SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
{X} ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2001
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 (I.R.S. Employer
incorporation or organization) Identification Number)
932 Grand Central Avenue
Glendale, California 91201
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (818) 240-8250
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Former address: 375 Park Avenue, New York, NY 10152
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Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: Common Stock,
$.001 Par Value
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days. Yes X . No ___.
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K (ss.229.405 of this chapter) is not contained herein,
and will not be contained, to the best of Registrant's knowledge, in definitive
proxy or information statements incorporated by reference in part III of this
Form 10-K or any amendment to this Form 10-K [ ].
As of December 31, 2002, the number of shares held by non-affiliates
was approximately 31,275,140 shares. Due to the limited and sporadic trading of
the Company's Common Stock in the over-the-counter market, no estimate is
provided of the value of the Company's Common Stock held by non-affiliates since
such information would not be meaningful.
The number of shares outstanding of the Registrant's Common Stock, as
of January 24, 2003, was 64,917,803.
FORWARD-LOOKING STATEMENTS
We believe this annual report contains "forward-looking statements"
within the meaning of the Private Securities Litigation Reform Act of 1995.
These statements are subject to risks and uncertainties and are based on the
beliefs and assumptions of our management, based on information currently
available to our management. When we use words such as "believes," "expects,"
"anticipates," "intends," "plans," "estimates," "should," "likely" or similar
expressions, we are making forward-looking statements. Forward-looking
statements include information concerning our possible or assumed future results
of operations set forth under "Business" and/or "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
Forward-looking statements are not guarantees of performance. They
involve risks, uncertainties and assumptions. Our future results and stockholder
values may differ materially from those expressed in the forward-looking
statements. Many of the factors that will determine these results and values are
beyond our ability to control or predict. Stockholders are cautioned not to put
undue reliance on any forward-looking statements. For those statements, we claim
the protection of the safe harbor for forward-looking statements contained in
the Private Securities Litigation Reform Act of 1995. For a discussion of some
of the factors that may cause actual results to differ materially from those
suggested by the forward-looking statements, please read carefully the
information under "Management's Discussion and Analysis of Financial Condition
and Results of Operations--Risk Factors." In addition to the Risk Factors and
other important factors discussed elsewhere in this annual report, you should
understand that other risks and uncertainties and our public announcements and
SEC filings could affect our future results and could cause results to differ
materially from those suggested by the forward-looking statements.
PART I
Item 1. Business
THE COMPANY
Emergent Group Inc. ("Emergent") is the parent company of Medical
Resources Management, Inc. ("MRM"), its wholly owned and only operating
subsidiary. MRM was acquired by Emergent in July 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 surgical equipment on a fee for service basis to hospitals,
surgical care centers and other health care providers. PRI serves both large and
small health care providers, including: 1) smaller independent hospitals and
physicians who cannot afford to buy surgical equipment because of budget
constraints or cannot justify buying due to limited usage; and 2) larger,
well-financed hospitals that may be able to purchase equipment for use in their
own facility but may choose not to because reimbursement or utilization rates
for many procedures do not warrant a capital commitment. Additionally,
infrequent utilization may not justify the cost of training and retention of
technicians to operate such equipment. PRI is also able to provide its
technicians to support hospital-owned surgical equipment on a fee for service
basis, thus improving efficiency and reducing costs for the hospital. Reduced
operating costs and improved flexibility for hospitals are elements of the PRI
value proposition to its customers.
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PRI makes mobile surgical services available to its customers by
providing surgical equipment on a per procedure basis to hospitals, outpatient
surgery centers, and physician offices. PRI provides mobile lasers and other
surgical equipment to customers along with technical support required to ensure
the equipment is working correctly. PRI also provides a limited amount of
non-surgical medical equipment on a rental basis to hospitals and surgery
centers. This non-surgical equipment is used throughout such facilities to
supplement their in-house resources.
PRI's mobile surgical services focus on two areas of the health care
industry: surgical care and cosmetic surgery. In the surgical care area,
physicians can perform minimally invasive surgery at hospitals renting PRI's
laser or other equipment. For cosmetic surgery, physicians benefit from having
different laser technologies available to offer to their patients without a
significant capital investment. In both instances, physicians and hospitals
receive PRI's technical support and expertise that is provided with the
equipment, allowing the staff to concentrate on their patient care duties
without the distraction of setup and running equipment.
PRI has approximately 500 active surgical service accounts in
California, Utah, Colorado and Nevada and experiences a high rate of repeat
business from the hospitals, surgery centers and doctors it serves. The market
encompasses many disciplines including plastic/cosmetics surgery, dermatology,
orthopedic surgery, otolaryngology, urology, obstetrics, gynecology,
ophthalmology, general surgery, podiatry and dentistry. Equipment is
increasingly becoming more specialized to specific medical procedures, and
technical training of the physician regarding the use of equipment is an
integral part of PRI's business.
PRI has begun building a healthcare distribution network that allows
physicians, hospitals and healthcare facilities access to new medical equipment
without the expense of acquisition. PRI is able to help manufacturers bring
advanced medical technologies to market by using its distribution channels and
relationships with doctors, hospitals and healthcare facilities to introduce
selected additional surgical products and services to end users on a `fee per
procedure' model. PRI had revenues of approximately $11.4 million in 2001,
including general medical equipment rental revenues of $1.6 million, which is
being discontinued, (amounts on a pro forma basis assuming a full year of
operations), and assisted in more than 12,000 surgical procedures. By making new
technologies available to physicians PRI hopes to become a distributor of
innovative medical device and support services to the healthcare community early
in a product's life cycle.
ACQUISITIONS
Acquisition of Medical Resources Management, Inc.
In July 2001, Emergent completed its acquisition of MRM as per an
Agreement and Plan of Reorganization of Merger (The "Merger Agreement") dated
January 23, 2001. As required by the terms of the Merger Agreement, Emergent
exchanged 5,633,667 shares of its Common Stock, which represented 11% of the
total post-merger outstanding shares, for all the issued and outstanding common
3
stock of MRM at a conversion ratio of 0.37 shares of Emergent's Common Stock per
share of MRM Common Stock. Based on the average of Emergent's closing stock
price for the 10 days prior to the acquisition, the purchase price for MRM was
$3,897,009 not including assumed debt. Additionally, on the effective date of
the Merger, all outstanding MRM options became options to purchase 564,786
shares of Emergent's Common Stock. The options exchanged had a fair value of
approximately $316,000. Emergent assumed approximately $13,802,071 in existing
MRM debt, capital lease obligations, and other liabilities. As of time of the
merger, the debt obligations had interest rates ranging from 6.3% to 25.5% and
were repayable over a one to five year period. Emergent's transaction costs
incurred in completing the merger amounted to approximately $336,000. Goodwill
of approximately $3,421,000 resulted from the merger. The transaction has been
accounted for under the purchase method of accounting. MRM is headquartered in
Glendale, California and operates as a wholly owned subsidiary of Emergent.
Following the merger, Emergent relocated its principal executive office from New
York City, New York to Glendale, California. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
Transfer of Equity with Dynamic International, Ltd. and Formation of
Emergent Group Inc.
Emergent Ventures, LLC ("Ventures"), a Delaware Corporation, was formed
on March 8, 2000 to invest primarily in global private equity opportunities in
information technology, health care and medical technology companies. Ventures'
equity capitalization consisted of a contribution of securities by Emergent
Management Company, LLC ("Manager"), for a fifty-eight percent (58%) interest in
Ventures and a contribution of $7,500,000 in cash by other members in return for
the remaining forty-two percent (42%) interest in Ventures.
On August 31, 2000, Ventures consummated the transactions contemplated
by an Equity Transfer Transaction ("Transfer"), all pursuant to an Equity
Transfer and Reorganization Agreement ("Agreement"), by and among Emergent,
formerly named Dynamic International, Ltd. ("Dynamic Ltd.") and Ventures.
Pursuant to and in accordance with the Agreement and immediately prior to the
consummation of the Transfer, Dynamic Ltd. transferred all of its assets and
liabilities (other than outstanding bank debt in the amount of $250,000) to a
wholly owned subsidiary of Dynamic Ltd., named Dynamic International, Inc.
Dynamic International, Inc. acquired the transferred assets, assumed the
remaining liabilities and indemnified Dynamic Ltd. against any liabilities
relating to or arising out of the transferred assets and the assumed
liabilities. In conjunction with the Transfer, Dynamic International, Inc. was
spun-off from Dynamic Ltd. as a separate entity to its stockholders on a pro
rata basis. Pursuant to the Agreement, Ventures contributed substantially all of
its assets to Dynamic Ltd. in exchange for the issuance of 39,755,178 shares of
Dynamic Ltd. common stock to the members of Ventures. Dynamic Ltd. subsequently
changed its name to Emergent Group Inc. ("Emergent") on November 6, 2000. The
Company retained Dynamic Ltd.'s State of Incorporation in Nevada. For financial
accounting purposes, the Transfer was accounted for as a re-capitalization by
Ventures as the accounting acquiror and with Dynamic Ltd. as the accounting
acquiree. After the Transfer, the former members of Ventures became the
beneficial owners of approximately 39,755,178 shares of Dynamic Ltd.'s common
stock, representing approximately ninety percent (90%) interest in Dynamic Ltd.
with voting control of the Emergent resting in the hands of Manager. Each of the
Directors of Dynamic Ltd. resigned immediately prior to the consummation of the
Transfer or within a few months thereafter. The beneficial owners of the Manager
were elected as directors and executive officers of Emergent. Emergent recorded
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goodwill as a result of the Transfer amounting to $250,000, which is being
amortized over three years. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
Prior to Emergent's acquisition of MRM it was a merchant banking firm.
Merchant banks are essentially in the business of finding opportunities and
sources of funding and, with investors' money and their own capital, financing
growth and facilitating transactions for, and among their clients. The
distinguishing characteristics of a merchant bank are that it commits its own
capital, or the capital of its principals, to a transaction, either in the form
of debt, typically short-term bridge financing, or equity, and that it generally
receives an equity position in the client company as part or all of the
compensation for its services. Since July 2001, Emergent ceased its merchant
banking activities to concentrate its management and resources on developing the
mobile surgical services business of MRM.
PRODUCTS AND SERVICES
PRI's technicians provide surgical equipment and associated technical
services support to physicians and operating room ("O.R.") personnel in
hospitals, surgical care centers and other health-related facilities on a
per-procedure basis. Mobile surgical services are ordered from 24 hours to
several months in advance of surgery, and re-confirmed with the customer the day
before the medical procedure by PRI's scheduling department. Upon arrival at the
customer site, PRI's technician posts required warning notices outside the O.R.,
issues safety equipment to the O.R. staff, provides any disposable materials
needed, and supplies equipment certifications and/or documentation required for
hospital record keeping. The technician is responsible for setting the
physician's requested power settings on rented equipment and for helping to
maintain a safe environment with regard to the rental equipment during the
surgical procedure. Technician-only services are made available to hospitals and
surgery facilities, especially those with fluctuating occupancy levels.
Customers find that outsourcing of trained technicians without renting equipment
to be a cost-effective alternative to training and staffing their own personnel.
PRI's laser equipment encompasses CO2, Nd:YAG, Pulse Dye, KTP/YAG and
Holmium YAG laser technology. PRI has established working relationships with
leading laser manufacturers and is sometimes an introducer of laser technology
in its markets. PRI reviews developments in the medical field to stay abreast of
new and emerging technologies and to obtain new surgical medical equipment. In
this regard, PRI has in recent years added equipment to provide for services in
cryosurgery, advanced visualization technology and brachytherapy. The Company
strives to develop and expand strategic relationships in order to enhance its
product lines and improve its access to new medical devices.
PRI also provides its customers with disposable products and/or
attachments that are needed for a given medical procedure. These disposable
products are primarily related to laser equipment rentals requiring fibers,
tubing, laser drapes and masks. Customers may benefit from this added service by
lowering their inventory levels of infrequently used products.
5
In the past PRI has offered a broad range of general medical equipment
to its customers. PRI's inventory of equipment included an extensive selection
of devices serving a broad range of hospital departments and needs such as adult
and infant ventilators, carbon dioxide monitors, defibrillators, feeding pumps,
PCA pumps, electro cardiogram monitors, infusion pumps, neo-natal monitors, and
pulse oximeters. In late 2001 the Company decided to discontinue this area of
business in order to focus on its core surgical equipment rental/services
business. In connection with the phase-out of the general medical equipment
rental business and after review of its other operating assets, the Company
recorded impairment charges for property and equipment, and goodwill of
$3,732,223 and $687,906, respectively, as of December 31, 2001. "See
Management's Discussion and Analysis of Financial Condition and Results of
Operations."
MARKETING AND SALES
PRI markets its mobile surgical equipment and services business largely
through the efforts of its direct sales force which focuses on providing
high-quality service and products to its customers and on obtaining new customer
accounts. In conjunction with its sales efforts, PRI sponsors educational
seminars on new laser and other surgical equipment technologies which are
attended by its current and prospective customers. These seminars allow PRI's
direct sales force to introduce new technologies and procedures to its customer
base early in the product's life cycle.
PRI's sales representatives attend national and regional physician
medical seminars and trade shows to present PRI's services and products. PRI
also markets its products and services through direct mail marketing of
literature and promotional materials which describe PRI's complete range of
surgical equipment and services to hospitals, surgery centers and physicians.
MARKETS
PRI currently serves customers in California, Colorado, Utah and
Nevada. Each location is staffed with full-time technicians and sales
representatives. During the period from July 2001 (date of acquisition) to
December 31, 2001, no customer accounted for more than 10% of PRI's total sales
for such periods.
Hospital Mobile Laser/Surgical Services
PRI provides mobile laser/surgical services to customers in each market
served. Each location is staffed with full-time trained technicians and sales
representatives, and is equipped with a variety of surgical equipment to meet
customer needs. During the twelve months ended December 2001, PRI performed over
12,000 procedures company-wide. For the period ended December 31, 2001, revenues
from our mobile laser/surgical services comprised approximately 68% of our total
revenues. We believe that revenue from our surgical related services will
continue to comprise the majority of our revenues in the foreseeable future.
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Cosmetic Mobile Laser/Surgical Services
The cosmetic laser business is primarily physician office based. This
market is characterized by rapid changes in specific techniques as new
technology emerges. Recently, cosmetic laser skin resurfacing surgery has shown
significant growth, however, price competition is a constant challenge from
smaller start-up companies. Recent legislation in California and some other
states restricting anesthesia in doctor offices has redirected some of this
cosmetic surgery to hospitals and surgery centers where PRI has existing
customer relationships and the ability to compete more effectively.
General Medical Equipment, Rentals
PRI entered the general equipment rental market several years ago.
However, due to lower margins and increased competition and its focus on the
higher margin mobile surgical services business, MRM started phasing out its
general equipment rental business in late 2001 and is in the process of selling
its general medical rental equipment assets.
INVESTMENTS
Investments In Limited Liability Companies
In connection with expanding its business in certain commercial and
geographic areas, PRI will occasionally sponsor and form Limited Liability
Companies ("LLCs") in which it will acquire a minority interest and offer the
remaining interest to physicians and other qualifed investors. These LLCs
acquired certain equipment for use in their respective business activities which
generally focus on cosmetic and surgical procedures. In prior years, PRI
sponsored and acquired minority equity interests in various LLCs in Utah,
Colorado and California and holds minority interest in six LLCs as of December
31, 2001. The Company utilizes the equity method of accounting for its
investments in the various LLCs. For the period ended December 31, 2001 the
Company recorded equity in earnings of $26,773 from its ownership interest in
such LLCs. In addition, PRI and its affiliates provide operating and
administrative services to the LLCs. During the period ended December 31, 2001
the Company earned fees for management, operational and other services of
$565,429. The balances due from the LLCs at December 31, 2001 was $38,268, which
is recorded under "due from related parties" in the accompanying consolidated
balance sheets.
Other Investments
As discussed herein, prior to Emergent's acquisition of MRM in July
2001 it acted as a merchant banking firm seeking opportunities and sources of
funding and, with investors' money and/or the Company's own capital, financing
expected growth of Company's clients or facilitating transactions for them.
During the course of these activities the Company's largest investment of
$2,000,000 was made in March 2000 in the securities of Stonepath Group Inc.
("Stonepath") (formerly Net Value Holdings Inc.), an investment made on the
Company's behalf by a related party. As of December 31, 2001 and 2000 the
Company recognized an unrealized gain (loss) on this investment of $175,760 and
$(1,908,333), respectively.
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In October 2000, a related party of the Emergent (the "plaintiff")
commenced an action on behalf of Emergent against Stonepath 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.
Emergent has filed an appeal of the court's decision. The Company does not
intend to conduct any additional merchant banking activities in the future.
GOVERNMENT REGULATION
The healthcare industry is subject to extensive federal and state
regulation. Promulgation of new laws and regulations, or changes in or
re-interpretations of existing laws or regulations, may significantly affect the
Company's business, operating results or financial condition. The Company is not
currently subject to regulation, however, a court or governmental body could
make a determination that the Company's business should be regulated. The
Company's operations might be negatively impacted if it had to comply with
government regulations. Furthermore, the manufacturers of medical equipment
utilized by the Company are subject to extensive regulation by the Food and Drug
Administration ("FDA"). Failure of such manufacturers to comply with FDA
regulations could result in the loss of approval by the FDA of such medical
equipment, which could adversely affect the Company's operating results or
financial condition. As consolidation among physician groups continues and
provider networks continue to be created, purchasing decisions may shift to
persons with whom the Company has not had prior contact. The Company cannot be
certain that it will be able to maintain its physician, vendor and/or
manufacturer relationships under such circumstances.
POTENTIAL EXPOSURE TO LIABILITY
Physicians, hospitals and other providers in the healthcare industry
are subject to lawsuits, which may allege medical malpractice or other claims.
Many of these lawsuits result in substantial defense costs and judgments or
settlements. The Company does not engage in the practice of medicine, nor does
it control the practice of medicine by physicians utilizing its services or
their compliance with regulatory requirements directly applicable to such
physicians or physician groups. However, the services the Company provides to
physicians, including actions by its technicians, its establishment of protocols
and its training programs, could give rise to liability claims. The Company may
become involved in material litigation in the future and it is possible that a
claim or claims arising from such litigation might exceed the Company's
insurance coverage. Currently, the Company's insurance coverage expires in April
2003. In the future, the Company may not be able to maintain such insurance
coverage or obtain new coverage in the future.
COMPETITION
The market for PRI's mobile surgical services is highly competitive.
Companies, particularly in the laser surgery industry, often compete by price,
thereby impacting profit margins. In addition, PRI faces many existing and
future competitors of various size and scale. Some of our competitors have
significantly greater financial and management resources than the company.
Competitors in our market include two privately held companies by the name of
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Mobile Med, Incorporated and Southland Surgical. In spite of such competition,
the Company believes that it can compete successfully but can give no assurances
with regard to its ability to compete. The Company's business could be adversely
affected if our customers elect to purchase surgical equipment directly from the
manufacturers and hire their own technicians.
EMPLOYEES
As of December 31, 2002, the Company employed 77 full-time persons
(including two executive officers), 50 of whom were involved in operations
activities (most of these were active as field technicians), 12 of whom were
involved in sales and marketing, and 15 of whom were involved in administration,
information technology, and accounting. In addition, the Company may employ
part-time and occasional employees as technicians to handle overload situations.
None of our employees are represented by collective bargaining agreements. The
Company believes that its employee relations are good.
Item 2. Properties
The Company leases approximately 14,400 square feet of office/warehouse
space for its operations and headquarters in Glendale, California. The lease
agreement provides for monthly rent of $13,270, and is subject to annual
increases based on increases in the Consumer Price Index. The lease expires in
July 2006 and provides for an option to renew for an additional five years. The
Company also leases an aggregate of approximately 5,000 square feet of space for
its field and sales office under operating lease agreements that expire on
various dates through March 2004 in Northern California, Colorado and Utah. We
believe our present facilities will be adequate for our reasonably foreseeable
needs.
Item 3. 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 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
9
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. 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 made 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 due under 39 personal sales contracts. The Company
is current in making all required payments under the settlement agreement.
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 an 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.
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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 December 31, 2001 and as of January 23, 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.
Item 4. Submission of Matters to a Vote of Security Holders.
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No matters were submitted to a vote of security holders during the
fourth quarter of fiscal 2001 or between January 1, 2002 and the filing date of
this Form 10-K.
PART II
Item 5. Market for Registrant's Securities and Related Stockholder Matters.
Our common stock was traded on the OTC Bulletin Board under the symbol
"EMGR" before being removed from listing due to the late filing of this Form
10-K. The last closing sales price of our Common Stock on the bulletin board was
$.005 on May 21, 2002. The Company intends to attempt to obtain a new listing
for its common stock on the OTC Bulletin board or BBX Exchange. No assurances
can be given that the Company will be successful in this regard. Since being
removed from the Bulletin Board, our common stock continues to trade on a
limited and sporadic basis in the Over-the-Counter Market. The following table
sets forth the range of high and low closing prices of our Common Stock for the
periods indicated. All sales of common stock for periods before the quarter
ended September 30, 2000 were sales of common stock of Dynamic International,
Ltd. before the spin-off of assets to Dynamic International Inc.
Quarters Ended High Low
September 30, 2000 (1).......................................$1.69 $.14
December 31, 2000............................................ 1.08 .31
March 31, 2001............................................... 1.00 .01
June 30, 2001................................................ 1.25 .25
September 30, 2001........................................... .56 .15
December 31, 2001............................................ .15 .05
March 31, 2002............................................... .06 .01
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June 30, 2002................................................ .035 .005
September 30, 2002........................................... .03 .0001
December 31, 2002.................... .01 .0001
Last Available in 2002...............
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December 20, 2002............................................ .0001 .0001
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(1) The common stock of the Company was not publicly traded until the
completion of the merger with Dynamic International, Ltd. in August
2000, therefore, no public market price existed for the Company's
common stock prior to the period ended September 30, 2000. See
"Business" and "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
All quotations reflect inter-dealer prices, without retail mark-up,
markdown or commissions, and may not necessarily represent actual transactions.
As of December 11, 2002, there were 1,078 holders of record of our
common stock, although we believe that there are other persons who are
beneficial owners of our common stock held in street name. The Company's
transfer agent is American Stock Transfer & Trust Company, 59 Maiden Lane, New
York, NY 10038.
Dividend Policy
We have never paid any cash dividends and intend, for the foreseeable
future, to retain any future earnings for the development of our business. Our
Board of Directors will determine our future dividend policy on the basis of
various factors, including our results of operations, financial condition,
capital requirements and investment opportunities.
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..Recent Sales of Unregistered Securities
Since January 1, 2001, the Company made the following sales or issuances of
unregistered securities:
- -------------- ------------------ -------------- ------------------------- -------------------- ----------------------
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 Number Sold Claimed conversion
- -------------- ------------------ -------------- ------------------------- -------------------- ----------------------
12/30/02 Common Stock 11,502,970 Services rendered; no Section 4(2) Not applicable.
commissions paid
- -------------- ------------------ -------------- ------------------------- -------------------- ----------------------
12/30/02 Common Stock 4,361,000 Options granted under This stock option 10-year Options were
2002 Stock Option Plan; plan will be granted to
no cash received; no registered on a employees, directors
commissions paid Form S-8 and consultants and
Registration at $.01 per share;
Statement shortly Options generally
after the filing vest in five equal
of this Form 10-K annual installments
and other required commencing on the
Exchange Act date of grant expire
Reports. ten years from date
of grant.
