
Payments on notes payable (215,476) (199,034)
Net change in book overdraft -- (145,518)
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Net cash provided by (used in) financing activities 320,086 (569,831)
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NET INCREASE IN CASH 323,996 704,192
CASH, BEGINNING OF PERIOD 957,242 482,165
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CASH, END OF PERIOD $ 1,281,238 $ 1,186,357
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SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
INTEREST PAID $ 46,802 $ 50,568
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SUPPLEMENTAL DISCLOSURES OF NON-CASH INVESTING AND FINANCING ACTIVITIES -
During the six months ended June 30, 2003 and 2002 the Company billed $500,905
and $523,803, 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 and six months
ended June 30, 2003 and 2002 are not necessarily indicative of the results
to be expected for any other interim period or any future fiscal year.
The Company's only operating subsidiary, 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 June
30, 2003 and December 31, 2002 the Company had working capital deficits of
$211,872 and $1,242,858, respectively. Although the Company achieved
breakeven operating results before extraordinary item for the three-months
ended June 30, 2003, we incurred losses before extraordinary item for the
six months ended June 30, 2003 and year ended December 31, 2002 of
$(48,838) 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
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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
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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 periods have been reclassified to conform
to the presentation for the three and six months ended June 30, 2003.
The financial information included in this quarterly report should be
read in conjunction with the consolidated financial statements and
related notes thereto in the Company's Annual Report on Form 10-K for
the year ended December 31, 2002.
Recent Accounting Pronouncements
--------------------------------
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities." This statement addresses
financial accounting and reporting for costs associated with exit or
disposal activities and nullifies Emerging Issues Task Force ("EITF") Issue
No. 94-3, "Liability Recognition for Certain Employee Termination Benefits
and Other Costs to Exit an Activity (including Certain Costs Incurred in a
Restructuring)." This statement requires that a liability for a cost
associated with an exit or disposal activity be recognized when the
liability is incurred. Under EITF Issue 94-3, a liability for an exit cost,
as defined, was recognized at the date of an entity's commitment to an exit
plan. The provisions of this statement are effective for exit or disposal
activities that are initiated after December 31, 2002 with earlier
application encouraged. This statement is not applicable to the Company.
In October 2002, the FASB issued SFAS No. 147, "Acquisitions of Certain
Financial Institutions." SFAS No. 147 removes the requirement in SFAS No.
72 and Interpretation 9 thereto, to recognize and amortize any excess of
the fair value of liabilities assumed over the fair value of tangible and
identifiable intangible assets acquired as an unidentifiable intangible
asset. This statement requires that those transactions be accounted for in
accordance with SFAS No. 141, "Business Combinations," and SFAS No. 142,
"Goodwill and Other Intangible Assets." In addition, this statement amends
SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived
Assets," to include certain financial institution-related intangible
assets. The Company does not expect adoption of SFAS No. 147 to have a
material impact, if any, on its financial position or results of
operations.
In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based
Compensation - Transition and Disclosure," an amendment of SFAS No. 123.
SFAS No. 148 provides alternative methods of transition for a voluntary
change to the fair value based method of accounting for stock-based
employee compensation. In addition, SFAS No. 148 amends the disclosure
requirements of SFAS No. 123 to require more prominent and more frequent
disclosures in financial statements about the effects of stock-based
compensation. This statement is effective for financial statements for
fiscal years ending after December 15, 2002. SFAS No. 148 will not have any
impact on the Company's financial statements as management does not have
any intention to change the fair value method.
In January 2003, the FASB issued FASB Interpretation No. 46, "Consolidation
of Variable Interest Entities." FIN 46 clarifies the application of
Accounting Research Bulletin No. 51, Consolidated Financial Statements, and
requires the consolidation of certain entities in which equity investors do
not have the characteristics of a controlling financial interest or do not
have sufficient equity for the entity to finance its activities without
additional subordinated financial support from other parties. Management
will adopt FIN 46 from July 1, 2003 with respect to its equity investments
in the limited liability companies shown in the consolidated balance sheet
at June 30, 2003. The Company is currently evaluating the impact of
consolidation of these entities on the Company's financial position and
results of operations.
7
In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement 133 on
Derivative Instruments and Hedging Activities." SFAS No. 149 amends and
clarifies accounting and reporting for derivative instruments and hedging
activities under SFAS No. 133, "Accounting for Derivative Instruments and
Hedging Activities." SFAS No. 149 is effective for derivative instruments
and hedging activities entered into or modified after June 30, 2003, except
for certain forward purchase and sale securities. For these forward
purchase and sale securities, SFAS No. 149 is effective for both new and
existing securities after June 30, 2003. Management does not expect
adoption of SFAS No. 149 to have a material impact on the Company's
financial position or results of operations.
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and Equity."
SFAS No. 150 establishes standards for how an issuer classifies and
measures in its statement of financial position certain financial
instruments with characteristics of both liabilities and equity. In
accordance with the standard, financial instruments that embody obligations
for the issuer are required to be classified as liabilities. SFAS No. 150
will be effective for financial instruments entered into or modified after
May 31, 2003 and otherwise will be effective at the beginning of the first
interim period beginning after June 15, 2003. The adoption of SFAS 150 is
not expected to have any impact on the Company's financial position or
results of operations.
