SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-Q
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Quarterly Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the Quarterly Period March 31, 2002
Commission File Number: 0-21475
EMERGENT GROUP INC.
(Exact name of registrant as specified in its charter)
Nevada 93-1215401
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(State of jurisdiction of Incorporation) (I.R.S. Employer Identification No.)
932 Grand Central Ave.
Glendale, CA 91201
(Address of principal executive offices)
(818) 240-8250 (Registrant's telephone number)
Not Applicable
(Former name, address and fiscal year, if changed since last report)
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Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports) and (2) has been subject to such
filing requirements for the past 90 days. Yes [ X ] No [ ]
As of January 24, 2003, the registrant had a total of 64,917,803 shares
of Common Stock outstanding.
EMERGENT GROUP INC.
FORM 10-Q Quarterly Report
Table of Contents
Page
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets as of March 31, 2002 (unaudited)
and December 31, 2001 3
Unaudited Condensed Consolidated Statements of Operations for the Three
Months Ended March 31, 2002 and 2001 4
Unaudited Condensed Consolidated Statements of Cash Flows for the Three
Months Ended March 31, 2002 5
Notes to the Unaudited Condensed Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 12
Item 3. Quantitative and Qualitative Disclosure About Market Risk 16
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 17
Item 2. Changes in Securities 17
Item 3. Defaults Upon Senior Securities 18
Item 4. Submissions of Matters to a Vote of Security Holders 18
Item 5. Other Information 19
Item 6. Exhibits and Reports on Form 8-K 19
Signatures 20
2
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Emergent Group Inc. and Subsidiaries
Condensed Consolidated Balance Sheets
($ in thousands)
March 31, December 31,
2002 2001
---------------- ---------------
ASSETS (unaudited)
Current assets
Cash $ 653 $ 482
Accounts receivable, net 1,456 1,455
Due from related parties, net 27 38
Investment securities 267 267
Inventory, net 554 545
Prepaid expenses 219 207
Income tax receivable 5 5
Assets held for sale 1,301 1,939
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Total current assets 4,482 4,938
Equity investment in limited liability companies 54 56
Property and equipment, net 1,856 2,000
Goodwill, net 2,880 2,880
Deposits and other assets, net 248 261
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Total assets $ 9,520 $ 10,135
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LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Book overdraft 9 146
Line of credit 1,109 1,109
Current portion of capital lease obligations 1,282 1,726
Current portion of notes payable 2,421 1,773
Convertible notes payable 100 100
Accounts payable 861 943
Accrued expenses 1,075 979
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Total current liabilities 6,857 6,776
Capital lease obligations, net of current portion 636 1,183
Notes payable, net of current portion 1,087 1,702
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Total liabilities 8,580 9,661
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 shares issued and outstanding 53 53
Additional paid-in capital 13,442 13,442
Accumulated other comprehensive loss (1,733) (1,733)
Accumulated deficit (10,822) (11,288)
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Total shareholders' equity 940 474
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Total liabilities and shareholders' equity $ 9,520 $ 10,135
The accompanying notes are an integral part of these condensed financial
statements.
3
Emergent Group Inc. and Subsidiaries
Condensed Consolidated Statements of Operations
($ in thousands, except per share data)
Three Months Ended
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March 31,
2002 2001
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(unaudited)
Revenue $ 2,502 $ -
Cost of goods sold 1,414 -
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Gross profit 1,088 -
Selling, general, and administrative expenses 871 412
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Income (Loss) from operations 217 (412)
Other income (expense)
Net gain on forgiveness of debt 227 -
Realized gain (loss) on investment securities - (688)
Interest expense (154) -
Equity in net earnings of investment in limited
liability companies 7 -
Gain on disposal of property and equipment 81 -
Other Income (expense), net 88 34
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Total other income (expense) 249 (654)
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Income (loss) before provision for income taxes 466 (1,066)
Provision for income taxes - -
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Net income (loss) 466 (1,066)
Other comprehensive gain, net of tax
Unrealized gain on investment securities - 3
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Comprehensive income(loss) $ 466 $ (1,063)
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Basic and diluted income(loss) per share $ 0.01 $ (0.02)
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Weighted-average shares outstanding 53,045 44,173
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The accompanying notes are an integral part of these condensed financial
statements.