- -------------- ------------------ -------------- ------------------------- -------------------- ----------------------
12/30/02 Common Stock 30,000 Warrants granted in Section 4(2) Warrants exercisable
connection with debt at anytime $.01 per
foregiveness; no cash share through
received; no 2/28/05.
commissions paid
- -------------- ------------------ -------------- ------------------------- -------------------- ----------------------
5/01 Common Stock 237,874 Conversion of Section 4(2) Not applicable
outstanding debt; no
commissions paid
- -------------- ------------------ -------------- ------------------------- -------------------- ----------------------
5/21/02 Common Stock 6,195,880 Options granted under This stock option 10-year Options were
2002 Stock Option Plan; plan will be granted to
no cash received; no registered on a employees/consultants
commissions paid Form S-8 at $.01 per share;
Registration Options generally
Statement vest in five equal
shortly after the annual installments
filing of this Form commencing on the
10-K and other date of grant and
required Exchange expire ten years from
Act Reports. from date of grant.
13
- -------------- ------------------ -------------- ------------------------- -------------------- ----------------------
11/1/01 Common Stock 970,000 Options granted under This stock option Options vest over a
2001 Stock Option Plan; plan will be period of three
no cash received; no registered on a years, exercisable
commissions paid Form S-8 at $1.00 per share,
Registration and expire on December
Statement 31, 2005.
shortly after
the filing of this
Form 10-K and other
required Exchange Act
Reports.
- -------------- ------------------ -------------- ------------------------- -------------------- ----------------------
11/1/01 Common Stock 4,673,436 Options/warrants Section 4(2) Options/warrants
approved by the Board approved by the
of Directors outside of Board of Directors
Stock Option Plan to an to various persons
officer, a director, and vest over
officer of subsidiary, different time
outside general periods and are
counsel, employees and exercisable at
consultants; no cash prices between $.01
received; no per share and $1.00
commissions paid per share; all the
options/ warrants
expiration no later
than December 31,
2004
- -------------- ------------------ -------------- ------------------------- -------------------- ----------------------
7/01 Common Stock 3,000,000 Common Stock sold in Section 4(2) Not applicable
July 2001 at $.20 per
share. Stock was
approved by the Board
on 11/1/01 but
belatedly issued in
June 2002; no
commissions paid
- -------------- ------------------ -------------- ------------------------- -------------------- ----------------------
14
Equity Compensation Plan
The following summary information is as of December 31, 2002 and relates to
our 2002 Stock Option Plan described in Item 11 pursuant to which we have
granted options to purchase our common stock:
- ------------------------------- ------------------------------ ---------------------- --------------------------------
(a) (b) (c)
- ------------------------------- ------------------------------ ---------------------- --------------------------------
Plan category Number of shares of common Weighted average Number of securities
stock to exercise price of remaining available for
be issued upon exercise outstanding future issuance under
of outstanding options options (1) equity compensation plans
(excluding shares
reflected in column (a)
- ------------------------------- ------------------------------ ---------------------- --------------------------------
Equity compensation
Plans (2) 9,167,609 $.012 3,832,391
- ------------------------------- ------------------------------ ---------------------- --------------------------------
- --------------------
(1) Based upon 9,007,609 options exercisable at $.01 per share, 80,000 options
exercisable at $.05 per share and 80,000 options exercisable at $.20 per
share.
(2) The 2002 Stock Option Plan will be submitted to stockholders for approval
at our next annual meeting.
The following summary information is as of December 31, 2002 and relates to
our 2001 Stock Option Plan described in Item 11 pursuant to which we have
granted options to purchase our common stock:
- ------------------------------- ------------------------------ ---------------------- --------------------------------
(a) (b) (c)
- ------------------------------- ------------------------------ ---------------------- --------------------------------
Plan category Number of shares of common Weighted average Number of securities
stock to exercise price of remaining available for
be issued upon exercise outstanding future issuance under
of outstanding options options (1) equity compensation plans
(excluding shares
reflected in column (a))
- ------------------------------- ------------------------------ ---------------------- --------------------------------
Equity compensation
Plans (2) 585,000 $1.00 -0-
- ------------------------------- ------------------------------ ---------------------- --------------------------------
- --------------------
(1) All options are exercisable at $1.00 per share.
(2) The 2001 Stock Option Plan will be submitted to stockholders for approval
at our next annual meeting. The Plan originally covered 8,000,000 shares
but has been reduced by board resolution to the number of outstanding
options.
15
The following summary information is as of December 31, 2002 and relates to
our Stock Option Plans of MRM described in Item 11 which were assumed by
Emergent and pursuant to which we have granted options to purchase our common
stock:
- ------------------------------- ------------------------------ ---------------------- --------------------------------
(a) (b) (c)
- ------------------------------- ------------------------------ ---------------------- --------------------------------
Plan category Number of shares of common Weighted average Number of securities
stock to exercise price of remaining available for
be issued upon exercise outstanding future issuance under
of outstanding options options (1) equity compensation plans
(excluding shares
reflected in column (a))
- ------------------------------- ------------------------------ ---------------------- --------------------------------
Equity compensation
Plans (2) 51,375 $1.47 -0-
- ------------------------------- ------------------------------ ---------------------- --------------------------------
- --------------------
(1) Based upon 44,530 options exercisable at $.68 per share and 6,845 options
exercisable at $4.05 per share.
(2) The Board of Directors of Emergent does not intend to grant any more options
under the old MRM Plans.
Item 6. SELECTED FINANCIAL DATA
The following selected financial data has been derived from
the Company's consolidated financial statements, which have been
examined by independent certified public accountants. Such financial
data should be read in conjunction with "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and the
audited consolidated financial statements included elsewhere in this
Form 10K.
Statement of Operations Data
Period from inception
Year Ended (March 8, 2000) to
December 31, 2001 (1) December 31,2000
-------------------- ----------------
Revenues ...................................... $ 5,244,585 $--
Cost of goods sold ............................ 4,328,935 --
Gross profit .................................. 915,650 --
Selling, general and administrative expenses .. (3,609,439) (986,401)
Impairment of property and equipment .......... (3,732,223) --
Impairment of goodwill ........................ (687,906) --
Loss from operations .......................... (7,113,918) (986,401)
Total other income (expense) .................. (2,604,703) (581,419)
Loss before provision for income taxes ........ (9,718,621) (1,567,820)
Provision for income taxes .................... 1,600 --
Net Loss ...................................... (9,720,221) (1,567,820)
Other comprehensive gain (loss), net of tax
Unrealized gain (loss) on investment securities 309,822 (2,042,395)
Comprehensive loss ............................ (9,410,399) (3,610,215)
Basic and diluted net loss per
share ......................................... (0.19) (0.04)
(1) Operating results include the operations of MRM from July 6, 2001 (date of
acquisition) to December 31, 2001.
Balance Sheet Data
December 31,
2001 December 31, 2000
Total assets ............................................... $10,135,189 $ 5,184,747
Long-term debt ............................................. 2,884,798 --
Cash dividends declared per common share ................... 0 0
Weighted average common shares outstanding basic and diluted 48,350,262 41,557,789
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 judgements. Actual results could
differ from those estimates. We believe that the following critical accounting
policies affect our more significant judgements and estimates in the preparation
of our financial statements.
Revenue Recognition. We are required to make judgements based on
historical experience and future expectations, as to the realizability of goods
and services billed to our customers. These judgements 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.
17
Inventory Valuation. We are required to make judgements 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 judgements 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.
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
The following discussion should be read in conjunction with our
consolidated financial statements and the notes thereto appearing elsewhere in
this Form 10K. All statements contained herein that are not historical facts,
including, but not limited to, statements regarding anticipated future capital
requirements, our future plan of operations, our ability to obtain debt, equity
or other financing, and our ability to generate cash from operations, are based
on current expectations. These statements are forward-looking in nature and
involve a number of risks and uncertainties that may cause the Company's actual
results in future periods to differ materially from forecasted results.
Overview
Emergent is the parent company of MRM, its wholly owned and only
operating subsidiary. MRM primarily conducts its business through its wholly
owned subsidiary, PRI. Emergent Group Inc., 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 serves both large and small health care
providers and makes mobile surgical services available to its customers by
providing this equipment on a per procedure basis to hospitals, out patient
surgery centers, and physician offices. PRI provides mobile lasers and other
surgical equipment with technical support required to ensure the equipment is
working correctly. PRI also provides a limited amount of general equipment on a
rental basis to hospitals and surgery centers, although PRI is discontinuing
this area of business in order to focus on its core surgical equipment
rental/services business. In connection with the phase-out of the general
medical equipment rental business and review of other property and equipment
assets, the Company recorded impairment charges for property and equipment, and
goodwill of $3,732,223 and $687,906, respectively, as of December 31, 2001
Acquisition of Medical Resources Management, Inc.
Reference is made to "Item 1" for a discussion of the Company's July
2001 acquisition of MRM.
18
Prior to Emergent's acquisition of MRM, Emergent was a merchant banking
firm. Merchant banks are essentially in the business of finding opportunities
and sources of funding and, with investors' money and their own capital,
financing growth and facilitating transactions for, and among their clients. The
distinguishing characteristics of a merchant bank are that it commits its own
capital, or the capital of its principals, to a transaction, either in the form
of debt, typically short-term bridge financing, or equity, and that it generally
receives an equity position in the client company as part or all of the
compensation for its services. In late 2000 Emergent made convertible loans to
MRM. Since July 2001 we have ceased our merchant banking activities in order to
concentrate the Company's management and resources on developing the mobile
surgical services business of MRM.
Transfer of Equity with Dynamic International, Ltd. and Formation of
Emergent Group Inc.
Reference is made to "Item 1" for a discussion of an equity transfer
and spin-off of assets to Dynamic International Ltds and the former members of
Emergent Ventures, LLC's acquisition of control of Dynamic Ltd.
19
Results of Operations
The following table sets forth certain selected condensed consolidated statement
of operations data for the periods indicated:
Statement of Operations Data
- -------------------------------------------------------- --------------------------------- ---------------------------------
For the period
from inception
Year Ended (March 8, 2000)
December 31, to December 31,
2001 2000
- -------------------------------------------------------- --------------------------------- ---------------------------------
Revenues $ 5,244,585 $ ---
- -------------------------------------------------------- --------------------------------- ---------------------------------
Cost of sales 4,328,935 ---
- -------------------------------------------------------- --------------------------------- ---------------------------------
Gross profit 915,650 ---
- -------------------------------------------------------- --------------------------------- ---------------------------------
Selling, general and administrative expenses 3,609,439 (986,401)
- -------------------------------------------------------- --------------------------------- ---------------------------------
Impairment of property and
equipment 3,732,223 ---
- -------------------------------------------------------- --------------------------------- ---------------------------------
Impairment of goodwill 687,906 ---
- -------------------------------------------------------- --------------------------------- ---------------------------------
Loss from operations (7,113,918) (986,401)
- -------------------------------------------------------- --------------------------------- ---------------------------------
Total other income (expense) (2,604,703) (581,419)
- -------------------------------------------------------- --------------------------------- ---------------------------------
Loss before provision for income taxes (9,718,621) (1,567,820)
- -------------------------------------------------------- --------------------------------- ---------------------------------
Provision for income taxes 1,600 ---
- -------------------------------------------------------- --------------------------------- ---------------------------------
Net loss (9,720,221) (1,567,820)
- -------------------------------------------------------- --------------------------------- ---------------------------------
Other comprehensive gain (loss), net of tax 309,822 (2,042,395)
- -------------------------------------------------------- --------------------------------- ---------------------------------
Comprehensive loss (9,410,399) (3,610,215)
- -------------------------------------------------------- --------------------------------- ---------------------------------
Basic and diluted net loss per share (0.19) (0.04)
- -------------------------------------------------------- --------------------------------- ---------------------------------
The Company conducted no significant operations, other than its
investing activity prior to its acquisition and merger with MRM on July 6, 2001.
The condensed consolidated financial statements of the Company for the year
ended December 31, 2001 reflects a net loss of $(9,720,221) on net revenues of
$5,244,585. In addition, in late 2001 the Company decided to discontinue its
rental of general equipment to hospitals and physicians, which accounted for
approximately 11% of revenues for the period ended December 31, 2001.
20
Year Ended December 31, 2001 Compared to the period from March 8, 2000
(inception) to December 31, 2000
The Company generated revenues of $5,244,585 in 2001 compared to $0 in
2000. Revenues for 2001 were generated by MRM during the period from July 6,
2001 (date of acquisition) to December 31, 2001. The Company had no operations
prior to the acquisition of MRM. Approximately 68% of revenues for 2001 were
generated from MRM mobile surgical equipment services with the balance primarily
generated from cosmetic services and non-surgical equipment rentals.
Cost of goods sold of amounted to $4,328,935 for 2001, compared to $0
for 2000. Such costs were incurred by MRM during the period from July 6, 2001 to
December 31, 2001 in connection with its mobile surgical equipment services
business. No such costs were incurred during 2000 as discussed herein. Costs of
good sold primarily consist of payroll costs and related expenses for
technicians, cost of disposables consumed, insurance costs and other operating
costs incurred in rendering such services..
Gross profit from operations was $915,650 for 2001 compared to $0 for
the period ended December 31, 2000. Gross profit represented 17.4% of revenues
for 2001 and is not necessarily indicative of the margins that may be realized
in future periods. We anticipate that operating margins will improve in future
periods as we complete our financial restructuring efforts and continue to
improve our operating procedures.
Selling, general and administrative expenses were $3,609,439 for 2001,
compared to $986,401 for 2000. The increase in such expenses relate to the
inclusion of operating results for MRM for the period from July 6, 2001 (date of
acquisition) to December 31, 2001, while no such expenses were incurred in 2000.
As discussed elsewhere in this Form 10-K, the Company, as the successor to
Dynamic International, Ltd., is deemed to have been formed for financial
reporting purposes on March 8, 2000 and as a result incurred general and
administrative expenses from the date of formation to December 31, 2000, while
general and administrative expenses were incurred for the full year in 2001.
The Company recognized an impairment charge of $3,609,439 as of
December 31, 2001 primarily in connection with the revaluation of its general
rental equipment. In late 2001, the Company decided to discontinue its general
rental business due to poor performance and in order to focus on its core
business of providing mobile surgical equipment and services. The Company is in
the process of selling its remaining general rental equipment through the use of
independent equipment brokers. From January 1, 2002 to December 31, 2002, the
Company sold general rental equipment with an aggregate net book value of
$504,044 and had recognized net gains on such dispositions of approximately
$163,880. The Company expects to continue its disposition activities until all
such general rental equipment is sold.
The Company recognized an impairment charge of $687,906 related to
recorded goodwill as of December 31, 2001. Such amount represents a portion of
the goodwill recorded in connection with the acquisition and merger with MRM in
July 2001. The write-down of goodwill related to the MRM merger primarily
21
resulted from the Company's decision to discontinue the non-surgical rental
business in late 2001. The Company will continue to review the value of its
tangible and intangible assets in the future as events and circumstances warrant
and it may be required to record additional impairment charges if the carrying
amount of its assets is deemed to be unrecoverable.
Realized losses on investment securities amounted to $2,306,428 in
2001, compared to $709,703 in 2000. The realized losses in 2001 relate primarily
to the permanent impairment of several investments in common stocks of
unaffiliated companies, which were acquired by Emergent in 2000.
Interest expense amounted to $357,134 in 2001 compared to $0 in 2000.
Interest expense was incurred by MRM in connection with its debt and capital
lease obligations.
Period from Inception (March 8, 2000) to December 31, 2000
For the period form inception (March 8, 2000) to December 31, 2000, we
incurred a net loss of $(1,567,820) or $(0.04) per share. The net loss resulted
from expenses being incurred due to an increase in operations and investing
activities. The net loss includes a realized loss of $709,703 on investments
attributable to the termination of business operations by the company with which
the investment was made. The unrealized loss of $2,042,395 on investments is due
to the general decline in value of technology and Internet related companies.
Recently Issued Accounting Pronouncements
Between June 2001 and October 2002, the Financial Accounting Standards
Board ("FAB") issued SFAS No. 141 through SFAS No. 147. These pronouncements and
any anticipated effect on us are described in Note 3 in the notes to our
consolidated financial statements, which are incorporated herein by reference in
this Item 7.
Liquidity and Capital Resources
Our 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 our business. As of December
31, 2001 we had a deficiency in working capital of $(1,837,584) and incurred a
net loss of $(9,720,221) for the year then ended. In order to avoid ceasing our
operations, 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 have
substantially completed this process whereby we have renegotiated outstanding
debt and lease obligations with principal balances outstanding as of December
31, 2001 of approximately $5.1 million and have recorded $2.1 million in net
gains on forgiveness of debt. The restructured debt and lease obligation
agreements provide in some cases for the return of equipment used to
22
collateralize such obligations, if applicable, and certain periodic and monthly
installment for the balance of such obligations. In connection with our
renegotiations with creditors we returned equipment with a net book value of
approximately $1.5 million. 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,
we have renegotiated outstanding trade debt with our major vendors in the amount
of approximately $446,000 and have recorded gains on forgiveness of vendor debt
in the amount of $335,000. As of the filing date of this Annual Report on Form
10K, we are in compliance with the terms and conditions of our renegotiated debt
agreements. However, as of December 31, 2002 the Company continues to be in
default under certain note and lease obligations with aggregate principal
balances outstanding of $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 December 31, 2001 we had a bank loan (the "Bank Term Loan")
outstanding in the amount of $867,000. The loan agreement provides for monthly
payments of principal of $33,333 and interest at the prime rate plus 4.00%.
Pursuant to the loan agreement principal and interest are due in 60 monthly
installments through May 2004. As of December 31, 2001 we were in default under
the loan agreement and as a result all principal and interest were accelerated
and became immediately due and payable. However, in connection with the
renegotiation of our debt obligations the due date for the principal and
interest was extended to March 31, 2003. In addition, the lender has agreed to
accept reduced principal payments of $16,667 per month through March 31, 2003.
The Company assumed this loan obligation in July 2001 in connection with its
acquisition of MRM. 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, 2001, and the Company was in default under the credit
agreement. As a result this facility is not available for use as of the filing
date of this Form 10-K. We have agreed with the lender to pay down the Bank Line
of Credit using 50% of proceeds from the sale of medical rental equipment, not
pledged to other lenders, as such transactions occur. No amounts have been
repaid from such sales as of December 31, 2002. The Bank Line of Credit has been
extended to March 31, 2003. The Company intends to continue its renegotiation
efforts with the lender in order to reach favorable repayment terms and
conditions regarding these two bank credit facilities. No assurances can be
given that these negotiations will be comleted on terms satisfactory to the
Company, if at all.
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 December 31, 2001, and the filing date of this Form 10-K, 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 December 31, 2001.
The Company had cash and cash equivalents of $482,165 at December 31,
2001. Cash provided by operating activities for the year ended December 31, 2001
was $274,116. Such amount primarily related to the inclusion in net loss of
certain non-cash write-downs, including, write-down of investments of
$2,306,428, impairment of charges of $4,420,129, depreciation and amortization
of $1,117,661, compensation expense for the issuance of stock options of
$525,891, offset by a net decrease in working capital. Cash provided from
investing activities amounted to $150,662 due to net proceeds from the sale of
investments of $30,000, and the proceeds from the sale of property and equipment
23
of $355,411 offset by the purchase of property and equipment for $120,199 and
cash paid to limited liability companies of $114,550. Cash used by financing
activities of $693,453, was primarily the result of the pay down of debt
obligations and related fees of $1,320,849, costs related to the acquisition of
MRM of $335,856, all offset by borrowings of $387,832 and proceeds from the sale
of common stock of $600,000.
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,
2001, in their Report of Independent Certified Public Accountants included in
our audited financial statements contained elsewhere in this report. For the
year ended December 31, 2001, we incurred a net loss of $(9,720,221). Our
accumulated deficit amounted to $(11,288,041) at December 31, 2001. 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 will be cash generated from operations,
raising additional capital from the sale of equity or other securities,
borrowings under debt facilities and trade payables. However, there can be no
assurances 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.
24
RISK FACTORS
WE HAVE INCURRED LOSSES AND MAY CONTINUE TO INCUR LOSSES.
We incurred a net loss of $(9,720,221) for the year ended December 31,
2001 due to a number of factors including impairment charges for property and
equipment and goodwill of $4,420,129, a realized loss of on investments of
$2,306,428 due to the permanent impairment of such investments and an increase
in administrative and selling expenses as of result of our acquisition of MRM in
July 2001. In addition, the report of our independent auditors for the year
ended December 31, 2001 contains a going concern opinion as a result of
continuing net losses, a deficiency in working capital as of December 31, 2001
and defaults under certain debt and lease agreements. These matters raise
substantial doubt about our ability to continue as a going concern. While many
of these losses were primarily attributed to the matters noted herein, there can
be no assurances that we will achieve profitability in the future.
OUR CORE BUSINESS IN MOBILE SURGICAL SERVICES HAS BEEN VERY PRICE COMPETITIVE.
The market for our services and equipment is highly competitive.
Competitors often compete by lowering prices, thus impacting profit margins. We
can provide no assurances that we will be successful (profitable) in a highly
competitive market.
WE MAY NEED SUBSTANTIAL ADDITIONAL FINANCING TO ACHIEVE OUR STRATEGIC GOALS AND
TO RETIRE DEBT.
Much of our future growth depends upon our ability to expand our
customer base and on our ability to acquire new technologies related to medical
surgical equipment. Such endeavors will require additional capital resources. In
addition, we will need to generate funds to meet our existing debt obligations,
most of which was recently restructured. These initiatives may require us to
raise significant sums of additional capital, which may or may not be available.
We can provide no assurances that such financing will be available to us on
satisfactory terms, if at all.
OUR BUSINESS IS SUBJECT TO ADVERSE CHANGES IN GOVERNMENT REGULATION.
Many aspects of our business in delivering surgical equipment and
related services may be impacted by changes in federal and state regulations. We
could encounter difficulties in meeting the requirements of new or changing
regulations.
25
WE MAY HAVE DIFFICULTIES IN ESTABLISHING SERVICE CAPABILITIES WITH NEW MEDICAL
DEVICES UNRELATED TO OUR CURRENT BUSINESS.
Establishing a market presence with new technologies may require us to
build a new sales and support infrastructure. We may have difficulty hiring the
appropriate personnel and establishing the necessary relationships for us to
successfully penetrate any new market.
THERE MAY NOT BE AN ACTIVE TRADING MARKET FOR OUR STOCK.
In the past, there has been an irregular and relatively illiquid public
market for our common stock. Our common stock was removed from listing and
trading on the OTC Electronic Bulletin Board due to the late filing of this Form
10-K. Our common stock trades periodically and on a limited basis in the
Over-the-Counter Market. We intend to attempt to obtain a broker-dealer to file
a new listing of our common stock on the OTC Electronic Bulletin Board or BBX
Exchange, as the case may be. There can be no assurances that we will be
successful in this regard nor can we provide assurance when and if, or to what
extent, a more regular and/or liquid trading market may develop. This may make
it difficult for you to sell your shares of our common stock.
THE PRICE OF OUR STOCK MAY FLUCTUATE
The market price of our common stock may be as highly volatile, or more
so, as the stock market in general or, for that of micro cap stocks, and the
technology sector more specifically. Stockholders may have difficulty selling
their common stock following periods of such volatility due to the market's
adverse reaction to such volatility. Many of the factors leading to such
volatility are well beyond our control and could include:
o conditions and trends in our industry;
o changes in the market valuation of companies similar to us;
o actual or expected variations in our operating results;
o announcements by us or our competitors of the development of new
products or technologies or strategic alliances or acquisitions; and
o changes in members of our senior management or other key employees.
These and other factors may adversely affect the price of our common
stock, regardless of its future operating results and we cannot assure you that
our common stock will trade at prices similar to the stock of our competitors or
other similar companies.