3. DEBT OBLIGATIONS AND PLAN OF RESTRUCTURE
During 2002 we were in default on most of our note and lease obligations
due to delinquent principal and interest payments. In 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 six months ended June 30, 2003 and 2002, we recorded net
gains on forgiveness of debt in the amount of $104,819 and $1,050,382,
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 June 30, 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 June 30. 2003 we had a bank loan (the "Bank Term Loan") outstanding in
the amount of $499,775. 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 June 30, 2003 we were in default
under certain provisions of the original 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 $1,000,000 with the same lender. This Bank Line of Credit
provides for interest at the prime rate, plus 2.75%, with borrowings based
upon eligible accounts receivable as defined. The amount outstanding under
the Bank Line of Credit exceeded the eligible borrowing base as of December
31, 2002 and June 30, 2003 and the Company was in default under certain
provisions of the original 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. The
amendment to the line of credit provided for a pay down of $108,700 upon
execution of the amendment. The other terms and condition of this credit
facility remain the same.
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 June 30, 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
June 30, 2003.
8
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. ("Citicorp") 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 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 that did not function properly and allegedly caused her
harm. The Company reported this legal proceeding to its insurance company,
which settled this matter in the second quarter of 2003 for an immaterial
dollar amount. The Company's loss was limited to its deductible.
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 contained three causes of action as follows: 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 alleged 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 claimed 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 sought actual,
incidental, consequential, and general damages in an unspecified amount,
punitive damages, costs and attorneys' fees. In the second quarter of 2003,
the Company settled this matter for an immaterial dollar amount.
9
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 June 30, 2003, we are not a party to any pending legal
proceedings the adverse outcome of which could reasonably be expected to
have a material adverse effect on our operating results or financial
position.
5. PURCHASE OF GOODWILL OF BUSINESS AND COVENANT NOT-TO-COMPETE
In May 2003, the Company entered into an agreement with the owner
("Seller") of a small mobile cosmetic laser company located in the Los
Angeles area to purchase (the "Agreement") its goodwill and customer lists
as well as a covenant not-to-compete. The purchase price of $50,000 was
paid in June 2003 and was allocated to the customer list and covenant
not-to-compete. Such payment is being amortized on a straight-line basis
over five years. The Company also agreed to make additional payments to the
Seller for a period of eighteen months based on future revenues resulting
from the acquired customer list. The additional payments were not material
during the period ended June 30, 2003. Such amounts are being amortized on
a straight-line basis over five years from the date of purchase.
6. 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 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 six months ended June 30, 2003.
In December 2002, the Company entered into a consulting agreement with its
former Chief Executive Officer and his company, JIMA Management. The
agreement related to the provision of consulting services during the period
from July 2001 to March 2002 in exchange for a monthly fee of $10,000,
payable in 2003. During the three and six months ended June 30, 2003, the
Company recorded consulting expense of $3,000 and $6,000, respectively, and
paid $20,000 and $40,000, respectively, on amounts accrued in 2001 and 2002
with regard to such services rendered.
During the six months ended June 30, 2003 the Company billed $500,905 to a
related party for management and other fees. Such fees amounted to $523,803
for the six months ended June 30, 2002. The Company also incurred expenses
on behalf of the related party.
In November 2002, the Company entered into a settlement agreement with the
former Chief Executive Officer/Chairman/President of 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 $8,894 and $14,632, respectively, for the three and six months
ended June 30, 2003.
Between December 30, 2002 and June 30, 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.
10
On December 30, 2002, the Company entered into two, 18-month employment
agreements with the one officer and one associate of BJH. The agreements
were to appoint a new Chairman and Chief Executive Officer, and President
for annual compensations of $175,000 and $161,000, respectively, beginning
in January 2003. The officer positions were assumed on February 1, 2003.
The agreements also provide for milestone bonuses up to $75,000 each, plus
a percentage of pre-tax profits should certain targets be achieved. No
bonus amounts have been accrued through June 30, 2003 under these
agreements.
Private Placement of Convertible Subordinated Promissory Notes
--------------------------------------------------------------
In June 2003, the Company raised $1,000,000 from the private placement of
its Subordinated Promissory Notes (the "Notes") as more fully described in
its Form 8-K dated June 27, 2003. Such Notes were generally sold in
increments of $20,000 (50 units) each. Certain officers and directors of
the Company and members of law firms who have acted in a legal capacity to
the Company purchased Notes totaling $700,000. Notes totaling $300,000 were
purchased by other accredited investors. The Notes provide for interest at
6% per annum payable at the earlier of maturity, conversion or redemption.
Pursuant to the terms and conditions of the Notes, the Notes shall be
automatically converted into shares of the Company's common stock (100
million pre-split shares or 2,500,000 post split shares) upon the effective
date of a one for forty reverse split of the Company's common stock. The
Company's shareholders have approved the reverse split, which will be
effective on August 29, 2003 as discussed below. Therefore, the principal
balance of such Notes shall be converted into 2,500,000 post-split common
shares, effective August 29, 2003. An additional 25,000 post-split shares
will be issued in lieu of accrued interest.