4
Emergent Group Inc. and Subsidiaries
Condensed Consolidated Statements of Cash Flows
($ in thousands)
Three Months ended
---------------------------------
March 31,
2002 2001
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(Unaudited)
Cash flows from operating activities
Net loss $ 466 $ (1,066)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Gain on disposal of property and equipment (81) -
Gain on forgiveness of debt (227)
Realized loss on investment securities - 688
Depreciation and amortization 154 37
Equity in net gain of investment in limited liability companies (7)
Provsion for doubtful accounts 5 -
(Increase) decrease in
Accounts receivable 381 -
Interest receivable - (20)
Inventory (9) -
Due from related party (288) 26
Prepaid expenses (12) -
Deposits and other assets 1 (37)
Increase (decrease) in
Accounts payable (159)
Accrued expenses 181 106
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Net cash provided by (used in) operating activities 405 (266)
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Cash flows from investing activities
Purchase of property and equipment (8) -
Proceeds from the sale of property and equipment 112 -
Purchase of investments, net - (175)
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Net cash provided by (used in) investing activities 104 (175)
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Cash flows from financing activities
Net change in book overdraft (138) -
Payments on capital lease obligations (89) -
Payments on notes payable (111) -
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Net cash used in financing activities (338) -
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Net increase (decrease) in cash 171 (441)
Cash, beginning of period 482 751
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Cash, end of period $ 653 $ 310
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Supplemental disclosures of cash flow information:
Interest paid and/or forgiven $ 154 $ -
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Supplemental disclosures of non-cash investing and financing activities -
During the quarter ended March 31, 2002 the Company billed $288,000 to
affiliated companies for management fees. The Company also incurred expenses on
behalf of the affiliated companies.
The accompanying notes are an integral part of these condensed financial
statements.
5
EMERGENT GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
1. BUSINESS
Emergent Group Inc. ("Emergent") is the parent company of Medical Resources
Management, Inc. ("MRM"), its wholly owned and only operating subsidiary.
Emergent acquired MRM in July 2001 as per an Agreement and Plan of
Reorganization of Merger ("Merger Agreement"), dated January 23, 2001. MRM
primarily conducts its business through its wholly owned subsidiary
Physiologic Reps ("PRI"). Emergent 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 also provides technical support
required to ensure the equipment is working correctly. PRI provides a
limited amount of non-surgical equipment on a rental basis to hospitals and
surgery centers, although PRI is winding down this area of business in order
to focus on its core surgical equipment rental/services business.
2. BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements of
Emergent have been prepared pursuant to the rules of the Securities and
Exchange Commission ("SEC"). Certain information and footnote disclosures
normally included in financial statements prepared in accordance with
accounting principles generally accepted in the United States have been
condensed or omitted pursuant to such rules and regulations. These unaudited
condensed consolidated financial statements should be read in conjunction
with the audited consolidated financial statements and notes thereto
included in the Company's Annual Report on Form-10K for the year ended
December 31, 2001. In the opinion of management, the accompanying unaudited
condensed consolidated financial statements reflect all adjustments, which
are of a normal recurring nature, necessary for a fair presentation of the
results for the periods presented.
The results of operations presented for the three months ended March 31,
2002 and 2001 are not necessarily indicative of the results to be expected
for any other interim period or any future fiscal year.
The Company's only operating subsidiary, MRM, has historically incurred
operating losses. The consolidated financial statements have been prepared
on a going-concern basis, which contemplates the realization of assets and
satisfaction of liabilities in the normal course of business. As of March
31, 2002 and December 31, 2001 the Company had a working capital deficit of
$2.4 million and $1.8 million, respectively. For the three months ended
March 31, 2002, the Company reported net income of $466,000 of which
$227,000 related to the forgiveness of debt. However, there can be no
assurances that once the Company completes its efforts to restructure its
outstanding debt obligations, as discussed herein, that it would continue to
achieve positive operating results. The financial statements do not include
any adjustments to reflect the possible future effects on the recoverability
and classification of assets or the amounts and classification of
liabilities that may result from the outcome of this uncertainty.