26
WE MAY EXPERIENCE QUARTERLY AND ANNUAL FLUCTUATIONS IN OUR OPERATING RESULTS IN
THE FUTURE, WHICH MAKES OUR PAST PERFORMANCE AN UNRELIABLE INDICATION OF FUTURE
PERFORMANCE.
Our operating results may vary significantly from quarter to quarter
and from year to year in the future. A number of factors, many of which are
outside of our control, may cause these variations, including:
o fluctuations in demand for our products and services;
o the introduction of new products, services or technologies by
competitors, entry of new competitors, pricing pressures and
other competitive factors;
o our ability to obtain and introduce new surgical equipment products,
services and technologies in a timely manner;
o the rate of market acceptance of any new surgical equipment products or
services that we offer;
o delays or reductions in customer orders of our products and services in
anticipation of the introduction of new or enhanced products and
services by our competitors or us;
o our ability to control expenses;
o the timing of regulatory approvals and changes in domestic and regulatory
environments;
o the level of capital spending of our customers;
o costs related to acquisitions or alliances, if any; and
o general economic conditions.
Due to these and other factors, we believe that our operating results
in future quarters and years may differ from expectations, and
quarter-to-quarter and year-to-year comparisons of our past operating results
may not be meaningful. You should not rely on our results for any quarter or
year as an indication of future performance.
OUR INDUSTRY IS UNPREDICTABLE AND CHARACTERIZED BY RAPID TECHNOLOGICAL CHANGES
AND EVOLVING STANDARDS, AND, IF WE FAIL TO ADDRESS CHANGING MARKET CONDITIONS,
OUR BUSINESS AND OPERATING RESULTS WILL BE HARMED.
Our industry is characterized by rapid technological change, frequent
new product introductions, changes in customer requirements and evolving
industry standards. Our equipment could quickly become obsolete due to new
technological developments in medical devices. This could lead to a significant
financial impact since most of our equipment is generally financed over a period
of several years. Because this market is subject to rapid change, it is
difficult to predict our potential size or future growth rate. Our success in
generating revenues in this market will depend on, among other things:
27
o maintaining and enhancing our relationships with customers;
o the education of potential customers about the benefits of our products
and services; and
o our ability to accurately predict and obtain new products, services and
technologies to meet industry standards.
We cannot assure you that our expenditures for the acquisition of new
products and technologies will result in their introduction or, if such products
or technologies are introduced, that they or the related services will achieve
sufficient market acceptance. We may need to expend significant resources to
acquire new products and services in the future, which may adversely impact our
profitability. However, the failure to make such expenditures to address rapid
technological changes in the industry could adversely affect our business.
FAILURE TO SUCCESSFULLY COMPLETE AND MANAGE GROWTH STRATEGIES COULD ADVERSELY
AFFECT OUR BUSINESS, PROFITABILITY AND GROWTH PROSPECTS.
Part of our growth strategy may include acquisitions and alliances
involving complementary products, services, technologies and businesses. If we
are unable to overcome the potential problems and inherent risks related to such
acquisitions and alliances, our business, profitability and growth prospects
could suffer. Our ability to expand successfully through acquisitions and
alliances depends on many factors, including our ability to identify appropriate
prospects and negotiate and close transactions. Even if future acquisitions or
alliances are completed:
o we could fail to select the best acquisition or alliance partners;
o we could fail to effectively plan and manage acquisition or alliance
strategies;
o management's attention could be diverted from other business concerns;
o we could encounter problems integrating the acquired or allied
operations, technologies or products; and
o the acquisition or alliance could have adverse effects on our existing
business relationships with suppliers and/or customers.
Many companies compete for acquisition and alliance opportunities in
our industry. Some of our competitors are companies that have significantly
greater financial and management resources than us. This may reduce the
28
likelihood that we will be successful in completing alliances necessary to the
future success of our business.
Anticipated growth in the number of employees and in sales, combined
with the challenges of managing geographically dispersed operations, may place a
significant strain on our management systems and resources. We expect that we
will need to continue to improve our information technology systems, financial
and managerial controls, reporting systems and procedures and continue to
expand, train and manage our work force. The failure to effectively manage
growth could disrupt our business and adversely affect our operating results.
IF WE LOSE SENIOR MANAGEMENT AND KEY EMPLOYEES ON WHOM WE DEPEND, OUR BUSINESS
COULD SUFFER.
Effective December 30, 2002, we entered into 18 month employment
contracts with Bruce J. Haber and Louis Buther who are key employees of the
Company. At such time as we are current in our filings under the Securities
Exchange Act of 1934, as amended, Mr. Haber will become our Chief Executive
Officer and Chairman of the Board and Mr. Buther will become our President.
Management believes that our overdue reports on Form 10-Q for the quarters ended
March 31, June 30 and September 30, 2002 will be filed on or about January 28,
2003, although no assurances can be given in this regard. Contemporaneously with
Mr. Haber's joining us, we have hired Louis Buther as our new President. We
believe that our future success will depend to a significant extent upon
retaining the services of Messrs. Haber and Buther and other key employees. Our
business could be materially and adversely affected if we lose the services of
Messrs. Haber and Buther. We currently do not have "key-person" life insurance
policies to cover the lives of Messrs. Haber and Buther or any other key
employees. The ability to continue to attract and retain highly skilled
personnel will be a critical factor in determining our future success.
Competition for highly skilled personnel is intense and we may not be successful
in attracting, assimilating or retaining qualified personnel to fulfill current
or future needs. If we cannot recruit, train, retain and effectively manage key
employees, our business, profitability and growth prospects could suffer.
SOME OF OUR PRODUCTS ARE COMPLEX IN DESIGN AND MAY CONTAIN DEFECTS THAT ARE NOT
DETECTED UNTIL DEPLOYED BY CUSTOMERS, WHICH COULD INCREASE OUR COSTS AND REDUCE
OUR REVENUES.
Many of our products are inherently complex in design and require
ongoing regular maintenance. As a result of the technical complexity of the
equipment and certain fibers used in the delivery of our services, changes in
our suppliers' manufacturing processes or the inadvertent use of defective or
contaminated materials by such suppliers could result in a material adverse
effect on our ability to achieve acceptable product reliability. To the extent
that such product reliability is not achieved, we could experience, among other
things:
o damage to our business reputation;
o loss of customers;
29
o failure to attract new customers or achieve market acceptance;
o diversion of resources; and
o legal actions by customers.
The occurrence of any one or more of the foregoing factors could
seriously harm our business, our financial condition and results of operations.
WE FACE INTENSE COMPETITION.
The surgical equipment rental and services industry is highly
competitive. Our operations compete with services provided by numerous local,
regional and national equipment and service providers. Certain of these
competitors are larger or have greater financial resources than us. There can be
no assurance that we will not encounter increased competition, which could have
a negative impact on our business, results of operations or financial condition.
Forward-Looking Statements
The Private Securities Litigation Reform Act of 1995 (the Act)
provides a safe harbor for forward-looking statements made by or on behalf of
our Company. Our Company and its representatives may from time to time make
written or verbal forward-looking statements, including statements contained in
this report and other Company filings with the Securities and Exchange
Commission and in our reports to stockholders. Statements which relate to other
than strictly historical facts, such as statements about the Company's plans and
strategies and expectations for future financial performance are forward-looking
statements within the meaning of the Act. Generally, the words "believe,"
"expect," "intend," "estimate," "anticipate," "will" and other similar
expressions identify forward-looking statements. The forward-looking statements
are and will be based on management's then current views and assumptions
regarding future events and operating performance, and speak only as of their
dates. The Company undertakes no obligation to publicly update or revise any
forward-looking statements, whether as a result of new information, future
events or otherwise. See Risk Factors for a discussion of events and
circumstances that could affect our financial performance or cause actual
results to differ materially from estimates contained in or underlying our
forward-looking statements.
30
Item 7(a). Quantitative and Qualitative Disclosures about Market Risk.
The Company is not exposed to financial market risks from changes in
foreign currency exchange rates or changes in interest rates. The Company does
not use derivative financial instruments.
The Company's debt obligations are primarily fixed rate, with the exception
of its working capital loans. If the Company were to pursue re-financing of its
fixed rate debt or lease obligations, it could potentially be exposed to changes
in interest rates.
Item 8. Financial Statements and Supplementary Data.
Financial Statements
Quarterly Results
The following table sets forth certain unaudited quarterly financial
data for 2001 and 2000. In our opinion, this unaudited information has been
prepared on the same basis as the audited information and includes all
adjustments (consisting only of normal recurring adjustments) necessary to
present fairly the information set forth therein. The operating results for any
one quarter are not necessarily indicative of results for any future period.
Quarterly Results of Operations
The following table sets forth unaudited quarterly financial data for
the periods indicated. We derived this data from unaudited financial statements,
and in the opinion of our management, they include all adjustments, which
consist primarily of normal recurring adjustments necessary to present fairly
the financial results for the periods. Results of operations for any previous
period do not necessarily indicate what results may be for any future period.
- ------------------------------------ ----------------------------------------------------------------------------------
Selected Quarterly Financial Information
(Unaudited)
- ------------------------------------ ----------------------------------------------------------------------------------
Quarter Ended
- ------------------------------------ --------------------- --------------------- ------------------ -------------------
Period from Inception
(March 8, 2000) to
March 31, 2000 (1) June 30, 2000 (1) Sept. 30, 2000 Dec. 31, 2000
- ------------------------------------ --------------------- --------------------- ------------------ -------------------
Net revenues $ -- $ -- $ -- $ --
- ------------------------------------ --------------------- --------------------- ------------------ -------------------
Cost of good sold -- -- -- --
---------------- ---------------- ------------ -------------
- ------------------------------------ --------------------- --------------------- ------------------ -------------------
Gross profit -- -- -- --
- ------------------------------------ --------------------- --------------------- ------------------ -------------------
Selling, general and
administrative 45,201 167,238 284,296 489,666
- ------------------------------------ --------------------- --------------------- ------------------ -------------------
Operating income (loss) (45,201) (167,238) (284,296) (489,666)
- ------------------------------------ --------------------- --------------------- ------------------ -------------------
Other income (expenses):
- ------------------------------------ --------------------- --------------------- ------------------ -------------------
Realized loss on investment
securities -- -- -- (709,703)
- ------------------------------------ --------------------- --------------------- ------------------ -------------------
Other income -- 128,284
---------------- ---------------- ------------ -------------
- ------------------------------------ --------------------- --------------------- ------------------ -------------------
Net income (loss) $ (45,201) $ (167,238) $ (284,296) $ (1,071,085)
- ------------------------------------ --------------------- --------------------- ------------------ -------------------
Unrealized gain (loss) on
Investments 1,343,554 (2,456,663) (661,564) (267,722)
--------------- ------------- ----------- --------------
- ------------------------------------ --------------------- --------------------- ------------------ -------------------
Comprehensive income (loss) $ 1,298,353 $(2,623,901) $ (945,860) $ (1,338,807)
=============== ============= =========== ==============
- ------------------------------------ --------------------- --------------------- ------------------ -------------------
INCOME (LOSS) PER
SHARE DATA:
- ------------------------------------ --------------------- --------------------- ------------------ -------------------
Basic and diluted loss NA NA $ (0.02) $ (0.02)
- ------------------------------------ --------------------- --------------------- ------------------ -------------------
Weighted average common
Shares outstanding NA NA 17,381,852 44,173,280
- ------------------------------------ --------------------- --------------------- ------------------ -------------------
31
(1) As discussed elsewhere in this Annual Report on Form 10K, Emergent Ventures,
LLC completed its merger with Dynamic International, Ltd. in August 2000. Prior
to that date there were no shares of common stock outstanding. See "Business"
and "Management's Discussion and Analysis of Financial Condition and Results of
Operations."
Quarter Ended Quarter Ended Quarter Ended Quarter Ended
March 31, 2001 June 30, 2001 September 30, December 31,
(2) (2) 2001 (2) 2001 (1)
--- --- -------- --------
Net revenues $ - $ - $ 2,769,622 $ 2,474,963
Cost of goods sold - - 2,002,538 2,326,397
----------------- ---------------- ----------------- -----------------
Gross profit - - 767,084 148,566
General & administrative expense 411,853 525,138 831,108 1,841,340
Impairment of property and equipment 3,732,223
Impairment of goodwill 687,906
----------------- ---------------- ----------------- -----------------
Loss from operations (411,853) (525,138) (64,024) (6,112,903)
Other Income (expense):
Realized gain (loss) on Investment securities (687,500) (783,075) (930,396) 94,543
Interest expense - - (211,776) (145,358)
Equity in net gain of investment in limited liability - - 24,098 2,675
companies
Gain on disposal of property and equipment - - 1,483 44,088
Revaluation of property & equipment - - - -
Other (expense), net 33,219 15,851 (27,453) (35,102)
----------------- ---------------- ----------------- -----------------
Total other (expense) (654,281) (767,224) (1,144,044) (39,154)
----------------- ---------------- ----------------- -----------------
Loss before income taxes (1,066,134) (1,292,362) (1,208,068) (6,152,057)
Provision for income taxes - - - (1,600)
----------------- ---------------- ----------------- -----------------
Net loss $ (1,066,134) $ (1,292,362) $ (1,208,068) $ (6,153,657)
----------------- ---------------- ----------------- -----------------
Other comprehensive gain (loss), net of tax
Unrealized gain (loss) on investment activities 3,105 133,834 38,821
----------------- ---------------- ----------------- -----------------
Reclassification adjustment for gains included
in net loss (2) 134,062
----------------- ---------------- ----------------- -----------------
Comprehensive loss $ (1,063,029) $ (1,158,528) $ (1,208,068) $ (5,980,774)
----------------- ---------------- ----------------- -----------------
LOSS PER SHARE DATA: $ (0.02) $ (0.03) $ (0.02) $ (0.12)
Net loss per share- basic & diluted
Weighted average number of common shares outstanding 44,173,280 44,173,280 49,501,000 49,998,000
(1) In connection with the acquisition of substantially all of the assets and
liabilities of MRM in July 2001, Emergent recorded an excess of cost over
the fair value of assets acquired of $3,420,862. In the fourth quarter, we
recorded an expense of $687,906 in connection with the impairment of this
asset. In addition, we recorded a net expense of $3,732,223 in connection
with a review of property and equipment for impairment. Also, we increased
the reserve for inventory obsolescence by $50,000 in December 2001, which
is included in cost of goods sold.
(2) Certain reclassifications are reflected in the above quarterly data since
the filing of such quarterly reports on Form 10-Q.
32
The report of the Independent Accountants, Financial Statements and Schedules
are set forth beginning on page F-1 of this Annual Report on Form 10-K.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.
On January 25, 2001 we dismissed Moore Stephens, P.C. ("MS") as our
independent auditor. MS was the independent auditor for Dynamic International,
Ltd. ("Dynamic") at the time of the merger with Emergent Ventures, LLC in August
2000. MS reported on Dynamic's financial statements for each of the two fiscal
years ended April 30, 2000 and 1999, respectively (collectively, the "Prior
Fiscal Years"). Such reports were each modified in their reference to the
uncertainty of Dynamic's ability to continue as a going concern. Except for this
reference, such reports did not contain an adverse opinion or disclaimer of
opinion, nor were such reports qualified or modified as to uncertainty, audit
scope or accounting principles. For the period from August 2000 through January
25, 2001 (the "Interim Period") there were no disagreements ("Disagreements")
between us and MS on any matter of accounting principles or practices, financial
statement disclosure, or auditing scope or procedure, which Disagreement, if not
resolved to the satisfaction of MS, would have caused MS to make reference to
the subject matter of the Disagreement in connection with its reports for the
Prior Fiscal Years. There were no "Reportable Events," as such term is defined
in Item 304(A)(1)(v) of Regulation S-K, during either (i) the Prior Fiscal Years
or (ii) the Interim Period. Subsequently, we engaged Arthur Andersen LLP ("AA")
as our independent public accountants for our fiscal year ended December 31,
2000. We did not consult AA with respect to either (i) the Prior Fiscal Years,
(ii) the Interim Period with respect to either the application of accounting
principles to a specified transaction, either completed or proposed, or the type
of audit opinion that might be rendered on our financial statements, or (iii)
any matter that was either the subject of a Disagreement or a Reportable Event.
On March 5, 2002 AA notified us that AA was no longer our independent
auditor and effectively resigned from such capacity. AA's report on our
financial statements for the period from March 8, 2000 (the date of inception of
Emergent Ventures LLC) to December 31, 2000 (collectively, the "Prior Fiscal
Year"), did not contain an adverse opinion or disclaimer of opinion, nor was
such report qualified or modified as to uncertainty, audit scope or accounting
principles. The decision of AA to resign was not recommended or approved by our
Board of Directors. There were no disagreements ("Disagreements") between us and
AA during either (i) the Prior Fiscal Year, or (ii) the period January 1, 2001
through March 5, 2002 (the "Interim Period") on any matter of accounting
principles or practices, financial statement disclosure, or auditing scope or
procedure, which Disagreement, if not resolved to the satisfaction of AA, would
have caused AA to make reference to the subject matter of the Disagreement in
connection with its report for the Prior Fiscal Year. There were no "Reportable
Events," as such term is defined in Item 304(A)(1)(v) of Regulation S-K, during
either (i) the Prior Fiscal Year or (ii) the Interim Period. We have engaged
Singer Lewak Greenbaum & Goldstein LLP ("SLGG") as our independent auditor for
our fiscal year ended December 31, 2001. We did not consult SLGG with respect to
33
either (i) the Prior Fiscal Year, (ii) the Interim Period with respect to either
the application of accounting principles to a specified transaction, either
completed or proposed, or the type of audit opinion that might be rendered on
our financial statements, or (iii) any matter that was either the subject of a
Disagreement or a Reportable Event.
PART III
Item 10. Directors and Executive Officers of the Registrant.
The names, ages and principal occupations of the Company's
present directors, and the date on which their term of office commenced and
expires, are listed below.
Term of Office First Became
Name Age Director Principal Occupation
Daniel Yun........................ 35 (1) 2000 Private Investor
Mark Waldron...................... 35 (1) 2000 Chief Executive Officer
and President
Howard Waltman.................... 70 (1) 2001 Private Investor
Matthew K. Fong, Sr............... 49 (1) 2001 President of Strategic
Advisory Group and Senior
Counsel with Sheppard,
Mullen, Richter & Hampton
- ------------------
(1) Directors are elected at the annual meeting of stockholders and hold
office until the following annual meeting.
Daniel Yun is Chairman of the Board and Mark Waldron is Chief Executive
Officer and President of the Company. William M. McKay, who joined the Company
in August 2002, is Chief Financial Officer, Secretary and Treasurer. The terms
of all officers expire at the annual meeting of directors following the annual
stockholders meeting. Officers serve at the pleasure of the Board and may be
removed, either with or without cause, by the Board of Directors, and a
successor elected by a majority vote of the Board of Directors, at any time.
Daniel Yun became Chairman of the Board of the Company and has served
in this capacity since August, 2000. Mr. Yun has also served as a director of
its subsidiary, Medical Resources Management, Inc., since September 2000. Mr.
Yun is Chairman of the board of Voyager Advisors, LLC, a Securities and Exchange
Commission registered investment advisor. During approximately the past four
years, Mr. Yun's principal occupation has been as a private investor. He has
served as Manager of Emergent Capital Investment Management LLC since October
1998. Between May 1994 and August 1998, Mr. Yun served as vice president in
charge of middle market derivatives at Lehman Brothers. Before joining Lehman
Brothers, Mr. Yun was an associate in the fixed income division of Goldman,
Sachs & Co. from 1993 to 1994. Upon graduating from the United States Military
Academy at West Point with a Bachelor of Science in Economics, Mr. Yun was
commissioned as a second lieutenant in the US Army, and was later appointed as a
commanding officer in charge of 220 multinational soldiers in Korea. While in
the army, Mr. Yun attended the Airborne, Air Assault and Ranger Schools, and
obtained a Master in Public Administration from the University of Oklahoma. His
professional publications include "Understanding Exotic Derivatives" in
Controlling and Managing Interest Rate Risk, (ed. Robert Klein, Prentice Hall,
1996). Mr. Yun currently serves on the Rand Corporation Advisory Board.
34
Mark Waldron has served as a director, Chief Executive Officer and
President of the Company since August, 2000. Mr. Waldron has served as a
director of Medical Resources Management, Inc. since September 2000. Between
1998 and 2001, Mr. Waldron's principal occupation was as a private investor. Mr.
Waldron is a former vice president of J.P. Morgan in New York and was with the
firm from June 1993 to June 1998. Mr. Waldron received his MBA from Northwestern
University's Kellogg School of Management through the School's accelerated
one-year program, where he attained Dean's List standing. Mr. Waldron was an
Associate at Bankers Trust Company before attending business school, and
received a B.A. with honors from the Richard Ivey School of Business at the
University of Western Ontario. Mr. Waldron is a member of the Foreign Policy
Association and MENSA, and is a citizen of Canada.
Howard Waltman has served as a director of the Company since 2001.
Since 2000, Mr. Waltman has acted as a private investor for a family limited
liability corporation. Since 1986, Mr. Waltman has served as a director of
Express Scripts, Inc. ("ESI"), and as its Chairman from 1986 to 2000. ESI was
formed in 1986 as a subsidiary of Sanus, a company formed in 1983 by Mr.
Waltman, who served as its Chariman of the Board from 1983 to 1987. Sanus was
acquired by New York Life Insurance Company in 1987. ESI provides mail order
pharmacy services and pharmacy claims processing services and was spun out of
Sanus and taken public in June 1992. Mr. Waltman also founded Bradford National
Corp. in 1968, which was sold to McDonnell Douglas Corporation in 1981. From
1996 to 2000, Mr. Waltman served as a director of Computer Outsourcing Services,
Inc. Mr. Waltman is currently a director of a number of privately held
companies.
Matthew K. Fong, Sr. has served as a director of the Company since
2001. Mr. Fong has served as a senior counsel with Sheppard, Mullin, Richter &
Hampton, a law firm with offices in both San Francisco and Los Angeles since
2000. Since 1999, he has served as President of Strategic Advisory Group of
Industry, CA, a business strategy consulting company. Mr. Fong was the
Republican candidate for the U.S. Senate in California in 1998, in which he ran
against Democrat Senator Barbara Boxer. From 1995 to 1999, Mr. Fong was the
Treasurer of the State of California. Mr. Fong holds a BS in International
Affairs from the US Air Force Academy, an MBA from Pepperdine University, and a
JD from Southwestern University.
William M. McKay, age 48, has served as Chief Financial Officer of the
Company since August 2002. From August 2000 to August 2002, he served as Chief
Financial Officer and as a consultant for EV Global Motors Company, a privately
held consumer products company. From December 1998 to July 2000 Mr. McKay served
as Chief Financial Officer and Secretary for Internet Dynamics, Inc., a
privately held software development company. From February 1998 to November
1998, he served as Chief Financial Officer for Koo Koo Roo, Inc., a publicly
held food services company. From May 1995 to February 1998, Mr. McKay served as
Chief Financial Officer and Secretary for View Tech, Inc., a publicly held
35
technology company. Mr. McKay also has ten years of public accounting experience
with Deloitte & Touche, where he last served as a senior manager in its audit
department. Mr. McKay is a member of the American Institute of Certified Public
Accountants and the California Society of Certified Public Accountants, and
holds a B.S. in business administration with an emphasis in accounting from the
University of Southern California - Los Angeles.