7. SUBSEQUENT EVENT
On August 5, 2003, a majority of the Company's stockholders approved an
Amendment to the Company's Articles of Incorporation to (i) reduce the
number of outstanding shares of Common Stock through a one-for-40 reverse
stock split, effective at the opening of business on August 29, 2003 to
record holders at the close of business on August 28, 2003 and (ii) a
proportionately increase the par value of the Company's Common Stock from
$.01 par value to $.04 par value per share. All stockholders of record will
be requested to exchange every 40 shares of Common Stock, $.001 par value
for one new share of Common Stock, $.04 par value. On the effective date of
the reverse stock split, the Company's Notes (principal and interest) will
automatically convert into a total of 2,525,000 shares of Common Stock of
the Company at an effective conversion price of $.40 per shares.
Pro forma earnings (loss) per share information is presented below giving
effect to the reverse split as of June 30, 2003 and 2002 and of the
conversion of the Notes as of June 30, 2003:
Three Months Ended Six Months Ended
June 30, June 30,
2003 2002 2003 2002
--------- ----------- ----------- -----------
INCOME (LOSS) BEFORE EXTRAORDINARY ITEM $ 1,299 $(1,763,780) $ (48,838) $(1,525,181)
Extraordinary item
Gain on forgiveness of debt 1,298 823,866 104,819 1,050,382
--------- ----------- ----------- -----------
Net income (loss) $ 2,597 $ (939,914) $ 55,981 $ (474,799)
========= =========== =========== ===========
PRO FORMA INCOME (LOSS) PER SHARE DATA:
Before extraordinary item $ 0.00 $ (1.33) $ (0.01) $ (1.150)
Extraordinary item 0.00 0.62 0.03 0.79
--------- ----------- ----------- -----------
BASIC AND DILUTED INCOME PER SHARE $ 0.00 $ (0.71) $ 0.01 $ (0.36)
========= =========== =========== ===========
PRO FORMA WEIGHTED-AVERAGE SHARES OUTSTANDING 4,208,945 1,326,121 4,183,945 1,326,121
========= =========== =========== ===========
11
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.
12
Inventory Valuation. We are required to make judgments based on historical
experience and future expectations, as to the realizability of our
inventory. We make these assessments based on the following factors: (a)
existing orders and usage, (b) age of the inventory, and (c) historical
experience.
Property and Equipment. We are required to make judgments based on
historical experience and future expectations, as to the realizability of
our property and equipment. We made these assessments based on the
following factors: (a) the estimated useful lives of such assets, (b)
technological changes in our industry, and (c) the changing needs of our
customers.
RESULTS OF OPERATIONS
The following table sets forth certain selected unaudited condensed
consolidated statement of operations data for the periods indicated in
dollars and as a percentage of total net revenues. The following discussion
relates to our results of operations for the periods noted and are not
necessarily indicative of the results expected for any other interim period
or any future fiscal year. In addition, we note that the period-to-period
comparison may not be indicative of future performance.
Three Months Ended Six Months Ended
JUNE 30, JUNE 30,
2003 % 2002 (1) % 2003 % 2002(1) %
----------- ---- ----------- ---- ---------- ---- ----------- ----
REVENUE $ 2,345,865 100% $ 2,197,824 100% $4,486,685 100% $ 4,700,345 100%
COST OF GOODS SOLD 1,519,510 65% 1,391,662 63% 2,835,447 63% 2,806,195 60%
----------- ---- ----------- ---- ---------- ---- ----------- ----
GROSS PROFIT 826,355 35% 806,162 37% 1,651,238 37% 1,894,150 40%
SELLING, GENERAL, AND ADMINISTRATIVE EXPENSES 785,764 33% 844,863 38% 1,617,987 36% 1,715,557 36%
----------- ---- ----------- ---- ---------- ---- ----------- ----
INCOME (LOSS) FROM OPERATIONS 40,591 2% (38,701) -2% 33,251 1% 178,593 4%
OTHER INCOME (EXPENSE) (39,292) -2% (1,725,079) -78% (82,089) -2% (1,703,774) -36%
----------- ---- ----------- ---- ---------- ---- ----------- ----
LOSS BEFORE PROVISION FOR INCOME TAXES
AND EXTRAORDINARY ITEM 1,299 0% (1,763,780) -80% (48,838) -1% (1,525,181) -32%
PROVISION FOR INCOME TAXES -- 0% -- 0% -- 0% -- 0%
----------- ---- ----------- ---- ---------- ---- ----------- ----
NET INCOME (LOSS) BEFORE EXTRAORDINARY ITEM 1,299 0% (1,763,780) -80% (48,838) -1% (1,525,181) -32%
----------- ---- ----------- ---- ---------- ---- ----------- ----
EXTRAORDINARY ITEM
Gain on forgiveness of debt, net of tax 1,289 0% 823,866 37% 104,819 -1% 1,050,382 22%
----------- ---- ----------- ---- ---------- ---- ----------- ----
NET INCOME (LOSS) $ 2,588 0% $ (939,914) -43% $ 55,981 $(0) $(474,799) -10%
=========== ==== ============ ==== ========== ==== =========== ====
(1) Certain amounts for the period ended June 30, 2002 have been
reclassified to conform to the current year presentation.