In 2001, Dr. Bernard Rineberg resigned from his position as a director
of the Company. Upon the Company becoming current with all reports due under the
Securities Exchange Act of 1934, as amended, which is anticipated to be on or
before January 28, 2003, Bruce J. Haber has agreed to fill the vacancy in the
Board of Directors and become a director of the Company and to serve as its
Chairman of the Board and Chief Executive Officer through an Employment
Agreement. Mr. Haber will be required to devote to the Company such time as is
necessary for the performance of his duties. Contemporaneously, Louis Buther has
agreed to serve as the Company's President and to devote his full working time
to the affairs of the Company through an Employment Agreement. The biographies
of Messrs. Haber and Buther are as follows:
Bruce J. Haber, age 50, is currently President of BJH Management, LLC,
a management firm specializing in turnaround consulting and private equity
investments. From October 2001 until December 2002, Mr. Haber served on the
Board of Directors of EB2B Commerce, Inc. a computer software company. From
March 2002 to December 2002 Mr. Haber served as Chairman of the Board and as a
turnaround consultant to EB2B. Mr. Haber was founder, President and CEO of
MedConduit.com, Inc., a healthcare e-commerce B2B from 2000 to 2001. Mr. Haber
served as Executive Vice President and a Director of Henry Schein, Inc. as well
as President of their Medical Group from 1997 to 1999. From 1981 to 1997, Mr.
Haber served as President, CEO and Director of Micro Bio-Medics, Inc., and
Caligor Medical Supply Company which merged with Henry Schein in 1997. Mr. Haber
holds a Bachelor of Science degree from the City College of New York and a
Master of Business Administration from Baruch College in New York.
Louis Buther, age 49, has served as an independent consultant since
2000. From 1997 through 2000, Mr. Buther was Senior Vice President of the
Medical Division of Henry Schein, Inc. From 1983 to 1997, Mr. Buther served as
Vice President of Micro Bio-Medics, Inc., and Caligor Medical Supply Company
which merged with Henry Schein in 1997. Mr. Buther holds an Associates Art
Science Degree in Chemistry from Bronx Community College and a Bachelor of
Science Degree in Pharmacy from Long Island University.
36
Committees
Prior to November 2001, the Company had no standing audit, nominating
and compensation committees of the Board of Directors or committees performing
similar functions.
On November 1, 2001, the Company's Board established a Compensation
Committee with Messrs. Waltman, Fong and Yun as its members. On November 1,
2001, the Company's Board also established an Audit Committee with Messrs.
Waltman and Fong and Dr. Bernard Rineberg as its members. On December 19, 2002,
the Board approved each of the following: (i) a resolution that upon the
effective date of Mr. Bruce J. Haber becoming a director of the Company, the
members of the Compensation Committee shall be changed to include Messrs. Haber,
Waltman and Yun and (ii) a resolution reducing the number of Audit Committee
members to two with Messrs. Waltman and Fong as its members.
As required by the Securities and Exchange Commission, the Board of
Directors intends to establish an audit committee charter for the committee with
responsibilities to include, without limitation, the power to: (i) select the
independent certified public accountant and determine its independence; (ii)
satisfy itself on behalf of the board that the external and internal auditing
procedures assure reliable and informative accounting and financial reporting;
(iii) have meetings with management, or with the auditors, or with both
management and auditors, to review the scope of the auditor's examination, audit
reports and our internal auditing procedures and reviews; (iv) monitor policies
established to prohibit unethical, questionable, or illegal activities by those
associated with us; (v) review the compensation paid to the auditors through
annual audit and non-audit fees and the effect on the independence of the
auditors in relation thereto, and to exercise the powers and authority of the
Board of Directors to implement changes in connection with the foregoing or, at
the Audit Committee's option, to make recommendations to the entire Board of
Directors for its approval.; and (vi) otherwise comply with any other legal
requirements established by the Securities and Exchange Commission, federal law
and applicable state law.
37
Item 11. Compensation of Directors and Executive Officers.
The following table provides a summary compensation table with respect
to the Company's Chief Executive Officer, Mark Waldron, its former Chief
Executive officer of MRM, Richard Whitman, and its other three former executive
officers who earned $100,000 or more in salaries and/or bonuses in 2001 from the
Company (including its subsidiaries). During the past three fiscal years, the
Company has not granted stock appreciation rights to its executive officers. In
addition, the Company does not have a defined benefit or actuarial plan.
SUMMARY COMPENSATION TABLE
- --------------------------------------------------- ----------------------------------------------------------------- --------------
Long Term Compensation
- -------------------------- -------- ---------------------------------------- ---------------------------- ----------- --------------
Annual Compensation Awards Payouts
Name and Year Salary Bonus Other Annual Restricted Number of LTIP All Other
Principal Position ($) ($) Compensation ($) Stock Options Payout ($) Compensation
Award(s) ($) ($)
- -------------------------- -------- ---------- --------- ------------------- --------------- ------------ ----------- --------------
2001 70,000 0 17,821(1) 0 0 0 0
Mark Waldron, (1)
CEO of the Company
2000 0 0 0 0 3,700 (2) 0 0
1999 0 0 0 0 0 0 0
- -------------------------- -------- ---------- --------- ------------------- --------------- ------------ ----------- --------------
Richard Whitman, 2001 144,475 0 0 0 127,049 (3) 0 0
Former CEO of MRM
2000 168,750 0 0 0 0 0 0
1999 0 0 0 0 0 0 0
- -------------------------- -------- ---------- --------- ------------------- --------------- ------------ ----------- --------------
Kerry Bartlett, 2001 115,030 0 0 0 55,500 (4) 0 0
former Vice President of
Sales of MRM
2000 135,201 0 0 0 0 0 0
1999 108,440 0 0 0 0 0 0
- -------------------------- -------- ---------- --------- ------------------- --------------- ------------ ----------- --------------
Calvin Yee, former 2001 114,393 0 0 0 500,000 0 0
Vice President of (5)
the Company and Chief
Operating Officer of MRM
2000 0 0 0 0 0 0 0
1999 0 0 0 0 0 0 0
- -------------------------- -------- ---------- --------- ------------------- --------------- ------------ ----------- --------------
Al Guadagno, former 2001 135,938 0 0 0 148,000 0 0
Executive Vice President (6)
and Chief Financial
Officer of MRM
2000 50,000 0 0 0 0 0 0
1999 0 0 0 0 0 0 0
- -------------------------- -------- ---------- --------- ------------------- --------------- ------------ ----------- --------------
38
- --------------
(1) Mr. Waldron did not receive a salary during 2001. However, pursuant to
a consulting agreement entered into with Mr. Waldron in December 2002
the Company allocated $70,000 of fees provided for under the agreement
to services performed by Mr. Waldron in 2001 as the Company's CEO for
which he was not previously compensated. Such amount will be paid in
2003. In addition, the Company reimbursed Mr. Waldron $17,821 for his
rent, automobile, automobile insurance, and relocation expenses
incurred during 2001.
(2) Originally options to purchased 10,000 shares of Common Stock of MRM
granted on September 25, 2000 and assumed by the Company pursuant to
its Merger Agreement with MRM and now exercisable to purchase 3,700
shares at $.68 per share.
(3) Includes options to purchase 123,349 shares of the Company's Common
Stock exercisable at $.50 per share and options to purchase 3,700
shares of the Company's Common Stock exercisable at $.68 per share, all
of which were granted in connection with the Company's acquisition of
MRM and the resulting exchange of option shares of MRM for option
shares of the Company.
(4) Includes options to purchase 55,500 shares of the Company's Common
Stock exercisable at $.68 per share granted in July 2001 in connection
with the Company's acquisition of MRM and the resulting exchange of
option shares of MRM for shares of the Company.
(5) Represents non-statutory stock options issued in November 2001.
(6) Does not include ten-year non-statutory stock options to purchase
150,000 shares exercisable at $.01 per share granted in December 2002
pursuant to a Termination Agreement dated August 2002. Includes options
to purchase 148,000 shares at an exercise price of $.68 per share
granted in July 2001 in connection with the Company's acquisition of
MRM and the resulting exchange of option shares of MRM for option
shares of the Company.
Consulting Agreement with BJH Management, LLC
On October 15, 2001, the Company entered into a consulting agreement
(the "Consulting Agreement") with BJH Management, LLC ("BJH"), a New York based
company, to act as a consultant to the Company for an initial three-month
period, which the parties verbally agreed to extend to December 31, 2002.
Pursuant to the Consulting Agreement, BJH assigned Bruce J. Haber and Louis
Buther to assist the Company with strategic decisions, and day-to-day
operations. As compensation for its services, the Company paid BJH a monthly fee
of $25,000, plus reimbursement of reasonable and necessary business expenses,
subject to prior approval by the Company's Board of Directors. The Consulting
Agreement provided for a bonus in the form of a 12.5% equity interest in the
Company, on a post-funding basis, if the Company raised a minimum of $1 million
in equity capital by the conclusion of the consulting period, or if the Company
concluded that it no longer required any or all such additional equity as a
result of a debt restructuring on terms acceptable to the Company. Further, BJH
was entitled to receive such bonus if either of Messrs. Haber or Buther chose to
accept an executive position with the Company after the completion of a funding
transaction or debt restructuring. If no such positions were accepted, then the
equity participation would have been reduced to 7.5%. In the event the Company
was sold within a six-month period commencing on October 22, 2001, BJH would
have been entitled to a 10% equity interest.
39
Stock Issuance Agreement with BJH Management, LLC
The Company has determined that BJH, through its efforts in
renegotiating and restructuring of certain of the Company's outstanding debt
obligations with key creditors, had satisfied a significant portion of the
Company's funding and liquidity needs. In addition, Messrs. Haber and Buther
have agreed to join the Company as executive officers as set forth in the
"Employment Agreements "between the Company and Bruce J. Haber and Louis Buther
as described below. Therefore, pursuant to the terms of a Stock Issuance
Agreement and as additional consideration for agreeing to enter into the
Employment Agreements, the Company agreed to issue to BJH 11,502,970 shares of
common stock, which is equal to 17.5% of the fully diluted common shares
outstanding as of December 20, 2002 (the "Initial Shares"). The fully diluted
common shares outstanding is defined as the outstanding shares of the Company
plus the number of shares issuable upon exercise of options/warrants that are
exercisable at $.25 or less.
The Stock Issuance Agreement also provides for the following: On or
before January 31, 2004, provided that (i) that the Employment Agreements is
then still in full force and effect on December 31, 2003 (the "Anniversary
Date"), and (ii) during the period commencing on January 1, 2003 and ending on
the Anniversary Date (the "One-Year Period"), the Company has sold additional
shares of Common Stock or Common Stock equivalents (exclusive of any shares of
Common Stock issued pursuant to the exercise or conversion, as the case may be,
of options, warrants, convertible debt or other derivative securities
outstanding on the date hereof), BJH shall have the right (the "Anti-Dilution
Right") to purchase from the Company, at a purchase price of $.005 per share,
additional shares of Common Stock (the "Additional Shares"), such that, upon the
purchase of such Additional Shares, BJH's ownership interest in the Company, on
a fully diluted basis, after the purchase of any such Additional Shares, when
aggregated with the Initial Shares, equals 17 1/2 % of the Company on a fully
diluted basis as of the Anniversary Date, provided, however, that such
Anti-Dilution Right shall only apply to up to $2,000,000 of actual Equity
Issuances (meaning stock or common stock equivalents sold for cash consideration
in a private placement or public offering) closed by the Company during the One
Year Period. For the avoidance of doubt, it is expressly understood and agreed
by the parties that the foregoing Anti-Dilution Right only applies to the first
$2,000,000 (or such lesser amount) of Equity Issuances actually closed by the
Company during the One Year Period. Consequently, in the event and to the extent
that the Company effects Equity Issuances during the One Year Period in excess
of $2,000,000, BJH's ownership interest in the Company will be diluted
accordingly. Should the Employment Agreements be terminated prior to the
Anniversary Date, any Additional Shares acquired by BJH prior to the Anniversary
Date shall be forfeited and BJH, simultaneously with the termination of such
Employment Agreements, shall be required to sell such Additional Shares back to
the Company at the same price paid for the Additional Shares by BJH.
The Stock Issuance Agreement also provides that the shares acquired by
BJH from the Company may not be sold, transferred, assigned, pledged, encumbered
or otherwise disposed of for a period of 12 months from the execution of the
Stock Issuance Agreement except in the case of a change in control of the
Company or to Messrs. Haber or Buther and/or their immediate family members as
defined in the Agreement. The Stock Issuance Agreement also provides for certain
piggy-back registration rights to register the shares for resale with the
Securities and Exchange Commission and notice provisions of at least 30 days
before the initial filing of the Registration Statement with the Commission.
40
The Company paid BJH consulting fees and reimbursable expenses of
$69,355 and $439,975 for the period ended December 31, 2001, and the period from
January 1, 2002 to December 31, 2002, respectively..
Employment Agreements with Bruce J. Haber and Louis Buther
Effective December 30, 2002, the Company has entered into Employment
Agreements (the "Employment Agreements") with Bruce J. Haber and Louis Buther
for an initial term of 18 months subject to an automatic annual renewal unless
terminated 90 days prior to the end of the term of these Agreements. Pursuant to
the Agreements, effective upon the Company being current with all reports to be
filed under the Exchange Act of 1934, as amended, which is expected to occur on
or about January 28, 2003. Mr. Haber will serve as the Company's Chief Executive
Officer and will be elected to the Company's Board of Directors, initially as
Chairman and Mr. Buther will serve as its President. Messrs. Haber and Buther
will perform the duties customary for an executive of such rank with a public
company. Messrs. Haber and Buther will be based in New York City and are not
required to relocate without each person's respective consent. Mr. Haber will
not be required to devote his full-time to the Company, but will be required to
devote such time as is necessary for the performances of his duties. Mr. Buther
will be required to devote his full business time to the Company.
For Mr. Haber's services, he will receive an annual base compensation
of $175,000 (the "Haber Base Salary") payable in semi-monthly installments or
otherwise in accordance with Company policies. For Mr. Buther's services, he
will receive annual base compensation of $161,000 (the "Buther Base Salary"),
payable in semi-monthly installments or otherwise in accordance with Company
policies. In addition, in the event that pre-tax profits before Management's
bonuses are at least $1,035,000 for a calendar year, then Messrs. Haber and
Buther shall receive a bonus of $50,000 each, increasing to $75,000 each, if
pre-tax profits are $1,150,000 plus 6% each of pre-tax profits over $1,150,000.
Such bonus, if earned, will be paid within 30 days after the end of each fiscal
year end of the Company. The Company will reimburse Messrs. Haber and Buther for
all ordinary and necessary business expenses incurred in connection with the
performance of their duties and responsibilities. Messrs. Haber and Buther shall
be entitled to indemnification for any claim or lawsuit, which may be asserted
against them when acting in a capacity for the Company or any subsidiary or
affiliated business. Messrs. Haber and Buther shall also be entitled to
participate in officers and directors liability insurance maintained by the
Company and any subsidiary or affiliated business.
The Employment Agreements provide that all proprietary information
inventions and trade secret information of the Company shall belong exclusively
to the Company, including all patents, copyrights and other rights in connection
therewith. At all times, both during the term of the Employment Agreements and
after termination thereof for any reason whatsoever, Messrs. Haber and Buther
agree to keep in strict confidence and trust all proprietary information and
that they will not use or disclose any proprietary information except as may be
necessary in the ordinary course of performing their duties under the Services
Agreements. All inventions and invention ideas developed by Messrs. Haber and
Buther in connection with their Employment Agreements shall belong to the
Company as its sole property and each person grants to the Company an assignment
of all right, title and interest pertaining thereto. During the term of the
Employment Agreements and for a period of six months thereafter, Messrs. Haber
and Buther and BJH agree that they will not (i) directly or indirectly engage in
41
or become interested in any business enterprise which is engaged in the current
business of the Company, other than a maximum ownership interest of 5% of any
publicly traded company that is in the current business of the rental of
surgical equipment to healthcare providers; (ii) directly or indirectly
participate for their own benefit in the solicitation of any business of any
type conducted by the Company from any person or entity which was a client or
customer of the Company during the term of the Services Agreements; or (iii)
directly or indirectly recruit for employment, or induce or seek to cause such
person to terminate his or her employment with the Company, any person who is
then an employee of the Company or was an employee of the Company during the
preceding six months, provided that the foregoing shall not apply to the
recruiting for employment of Messrs. Haber and Buther and Fran Barr. The
Employment Agreements provide for termination of the Agreements for cause after
giving notice to Messrs. Haber and/or Buther or if they violate the restrictive
covenants, they are found to have committed an act of fraud, embezzlement, or
theft against the property or personnel of the Company or convicted of a felony
or other criminal conduct that would be expected to materially adversely affect
the Company's business, prospects, results of operations or financial condition.
The Employment Agreements may be terminated by the Company upon the death or
12-month disability of Messrs. Haber or Buther or without cause by giving
written notice.. Messrs. Haber and/or Buther may also terminate their respective
Employment Agreements at any time by giving 30 days prior written notice to the
Company. In all such cases, Messrs Haber and Buther shall be entitled to receive
their earned and unpaid base salary and Milestone Bonuses earned and unpaid
through the effective date of termination. In the case of termination without
cause, Mr. Haber shall be entitled to receive an amount equal to 50% of the then
current annual Haber Base Salary and reasonably incurred expenses through the
termination date. Mr. Buther shall be entitled to receive an amount equal to the
unpaid Buther Base Salary through the termination date of his Employment
Agreement. Upon termination of the Employment Agreement for cause, Haber/Buther
shall immediately resign as a director of the Company unless otherwise agreed to
by the Company and Messrs. Haber and Buther.
Consulting Agreement with Mark Waldron
On December 30, 2002, the Company entered into a non-exclusive
Consulting Agreement (the "Waldron Consulting Agreement" or "Agreement") with
JIMA Management LLC and Mark Waldron for the period from January 15, 2003 to
September 15, 2003. JIMA Management LLC agrees to provide the Company with the
non-exclusive services of Mr. Waldron as may be required by the Company from
time-to-time during the term of the agreement. Mr. Waldron's consulting services
will include advising the Company on commercial strategies, management and
operations, and assisting the Company with identifying and pursuing suitable
business opportunities. Pursuant to the Agreement, JIMA Management LLC will be
paid $10,000 per month. Such fees will also compensate JIMA Management LLC for
services provided by Mr. Waldron during the term of this agreement as well as
services provided to the Company and expensed on the Company's books and records
for the period from July 1, 2001 to March 31, 2002 during which time Mr. Waldron
served as the Company's Chief Executive Officer and did not receive a salary.
The Waldron Consulting Agreement also provides for certain piggy-back
registration rights to have his Common Stock registered for sale with the
Securities and Exchange Commission and notice provisions of at least 30 days
before the initial filing of the registration statement with the Commission.
42
In the first three months of 2002, Mr. Waldron did not receive a
salary, but received payment of his rent, automobile and automobile insurance as
benefits from the Company. Between April 2002 and January 2003, MRM was paying
him a salary at the monthly rate of $12,500 and has discontinued all other
benefits described above, except a monthly auto allowance.
The Company expensed fees of $70,000 and $10,000 as of December 31,
2001 and March 31, 2002, respectively, in connection with services provided
under the Waldron Consulting Agreement. The Company will expense the remaining
fees of $10,000 due under the Agreement in 2003.
Other Agreements
In August 2000, MRM entered into a two-year employment arrangement with
Al Guadagno, its Executive Vice President and Chief Financial Officer. The
principal terms of this arrangement are an annual base compensation of $150,000,
an annual bonus based upon performance, and the issuance of non-qualified stock
options at the inception of the arrangement. In addition, the arrangement
provided that, if Mr. Guadagno is terminated, he will then be entitled to
receive severance compensation through August 2002. The Company notified Mr.
Guadagno that his contract would not be renewed in August 2002.
In January 2000, MRM entered into a three-year employment contract with
Richard Whitman, MRM's former Chairman, President and Chief Executive Officer.
This contract provided for an annual base compensation of $180,000, an annual
bonus based upon performance, and the issuance of non-qualified stock options of
MRM at the inception of the contract (equal to 10% of the fully diluted shares
outstanding at the inception of this contract). In addition, the contract
provided that, if Mr. Whitman is terminated prior to the end of the contract, he
will then be entitled to receive compensation through the end of the contract.
Pursuant to an agreement dated August 20, 2001, as amended November 30, 2001.
Mr. Whitman, the Company and MRM agreed as follows:
o To terminate the January 2000 Agreement;
o To retain Mr. Whitman as a non-exclusive consultant for the
Company and MRM in the area of business development, fund
raising and corporate development through January 9, 2003;
o To pay Mr. Whitman a salary at the annual rate of $187,200
between October 1, 2001 and December 31, 2001 and thereafter
at the rate of $8,000 per month;
o The Company shall pay Mr. Whitman $31,650 (in 24 equal
installments), which amount represents the difference between
the amounts that he will have been paid to September 30, 2001
pursuant to his original employment contract and the
compensation to which he was entitled to be paid to September
30, 2001.
o Reaffirm Mr. Whitman's right to receive stock options and
registration rights in accordance with the January 2000
Agreement as adjusted to give effect to the conversion ratio
applied to other MRM stockholders.
o For Mr. Whitman to convert his $60,000 note into 237,874
shares of the Company's Common Stock with registration rights
subject to a lock-up agreement until August 15, 2002.
43
Pursuant to a Settlement Agreement dated November 26, 2002, Mr. Richard
Whitman and the Company entered into an agreement whereby the Company agreed to
pay Mr. Whitman $25,000 upon the execution of this agreement and an additional
$17,000 on or before March 31, 2003 (less payroll deductions) in full
satisfaction of all monies then due and owing to him. If timely payments are not
made, then the Company would owe him $213,000 less any payments made under their
Settlement Agreement. The Settlement Agreement also included Mr. Whitman's
waiver of registration rights effective immediately.
MRM has adopted a defined contribution retirement plan, which qualifies
under Section 401(k) of the Internal Revenue Code. This Plan covers
substantially all employees with over one year of service. MRM makes an annual
election to provide matching contributions of up to 15% of each participant's
deferral up to a maximum of 6% of compensation. Effective January 2000, MRM
elected to suspend any matching contributions. Except for MRM's 401(k) Plan, the
Company has no other annuity, pension, or retirement benefits for its employees.
Directors' Compensation
Directors do not presently receive compensation for serving on the
Board or on its committees other than the grant of stock options. Depending on
the number of meetings and the time required for the Company's operations, the
Company may decide to compensate its directors in the future.
2002 Employee and Consulting Compensation Plan
On April 1, 2002, the Company established an Employee Benefit and
Consulting Compensation Plan (the "2002 Plan") covering 13,000,000 shares. In
the event that stockholder approval is not obtained by April 1, 2003, then all
outstanding Incentive Stock Options granted under the 2002 Plan shall become
Non-Statutory Stock Options and no Incentive Stock Options could be thereafter
granted under the 2002 Plan.
Administration
Our Board of Directors, Compensation Committee or both, in the sole
discretion of our Board, administer the 2002 Plan. The Board, subject to the
provisions of the 2002 Plan, has the authority to determine and designate
officers, employees, directors and consultants to whom awards shall be made and
the terms, conditions and restrictions applicable to each award (including, but
not limited to, the option price, any restriction or limitation, any vesting
schedule or acceleration thereof, and any forfeiture restrictions). The Board
may, in its sole discretion, accelerate the vesting of awards. The Board of
Directors must approve all grants of Options and Stock Awards issued to our
officers or directors.
Types of Awards
The 2002 Plan is designed to enable us to offer certain officers,
employees, directors and consultants of us and our subsidiaries equity interests
in us and other incentive awards in order to attract, retain and reward such
individuals and to strengthen the mutuality of interests between such
individuals and our stockholders. In furtherance of this purpose, the 2002 Plan
contains provisions for granting incentive and non-statutory stock options and
Common Stock Awards.