COMPARISON OF THE THREE MONTHS ENDED JUNE 30, 2003 TO JUNE 30, 2002
We generated revenues of $2,345,865 in 2003 compared to $2,197,824 in 2002. The
increase in revenues of $148,041 in 2003 compared to 2002 is primarily related
to an increase in revenues from our advanced surgical procedures, offset by
decreases in revenues from cosmetic services and medical rentals. Revenues from
surgical and cosmetic services represented approximately 83% and 15%,
respectively, of total revenues for 2003 and 73% and 19% for 2002, respectively.
Revenues from medical equipment rentals comprised approximately 2% and 6% of
revenues for 2003 and 2002, respectively. Medical rental revenues, in terms of
absolute dollars and as a percentage of total revenues, are expected to continue
to decrease in future periods as we wind down this area of our business in order
to focus on our core mobile surgical equipment rental and service business.
Cost of goods sold was $1,519,510 or 65% of revenues in 2003 compared to
$1,391,662 or 63% of revenues in 2002. Cost of goods sold include payroll and
related expenses for technicians, cost of disposables used in providing surgical
and cosmetic services, depreciation and amortization and other expenses
primarily related to delivery of our mobile surgical equipment rental and
technical services. The increase in cost of goods sold of $127,848 in 2003 is
primarily related to an increase in disposable costs due to the increase in
revenues from our advanced surgical procedures. The cost of disposables used for
advanced surgical procedures are higher in terms of absolute dollars than the
cost of disposables for base surgical procedures. Such increases in costs were
primarily offset by decreases in payroll and related expenses for our
technicians. Such expenses decreased as a result of revisions to the
compensation plan for the technicians during the first quarter of 2003.
13
Gross margin was $826,355 in 2003 or 35% of net revenues compared to $806,162 in
2002 or 37% of revenues. Gross margins will vary period-to-period depending upon
a number of factors including mix of services, pricing, cost of disposables
consumed in rendering our services, and contractual agreements. The decline in
gross margin during 2003 is generally related to the higher overall cost of
disposables and higher depreciation charges in 2003 compared to 2002.
Selling, general, and administrative expenses were $785,764 in 2003 compared to
$844,863 in 2002. Such costs include payroll and related expenses, insurance and
rents. The overall decrease of $59,099 is generally related to cost control
procedures implemented during early 2003 and late 2002.
Realized loss on investments was $(1,732,573) in 2002 while no such loss was
incurred in 2003. Emergent was essentially a merchant banking firm prior to its
acquisition of MRM in July 2001. Emergent ceased such activities concurrent with
its acquisition of MRM in July 2001 in order to focus on MRM's mobile surgical
equipment rental and services business. The realized loss in 2002 related to the
sale and/or write-off of several investments made by Emergent in connection with
its merchant banking activities in 2000.
Net interest expense of $54,112 was incurred in 2003 compared to $128,812 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, and
principal payments on debt and lease obligations in 2003.
The gain on disposal of property and equipment was $6,184 for 2003 compared to
$131,554 in 2002. As discussed herein, we began to wind down our medical
equipment rental business in late 2001 and continued these efforts through 2002
in order to focus resources on development of our mobile surgical equipment
rental and services business. In this regard we began to dispose of our medical
rental equipment 2002. As of June 30, 2003 this activity is substantially
complete and gains from the disposal of property and equipment decreased
accordingly.
Other income (expense) for 2003 was $10,971 compared to $5,800 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. Such amounts will vary from period to period as such transactions
occur.
Gain on forgiveness of debt was $1,289 for 2003 compared to $823,866 in 2002. We
began our debt restructuring efforts during the first quarter of 2002 resulting
in gains on forgiveness of debt for the quarter ended June 30, 2002. Our major
restructuring efforts were substantially completed as of December 31, 2002;
therefore, gains from such activity decreased accordingly in 2003.
Net income was $2,588 in 2003 compared to a loss of $(939,914) in 2002. No
provision for income taxes is provided for in 2003 and 2002 due to the
availability of net operating loss carryforwards.
COMPARISON OF THE SIX MONTHS ENDED JUNE 30, 2003 TO JUNE 30, 2002
We generated revenues of $4,486,685 in 2003 compared to $4,700,345 in 2002. The
decrease in revenues of $213,660 in 2003 compared to 2002 is primarily related
to decreases in revenue from cosmetic services and medical rentals of $251,096
and $279,491, respectively, offset by a net increase in surgical services
revenues of $304,213. The net increase in our surgical revenues is related to
our advanced surgical procedures. Revenues from surgical and cosmetic services
represented approximately 83% and 15%, respectively, of total revenues for 2003
and 71% and 19% for 2002, respectively. Revenues from medical equipment rentals
comprised approximately 2% and 8% of revenues for 2003 and 2002, respectively.
Medical rental revenues, in terms of absolute dollars and as a percentage of
total revenues, are expected to continue to decrease in future periods as we
wind down this area of our business in order to focus on our core mobile
surgical equipment rental and service business.