44
Stock Options. A "stock option" is a contractual right to purchase a
number of shares of Common Stock at a price determined on the date the option is
granted. The option price per share of Common Stock purchasable upon exercise of
a stock option and the time or times at which such options shall be exercisable
shall be determined by the Board at the time of grant. Such option price shall
not be less than 100% of the fair market value of the Common Stock on the date
of grant (110% of the fair market value in the case of Incentive Stock Options
granted to any 10% or greater stockholders). The option price must be paid in
cash, money order, check or Common Stock of the Company. Non-Statutory Stock
Option may also contain at the time of grant, at the discretion of the Board,
certain other cashless exercise provisions.
Options shall be exercisable at the times and subject to the conditions
determined by the Board at the date of grant, but no option may be exercisable
more than ten years after the date it is granted. If the Optionee ceases to be
an employee of our company for any reason other than death, any incentive stock
option exercisable on the date of the termination of employment may be exercised
for a period of thirty days or until the expiration of the stated term of the
option, whichever period is shorter. In the event of the Optionee's death, any
incentive stock option exercisable at the date of death may be exercised by the
legal heirs of the Optionee from the date of death until the expiration of the
stated term of the option or six months from the date of death, whichever event
first occurs. In the event of disability of the Optionee, the Incentive Stock
Options shall expire on the stated date that the Option would otherwise have
expired or 12 months from the date of disability, whichever event first occurs.
The termination and other provisions of a non-statutory stock option shall be
fixed by the Board of Directors at the date of grant of each respective option.
Common Stock Award. "Common Stock Award" are shares of Common Stock
that will be issued to a recipient at the end of a restriction period, if any,
specified by the Board if he or she continues to be an employee, director or
consultant of us. If the recipient remains an employee, director or consultant
at the end of the restriction period, the applicable restrictions will lapse and
we will issue a stock certificate representing such shares of Common Stock to
the participant. If the recipient ceases to be an employee, director or
consultant of us for any reason (including death, disability or retirement)
before the end of the restriction period unless otherwise determined by the
Board, the restricted stock award will be terminated.
Eligibility
Our officers, employees, directors and consultants of Emergent Group
and our subsidiaries are eligible to be granted stock options, and Common Stock
Awards. Eligibility shall be determined by the Board; however, all Options and
Stock Awards granted to officers and directors must be approved by the Board.
Termination or Amendment of the 2002 Plan
The Board may at any time amend, discontinue, or terminate all or any
part of the 2002 Plan, provided, however, that unless otherwise required by law,
the rights of a participant may not be impaired without his or her consent, and
provided that we will seek the approval of our stockholders for any amendment if
such approval is necessary to comply with any applicable federal or state
securities laws or rules or regulations.
45
Awards
During 2002 we granted options to purchase 10,556,880 shares of our
Common Stock under the 2002 Plan. The options are exercisable at $.01 per share
(except for 80,000 options exercisable at $.05 per share and 80,000 options
exercisable at $.20 per share), 1,389,271 of which have been terminated as a
result of employees terminating their employment with the Company. Unless sooner
terminated, the 2002 Plan will expire on March 31, 2012 and no awards may be
granted after that date. Unless stockholder approval of the 2002 Plan is
obtained by April 1, 2003, all incentive stock options granted under the 2002
Plan shall become non-statutory stock options.
It is not possible to predict the individuals who will receive future
awards under the 2002 Plan or the number of shares of Common Stock covered by
any future award because such awards are wholly within the discretion of the
Board. The table below contains information as of December 31, 2002 on the known
benefits provided to certain persons and group of persons under the 2002 Plan.
46
----------------------------------------------------- ---------------- ----------------- -----------------------
Number of Range of Value of unexercised
Shares subject exercise price options at Dec. 31
to Options ($) per Share 2002(1)
Name and Position
----------------------------------------------------- ---------------- ----------------- -----------------------
Mark Waldron,
President and Chief Executive Officer -0- -0- -0-
----------------------------------------------------- ---------------- ----------------- -----------------------
William M. McKay, Chief Financial Officer 1,200,000 .01 (1)
----------------------------------------------------- ---------------- ----------------- -----------------------
Two Executive Officers
As a group 1,200,000 .01 (1)
----------------------------------------------------- ---------------- ----------------- -----------------------
Three Non-Employee
Directors as a group 2,000,000 .01 (1)
----------------------------------------------------- ---------------- ----------------- -----------------------
Non-Executive Officer
Employees and Consultants 5,967,609 .01 (1)
----------------------------------------------------- ---------------- ----------------- -----------------------
- -----------
(1) Value is normally calculated by multiplying (a) the difference between
the market value per share at year end and the option exercise price by
(b) the number of shares of Common Stock underlying the option. Due to
the limited and sporadic trading of the Company's Common Stock at year
end, no value is given to the options as of December 31, 2002.
2001 Stock Option Plan
On November 1, 2001, we adopted a 2001 Stock Option Plan, subject to
stockholder approval, similar to our 2002 Plan except that the 2001 Plan which
covers 8,000,000 shares does not provide for the direct issuance of stock and it
has no cashless exercise provisions. The Company granted options to purchase
970,000 shares under the 2001 Plan Exercisable at $1.00 per shares, 395,000 of
which have been terminated as a result of employees terminating their employment
with the Company. Since stockholder approval was not obtained on or before
November 1, 2002, all incentive stock options granted under the Plan have
automatically become non-statutory stock options and the Board is limited to
granting non-statutory stock options under the Plan. The Board of Directors has
no plans to issue any additional options under the 2001 Plan and on December 19,
2002, it approved a resolution reducing the number of authorized options under
the Plan to 585,000 shares of Common Stock, representing the number of
outstanding options under the Plan as of that date. The exercisability of
options outstanding under the 2001 Plan is subject to stockholder approval.
MRM Stock Option Plan
In September 1996, MRM adopted the 1996 Stock Incentive Plan ("1996
Plan") to allow officers, employees and certain non-employees to receive certain
options to purchase common stock and to receive grants of common stock subject
to certain restrictions. Under the Plan, regular salaried employees and
directors may be granted options exercisable at not less than 100% of the fair
47
market value of the shares at the date of grant. The exercise price of any
option granted to an optionee who owns stock possessing more than 10% of the
voting power of all classes of common stock of MRM must be 110% of the fair
market value of the common stock on the date of grant, and the duration may not
exceed five years. Options generally become exercisable at a rate of one-third
of the shares subject to option on each of the first, second and third
anniversary dates of the grant. The duration of options may not exceed ten
years. A maximum number of 1,500,000 shares of MRM's common stock were issuable
under the Plan.
In February 2000, MRM adopted the 2000 Stock Incentive Plan ("2000
Plan") to allow officers, employees and certain non-employees to receive certain
options to purchase common stock and to receive grants of common stock subject
to certain restrictions. Under the 2000 Plan, regular salaried employees,
including directors, who are full time employees, may be granted options
exercisable at not less than 100% of the fair market value of the shares at the
date of grant. The exercise price of any option granted to an optionee who owns
stock possessing more than 10% of the voting power of all classes of common
stock of MRM must be 110% of the fair market value of the common stock on the
date of grant, and the duration may not exceed five years. Options generally
become exercisable at a rate of one-third of the shares subject to option on
each of the first, second and third anniversary dates of the grant. The duration
of options may not exceed ten years. A maximum number of 2,500,000 shares of
common stock were issuable under the 2000 Plan.
Pursuant to the Merger Agreement between the Company and MRM in July
2001, each outstanding MRM stock option automatically became an option in shares
of the Company's common stock, on the same terms and conditions as were
applicable under such MRM option, to purchase the same number of shares of the
Company's common stock as the holder of MRM would have been entitled to receive
pursuant to the merger had such holder exercised such option in full immediately
prior to the effective time of the merger at a price per share (rounded up to
the nearest whole cent) equal to (y) the aggregate exercise price for the shares
of MRM otherwise purchasable pursuant to the MRM option divided by (z) the
number of full shares of the Company's common stock deemed purchasable pursuant
to such MRM option in accordance with the foregoing. At July 6, 2001, the
effective time of the merger, Emergent assumed MRM outstanding options to
purchase 564,786 shares of Emergent's Common Stock at exercise prices ranging
from $.68 per share to $4.05 per share. Of the 564,786 options, 51,375 are
currently outstanding as of December 31, 2002 and none have been exercised. The
Company does not intend to grant any more options under the MRM plans.
48
OPTION GRANTS TABLE
The information provided in the table below provides information with
respect to individual grants of stock options during 2001 of each of the
executive officers named in the summary compensation table above. The Company
did not grant any stock appreciation rights during 2001.
Option Grants in Last Fiscal Year
Individual Grants Potential
Realizable Value at
Assumed Annual
Rates of Stock Price
Appreciation
for Option Term (2)
Name Options (c)% of Total Exercise Price Expiration Date 5% ($) 10% ($)
Granted (#) Options/Granted to ($/Sh)
Employees in Fiscal
Year (1)
M. Waldron 0 (3) 0 N/A N/A N/A N/A
A. Guadagno 129,500 5.8 .68 8/15/10 47,915 119,140
A. Guadagno 18,500 .8 .68 3/15/11 6,845 17,020
R. Whitman 123,349 5.5 .50 1/9/10 34,538 83,877
R.Whitman 3,700 .2 .68 11/16/09 1,184 3,404
K. Bartlett 45,621 2.0 .68 2/24/10 16,880 49,271
K. Bartlett 7,400 .3 .68 5/24/09 2,368 6,808
K. Bartlett 2,479 .1 .68 10/25/08 694 1,611
C. Yee 500,000 22.3 .01 12/31/04 40,000 50,000
N/A - Not Applicable.
- -------------
(1) The percentage of total options granted to employees in fiscal year is
based upon options granted to officers, directors and
employees.
(2) The potential realizable value of each grant of options assumes that
the market price of the Company's Common Stock appreciates in value
from the date of grant to the end of the option term at annualized
rates of 5% and 10%, respectively, and after subtracting the exercise
price from the potential realizable value.
(3) Does not include options granted by MRM in September 2000 and
assumed by the Company in July 2001 pursuant to a Merger
Agreement. Mr. Waldron has options to purchase 3,700 shares
exercisable at $.68 per share.
49
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR
AND FY-END OPTION VALUES
The information provided in the table below provides information with
respect to each exercise of stock option during 2001 by each of the executive
officers named in the summary compensation table and the fiscal year end value
of unexercised options.
(a) (b) (c) (d) (e)
Value of
Number of Unexercised
Shares Unexercised In-the-Money
Acquired on Options at Options
Exercise Value FY-End (#) at Fy-End($)
( # ) Realized Exercisable/ Exercisable/
Name ($)(1) Unexercisable Unexercisable(1)
---- ----------------- ------ - ------------- ----------------
Mark Waldron -0- -0- 3,700/ -0- -0- / -0-
Al Guadagno -0- -0- 148,000/ -0- -0- / -0-
Richard Whitman -0- -0- 127,049/ -0- -0- / -0-
Kerry Bartlett -0- -0- 55,500/ -0- -0- / -0-
Calvin Yee -0- -0- 500,000/ -0- 20,000/ -0-
(1) The aggregate dollar values in column (c) and (e) are calculated by
determining the difference between the fair market value of the Common
Stock underlying the options and the exercise price of the options at
exercise or fiscal year end, respectively. In calculating the dollar
value realized upon exercise, the value of any payment of the exercise
price is not included. Fiscal year end value based upon a market price
of $.05 per share determined as of the close of business on December
28, 2001, the last reported sale before the end of our 2001 fiscal
year.
50
Item 12. Security Ownership of Certain Beneficial Owners and Management.
As of December 31, 2002, the Company had outstanding 64,917,803 shares
of Common Stock. The only persons of record who presently hold or are known to
own (or believed by the Company to own) beneficially more than 5% of the
outstanding shares of such class of stock is listed below. The following table
also sets forth certain information as to holdings of the Company's Common Stock
of all officers and directors individually, and all officers and directors as a
group.
- ------------------------------------------------------------- ------------------------------- ------------------------
Name and Address of Beneficial Owner (1) Number of Common Approximate
Shares Percentage
- ------------------------------------------------------------- ------------------------------- ------------------------
Daniel Yun
375 Park Avenue, Suite 3607
New York, NY 10152 11,472,036 (2) 17.7
- ------------------------------------------------------------- ------------------------------- ------------------------
Mark Waldron
932 Grand Central Avenue
Glendale, CA 91201 10,247,377 (3) 15.8
- ------------------------------------------------------------- ------------------------------- ------------------------
Howard Waltman
140 Deerfield
Tenafly, NJ 07670 3,453,355 (4) 5.1
- ------------------------------------------------------------- ------------------------------- ------------------------
Matthew Fong and Paula Fong
13191 Crossroads Parkway, Suite 285
Industry, CA 91746 1,000,000 (5) 1.5
- ------------------------------------------------------------- ------------------------------- -------------------------
William M. McKay
932 Grand Central Avenue
Glendale, CA 91201 240,000 (6) *
- ------------------------------------------------------------- ------------------------------- -------------------------
Bruce J. Haber
c/o BJH Management, LLC
145 Huguenot Street, Suite 405
New Rochelle, NY 10801 6,573,126(7) 10.1
- ------------------------------------------------------------- ------------------------------- -------------------------
Louis Buther
205 Ridgefield Avenue
South Salem, NY 10590 4,929,844(7) 7.6
- ------------------------------------------------------------- ------------------------------- -------------------------
All current and proposed executive officers and directors
as a group (seven) persons 37,910,568 (8) 54.8
- ------------------------------------------------------------- ------------------------------- -------------------------
Adventure Capital LLC
525 North Broadway, Suite 210
White Plains, NY 10603 5,737,247 (9) 8.8
- ------------------------------------------------------------- ------------------------------- -------------------------
(*) Represents less than 1% of the outstanding shares of the Company's
Common Stock.
51
(1) All shares are directly owned, and the sole investment and voting
power is held, by the persons named unless otherwise noted.
(2) Includes 1,233,334 shares owned by Emergent Capital L.P., which
Mr. Yun has sole voting and disposition power, 700,000
shares gifted to 17 persons and options to purchase 3,700 shares.
(3) Includes options to purchase 3,700 shares.
(4) Includes 453,255 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 3,000,000 shares,
exercisable within 60 days of the filing date of this Form 10-K.
(5) Includes options to purchase 1,000,000 shares which are exercisable
within 60 days of the filing date of this Form 10-K.
(6) Represents options to purchase shares of the Company's Common Stock
which are exercisable within 60 days of the filing date
of this Form 10-K.
(7) BJH Management LLC is a company owned by Mr. Bruce J. Haber. BJH
beneficially owns 11,502,970 shares of Common Stock of the Company. Of
the 11,502,970 shares, 6,573,126 shares are owned by Mr. Haber and
4,929,844 shares are owned by Louis Buther. BJH Management has the
right to receive additional securities of the Company under certain
circumstances as described in Item 11 with 57.1% allocated to Mr. Haber
and 42.9% allocated to Mr. Buther. This table gives effect to the
transfer of all of BJH's shares to Messrs. Haber and Buther as if these
transfers were completed as of December 31, 2002.
(8) See footnotes (2) through (5) above.
(9) Controlled by Paul Wasserman.
Voting Agreement
During December 2002, the Company's former Chairman of the Board, Mr.
Daniel Yun and former Chief Executive Officer, Mr. Mark Waldron entered into a
Voting Agreement (the "Voting Agreement"), whereby they agreed to vote all of
their common stock in unison. However, to the extent that Messrs. Yun and
Waldron do not agree on any particular matter, then each of them shall vote
their shares of common stock in a manner consistent with the recommendation of
the majority of the Company's Board of Directors. The Voting Agreement
terminates on the earlier of five years from the effective date, or upon the
sale of such shares by Messrs. Yun or Waldron to a non-related or unaffiliated
party.
The Company does not know of any arrangement or pledge of its
securities by persons now considered in control of the Company that might result
in a change of control of the Company.
Item 13. Certain Relationships and Related Transactions.
52
MRM Transactions
In April 2000, MRM borrowed $100,000 from Edward Whitman, the father of
MRM's former Chairman, President and Chief Executive Officer. This loan was in
the form of a note payable to Mr. Whitman and bore interest at a rate of 10% per
annum, with interest payable monthly and principal originally due in full in
April 2001 but subsequently extended to April 2002. In addition, Mr. Whitman
received 50,000 non-qualified stock options with an exercise price of $0.025 per
share at the time that the loan proceeds were received by MRM, which resulted in
deemed compensation of $28,000 in the aggregate. The terms and conditions of
this loan was believed to be the same as would be offered to an independent
third party by MRM.
In September 2000, MRM sold 6,666,666 shares of its common stock for
$0.30 per share, or an aggregate of $2.0 million. Emergent Capital L.P.
purchased 3,333,333 of these shares for $1.0 million.
During November and December 2000, MRM issued $60,000 in convertible
subordinated debt to Richard Whitman, an affiliate of MRM. This instrument bore
interest at the rate of 8% per annum, originally was to mature three months from
date of issuance but subsequently was extended and was converted into 237,874
shares of Emergent's stock. Between November 2000 and May 10, 2001, MRM received
$515,000 of loans from the Emergent, which were convertible into 5,150,000
shares of MRM Common Stock.
In December 2000, MRM sold 1,333,333 shares of its common stock. These
shares were sold at a price of $0.30 per share, with minimal offering expenses
comprised of mostly legal expenses, and resulted in net proceeds of $400,000.
On May 7, 2001, MRM borrowed $100,000 from Edward Whitman and issued a
promissory note convertible into MRM Common Stock. On November 4, 2002, the
Company entered into a Settlement Agreement with Edward Whitman pursuant to
which it agreed to pay Mr. Whitman $20,000 upon the execution of the agreement
and an additional $20,000 on or before March 31, 2003 and to issue 370,000
shares of the Company's common stock in full settlement of all outstanding
obligations, including, but not limited to, a $100,000 convertible promissory
note issued on May 7, 2001 and a $100,000 promissory note which originated in
April 2000.
Allen Bonnifield, a founder and former significant stockholder of MRM,
has executed personal guarantees for certain of MRM's leases and to a bank for
its current bank loan facility.
During the year ended December 31, 2001, the Company transferred
$227,013 of property and equipment to a related party, for which the Company
recorded a receivable in like amount. This is included in "Due from Related
Parties, Net" on the accompanying consolidated balance sheet. For a description
of the related party, see "Investments In Limited Liability Companies."
Emergent Group Inc. Transactions
Reference is made to "Item 1" for a discussion of an equity
transfer and spin-off of assets to Dynamic International Ltd. and the former
members of Emergent Ventures, LLC's acquisition of control of Dynamic Ltd.
53
Emergent's Acquisition of MRM
Reference is made to "Item 1" for a discussion of the Company's July
2001 acquisition of MRM.
Transactions with BJH Management LLC, Bruce J. Haber and Louis Buther
Reference is made to Item 11 for a description of transactions between
the Company, BJH, Bruce J. Haber and Louis Buther.
Consulting Agreement with Mark Waldron
Reference is made to Item 11 for a description of the Company's
Consulting Agreement with Mr. Waldron.
Loans from Shareholders to the Company and Transactions Between the Company
and Emergent Capital Investment Management, LLC.
From March 2001 through September 2001, Mark Waldron and Daniel Yun
loaned Emergent Ventures and the Company $1,045,123. The loans were issued as
Demand Notes with an interest rate of 10% per annum. Since the Company's
inception in March 2000 through September 2001, the Company has engaged in
numerous transactions with Emergent Capital Investment Management, LLC ("ECIM").
The Company and ECIM were related parties due to common ownership of both
entities. Daniel Yun and Mark Waldron were the sole members of ECIM and the
beneficial owners of 22,718,383 common shares of the Company, representing 43.0%
of the Company's outstanding shares as of September 30, 2001. These related
party transactions have been disclosed in the Company's Notes to the
Consolidated Financial Statements. The transactions between the Company and ECIM
consist of loans, the reimbursement of expenses and the sale of assets. As of
December 31, 2000, ECIM owed the Company $467,519. As of September 30, 2001, the
balance owed by ECIM to the Company increased to a total of $1,045,123. The
majority of this increase was due to the sale, from the Company to ECIM, of
fixed assets and security deposit associated with the Company's New York office.
The fixed assets consisted of leasehold improvements, furniture and office
equipment totaling $191,504, net of depreciation, and a security deposit of
$208,272. The Company decided to sell these assets given the move of its
corporate headquarters from New York to California. The Company has agreed to
sell to ECIM, at cost net of depreciation, a remaining $84,917 in office
equipment.
As of September 30, 2001, the Company owed a principal amount of
$1,045,123 to Messrs. Yun and Waldron, as described above, and ECIM, an entity
owned by Messrs. Yun and Waldron, owed the Company $1,045,123, as described
above. Effective September 30, 2001, Messrs. Yun and Waldron and the Company
agreed to offset the principal and accrued interest on the loans owned to
Messrs. Yun and Waldron, against the amount owed by ECIM to the Company
Other Transactions
On January 10, 2000, the Company entered into an agreement with Tahoe
Carson Management Consulting ("Tahoe"), which is managed by Allen Bonnifield,
the founder of MRM, pursuant to which it was to receive a monthly fee of $16,633
per month. On August 20, 2001, the Company entered into a revised agreement with
Tahoe for Tahoe to provide consulting services to the Company in exchange for
$6,000 per month from September 1, 2001 to January 9, 2003 plus the options
54
described in the preceding paragraph. Other than two payments of $6,000 that
were made subsequent to August 20, 2001, the Company was in arrears for the
payment of these consulting fees totaling approximately $232,035. In December
2002, the Company entered into a Settlement Agreement with Tahoe pursuant to
which the Company agreed to pay Tahoe $35,000 as follows: $10,000 on or before
December 18, 2002, $12,500 on or before March 31, 2003 and $12,500 on or before
June 30, 2003 and to issue options to purchase 150,000 shares of Common Stock
exercisable at $.01 per share through December 2012.
In July, 2001, the Company sold 3,000,000 shares of its Common Stock
for $600,000 to a non-affiliated person, who became the owner of 5.68% of the
Company's outstanding shares of Common Stock.
On November 1, 2001, the Board of Directors approved two-year
consulting agreements with Howard Waltman and Paula Fong. Pursuant to these
agreements, Mr. Waltman and Mrs. Fong were to provide certain consulting
services to the Company in exchange for the grant of options described in the
paragraph below. These agreements were terminated by the Board in December 2002,
thereby fully vesting the options granted to them. On the same date, the Board
also approved an employment agreement with Calvin Yee. Mr. Yee is no longer
employed by the Company. However, Mr. Yee received options granted in connection
with the employment contract which are described in the paragraph below.
On November 1, 2001, the Company's Board of Directors approved the
grant of options to purchase 1,500,000 shares to Howard Waltman, exercisable at
$.20 per share until December 31, 2004. On the same date, the Board approved the
grant of 500,000 options to Paula Fong, exercisable at $.20 per share. Of the
500,000 options, one-half became exercisable on September 1, 2002 and the
balance of the options will become exercisable on September 1, 2003. These
500,000 options expire on December 31, 2004. Also, on November 1, 2001, the
Board approved the grant of options to purchase 500,000 shares to Calvin Yee,
formerly a vice president of the Company and chief operating officer of MRM, and
warrants to purchase 500,000 shares to Patterson Travis, Inc., exercisable at
$.01 per share until December 31, 2004. On November 1, 2001, Martin Stein, Esq.
received options to purchase 200,000 shares with one-half exercisable at $.01
per share and the balance at $.20 per share and expiring December 31, 2004. On
November 1, 2001, the Board ratified the grant of options to Rick Friedman to
purchase 988,436 shares at $.01 per share, with 329,000 becoming exercisable on
July 1, 2002, an additional 329,000 becoming exercisable on July 1, 2003 and the
balance of the options becoming exercisable on July 1, 2004 and expiring
December 31, 2004. All the foregoing options and warrants were not granted under
a Stock Option Plan.
On November 1, 2001, the Board granted 50,000 options to Medical
Marketing Group, 25,000 options to Board Partners, 100,000 options to Amy Lai,
10,000 options to Vanessa Quintana, 150,000 options to Tahoe, 100,000 options to
George Morvis, and 50,000 warrants to Cura Capital. The foregoing grants were at
exercise prices ranging from $.01 per share to $1.00 per share with various
exercise and vesting dates and, for the most part, with options/warrants
expiring in 2004. All of the foregoing options and warrants were not granted
under a Stock Option Plan.
55
On November 1, 2001, the Company also granted to 61 employees of MRM
options to purchase 1,070,000 shares of the Company's Common Stock at $1.00 per
share. These options expire no later than December 31, 2005 under the Company's
2001 Stock Option Plan. All of these options terminate 90 days after the grantee
ceases to perform services to the Company.
In November 2001, the Company entered into an Employment Contract with
Calvin Yee, its former Vice President, and Chief Operating Officer of MRM. The
agreement called for a base salary of $125,000 per year and options to purchase
500,000 shares of the Company's Common Stock at $.01 per share, which options
expire on December 31, 2004. In 2002, this agreement was terminated and Mr. Yee
retained his options.
On November 1, 2001, the Board of Directors adopted a resolution which
states as follows: "RESOLVED, that no further related party transaction between
the Company and Daniel Yun ("Yun"), Mark Waldron ("Waldron"), or any other
entity in which Yun or Waldron are directors, principals or shareholders shall
be authorized without prior approval of a majority of outside, or
non-interested, members of the Board of Directors."
On May 21, 2002, the Company granted options to purchase 6,195,880
shares of the Company's Common Stock to employees/consultants of the Company at
an exercise price of $.01 per share. These options were granted under the
Company's 2002 Stock Option Plan and have a term of 10 years.
On September 4, 2002, the Company terminated the services of Al
Guadagno, who served as MRM's chief financial officer. MRM agreed to continue
his salary and benefits through November 12, 2002 and medical benefits, but in
no event after March 7, 2003. Mr. Guadagno agreed to terminate his 625,395
incentive stock options granted under the 2002 Stock Option Plan and to receive
in its place, options to purchase 150,000 shares also exercisable at $.01 per
share at any time between May 21, 2003 and May 20, 2012 in accordance with the
2002 Stock Option Plan.
Effective December 30, 2002, the Company granted options to purchase
4,361,000 shares of the Company's Common Stock to employees/consultants of the
Company at an exercise price of $.01 per share. These options were granted under
the Company's 2002 Stock Option Plan and have a term of 10 years. On the same
date, the Company approved the grant of warrants to purchase 30,000 shares of
Common Stock, exercisable at $.01 per share through February 28, 2005 to a
non-affiliated person in connection with debt forgiveness of $3,100.
56
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.
(a)(1)(2) Financial Statements and Financial Statement Schedules.
A list of the Financial Statements and Financial Statement Schedules filed
as a part of this Report is set forth in Item 8, and appears at Page F-1 of this
Report, which list is incorporated herein by reference.
(a)(3) Exhibits
Number Exhibit Description
- ------ -------- -------------
2.1 Agreement and Plan of Reorganization and Merger, dated as of January
23, 2001, among MRM, Registrant and MRM Acquisition Inc. (1)
2.2 Agreement to transfer equity dated August 10, 2000. (3)
3.1 Articles of Incorporation of Registrant. (5)
3.2 Amendment to Articles of Incorporation.(5)
3.3 By-laws of Registrant.(5)
9.1 Voting Trust Agreement between Daniel Yun and Mark Waldron(4)
10.1 Consulting Agreement dated October 15, 2001 with BJH Management LLC.(4)
10.2 Stock Issuance Agreement dated December 30, 2002 with BJH Management
LLC.(4)
10.3 Employment Agreement dated December 30, 2002 with Bruce J. Haber.(4)
10.4 Employment Agreement dated December 30, 2002 with Louis Buther.(4)
10.5 Consulting Agreement dated December 30, 2002 with JIMA Management LLC
and Mark Waldron.(4)
10.6 Consulting Agreement dated September 1, 2001 with Howard Waltman, which
was terminated by the Company on December 19, 2002.(4)
10.7 Consulting Agreement dated September 1, 2001 with Paula Fong, which
was terminated by the Company on December 19, 2002.(4)
10.8 Facility Lease - Glendale, California(4)
10.9 Settlement Agreement with Al Guadagno. (4)
10.10 Settlement Agreement with Richard Whitman.(4)
10.11 Consulting Agreements and Settlement Agreement with Tahoe Carson
Management Consulting.(4)
10.12 Employment Agreement - Calvin Yee, approved by the board on November 1,
2001. (4)
10.13 Engagement Letter - William M. Mckay (4)
11.1 Statement re: computation of per share earnings (see consolidated
financial statements and notes thereto).
21.1 Subsidiaries of Registrant listing the state or other jurisdiction of
each subsidiary other than subsidiaries which would not constitute
a significant subsidiary in Rule 1-02(w) of Regulation S-X. (5)
99.1 2002 Stock Option Plan.(4)
99.2 2001 Stock Option Plan.(4)
- --------------------------------------------------------------------------------
(1) Filed as an exhibit to the Registrant's Current Report on Form 8-K,
dated January 29, 2001, and incorporated herein by reference
57
(2) Filed as an exhibit to the Registrant's Form 10-K for its fiscal year
ended December 31, 2000.
(3) Incorporated by reference to the Registrant's Form 8-K - August 31,
2000 (date of earliest event).
(4) Filed herewith.
(5) Incorporated by reference to the Registrant's Form S-4 Registration
Statement filed May 8, 2001.
The following exhibits were filed or incorporated by reference in Medical
Resources Management, Inc.'s Form 10-KSB or Form 10-KSB/A for its fiscal year
ended October 31, 2000. The exhibits referenced therein are incorporated by
reference into the Registrant's Form 10-K.
Exhibit Exhibit Description
Number
3.1 Articles of Incorporation and Amendments thereto. (1)
3.2 By-Laws of the Registrant. (1)
10.1 Copy of a Warrant Agreement and Warrant issued between November 1996
and March 1997 to investors in the Registrant's Private Placement.
(1)
10.2 Registrant's 1996 Stock Incentive Plan. (1)
10.3 Equipment Note Loan and Security Agreement dated April 24, 1997
between the Registrant and LINC Capital Management, a division of
LINC Capital, Inc. (1)
10.4 Collateral Note No. 1 dated April 28, 1997 between the Registrant
and LINC Capital, Inc. (1)
10.5 Lease Modification Agreement dated April 24, 1997 between Pulse
Medical Products, Inc. and LINC Capital Management, a division of
LINC Capital, Inc. (1)
10.6 Warrant Purchase Agreement dated April 24, 1997 between the
Registrant and LINC Capital Management, a division of LINC Capital,
Inc. (1)
10.7 Warrant to Purchase Shares of Common Stock dated April 24, 1997
between the Registrant and LINC Capital Management, a division of
LINC Capital, Inc. (1)
10.8 Amendment to Warrant Agreement--Class A Redeemable Warrant, dated
September 26, 1999. (5)
10.9 Amendment to Warrant Agreement--Class B Redeemable Warrant, dated
10.10 Loan Agreement dated March 30, 1999 between Physiologic Reps and
Santa Monica Bank. (5)
10.11 Promissory Note dated March 30, 1999 between Physiologic Reps and
10.11 Promissory Note dated March 30, 1999 between Physiologic Reps and
Santa Monica Bank (Line of Credit). (5)
10.12 Promissory Note dated March 30,1999 between Physiologic Reps
and Santa Monica Bank (Term Loan). (5)
58
10.13 Registrant's 2000 Stock Incentive Plan. (7)
10.14 Agreement and Plan of Reorganization and Merger among Medical
Resources Management, Inc., Emergent Group Inc. and MRM
Acquisition, Inc. dated as of January 23, 2001. (6)
10.15 Employment Contract between the Registrant and Richard Whitman,
Chairman, President and CEO dated January 10, 2000. (7)
21.0 Subsidiaries of the Registrant. (7)
(1) Exhibit filed with Registrant's Form 10-SB on May 16, 1997 and incorporated
by reference herein.
(2) Exhibit filed with Registrant's Form 10-QSB for the quarter ended July 31,
1997 and incorporated by reference herein.
(3) Exhibit filed with Registrant's Form 10-KSB for the fiscal year ended
October 31, 1997 and incorporated by reference herein.
(4) Exhibit filed with Registrant's Form 10-QSB for the quarter ended January
31, 1998 and incorporated by reference herein.
(5) Exhibit filed with Registrant's Form 10-KSB for the fiscal year ended
October 31, 1999 and incorporated by reference herein.
(6) Exhibit filed with Registrant's Form 8-K filed on January 31, 2001.
(7) Exhibit filed with Registrant's Form 10-KSB or 10-KSB/A for the fiscal year
ended October 31, 2000 and incorporated by reference herein.
(b) Reports on Form 8-K.
No Reports on Form 8-K were filed or required to be filed during the
quarter ended December 31, 2001. However, a Form 8-K was filed in March 2002 to
report the resignation of Arthur Andersen LLP, our then independent auditors,
and the hiring of Singer Lewak Greenbaum Goldstein LLP as our new independent
auditors.
59
EMERGENT GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEAR ENDED DECEMBER 31, 2001 AND
FOR THE PERIOD FROM MARCH 8, 2000 (INCEPTION) TO DECEMBER 31, 2000
EMERGENT GROUP, INC. AND SUBSIDIARIES
CONTENTS
December 31, 2001
- --------------------------------------------------------------------------------
Page
INDEPENDENT AUDITOR'S REPORT F1 - F2
CONSOLIDATED FINANCIAL STATEMENTS
Consolidated Balance Sheets F3 - F4
Consolidated Statements of Operations and Comprehensive Loss F5
Consolidated Statements of Shareholders' Equity F6
Consolidated Statements of Cash Flows F7 - F9
Notes to Consolidated Financial Statements F10 - F35
INDEPENDENT AUDITOR'S REPORT
Board of Directors and Shareholders
Emergent Group, Inc. and subsidiaries
We have audited the accompanying consolidated balance sheet of Emergent Group,
Inc. and subsidiaries as of December 31, 2001, and the related consolidated
statements of operations and comprehensive loss, shareholders' equity, and cash
flows for the year then ended. These financial statements are the responsibility
of the Company's management. Our responsibility is to express an opinion on
these financial statements based on our audit.
We conducted our audit in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Emergent Group, Inc.
and subsidiaries as of December 31, 2001, and the results of their operations
and their cash flows for the year then ended in conformity with accounting
principles generally accepted in the United States of America.
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed in Note 2 to the
financial statements, the Company has suffered recurring losses from operations
since its inception and has an accumulated deficit of $11,288,041 at December
31, 2001. In addition, as detailed in Note 10, the Company is in default on a
majority of its debt obligations at December 31, 2001. Furthermore, a
significant portion of the Company's debt is due during the year ended December
31, 2002. This raises substantial doubt about the Company's ability to continue
as a going concern. Management's plans in regard to these matters are also
described in Note 2. The consolidated financial statements do not include any
adjustments that might result from the outcome of this uncertainty.
/s/ SINGER LEWAK GREENBAUM & GOLDSTEIN LLP
SINGER LEWAK GREENBAUM & GOLDSTEIN LLP
Los Angeles, California
May 24, 2002, except
for Notes 17 and 19,
as to which to the date
is January 20, 2003
F-1
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS - THIS IS A COPY OF ARTHUR ANDERSEN
LLP'S REPORT DATED MARCH 23, 2001 AND THIS REPORT HAS NOT BEEN RE-ISSUED BY
ARTHUR ANDERSEN LLP.
To the Stockholders of
Emergent Group Inc.:
We have audited the accompanying consolidated balance sheet of Emergent Group
Inc. (a Nevada corporation), and the related consolidated statement of
operations, changes in stockholders' equity and cash flows for the period from
inception (March 8, 2000) to December 31, 2000. These consolidated financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted our audit in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Emergent Group Inc.
as of December 31, 2000, and the results of its operations, and cash flows for
the period from inception (March 8, 2000) to December 31, 2000 in conformity
with accounting principles generally accepted in the United States.
/s/ ARTHUR ANDERSEN LLP
ARTHUR ANDERSEN LLP
New York, NY
March 23, 2001
F-2
EMERGENT GROUP, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
December 31,
ASSETS
- -------------------------------------------------------------------------------------------------------------------
2001 2000
---- ----
Current assets
Cash $ 482,165 $ 750,840
Accounts receivable, net of allowance for doubtful
accounts of $60,253 1,455,034 -
Due from related parties, net 38,268 467,519
Investment securities 267,427 3,217,730
Inventory, net 544,895 -
Prepaid expenses 206,432 24,969
Income tax receivable 4,830 -
Assets held for sale 1,939,171 -
------------ ------------
Total current assets 4,938,222 4,461,058
Equity investment in limited liability companies 55,521 -
Property and equipment, net 2,000,198 305,795
Goodwill, net of accumulated amortization of $102,468
and $27,778, respectively 2,880,488 222,222
Deposits 86,674 195,672
Finance fees, net of accumulated amortization
of $125,959 174,086 -
------------ ------------
Total assets $ 10,135,189 $ 5,184,747
============ ============
The accompanying notes are an integral part of these financial statements.
F-3
EMERGENT GROUP, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
December 31,
LIABILITIES AND SHAREHOLDERS' EQUITY
2001 2000
---- ----
Current liabilities
Book overdraft $ 146,427 $ -
Line of credit 1,108,700 -
Current portion of capital lease obligations 1,726,295 -
Current portion of notes payable 1,773,107 -
Convertible note payable 100,000 -
Accounts payable 943,093 121,837
Accrued expenses 978,184 -
------------ ------------
Total current liabilities 6,775,806 121,837
Capital lease obligations, net of current portion 1,183,393 -
Notes payable, net of current portion 1,701,405 -
------------ ------------
Total liabilities 9,660,604 121,837
------------ ------------
Commitments and contingencies
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
53,044,821 and 44,173,280 shares issued and
outstanding 53,045 44,173
Additional paid-in capital 13,442,154 8,628,952
Accumulated other comprehensive loss (1,732,573) (2,042,395)
Accumulated deficit (11,288,041) (1,567,820)
------------ ------------
Total shareholders' equity 474,585 5,062,910
------------ ------------
Total liabilities and shareholders' equity $ 10,135,189 $ 5,184,747
============ ============
The accompanying notes are an integral part of these financial statements.
F-4
EMERGENT GROUP, INC. AND SUBSIDIARIES
Consolidated Statements of Operations and Comprehensive Loss
For the year ended December 31, 2001 and
for the period from March 8, 2000 (Inception) to December 31, 2000
For the
Period from
For the March 8, 2000
Year Ended (Inception) to
December 31, December 31,
2001 2000
---- ----
Revenue $ 5,244,585 $ -
Cost of goods sold 4,328,935 -
---------- ----------
Gross profit 915,650 -
Selling, general, and administrative expenses 3,609,439 986,401
Impairment of property and equipment 3,732,223 -
Impairment of goodwill 687,906 -
---------- ----------
Loss from operations (7,113,918) (986,401)
---------- ----------
Other income (expense)
Realized loss on investment securities (2,306,428) (709,703)
Interest expense (357,134) -
Equity in net gain of investment in limited liability
companies 26,773 -
Gain on disposal of property and equipment 45,571 -
Other income (expense), net (13,485) 128,284
---------- ----------
Total other income (expense) (2,604,703) (581,419)
---------- ----------
Loss before provision for income taxes (9,718,621) (1,567,820)
Provision for income taxes 1,600 -
---------- ----------
Net loss (9,720,221) (1,567,820)
Other comprehensive gain (loss), net of tax
Unrealized gain (loss) on investment securities 175,760 (2,042,395)
Reclassification adjustment for gains included
in net loss 134,062 -
---------- ----------
Comprehensive loss $(9,410,399) $(3,610,215)
============ ============
Basic and diluted loss per share $ (0.19) $ (0.04)
======== ========
Weighted-average shares outstanding 48,350,262 41,557,789
=========== ============
The accompanying notes are an integral part of these financial statements.
F-5
EMERGENT GROUP, INC. AND SUBSIDIARIES
Consolidated Statements of Shareholders Equity
For the year ended December 31, 2001 and
for the period from March 8, 2000 (Inception) to December 31, 2000
Accumulated
Other
Additional Compre-
Common Stock Paid-In hensive Accumulated
Shares Amount Capital Loss Deficit Total
------ ------ ------- ---- ------- ------
Balance, March 8, 2000 (inception) ......... -- $ -- $ -- $ -- $ -- $ --
Capital contribution by members ............ 7,500,000 7,500,000
Contribution of investment securities
by a member ............................ 1,173,125 1,173,125
Recapitalization of capital accounts as
a results of Dynamic International,
Ltd. Transfer .......................... 44,173,280 44,173 (44,173) --
Unrealized loss on investment securities ... (2,042,395) (2,042,395)
Net loss ................................... (1,567,820) (1,567,820)
------------ ------------ ------------ ------------ ----------- ------------
Balance, December 31, 2000 ................. 44,173,280 44,173 8,628,952 (2,042,395) (1,567,820) 5,062,910
Issuance of common stock
In connection with the acquisition of
MRM, Inc. ............................ 5,633,667 5,634 3,239,358 3,244,992
For cash ............................... 3,000,000 3,000 597,000 600,000
In exchange for the conversion of a note
payable .............................. 237,874 238 59,762 60,000
Issuance of options in connection with
the acquisition of MRM, Inc. ........... 316,191 316,191
Compensation expense to employees
relating to stock options granted below
the fair market value .................. $ 75,000 $ 75,000
Compensation expense to non-employees
relating to stock options granted below
the fair market value .................. 525,891 525,891
Realized loss on investment securities ..... $ 134,062 134,062
Unrealized gain on investment securities ... 175,760 175,760
Net loss ................................... $ (9,720,221) (9,720,221)
------------ ------------ ------------ ------------ ----------- ------------
Balance, December 31, 2001 ......... 53,044,821 $ 53,045 $ 13,442,154 $ (1,732,573) $(11,288,041) $ 474,585
============ ============ ============ ============= ============= ============
The accompanying notes are an integral part of these financial statements.
F-6
EMERGENT GROUP, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
For the year ended December 31, 2001 and
for the period from March 8, 2000 (Inception) to December 31, 2000
For the
Period from
For the March 8, 2000
Year Ended (Inception) to
December 31, December 31,
2001 2000
---- ----
Cash flows from operating activities
Net loss $(9,720,221) $(1,567,820)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities, net of
effect of acquisition with MRM, Inc.
Gain on disposal of property and equipment (45,571) -
Realized loss on investment securities 2,306,428 709,703
Depreciation and amortization of property and
equipment 1,117,661 33,844
Equity in net gain of investment in limited liability
companies (26,773) -
Amortization of finance fees 23,726
Impairment of property and equipment 3,732,223
Impairment of goodwill 687,906
Amortization of goodwill 74,690 27,778
Compensation expense to non-employees for
issuance of stock options below the fair
market value 525,891 -
Compensation expense to employees for stock
options issued below the fair market value 75,000 -
Allowance for doubtful accounts 3,415 -
(Increase) decrease in
Accounts receivable 1,404,318 -
Due from related parties (901,769) (467,519)
Inventory 392,575 -
Prepaid expenses (122,616) (24,969)
Income tax receivable (4,830) (195,672)
Deposits (74,947) -
Increase in
Accounts payable 653,206 121,837
Accrued expenses 169,804 -
Deferred taxes 4,000 -
--------- ------------
Net cash provided by (used in) operating activities 274,116 (1,362,818)
--------- ------------
The accompanying notes are an integral part of these financial statements.
F-7
EMERGENT GROUP, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
For the year ended December 31, 2001 and
for the period from March 8, 2000 (Inception) to December 31, 2000
For the
Period from
For the March 8, 2000
Year Ended (Inception) to
December 31, December 31,
2001 2000
---- ----
Cash flows from investing activities
Proceeds from the sale of marketable securities $ 650,000 $ -
Purchase of marketable securities (620,000) (5,046,703)
Cash paid to limited liability companies (114,550) -
Purchase of property and equipment (120,199) (339,639)
Proceeds from the sale of property and equipment 355,411 -
-------- -----------
Net cash provided by (used in) investing activities 150,662 (5,386,342)
-------- -----------
Cash flows from financing activities
Transaction costs in connection with the acquisition
of MRM, Inc. (335,856) -
Net change in book overdraft (24,580) -
Payments for loan fees (68,550) -
Net changes in line of credit 87,626 -
Proceeds from notes payable 300,206 -
Payments on notes payable (888,130) -
Payments on capital lease obligations (364,169) -
Proceeds from sale of common stock 600,000 -
Capital contribution by members - 7,500,000
-------- -----------
Net cash provided by (used in) financing activities (693,453) 7,500,000
-------- -----------
Net increase (decrease) in cash (268,675) 750,840
Cash, beginning of period 750,840 -
-------- -----------
Cash, end of period $ 482,165 $ 750,840
========== =========
Supplemental disclosures of cash flow information
Interest paid $ 156,583 $ -
========== =========
The accompanying notes are an integral part of these financial statements.
F-8
EMERGENT GROUP, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
For the year ended December 31, 2001 and
for the period from March 8, 2000 (Inception) to December 31, 2000
Supplemental schedule of non-cash investing and financing activities During the
year ended December 31, 2001, the Company:
* acquired property and equipment totaling $175,774 under capital lease and
notes payable obligations.
* transferred property and equipment costing $418,517 and a capital lease
obligation of $227,013 to related parties.
* billed $565,429 to a related party for management fees. The Company also
incurred expenses on behalf of the related party. At December 31, 2001, the
Company agreed with the related party to offset a note payable against
these accumulated costs and expenses.
* acquired substantially all of the assets and liabilities of MRM, Inc. in
exchange for 5,633,667 shares of the Company's common stock valued at
$3,244,992 and options to purchase 564,786 shares of common stock valued at
$316,191.
* issued 237,874 shares of common stock for the conversion of a note payable
of $60,000.
During the period from March 8, 2000 (inception) to December 31, 2000:
* a member of the Company contributed $1,173,125 of investment securities.
The accompanying notes are an integral part of these financial statements.
F-9
EMERGENT GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2001
- --------------------------------------------------------------------------------
NOTE 1 - ORGANIZATION AND LINE OF BUSINESS
General
Emergent Ventures, LLC ("Emergent LLC") was formed and commenced
operations in the State of Delaware on March 8, 2000. Emergent LLC was
formed to invest primarily in global private equity investment
opportunities in information technology, health care, and medical
technology companies.
Emergent LLC's equity capitalization consisted of a contribution of
$1,173,125 of investment securities by Emergent Management Company, LLC
("Emergent Management"), a Delaware limited liability company, for 58%
of Emergent LLC's equity interest and a contribution of $7,500,000 in
cash by other members in return for the remaining 42% of Emergent LLC's
equity interest.
Acquisitions
Transfer of Equity with Dynamic International, Ltd.
On August 31, 2000, Emergent LLC consummated the transactions
contemplated by the Equity Transfer Transaction (the "Transfer"), all
pursuant to an Equity Transfer and Reorganization Agreement dated
August 10, 2000 (the "Agreement"), by and among Dynamic International,
Ltd. ("Dynamic"), certain of its shareholders, Emergent Management, and
several holders of membership interests in Emergent LLC.