Cost of goods sold was $2,835,447 or 63% of revenues in 2003 compared to
$2,806,195 or 60% of revenues in 2002. Cost of goods sold include payroll and
related expenses for technicians, cost of disposables used in providing surgical
and cosmetic services, depreciation and amortization and other expenses
primarily related to delivery of our mobile surgical equipment rental and
technical services. The increase in cost of goods sold of $29,252 in 2003 is
primarily related to an increase in disposable costs due to the increase in
revenues from our advanced surgical procedures and an increase in depreciation
expense as a result of equipment purchases during the six months ended June 30,
2003. The cost of disposables used for advanced surgical procedures are higher
in terms of absolute dollars than the cost of disposables for base surgical
procedures. Such increases in costs were primarily offset by decreases in
payroll and related expenses for our technicians. Such expenses decreased as a
result of revisions to the compensation plan for the technicians during the
first quarter of 2003.
14
Gross margin was $1,651,238 in 2003 or 37% of net revenues compared to
$1,894,150 in 2002 or 40% of revenues. Gross margins will vary period-to-period
depending upon a number of factors including mix of services, pricing, cost of
disposables consumed in rendering our services, and contractual agreements. The
decline in gross margin during 2003 is generally related to the higher overall
cost of disposables and higher depreciation charges in 2003 compared to 2002. In
addition, gross margins on the medical equipment rental business was higher in
2002 given the equipment impairment write-downs in 2001 and 2002, resulting in
lower depreciation charges against such revenues in 2002. Revenue from medical
equipment rentals for 2003 and 2002 was $100,241 and $379,732, respectively.
Selling, general, and administrative expenses were $1,617,987 in 2003 compared
to $1,715,557 in 2002. Such costs include payroll and related expenses,
insurance and rents. The overall decrease of $97,570 is generally related to
cost control procedures implemented during early 2003 and late 2002 and the fact
that certain general and administrative costs incurred in connection our
restructuring efforts in 2002 were not incurred in 2003.
Realized loss on investments was $(1,732,573) in 2002 while no such loss was
incurred in 2003. Emergent was essentially a merchant banking firm prior to its
acquisition of MRM in July 2001. Emergent ceased such activities concurrent with
its acquisition of MRM in July 2001 in order to focus on MRM's mobile surgical
equipment rental and services business. The realized loss in 2002 related to the
sale and/or write-off of several investments made by Emergent in connection with
its merchant banking activities in 2000.
Net interest expense of $106,628 was incurred in 2003 compared to $282,560 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, and
principal payments on debt and lease obligations in 2003.
The gain on disposal of property and equipment was $32,451 for 2003 compared to
$212,822 in 2002. As discussed herein, we began to wind down our medical
equipment rental business in late 2001 and continued these efforts through 2002
in order to focus resources on development of our mobile surgical equipment
rental and services business. In this regard we began to dispose of our medical
rental equipment in 2002. As of June 30, 2003 this activity is substantially
complete and gains from the disposal of property and equipment decreased
accordingly.
Other income (expense) for 2003 was $8,234 compared to $92,363 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. Other income for 2002 included proceeds received in connection with an
insurance settlement. Such amounts will vary from period to period as such
transactions occur.
Gain on forgiveness of debt was $104,819 for 2003 compared to $1,050,382 in
2002. We began our debt restructuring efforts during the first quarter of 2002
resulting in gains on forgiveness of debt for the six months ended June 30,
2002. Our major restructuring efforts were substantially completed as of
December 31, 2002; therefore, gains from such activity decreased accordingly in
2003. We anticipate that such gains, if any, will continue to decrease in the
future.
Net income was $55,981 in 2003 compared to a loss of $(474,799) 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 six
months June 30, 2003 we recorded gains $104,819 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.
15
However, as of June 30, 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.
In June 2003, the Company raised $1,000,000 from the private placement of its
Subordinated Promissory Notes (the "Notes") as more fully described in its Form
8-K dated June 27, 2003. Such Notes were generally sold in increments of $20,000
(50 units) each. Certain officers and directors of the Company and members of
law firms who have acted in a legal capacity to the Company purchased Notes
totaling $700,000. Notes totaling $300,000 were purchased by other accredited
investors. The Notes provide for interest at 6% per annum payable at the earlier
of maturity, conversion or redemption. Pursuant to the terms and conditions of
the Notes, the Notes shall be automatically converted into shares of the
Company's common stock (100 million pre-split shares or 2,500,000 post split
shares) upon the effective date of a one for forty reverse split of the
Company's common stock. The Company's shareholders have approved the reverse
split, which is effective on August 29, 2003 as discussed below. Therefore, the
principal balance of such Notes shall be converted into 2,500,000 post-split
common shares, effective August 29, 2003 at an effective conversion price of
$.04 per share. An additional 25,000 post split shares will be issued in lieu of
accrued interest.
In May 2003, the Company entered into an agreement with the owner ("Seller") of
a small mobile cosmetic laser company located in the Los Angeles area to
purchase (the "Agreement") its goodwill and customer lists as well as a covenant
not-to-compete. The purchase price of $50,000 was paid in June 2003 and was
allocated to the customer list and covenant not-to-compete. Such payment is
being amortized on a straight-line basis over five years. The Company also
agreed to make additional payments to the Seller for a period of eighteen months
based on future revenues resulting from the acquired customer list. The
additional payments were not material during the period ended June 30, 2003.
Such amounts are being amortized on a straight-line basis over five years from
the date of purchase.