Pursuant to the Agreement, Emergent LLC contributed substantially all
of its assets to Dynamic in exchange for the issuance of 39,755,178
shares of Dynamic's common stock to the members of Emergent LLC.
Dynamic's name was subsequently changed to Emergent Group, Inc.
("Emergent Group").
On August 31, 2000, pursuant to and in accordance with the Agreement
and prior to the consummation of the Transfer, Dynamic transferred all
of its assets and liabilities (other than outstanding bank debt in the
amount of $250,000) to a wholly owned corporation of Dynamic named
Dynamic International, Inc. Dynamic International, Inc. acquired the
transferred assets, assumed the remaining liabilities, and indemnified
Dynamic against any liabilities relating to or arising out of the
transferred assets and the assumed liabilities.
F-10
EMERGENT GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2001
- --------------------------------------------------------------------------------
NOTE 1 - ORGANIZATION AND LINE OF BUSINESS (Continued)
Acquisitions (Continued)
Transfer of Equity with Dynamic (Continued)
For financial accounting purposes, the acquisition was accounted for as
a capitalization by Emergent LLC with Dynamic. After the Transfer, the
former members of Emergent LLC became the beneficial owners of
approximately 39,000,000 shares of Dynamic's common stock, representing
approximately a 90% interest in Dynamic. Each of the directors of
Dynamic immediately resigned prior to the consummation of the Transfer.
The principal interest holders of Emergent Management were elected as
directors of Dynamic. They comprise a majority of Dynamic's directors
and serve as Dynamic's executive officers. Emergent LLC has recorded
goodwill as a result of the Transfer amounting to $250,000, which will
be amortized over three years. The net balance remaining as of December
31, 2001 was $147,532, which has been recorded under goodwill on the
accompanying consolidated balance sheets.
Merger with Medical Resources Management, Inc. and subsidiaries
In July 2001, the Company (as defined in Note 3) acquired substantially
all of the assets and liabilities of Medical Resources Management, Inc.
("MRM") in exchange for 5,633,667 shares of the Company's common stock
valued at $3,244,992 and options to purchase 564,786 shares of common
stock valued at $316,191. In addition, transaction costs of $335,856
were incurred. The transaction has been accounted for in accordance
with Statement of Financial Accounting Standards ("SFAS") No. 141,
"Business Combinations," which is required for all transactions
occurring after June 30, 2001. In accordance with SFAS No. 141, the
purchase price was allocated to assets acquired and liabilities assumed
based on the estimated fair market value at the closing date of the
acquisition, with the excess of the purchase price being allocated to
goodwill.
At December 31, 2001, $687,906 of goodwill was impaired and expensed to
the consolidated statement of operations and comprehensive loss. The
remaining balance will be reviewed periodically for impairment and will
be expensed to the consolidated statement of operations and
comprehensive loss accordingly. The assets acquired and liabilities
assumed in connection with the transaction were as follows:
Accounts receivable $ 1,666,820
Inventory 937,469
Property and equipment 11,372,556
Other assets 301,373
Liabilities assumed (13,802,071)
----------------
Net assets 476,147
Excess of cost over fair value of net assets acquired 3,420,862
----------------
Total purchase price $ 3,897,009
================
F-11
EMERGENT GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2001
- --------------------------------------------------------------------------------
NOTE 1 - ORGANIZATION AND LINE OF BUSINESS (Continued)
Acquisitions (Continued)
Merger with MRM and subsidiaries (Continued)
The acquisition has been accounted for as a purchase, and results of
operations of MRM since the date of acquisition are included in the
consolidated financial statements. The unaudited, pro forma,
consolidated results of operations for the year ended December 31, 2001
and the period from March 8, 2000 (inception) to December 31, 2000 as
if MRM were acquired on January 1, 2000 have been presented below.
Included in the pro forma numbers for the period from March 8, 2000
(inception) to December 31, 2000 are the results of operations for MRM
for the year ended October 31, 2000 and the results of operations for
Emergent Group for the period from March 8, 2000 (inception) to
December 31, 2000:
2001 2000
--------------- ----------------
(unaudited) (unaudited)
Revenue $ 10,939,346 $ 11,102,650
Net loss $ (11,905,262) $ (5,208,429)
Basic and diluted loss per share $ (0.22) $ (0.12)
MRM provides mobile laser/surgical services on a per procedure basis to
hospitals, out patient surgery centers, and physicians' offices. The
lasers are provided with technical support to ensure that they operate
correctly. MRM also provides other medical equipment on a rental basis
to hospitals and surgery centers.
NOTE 2 - GOING CONCERN AND BASIS OF PRESENTATION
The accompanying financial statements have been prepared assuming that
the Company will continue as a going concern. The Company has suffered
recurring losses from operations since its inception and has an
accumulated deficit of $11,288,041 at December 31, 2001. In addition,
as detailed in Note 10, the Company is in default on a majority of its
debt obligations at December 31, 2001. Furthermore, a significant
portion of the Company's debt is due during the year ended December 31,
2002.
The consolidated financial statements do not include any adjustments
relating to the recoverability and classification of recorded asset
amounts or amounts and classifications of liabilities that might be
necessary should the Company be unable to continue its existence. The
recovery of the Company's assets is dependent upon continued operations
of the Company.
F-12
EMERGENT GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2001
- --------------------------------------------------------------------------------
NOTE 2 - GOING CONCERN AND BASIS OF PRESENTATION (Continued)
In addition, the Company's recovery is dependent upon future events,
the outcome of which is indeterminable. The Company's attainment of
profitable operations is dependent upon the Company obtaining
additional debt and equity financing and achieving a level of sales
adequate to support the Company's cost structure.
NOTE 3 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The consolidated financial statements include the accounts of Emergent
Group and its subsidiaries, MRM, PRI, and Pulse (collectively, the
"Company"). All significant inter-company transactions and balances
have been eliminated in consolidation.
Revenue Recognition
Revenue is recognized when the services are performed and billable.
Comprehensive Income
The Company utilizes SFAS No. 130, "Reporting Comprehensive Income."
This statement establishes standards for reporting comprehensive income
and its components in a financial statement. Comprehensive income as
defined includes all changes in equity (net assets) during a period
from non-owner sources. Examples of items to be included in
comprehensive income, which are excluded from net income, include
foreign currency translation adjustments, minimum pension liability
adjustments, and unrealized gains and losses on securities.
Cash
Cash consists of cash on hand and in banks. The Company maintains cash
at several financial institutions. At times, such cash may be in excess
of the Federal Deposit Insurance Corporation insurance limit of
$100,000. As of December 31, 2001, uninsured portions of balances at
those banks aggregated to $313,737. The Company has not experienced
losses in such accounts and believes it is not exposed to any
significant risk on cash.
Unrealized Gains and Losses on Investment Securities
The Company has recognized a realized loss on permanently impaired
investments that were classified as available-for-sale in accordance
with SFAS No. 115, "Accounting for Certain Investments in Debt and
Equity Securities." The Company has also recorded an unrealized gain
under comprehensive income, which reflects the fair market value of the
securities that were sold subsequent to December 31, 2001.
Inventory
Inventory is stated at the lower of cost or market. Cost is determined
by the first-in, first-out method.
F-13
EMERGENT GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2001
- --------------------------------------------------------------------------------
NOTE 3 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Equity Investment in Limited Liability Companies
Equity investments are recorded in accordance with the equity method of
accounting.
Property and Equipment
Property and equipment are recorded at cost, less accumulated
depreciation and amortization. Depreciation and amortization are
provided using the straight-line and accelerated methods over estimated
useful lives of five to seven years. Betterments, renewals, and
extraordinary repairs that extend the life of the assets are
capitalized; other repairs and maintenance charges are expensed as
incurred. The cost and related accumulated depreciation and
amortization applicable to retired assets are removed from the
Company's accounts, and the gain or loss on dispositions, if any, is
recognized in the consolidated statements of operations and
comprehensive loss.
Impairment of Long-Lived Assets
The Company reviews its long-lived assets for impairment whenever
events or changes in circumstances indicate that the carrying amount of
an asset may not be recoverable. Recoverability of assets to be held
and used is measured by a comparison of the carrying amount of the
assets to future net cash flows expected to be generated by the assets.
If the assets are considered to be impaired, the impairment to be
recognized is measured by the amount by which the carrying amount
exceeds the fair value of the assets. During the year ended December
31, 2001, the Company determined that the value of the excess of cost
over fair value of net assets acquired relating to MRM was impaired and
recorded a loss of $687,906 in the consolidated statement of operations
and comprehensive loss. In addition, the Company also reviewed property
and equipment for impairment at December 31, 2001 and recorded a net
loss of $3,732,223 in the consolidated statement of operations and
comprehensive loss.
Fair Value of Financial Instruments
For certain of the Company's financial instruments, including cash,
accounts receivable, due from related parties, prepaid expenses, assets
held for sale, accounts payable, and accrued expenses, the carrying
amounts approximate fair value due to their short maturities.
Stock-Based Compensation
SFAS No. 123, "Accounting for Stock-Based Compensation," defines
a fair value based method of accounting for stock-based compensation.
However, SFAS No. 123 allows an entity to continue to measure
compensation cost related to stock and stock options issued to
employees using the intrinsic method of accounting prescribed by
Accounting Principles Board ("APB") Opinion No. 25, "Accounting for
Stock Issued to Employees." Entities electing to remain with the
accounting method of APB No. 25 must make pro forma disclosures of net
loss and loss per share as if the fair value method of accounting
defined in SFAS No. 123 had been applied. The Company has elected to
account for its stock-based compensation to employees under APB No.
25.
F-14
EMERGENT GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2001
- --------------------------------------------------------------------------------
NOTE 3 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Advertising Expense
The Company expenses advertising in the periods the services were
incurred. For the year ended December 31, 2001 and the period from
March 8, 2000 (inception) to December 31, 2000, advertising expense was
$35,111 and $0, respectively.
Income Taxes
The Company accounts for income taxes under the liability method, which
requires the recognition of deferred tax assets and liabilities for the
expected future tax consequences of events that have been included in
the financial statements or tax returns. Under this method, deferred
income taxes are recognized for the tax consequences in future years of
differences between the tax bases of assets and liabilities and their
financial reporting amounts at each period end based on enacted tax
laws and statutory tax rates applicable to the periods in which the
differences are expected to affect taxable income. Valuation allowances
are established, when necessary, to reduce deferred tax assets to the
amount expected to be realized. The provision for income taxes
represents the tax payable for the period and the change during the
period in deferred tax assets and liabilities.
Loss Per Share
The Company utilizes SFAS No. 128, "Earnings per Share." Basic loss per
share is computed by dividing loss available to common shareholders by
the weighted-average number of common shares outstanding. Diluted loss
per share is computed similar to basic loss per share except that the
denominator is increased to include the number of additional common
shares that would have been outstanding if the potential common shares
had been issued and if the additional common shares were dilutive.
Common equivalent shares are excluded from the computation if their
effect is anti-dilutive. The Company does not have any common stock
equivalents.
Estimates
The preparation of financial statements 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
revenue and expenses during the reporting period. Actual results could
differ from those estimates.
Reclassifications
Certain amounts included in the prior year financial statements have
been reclassified to conform with the current year presentation. Such
reclassification did not have any effect on reported net loss.
F-15
EMERGENT GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2001
- --------------------------------------------------------------------------------
NOTE 3 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Recently Issued Accounting Pronouncements
In June 2001, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 141, "Business Combinations." This statement addresses
financial accounting and reporting for business combinations and
supersedes Accounting Principles Board ("APB") Opinion No. 16,
"Business Combinations," and SFAS No. 38, "Accounting for
Pre-Acquisition Contingencies of Purchased Enterprises." All business
combinations in the scope of this statement are to be accounted for
using one method, the purchase method. The provisions of this statement
apply to all business combinations initiated after June 30, 2001. Use
of the pooling-of-interests method for those business combinations is
prohibited. This statement also applies to all business combinations
accounted for using the purchase method for which the date of
acquisition is July 1, 2001 or later. The Company has adopted SFAS No.
141 for its acquisition of MRM (see Note 1).
In June 2001, the FASB issued SFAS No. 142, "Goodwill and Other
Intangible Assets." This statement addresses financial accounting and
reporting for acquired goodwill and other intangible assets and
supersedes APB Opinion No. 17, "Intangible Assets." It addresses how
intangible assets that are acquired individually or with a group of
other assets (but not those acquired in a business combination) should
be accounted for in financial statements upon their acquisition. This
statement also addresses how goodwill and other intangible assets
should be accounted for after they have been initially recognized in
the financial statements. It is effective for fiscal years beginning
after December 15, 2001. Early application is permitted for entities
with fiscal years beginning after March 15, 2001, provided that the
first interim financial statements have not been issued previously. The
Company does not expect adoption of SFAS No. 142 to have a material
impact, if any, on its financial position or results of operations.
In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset
Retirement Obligations." This statement applies to legal obligations
associated with the retirement of long-lived assets that result from
the acquisition, construction, development, and/or the normal operation
of long-lived assets, except for certain obligations of lessees. The
Company does not expect adoption of SFAS No. 143 to have a material
impact, if any, on its financial position or results of operations.
F-16
EMERGENT GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2001
- --------------------------------------------------------------------------------
NOTE 3 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Recently Issued Accounting Pronouncements (Continued)
In August 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets." This statement addresses
financial accounting and reporting for the impairment or disposal of
long-lived assets. This statement replaces SFAS No. 121, "Accounting
for the Impairment of Long-Lived Assets and for Long-Lived Assets to be
Disposed of," the accounting and reporting provisions of APB No. 30,
"Reporting the Results of Operations - Reporting the Effects of
Disposal of a Segment of a Business, and Extraordinary, Unusual, and
Infrequently Occurring Events and Transactions," for the disposal of a
segment of a business, and amends Accounting Research Bulletin No. 51,
"Consolidated Financial Statements," to eliminate the exception to
consolidation for a subsidiary for which control is likely to be
temporary. During the year ended December 31, 2001, the Company
determined that the value of the excess of cost over fair value of net
assets acquired relating to MRM was impaired and recorded a loss of
$687,906 in the consolidated statement of operations and comprehensive
loss. In addition, the Company also reviewed property and equipment for
impairment at December 31, 2001 and recorded a net loss of $3,732,223
in the consolidated statement of operations and comprehensive loss.
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.
F-17
EMERGENT GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2001
- --------------------------------------------------------------------------------
NOTE 3 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Recently Issued Accounting Pronouncements (Continued)
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.
NOTE 4 - INVESTMENT SECURITIES
The Company accounts for investment securities in accordance with
the provisions of SFAS No. 115, "Accounting for Certain Investments in
Debt and Equity Securities." Under SFAS No. 115, debt securities and
equity securities that have readily determinable fair values are to be
classified in three categories:
o Held to maturity - the positive intent and ability to hold to
maturity. Amounts are reported at amortized cost and adjusted for
amortization of premiums and accretion of discounts.
o Trading securities - bought principally for the purpose of selling
them in the near term. Amounts are reported at fair value with
unrealized gains and losses included in earnings.
o Available-for-sale - not classified in one of the above
categories. Amounts are reported at fair value with unrealized
gains and losses excluded from earnings and reported separately as
a component of shareholders' equity.
F-18
EMERGENT GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2001
- --------------------------------------------------------------------------------
NOTE 4 - INVESTMENT SECURITIES (Continued)
The Company has classified all of its investments as either trading or
available-for-sale securities. As of December 31, 2001 and 2000,
investment securities are summarized as follows:
2001
Fair Market Unrealized Realized
Value Gain Loss Cost
--------------- ---------------- --------------- ----------------
Common stock
Trading investments $ 267,427 $ 309,822 $ (135,625) $ 93,230
Non-trading
investments - - (1,420,803) 1,420,803
Debt securities - - (750,000) 750,000
--------------- ---------------- --------------- ----------------
Total $ 267,427 $ 309,822 $ (2,306,428) $ 2,264,033
=============== ================ =============== ================
2000
Fair Market Unrealized Realized
Value Loss Loss Cost
--------------- ---------------- --------------- ----------------
Common stock
Trading investments $ 93,230 $ (2,042,395) $ - $ 2,135,625
Non-trading
investments 2,034,500 - (709,703) 2,744,203
Debt securities 1,090,000 - - 1,090,000
--------------- ---------------- --------------- ----------------
Total $ 3,217,730 $ (2,042,395) $ (709,703) $ 5,969,828
=============== ================ =============== ================
NOTE 5 - INVENTORY
Inventory at December 31, 2001 consisted of the following:
Disposables $ 428,944
Eyewear 88,849
Accessories 181,081
Medical rental 10,126
----------------
709,000
Less reserve for obsolescence 164,105
----------------
Total $ 544,895
================
The Company did not have any inventory at December 31, 2000.
F-19
EMERGENT GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2001
- --------------------------------------------------------------------------------
NOTE 6 - ASSETS HELD FOR SALE
Assets held for sale are reported at the lower of the carrying amount
or fair value. During the year ended December 31, 2001, the Company
classified $1,939,171 of property and equipment as assets held for
sale. Subsequent to December 31, 2001, these assets were returned to
several capital lease and notes payable holders in exchange for the
forgiveness of debt.
NOTE 7 - EQUITY INVESTMENT IN LIMITED LIABILITY COMPANIES
During the years ended December 31, 2000 and 1999, PRI acquired between
a 20% and 31% equity interest in several limited liability companies
(the "LLCs"). The LLCs were formed by certain physicians and MRM, who
made investments between $5,000 and $17,500. The Company provides
operating and administrative services to the LLCs and accounts for its
interest in the LLCs using the equity method of accounting.
During the year ended December 31, 2001 and the period from March 8,
2000 (inception) to December 31, 2000, the Company recognized an equity
share of $26,773 and $0, respectively. The Company's total equity
investments in these LLCs during the year ended December 31, 2001 and
the period from March 8, 2000 (inception) to December 31, 2000 were
$55,521 and $0, respectively. During the year ended December 31, 2001,
the Company earned management fees of $565,429 to the LLCs for the
performance of operational, management, and other services. The
balances due from the LLCs at December 31, 2001 and 2000 were $38,268
and $0, respectively, which are recorded under due from related parties
on the accompanying consolidated balance sheets.
NOTE 8 - PROPERTY AND EQUIPMENT
Property and equipment at December 31, 2001 and 2000 consisted of the
following:
2001 2000
--------------- ----------------
Furniture and fixtures, including computers $ 22,659 $ 339,639
Transportation equipment 15,968 -
Rental equipment 2,250,957 -
Leasehold improvements 2,100 -
--------------- ----------------
2,291,684 339,639
Less accumulated depreciation and amortization 291,486 33,844
--------------- ----------------
Total $ 2,000,198 $ 305,795
=============== ================
F-20
EMERGENT GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2001
- --------------------------------------------------------------------------------
NOTE 8 - PROPERTY AND EQUIPMENT (Continued)
Included in the above are $1,191,455 of assets acquired through capital
lease obligations, which are net of accumulated amortization of
$146,741.
Depreciation and amortization expense was $1,117,661 and $33,844 for
the year ended December 31, 2001 and the period from March 8, 2000
(inception) to December 31, 2000, respectively. Depreciation charges on
assets that were subsequently impaired is included in the amount
expensed at December 31, 2001.
NOTE 9 - LINE OF CREDIT
In March 2001, MRM entered into a line of credit agreement with a
financial institution that allows it to borrow a maximum of
$2,000,000. The line of credit bears interest at prime (4.75% at
December 31, 2001), plus 2.75%, is payable on a monthly basis, is
secured by accounts receivable, inventory, equipment, and a personal
guarantee by a shareholder, and matures in July 2002. As of December
31, 2001, the Company had exceeded the eligible borrowing base, and
was in default of various covenants, and therefore the facility was
not available for use. Subsequent to December 31, 2001, the Company
agreed to pay down the line of credit using 50% of the proceeds from
the sale of medical rental equipment, and the agreement was extended
to March 31, 2003. As of December 31, 2001 and 2000, the outstanding
balance under the line of credit was $1,108,700 and $0, respectively.
NOTE 10 - NOTES PAYABLE
Notes payable at December 31, 2001 consisted of the following:
Note payable to bank, issued in March 1999 to MRM and bearing
interest at prime, plus 4%, payable monthly. The note is
secured by various accounts receivable, inventory,
equipment, and a personal guarantee by a shareholder. As
of December 31, 2001, this note was in default. Subsequent
to December 31, 2001, the Company re-negotiated the debt,
and the principal is now payable in four consecutive,
monthly installments of $16,667 each, beginning March 2,
2002, plus 20 installments of $33,333 each, beginning July
2, 2002, with a final payment equal to all
unpaid principal on March 2, 2004. $ 866,667
Equipment note payable to a finance company, secured by
various accounts receivable and inventory. The note bears
interest at 12% per annum and is payable monthly. The
principal is payable
on demand. 300,206
F-21
EMERGENT GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2001
- --------------------------------------------------------------------------------
NOTE 10 - NOTES PAYABLE (Continued)
Unsecured promissory note, bearing interest at 12.5% per
annum.
The note is due in full on December 31, 2002. $ 100,000
Unsecured promissory note, bearing interest at 10% per annum.
The note was due in full on April 18, 2001. At December 31,
2001, the note was in default. 100,000
Thirty-nine notes payable to a finance company, which are
secured by the Company's medical equipment. The notes
payable bear interest at varying rates between 9% and 11%
per annum and require monthly payments of approximately
$81,000. The notes payable mature through December 2005. 2,091,963
Note payable to a finance company, secured by an automobile,
bearing interest at 8.9% per annum. The note was payable in
full in April 2002 and requires monthly payments of $506. 6,586
Note payable to bank, secured by medical equipment, bearing
interest at 10.4% per annum. The note is payable in full on
July 2003 and requires monthly payments of $521. 9,090
----------------
3,474,512
Less current portion 1,773,107
----------------
Long-term portion $ 1,701,405
================
The Company did not have any notes payable at December 31, 2000.
Subsequent to December 31, 2001, the Company entered into discussions
with several note payable holders to re-negotiate the terms and
repayment of the Company's liabilities (see Note 19). These
negotiations have resulted in large portions of the note payable
balances being forgiven. Future maturities of notes payable at December
31, 2001 were as follows:
Year Ending
December 31,
2002 $ 1,773,107
2003 1,104,074
2004 533,272
2005 64,059
----------------
Total $ 3,474,512
================
F-22
EMERGENT GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2001
- --------------------------------------------------------------------------------
NOTE 11 - CONVERTIBLE NOTE PAYABLE
At December 31, 2001, the Company maintained a short-term, convertible
promissory note, which bore interest at 8% per annum and matured in
April 2002. It was convertible at a rate of $0.27 per share into
370,000 shares of common stock. The outstanding balance at December 31,
2001 was $100,000. Subsequent to December 31, 2001, the note was
converted in full.
NOTE 12 - ACCRUED EXPENSES
Accrued expenses at December 31, 2001 consisted of the following:
Accrued payroll and payroll related amounts $ 261,240
Accrued interest 248,913
Accrued penalties and late fees 74,661
Other 393,370
----------------
Total $ 978,184
================
The Company did not have any accrued expenses at December 31, 2000.
NOTE 13 - COMMITMENTS AND CONTINGENCIES
Operating and Capital Leases
The Company leases a facility in Glendale, California, which serves as
an administrative and corporate office. The lease is scheduled to
expire in July 2006. Total rent expense incurred for the year ended
December 31, 2001 and the period from March 8, 2000 (inception) to
December 31, 2000 was $71,280 and $0, respectively.
The Company leases a facility in Dublin, California, which serves as an
administrative office. The lease is scheduled to expire in March 2004.