At June 30. 2003 we had a bank loan (the "Bank Term Loan") outstanding in the
amount of $499,775. 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 June 30, 2003 we were in default under certain
provisions of the original 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 $1,000,000 with the same
lender. This Bank Line of Credit provides for interest at the prime rate, plus
2.75%, with borrowings based upon eligible accounts receivable as defined. The
amount outstanding under the Bank Line of Credit exceeded the eligible borrowing
base as of December 31, 2002 and June 30, 2003 and the Company was in default
under certain provisions of the original 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. The amendment to
the line of credit provided for a pay down of $108,700 upon execution of the
amendment. The other terms and condition of this credit facility remain the
same.
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 June 30, 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 June 30, 2003.
16
The Company had cash and cash equivalents of $1,281,238 at June 30, 2003. Cash
provided by operating activities for the six months ended June 30, 2003 was
$258,856. Cash from operations includes net income of $55,981, depreciation and
amortization of $377,476 and a decrease in accounts receivable of $1,041,693,
offset by an increase in due from related party of $742,157, a gain on
forgiveness of debt of $104,818 and a net decrease in accounts payable and
accrued expenses of $287,620. Cash used in investing activities was $254,946 due
to the purchase of property and equipment of $183,561, purchase of customer list
and covenant not-to-compete for $50,000 and cash paid to limited liability
companies of $56,968, offset by proceeds from the sale of property and equipment
of $35,583. Cash provided by financing activities was $320,086, which related to
the proceeds of $1,000,000 from the private placement of subordinated notes,
offset by payments of $571,214 on debt and lease obligations and payments of
$108,700 on our line of credit.
The Company had cash and cash equivalents of $1,186,357 at June 30, 2002. Cash
provided by operating activities was $789,471 for the six months ended June 30,
2002. Cash provided by operating activities related to the inclusion in net loss
of a realized loss on investment securities of $1,732,573 which had no effect on
cash, depreciation and amortization expense of $312,902; offset by the net loss
of $(474,799), gain on disposal of property and equipment of $212,822 and gain
on forgiveness of debt of $1,050,382. Cash provided by investing activities was
$484,552, which primarily related to proceeds of $267,837 from the sale of
property and equipment and proceeds of $267,427 from the sale of securities.
Cash used in financing activities was $569,831, which related to the payment of
debt and lease obligations of $424,313 and the repayment of a bank overdraft of
$145,518.
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 $2,100,955 and a realized loss on investment securities of
$1,732,573. Our accumulated deficit amounted to $(13,046,480) at December 31,
2002. Our auditors considered these factors, among others, to raise doubt about
our ability to continue as a going concern. Recovery of our assets in the normal
course of business is dependent upon future events, the outcome of which is
indeterminable.
We anticipate that our future liquidity requirements will arise from the need to
finance our accounts receivable and inventories, and from the need to fund our
current debt obligations and capital expenditure needs. The primary source of
funding for such requirements is anticipated to be cash generated from
operations, borrowings under debt facilities, trade payables and the sale of our
capital stock. In June 2003, the Company raised $1,000,000 in gross proceeds
from the sale of our subordinated promissory notes, the entire principal and
accrued interest of which will automatically convert into a total of 2,525,000
post split shares of Common Stock on August 29, 2003, the effective date of our
one-for-40 reverse stock split. Additional financing may be required for our
business operations in the future. There can be no assurances given that we will
be able to obtain financing on terms satisfactory to us, if at all, or that we
will have sufficient liquidity to fund our future operations or fulfill our
restructured debt, lease and vendor obligations. The financial statements do not
include any adjustments to reflect the possible future effects on the
recoverability and classification of assets or the amounts and classification of
liabilities that may result from the outcome of this uncertainty.
ITEM 3. CONTROLS AND PROCEDURES
- -------------------------------
The Company maintains disclosure controls and procedures that are designed to
ensure that information required to be disclosed in the Company's Exchange Act
reports is recorded, processed, summarized and reported within the time periods
specified in the SEC's rules and forms, and that such information is accumulated
and communicated to the Company's management, including its Chief Executive
Officer and Chief Financial Officer, as appropriate, to allow timely decisions
regarding required disclosure based closely on the definition of "disclosure
controls and procedures" in Rule 13a-14(c). In designing and evaluating the
disclosure controls and procedures, management recognized that any controls and
procedures, no matter how well designed and operated, can provide only
reasonable assurance of achieving the desired control objectives, and management
necessarily was required to apply its judgment in evaluating the cost-benefit
relationship of possible controls and procedures.
17
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings:
Reference is made to Note 4 of the Notes to Condensed Consolidated Financial
Statements for a description of certain legal proceedings and settlements that
were made to two of these proceedings. During the quarter ended June 30, 2003,
there have been no other material developments with respect to legal
proceedings, except as disclosed in Note 4.
ITEM 2. Changes in Securities.
(a) Not applicable.
(b) Not applicable.
(c) Recent Sales of Unregistered Securities
During the six months ended June 30, 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 IF OPTION, WARRANT
DISCOUNTS TO MARKET OR CONVERTIBLE
PRICE OR CONVERTIBLE EXEMPTION FROM SECURITY, TERMS OF
SECURITY, AFFORDED TO REGISTRATION EXERCISE OR
DATE OF SALE TITLE OF SECURITY NUMBER SOLD PURCHASERS CLAIMED CONVERSION
- -------------- ------------------ -------------- ------------------------- -------------------- ----------------------
02/27/03 Common Stock 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.
- -------------- ------------------ -------------- ------------------------- -------------------- ----------------------
06/27/03 Subordinated $1,000,000* Cash paid by lenders; Section 4(2), The $1,000,000 of
Notes no commissions paid Rule 506 principal will
automatically convert
into 2,500,000 post-split
shares of Common Stock
on August 29, 2003,
the effective date
of the one-for-40
reverse stock split.
Interest will be
paid in cash or
stock at the election
of the note holders.
- -------------- ------------------ -------------- ------------------------- -------------------- ----------------------
* See Item 5 below for additional information.
18
ITEM 3. Defaults Upon Senior Securities
-------------------------------
Not applicable.
ITEM 4. Submissions of Matters to a Vote of Security Holders: None
----------------------------------------------------------
During the quarter ended June 30, 2003, no matter was submitted to a
vote of security holders.
Item 5. Other Information:
-----------------
On June 27, 2003, Emergent Group Inc. completed a private placement of
$1,000,000 of its subordinated promissory notes (the "Notes"). The terms of the
offering and the Notes are summarized as follows:
o 50 Units were offered on a "best efforts" basis at a
purchase price of $20,000 per Unit with each Unit consisting
of a Subordinated Promissory Note in the principal amount of
$20,000;
o The Notes shall be subordinated to all institutional leasing
and other types of senior indebtedness, both current
indebtedness and indebtedness incurred in the future;
o Interest shall be at a rate of 6% per annum payable at the
earlier of maturity, conversion or redemption. Interest
would have retroactively increased to 12% per annum if the
Stockholder Matter as defined below was not approved by
August 7, 2003;
o If the Stockholder Matter was not approved by August 7,
2003, the Notes would have become pre-payable at the option
of the Corporation at 110% of the face value and a security
interest in all the assets of the Corporation would have
been given to all Note holders to the extent permitted by
law and subject to the priority liens of holders of senior
indebtedness;
o The convertibility of the Notes was subject to stockholder
approval of a one-for-40 Reverse Stock Split and a
proportionate increase in the par value of Emergent's Common
Stock from $.001 per share to a new par value of $.04 per
share (collectively herein referred to as the "Stockholder
Matter").
o As a result of the August 5, 2003 approval by stockholders
of the Stockholder Matter, the Notes shall automatically
convert into Common Stock on the August 29, 2003 effective
date of the Reverse Stock Split at the conversion rate of
$2.00 of principal into five post-split shares of Common
Stock; and
o Interest on the Notes will be payable in cash unless an
affirmative election is made by the Note holders to receive
Common Stock in lieu thereof at a conversion price that will
be no lower than the conversion rate.
Of the $1,000,000 raised, $700,000 was invested by eleven persons who are
officers, and directors of Emergent or members of law firms who have acted in a
legal capacity to Emergent. The remaining $300,000 was purchased by six
accredited investors. Of the $700,000, officers, directors and employees of the
Company invested the following sums of money: $200,000 was invested by each of
Daniel Yun and Bruce J. Haber, $60,000 was invested by each of Mark Waldron and
Louis Buther, $100,000 was invested by Howard Waltman, $10,000 was invested by
William M. McKay and $40,000 was invested by Richard Frey.
Emergent filed an Information Statement with the Securities and Exchange
Commission with respect to the proposals listed below. The Information Statement
was mailed to stockholders of record on July 15, 2003 and stockholders
consisting of its officers and directors holding at least a majority of the
outstanding shares of Common Stock of Emergent submitted to the Secretary of
Emergent their consent to the proposals listed below on August 5, 2003. The
reverse stock split will become effective on the opening of business on August
29, 2003. The following are the proposals approved by stockholders by majority
consent:
19
(1) The re-election of Bruce J. Haber, Mark Waldron, Howard Waltman, Daniel
Yun and Matthew K. Fong for a period of one year and until their successors are
elected and shall qualify;
(2) The ratification of the Board's selection of Singer Lewak Greenbaum &
Goldstein LLP as the Company's independent auditors for the year ending December
31, 2003;
(3) An amendment to the Company's Articles of Incorporation and the filing
of said amendment with the Secretary of State of the State of Nevada (a)
changing the par value of the Company's Common Stock from $.001 par value to
$.04 par value; and (b) reducing the number of outstanding shares of Common
Stock through a one-for-40 reverse stock split, effective August 29, 2003, to be
accomplished by all stockholders of record at the close of business on August
28, 2003, being requested to exchange every 40 shares of Common Stock, $.001 par
value, for one new share of Common Stock, $.04 par value;
(4) The ratification of the Company's 2002 Employee and Consulting
Compensation Plan covering 325,000 post-split shares of Common Stock; and
(5) The ratification of the Company's 2001 Stock Option Plan covering
14,625 post-split shares of Common Stock.
On the Effective Date of the reverse stock split, it is anticipated that
there will be 4,208,946 post-split shares of Common Stock issued and outstanding
and Common Stock rights, options and warrants outstanding to purchase an
estimated additional 932,038 post-split shares. It is expected that officers,
directors and 5% or greater stockholders would have the following ownership
interest as detailed in the table below. (It should be noted that all references
below in the table and footnotes that follow to shares are post-split shares and
give effect to a one-for-40 reverse stock split and assumes that all persons
elect to receive interest in cash rather than stock, of which there can be no
assurances given.)