Total rent expense incurred for the year ended December 31, 2001 and
the period from March 8, 2000 (inception) to December 31, 2000 was
$33,921 and $0, respectively.
The Company leases its automobiles under various operating leases. The
leases are scheduled to expire between December 2003 and February 2004.
Total automobile rental expense for the year ended December 31, 2001
and the period from March 8, 2000 (inception) to December 31, 2000 was
$66,636 and $0, respectively.
F-23
EMERGENT GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2001
- --------------------------------------------------------------------------------
NOTE 13 - COMMITMENTS AND CONTINGENCIES (Continued)
Operating and Capital Leases (Continued)
The Company also has 42 capital lease obligations with several finance
companies for various rental equipment. The capital leases bear
interest at rates between 6% and 34% per annum. The monthly lease
payments range between $92 to $17,851 and terminate through April 2006.
At December 31, 2001, the Company was in default in connection with
numerous capital lease obligations.
Future minimum lease payments under operating and capital leases at
December 31, 2001 were as follows:
Year Ending Operating Capital
December 31, Lease Lease
------------ --------------- ----------------
2002 $ 340,874 $ 1,735,822
2003 336,493 1,058,275
2004 173,113 337,331
2005 155,520 207,475
2006 84,240 130,600
--------------- ----------------
Total minimum lease payments $ 1,090,240 3,469,503
===============
Less amounts representing interest 559,815
----------------
2,909,688
Less current portion 1,726,295
----------------
Long-term portion $ 1,183,393
================
Subsequent to December 31, 2001, the Company entered into discussions
with several capital lease holders to re-negotiate the terms and
repayment of the Company's liabilities (see Note 19).
Litigation
In October 2000, Emergent Capital Investment Management LLC ("ECIM"), a
related party, commenced an action on behalf of the Company against
Stonepath, a third party, 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 ECIM's investment in Stonepath. On April 15, 2002, the
amended Complaint was dismissed without leave to amend. ECIM has filed
an appeal of this decision. The Company does not intend to conduct any
additional merchant banking activities to make investments in other
companies in the foreseeable future.
F-24
EMERGENT GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2001
- --------------------------------------------------------------------------------
NOTE 13 - COMMITMENTS AND CONTINGENCIES (Continued)
Litigation (Continued)
On March 13, 2002, Fleet Capital Leasing Healthcare Finance, Inc. filed
a suit in the Superior Court of Los Angeles against PRI. The
complainant seeks damages of approximately $33,000, plus interest and
late charges for breach of guaranty. This claim is in connection with
capital lease equipment, which is leased by an LLC in which the Company
holds a 14% interest and one where the Company acts as guarantor.
Management of the Company is currently unable to assess the outcome of
this claim.
On April 25, 2002, Citicorp Vendor Finance, Inc. ("Citicorp") filed a
suit in the Superior Court of Los Angeles against PRI and MRM. The
complainant seeks damages of approximately $656,000, plus interest and
late charges and asserts breach of contract. 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
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. The
settlement further stipulates in event of non-payment, Citicorp may
petition the court for an entry of judgment against PRI. All payments
have currently been made on a timely basis. At December 31, 2001, the
Company has accrued for the liability in full.
In October 2002, a former employee commenced legal proceedings in the
Superior Court of California against the Company. The compliant alleges
discrimination, breach of contract, and breach of the implied covenant
of good faith and fair dealing. The Company intends to vigorously
defend this claim.
NOTE 14 - SHAREHOLDERS' EQUITY
Preferred Stock
The Company has 10,000,000 authorized shares of non-voting preferred
stock with a $0.001 par value. The preferred stock may be issued in
series, from time to time, with such designations, rights, preferences,
and limitations as the Board of Directors may determine by resolution.
The Company did not have any preferred stock issued and outstanding at
December 31, 2001 and 2000.
Common Stock
During the year ended December 31, 2001, the Company completed the
following transactions:
o issued 3,000,000 shares of common stock for cash totaling $600,000.
Offering costs were not recorded in connection with this transaction.
F-25
EMERGENT GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2001
- --------------------------------------------------------------------------------
NOTE 14 - SHAREHOLDERS' EQUITY (Continued)
Common Stock (Continued)
o converted a note payable for $60,000 into 237,874 shares of common
stock. Expense was not recorded in connection with a beneficial
conversion feature since the note was convertible at a rate that
was approximately market value.
o acquired substantially all of the assets and liabilities of MRM,
Inc. in exchange for 5,633,667 shares of the Company's common
stock valued at $3,244,992 and options to purchase 564,786 shares
of common stock valued at $316,191.
o issued options to purchase 2,013,436 shares of common stock with
exercise prices ranging from $0.01 to $1 to consultants for
services valued at $155,891, which has been recorded as consulting
expense. Included in these issuances were options to purchase
250,000 shares of common stock issued to consultants who are
former employees of Either Emergent or MRM. In addition, options
to purchase 200,000 shares of common stock were issued to the
Company's general counsel.
o issued warrants to purchase 500,000 shares of common stock with an
exercise price of $0.01 to consultants for services valued at
$370,000, which has been recorded as consulting expense.
o issued warrants to purchase 50,000 shares of common stock with an
exercise price of $0.01 to a capital lease holder in connection
with the re-negotiation of debt. Management determined that there
was not a material charge in connection with this transaction, so
an expense was not recorded.
o issued options to employees to purchase 2,110,000 shares of common
stock when the exercise price was less than the fair value of the
Company's common stock at the date of grant. Compensation expense
in the amount of $75,000 was recorded in connection with the
issuance of the stock options.
During the period from March 8, 2000 (inception) to December 31, 2000,
a member of the Company contributed $1,173,125 of investment
securities. This investment was recorded as a capital contribution
under additional paid-in capital by the Company. In addition, the
Company recorded a capital contribution of $7,500,000. These
contributions were received in connection with the recapitalization of
capital accounts as a result of the Dynamic transfer, whereby a total
of 44,173,280 shares were issued.
F-26
EMERGENT GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2001
- --------------------------------------------------------------------------------
NOTE 14 - SHAREHOLDERS' EQUITY (Continued)
Stock Option Plans
In September 1996, MRM adopted the 1996 Stock Incentive Plan (the "1996
Plan") to allow officers, employees, and certain non-employees to
receive certain options to purchase common stock. Under the 1996 Plan,
regular salaried employees and directors may be granted options
exercisable at not less than 100% of the fair market value of the
shares at the date of grant. The exercise price of any option granted
to a person who owns stock possessing more than 10% of the voting power
of all classes of common stock of MRM must be 110% of the fair market
value of the common stock on the date of grant, and the duration may
not exceed five years. Options generally become exercisable at a rate
of one-third of the shares subject to option on each of the first,
second, and third anniversary dates of the grant. The duration of the
options may not exceed 10 years. A maximum number of 1,500,000 shares
of MRM's common stock may be issued under the 1996 Plan.
In February 2000, MRM adopted the 2000 Stock Incentive Plan (the "2000
Plan") to allow officers, employees, and certain non-employees to
receive certain options to purchase common stock. Under the 2000 Plan,
regular salaried employees and directors may be granted options
exercisable at not less than 100% of the fair market value of the
shares at the date of grant. The exercise price of any option granted
to a person who owns stock possessing more than 10% of the voting power
of all classes of common stock of MRM must be 110% of the fair market
value of the common stock on the date of grant, and the duration may
not exceed five years. Options generally become exercisable at a rate
of one-third of the shares subject to option on each of the first,
second, and third anniversary dates of the grant. The duration of the
options may not exceed 10 years. A maximum number of 2,500,000 shares
of MRM's common stock may be issued under the 2000 Plan.
Pursuant to the merger agreement between Emergent and MRM in July 2001,
each outstanding MRM stock option automatically converted into an
option in shares of Emergent's common stock with the same terms and
conditions as were applicable under the MRM stock option plans. At the
date of the merger, Emergent assumed all of the outstanding options of
MRM, which allowed the purchase of 564,786 shares of Emergent's common
stock at exercise prices ranging from $0.68 to $4.05 per share. The
Company does not intend to grant any more options under the MRM plans.
F-27
EMERGENT GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2001
- --------------------------------------------------------------------------------
NOTE 14 - SHAREHOLDERS' EQUITY (Continued)
Stock Option Plans (Continued)
During the year ended December 31, 2001, the Company adopted the 2001
Stock Option Plan (the "2001 Plan"). The purpose of the 2001 Plan is to
provide incentive to key employees, officers, and consultants of the
Company who provide significant services to the Company. There are
8,000,000 shares available for grant under the 2001 Plan (see Note 19).
Options will not be granted for a term of more than 10 years from the
date of grant. In the case of incentive stock options granted to a 10%
shareholder, the term of the incentive stock option must not exceed
five years from the date of grant. Options will vest evenly over a
period of five years, and the 2001 Plan expires December 31, 2011.
The exercise of options granted under the 2001 Plan will be determined
by the Board of Directors. Non-statutory stock options may be granted
at any price determined by the Board even if the exercise price of the
options is at a price below the fair market value of the Company's
common stock on the date of grant. The purchase price of an incentive
stock option may not be less than the fair market value of the common
stock at the time of grant, except in the case of a 10% shareholder who
receives an incentive stock option, the purchase price may not be less
than 110% of such fair market value. The aggregate fair market value of
the stock for which incentive stock options are exercisable by any
employee during any calendar year must not exceed $100,000.
A summary of the Company's outstanding options and activity is as
follows:
Weighted-
Average
Number Exercise
of Options Price
Outstanding, March 8, 2000 (inception) to
December 31, 2000 - $ -
Stock options converted upon merger 564,786 $ 0.73
Granted 5,093,436 $ 0.04
Canceled (177,068) $ 0.80
---------------
Outstanding, December 31, 2001 5,481,154 $ 0.14
===============
Exercisable, December 31, 2001 2,009,246 $ 0.26
===============
F-28
EMERGENT GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2001
- --------------------------------------------------------------------------------
NOTE 14 - SHAREHOLDERS' EQUITY (Continued)
Stock Option Plans (Continued)
The weighted-average remaining contractual life of the options
outstanding at December 31, 2001 is 3.34 years. The exercise prices for
the options outstanding at December 31, 2001 ranged from $0.01 to
$4.05, and information relating to these options is as follows:
Weighted- Weighted-
Weighted- Average Average
Average Exercise Exercise
Range of Stock Stock Remaining Price of Price of
Exercise Options Options Contractual Options Options
Prices Outstanding Exercisable Life Outstanding Exercisable
------------------ --------------- --------------- ---------------- --------------- ----------------
$ 0.01 - 0.20 4,048,436 1,555,000 2.83 years $ 0.11 $ 0.01
$ 0.21 - 1.00 1,421,803 443,331 9.06 years $ 0.90 $ 0.66
$ 1.01 - 4.05 10,915 10,915 5.22 years $ 4.04 $ 4.04
--------------- ---------------
5,481,154 2,009,246
The Company has adopted only the disclosure provisions of SFAS No. 123.
It applies APB No. 25 and related interpretations in accounting for its
plans and does not recognize compensation expense for its stock-based
compensation plans other than for restricted stock and options issued
to outside third parties.
If the Company had elected to recognize compensation expense based upon
the fair value at the grant date for awards under these plans
consistent with the methodology prescribed by SFAS 123, the Company's
net loss and basic loss per share for the year ended December 31, 2001
would be as follows:
Net loss
As reported $ (9,720,221)
Pro forma $ (9,766,403)
Basic and diluted loss per share
As reported $ (0.19)
Pro forma $ (0.20)
F-29
EMERGENT GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2001
- --------------------------------------------------------------------------------
NOTE 14 - SHAREHOLDERS' EQUITY (Continued)
Stock Option Plans (Continued)
For purposes of computing the pro forma disclosures required by SFAS
No. 123, the fair value of each option granted to employees and
directors is estimated using the Black-Scholes option-pricing model
with the following weighted-average assumptions for the year ended
December 31, 2001: dividend yields of 0%, expected volatility of 175%,
risk-free interest rates of 3.8%, and expected life of 2.28 years. The
weighted-average fair value of options granted during the year ended
December 31, 2001 for which the exercise price was greater than the
market price on the grant date was $0.12, and the weighted-average
exercise price was $0.55. The weighted-average fair value of options
granted during the year ended December 31, 2001 for which the exercise
price was less than the market price on the grant date was $0.13, and
the weighted-average exercise price was $0.01.
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options which have no vesting
restrictions and are fully transferable. In addition, option valuation
models require the input of highly subjective assumptions including the
expected stock price volatility. Because the Company's employee stock
options have characteristics significantly different from those of
traded options, and because changes in the subjective input assumptions
can materially affect the fair value estimate, in management's opinion,
the existing models do not necessarily provide a reliable single
measure of the fair value of its employee stock options.
NOTE 15 - INCOME TAXES
The components of the income tax provision for the year ended December
31, 2001 and the period from March 8, 2000 (inception) to December 31,
2000 were as follows:
2001 2000
--------------- ----------------
Current $ 1,600 $ -
Deferred - -
--------------- ----------------
Total $ 1,600 $ -
=============== ================
F-30
EMERGENT GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2001
- --------------------------------------------------------------------------------
NOTE 15 - INCOME TAXES (Continued)
A reconciliation of the provision for income tax expense with the
expected income tax computed by applying the federal statutory income
tax rate to income before provision for income taxes was as follows for
the year ended December 31, 2001 and the period from March 8, 2000
(inception) to December 31, 2000:
2001 2000
--------------- ----------------
Income tax computed at federal statutory tax rate 34.0% 34.0%
State taxes, net of federal benefit 8.0 8.0
--------------- ----------------
Total 42.0% 42.0%
=============== =================
The tax effects of temporary differences that give rise to deferred
taxes at December 31, 2001 and 2000 are as follows:
2001 2000
--------------- ----------------
Deferred tax assets
Impairment of assets $ 2,609,490 $ -
Capital loss carryover 919,862 304,037
Unrealized loss on investment securities 1,287,492 1,029,186
Net operating loss carryforwards 2,524,816 355,717
Other 271,010 -
--------------- ----------------
Total gross deferred tax assets 7,612,670 1,688,940
Less valuation allowance 7,612,670 1,688,940
--------------- ----------------
Net deferred tax assets $ - $ -
=============== ================
The valuation allowance increased by $5,923,730 during the year ended
December 31, 2001. All other deferred tax assets were immaterial. As of
December 31, 2001, the Company had approximately $2,832,000 in federal
net operating loss carryforwards attributable to losses incurred since
the Company's inception that may be offset against future taxable
income through 2020.
NOTE 16 - BENEFIT PLAN
MRM has adopted a defined contribution retirement plan (the "Plan"),
which qualifies under Section 401(k) of the Internal Revenue Code. The
Plan covers all employees. MRM makes an annual election to provide
matching contributions of up to 6% of each participant's deferral. MRM
did not make any matching contributions during the year ended December
31, 2001 and the period from March 8, 2000 (inception) to December 31,
2000.
F-31
EMERGENT GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2001
- --------------------------------------------------------------------------------
NOTE 17 - RELATED PARTY TRANSACTIONS
During the year ended December 31 2001, the Company transferred
$227,013 of property and equipment to a related party. This amount is
included in due from related parties on the accompanying consolidated
balance sheet.
During the period from March 8, 2000 (inception) to December 31, 2000,
the Company was funded by an operating entity that was owned by the
Company's principal shareholders. During the year ended December 31,
2001, the Company transferred $191,504 of property and equipment and
incurred several operating costs on behalf of this entity. The full
amount due, including the balance of $467,519 due from the related
party at December 31, 2000, was repaid in full during the year ended
December 31, 2001 by the offset of a loan of $1,045,123 due by the
Company to the related entity.
In November 2002, the Company entered into a settlement agreement with
its former Chief Financial Officer/Chairman/President of MRM. The terms
of the agreement required an immediate payment of $25,000 in exchange
for the release of all obligations under the January 2000 employment
agreement, which was subsequently amended in both August and November
2001. In addition, the Company is required to pay a further $17,000 by
March 31, 2003. If the terms of the agreement are not met, the Company
will be obligated to pay the former officer a total of $213,000, less
any payments previously made under the settlement.
In November 2002, the Company entered into a settlement agreement with
a family member of the former Chief Financial
Officer/Chairman/President of MRM. Prior to the merger, the family
member was due a $100,000 note payable from MRM. During the year ended
December 31, 2001, the terms of the note had been extended to April
2002. In November 2002, in exchange for the forgiveness of the note
payable, the Company issued 370,000 shares of common stock to the
family member.
In October 2001, the Company entered into a three-month consulting
agreement with a consulting company based in New York. The agreement
was subsequently extended to December 31, 2002. The agreement provided
for consulting services in exchange for a monthly fee of $25,000 and a
bonus if at least $1,000,000 in equity funding was raised for the
Company.
Subsequent to December 31, 2001, the Company maintained that the
consulting firm had satisfied a significant portion of the funding
needs. In connection with this funding and also the employment
agreements discussed below, 11,502,970 shares of the Company's common
stock were issued to two principal officer of the consulting
company and one consultant of BJH, representing a 17.5% stockholding of
the Company's fully diluted shares outstanding.
On December 30, 2002, the Company also approved a bonus of $100,000 to
the consulting company for the year ended December 31, 2002.
F-32
EMERGENT GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2001
- --------------------------------------------------------------------------------
NOTE 17 - RELATED PARTY TRANSACTIONS (Continued)
On December 30, 2002, the Company entered into two, 18-month employment
agreements with the two officers of the consulting company. The
agreements were to appoint a new Chief Executive Officer and President
for annual compensations of $175,000 and $161,000, respectively,
beginning in January 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.
In December 2002, the Company entered into a consulting agreement with
the current 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. As of December 31, 2002, the Company has
accrued $70,000 with regard to these services rendered.
In November 2001, the Company entered into an employment contract
with the former Vice President/Chief Operating Officer of MRM. The
agreement called for a base salary of $125,000 per year and options to
purchase 500,000 shares of the Company's common stock at $0.01 per
share. The options expire in December 2004. Subsequent to December 31,
2001, this agreement was terminated, but the officer retained his
options.
NOTE 18 - FOURTH QUARTER ADJUSTMENTS
In connection with the acquisition of substantially all of the assets
and liabilities of MRM in July 2001, the Company recorded an excess of
cost over fair value of assets acquired of $3,420,862. The Company
recorded an expense of $687,906 in the fourth quarter in connection
with the impairment of this asset. In connection with a review of
property and equipment for impairment, the Company recorded a net
expense of $3,732,223 in the fourth quarter.
NOTE 19 - SUBSEQUENT EVENTS
Stock Option Plans
In April 2002, the Company adopted the 2002 Employee Benefit and
Consulting Services Compensation Plan (the "2002 Plan"). The purpose of
the 2002 Plan is to provide incentive to key employees, officers, and
consultants of the Company who provide significant services to the
Company. There are 13,000,000 shares available for grant under the 2002
Plan. Options will not be granted for a term of more than 10 years from
the date of grant. In the case of incentive stock options granted to a
10% shareholder, the term of the incentive stock option must not exceed
five years from the date of grant. Options will vest evenly over a
period of five years, and the 2002 Plan expires in March 2012.
The Company issued to employees options to purchase 5,927,854 shares of
common stock under the 2002 Plan. The options have a ten-year term
and are exercisable at $0.01 per share. Generally, one fifth of each
issuance vests over five consecutive years. As of December 2002,
options to purchase 1,389,271 shares of common stock were cancelled due
to employee terminations.
F-33
EMERGENT GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2001
- --------------------------------------------------------------------------------
NOTE 19 - SUBSEQUENT EVENTS (Continued)
Stock Option Plans (Continued)
The Company issued options to purchase 351,000 shares of common stock
to various employees under the 2002 Plan at an exercise price of $0.01
per share. The shares vest between December 2002 and December 2012.
The Company issued options to purchase 3,078,026 shares of common stock
under the 2002 Plan to various consultants. The options vest between
May 2002 and December 2012 at exercise prices ranging from $0.01 and
$0.20 per share. Included in this issuance are options to the Company's
former Chief Executive Officer to purchase 150,000 shares of common
stock at an exercise price of $0.01 per share. These options vest
between May 2003 and May 2012.
The Company entered into an employment contract to appoint a new Chief
Financial Officer for an annual compensation of $125,000. The contract
remains valid until terminated by either party. The Company
subsequently issued stock options to purchase 1,200,000 shares of
common stock to the new officer under the 2002 Plan. The options vest
between December 2002 and August 2006.
The Company issued options to purchase 150,000 shares of common
stock to a former officer of MRM as part of a settlement agreement for
the termination of a consulting contract entered in January 2000 and
subsequently amended in August 2001. In addition to the options, the
former officer vendor also received $35,000 in exchange for the
cancellation of the contract. The options vest between December 2002
and December 2012 at an exercise price of $0.01 per share.
The Company reduced the authorized share capital under the 2001 Plan
from 8,000,000 to 585,000 shares.
The Company cancelled options to purchase 351,343 shares of common
stock under the 1996 Plan due to employee terminations.
The Company cancelled options to purchase 370,000 shares of common
stock under the 2001 Plan due to employee terminations.
Other Subsequent Events
The Company entered in debt re-negotiations with capital lease and note
payable holders, resulting in the forgiveness of $3,199,181 of debt and
$426,743 of accrued interest charges. In connection with these
transactions, property and equipment with a net book value of
$1,530,747 was returned to capital lease and note payable holders,
resulting in a net gain of $2,095,177.
The Company sold medical rental, and transportation equipment with an
aggregate net book value of $504,044 and recognized gains net of sales
commissions of $163,880.
F-34
EMERGENT GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2001
- --------------------------------------------------------------------------------
NOTE 19 - SUBSEQUENT EVENTS (Continued)
Other Subsequent Events (Continued)
The Company entered into debt re-negotiations with several vendors,
resulting in the forgiveness of $334,954 of debt.
The Company issued warrants to purchase 30,000 shares of common stock
to a vendor in exchange for the forgiveness of debt of $3,100. These
warrants vest between February 2002 and February 2005.
F-35
SIGNATURES
Pursuant to the requirements Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has caused this Report to be signed on its
behalf by the undersigned, thereunto duly authorized.
EMERGENT GROUP INC.
By: /s/ Mark Waldron
Mark Waldron, Chief Executive
Officer and President
Dated: Glendale, California
January 27, 2003
Pursuant to the requirements of the Securities Exchange Act of 1934,
this Report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated:
Signatures Title Date
/s/ Daniel Yun Chairman of the Board January 27, 2003
Daniel Yun
/s/ Mark Waldron Chief Executive Officer, January 27, 2003
Mark Waldron President and Director
/s/ William M. McKay Executive Vice President, January 27, 2003
William M. McKay Chief Financial Officer
Secretary and Treasurer
/s/ Howard Waltman Director January 27, 2003
Howard Waltman
/s/ Matthew K. Fong Director January 27, 2003
Matthew K. Fong
Daniel Yun, Mark Waldron, Howard Waltman and Matthew K. Fong represent all
the current members of the Board of Directors.
60
CERTIFICATION
I, Mark Waldron, Chief Executive Officer of the Registrant, certify that:
1. I have reviewed this annual report on Form 10-K of Emergent Group
Inc.;
2. Based on my knowledge, this annual 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
annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual 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 annual report;
Date: January 27, 2003 /s/Mark Waldron
Mark Waldron,
Chief Executive Officer
61
CERTIFICATION
I, William M. McKay, Chief Financial Officer of the Registrant, certify
that:
1. I have reviewed this annual report on Form 10-K of Emergent Group
Inc.
2. Based on my knowledge, this annual 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
annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual 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 annual report;
Date: January 27, 2003 /s/William M. McKay
William M. McKay,
Chief Financial Officer
62