20
- ------------------------------------------------------------- ------------------------------- ------------------------
Name and Address of Beneficial Owner (1) Number of Common Approximate
Shares Percentage
- ------------------------------------------------------------- ------------------------------- ------------------------
Daniel Yun
375 Park Avenue, Suite 3607
New York, NY 10152 791,802 (2) 18.8
- ------------------------------------------------------------- ------------------------------- ------------------------
Mark Waldron
932 Grand Central Avenue
Glendale, CA 91201 407,685 (3) 9.7
- ------------------------------------------------------------- ------------------------------- ------------------------
Howard Waltman
140 Deerfield
Tenafly, NJ 07670 338,834 (4) 7.9
- ------------------------------------------------------------- ------------------------------- ------------------------
Matthew Fong and Paula Fong
13191 Crossroads Parkway, Suite 285
Industry, CA 91746 25,000 (5) *
- ------------------------------------------------------------- ------------------------------- ------------------------
William M. McKay
932 Grand Central Avenue
Glendale, CA 91201 37,250 (6) *
- ------------------------------------------------------------- ------------------------------- ------------------------
Bruce J. Haber
c/o BJH Management, LLC
145 Huguenot Street, Suite 405
New Rochelle, NY 10801 1,010,246 (7) 22.4
- ------------------------------------------------------------- ------------------------------- ------------------------
Louis Buther
205 Ridgefield Avenue
South Salem, NY 10590 530,435 (7) 12.0
- ------------------------------------------------------------- ------------------------------- ------------------------
All current and proposed executive officers and directors
as a group (seven) persons 3,141,252 (8) 64.4
- ------------------------------------------------------------- ------------------------------- ------------------------
- ---------------
(*) Represents less than 1% of the outstanding shares of the Company's Common
Stock.
(1) All shares are directly owned, and the sole investment and voting power is
held, by the persons named unless otherwise noted.
(2) Includes 30,834 shares owned by Emergent Capital L.P., which Mr. Yun has
sole voting and disposition power, 17,500 shares gifted to 17 persons and
options to purchase 93 shares.
(3) Includes options to purchase 93 shares.
(4) Includes 11,332 shares owned by his family in the name of The THW Group
LLC, over which shares Mr. Waltman exercises voting and investment control
and options to purchase 75,000 shares.
(5) Includes options to purchase 25,000 shares.
(6) Includes options to purchase 12,000 shares of the Company's Common Stock
which are exercisable within 60 days of the anticipated filing date of this
form 10-QSB.
(7) BJH Management LLC is a company owned by Mr. Bruce J. Haber. BJH acquired
348,575 shares of Common Stock of the Company pursuant to a services
agreement and Mr. Haber purchased $200,000 of Notes which will convert into
500,000 shares. Of the 348,575 shares, 199,186 shares were gifted by Mr.
Haber to an irrevocable trust for the benefit of his daughter, Jessica L.
Haber with his wife, Michela I. Haber, as Trustee. The remaining 149,389
shares were transferred to Louis Buther. BJH Management has certain
anti-dilution rights to maintain on behalf of itself, and at its option,
its transferees, a minimum combined 17.5% of the Company's outstanding
shares on a fully diluted basis. Pursuant to these rights as a result of
the Company's completion of its private placement offering and anticipated
stockholder approval of the Stockholder Matter, BJH will receive rights to
purchase 535,606 shares of Common Stock exercisable at $.20 per share. Of
these rights, the right to purchase 229,546 shares will be transferred to
Mr. Buther and the remaining rights to purchase 306,060 shares will be
transferred to Mr. Haber. The amount of stock shown in the table as owned
by Mr, Haber includes the shares held in his daughter's trust, although he
disclaims beneficial ownership of such shares.
(8) See footnotes (2) through (5) above.
21
ITEM 6. Exhibits and Reports on Form 8-K:
(a) Exhibits
Number Exhibit Description
- --------------------------------------------
3.1 Amendment to Articles of Incorporation.*
11.1 Statement re: computation of earnings per share. See consolidated statement
of operations and notes thereto.
99.1 Form of Subordinated Note is hereby incorporated by reference to the
Company's Form 8-K dated June 27, 2003.
99.2 Certification by the Chief Executive Officer pursuant to 18 U.S.C. Section
1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.*
99.3 Certification by the Chief Financial Officer pursuant to 18 U.S.C. Section
1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.*
* Filed herewith.
(b) Reports on Form 8-K.
Emergent Group Inc. filed a current report on Form 8-K dated June 27,
2003. No other Form 8-K's were filed or required to be filed for the
quarter ended June 30, 2003.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
EMERGENT GROUP INC.
Date: August 12, 2003 By: /s/ Bruce J. Haber
------------------------------------
Bruce J. Haber,
Chairman and Chief Executive Officer
Date: August 12, 2003 By: /s/ William M. McKay
------------------------------------
William M. McKay,
Chief Financial Officer
22
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: August 12, 2003 /s/ Bruce J. Haber
------------------------------------
Bruce J. Haber,
Chairman and Chief Executive Officer
23
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: August 12, 2003 /s/ William M. McKay
---------------------------
William M. McKay,
Chief Financial Officer
24