Principles of Consolidation
The condensed consolidated financial statements include the accounts of
all majority-owned subsidiaries. All significant intercompany transactions
have been eliminated in consolidation.
Use of Estimates
The preparation of the condensed consolidated financial statements in
accordance with generally accepted accounting principles requires
management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported
amounts of income (loss) and expenses during the reporting period. Actual
results could differ significantly from those estimates.
6
Inventory
Inventory consists of finished goods primarily used in connection with the
delivery of our mobile surgical equipment rental and services business.
Inventory is stated at the lower of cost or market, on a first-in,
first-out basis.
Earnings (Loss) Per Share
The Company computes earnings (loss) per share in accordance with SFAS No.
128, "Earnings Per Share." Under the provisions of SFAS No. 128, basic net
income (loss) per common share ("Basic EPS") is computed by dividing net
income (loss) per common share by the weighted average number of common
shares outstanding. Diluted net income (loss) per common share ("Diluted
EPS") is computed by dividing net income (loss) by the weighted average
number of common shares and dilutive common share equivalents then
outstanding. SFAS No. 128 requires the presentation of both Basic EPS and
Diluted EPS on the face of the condensed consolidated statements of
operations.
Reclassifications
Certain amounts in the prior period have been reclassified to conform to
the presentation for the three months ended March 31, 2002. The financial
information included in this quarterly report should be read in
conjunction with the consolidated financial statements and related notes
thereto in the Company's Form 10-K for the year ended December 31, 2001.
Recent 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.
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.
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
7
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.
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.
3. DEBT OBLIGATIONS AND PLAN OF RESTRUCTURE
During the first quarter of 2002 the Company was in default on most of its
note and lease obligations due to delinquent principal and interest
payments. In order to avoid ceasing our operations or a possible bankruptcy
filing and in an effort to improve our financial condition, during the first
quarter of 2002 we began the process of renegotiating substantially all of
our outstanding debt, lease, and trade obligations with our key creditors.
As of March 31, 2002 we had renegotiated notes and lease obligations with
principal balances outstanding as of December 31, 2001 of approximately $1.1
million and have recorded net gains on forgiveness of debt of $227,000.
Further, as of December 31, 2002 we have substantially completed our debt
restructuring efforts whereby we have renegotiated outstanding note and
lease obligations with principal balances outstanding as December 31, 2001
of approximately $5.1 million and have recorded approximately $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 collateralize such obligations, if applicable, and certain periodic and
monthly installments for the balance of such obligations. In connection with
our renegotiations with creditors we returned equipment with a net book
value of approximately $638,000 as of March 31, 2002. Generally, in the
8
event of default by the Company we are required to repay all amounts
previously forgiven and all amounts then outstanding are accelerated and
become immediately due and payable. In addition, as of March 31, 2002 and
December 31, 2002, we have renegotiated outstanding trade debt with our
vendors in the amount of $30,000 and $446,000, respectively, and have
recorded net gains on forgiveness of vendor debt in the amount of $12,000
and $335,000, respectively. As of the filing date of this Quarterly Report
on Form 10-Q, 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 March 31, 2002, we had a bank loan (the "Bank Term Loan") outstanding in
the amount of $767,000. The loan agreement, as amended, 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 March 31, 2002 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, during November
2002, 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 $1,109,000 with the same lender. This Bank Line of Credit provides
for interest at the prime rate, plus 2.75%, with borrowings based upon
eligible accounts receivable as defined. The amount outstanding under the
Bank Line of Credit exceeded the eligible borrowing base as of December 31,
2001 and March 31, 2002 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 Quarterly Report on Form 10Q. 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 completed 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 March 31, 2002 and as of the filing date of
this Form 10-Q, we were not in compliance with certain financial covenants
of such agreements. As a result, we have classified all of the bank loan
facilities as current liabilities in the accompanying balance sheet as of
March 31, 2002.
4. ACQUISITION OF MRM AND PRO FORMA INFORMATION
Effective July 6, 2001, the Company completed its acquisition of MRM as per
the Merger Agreement. The transaction has been accounted for under the
purchase method of accounting in accordance with Statements of Financial
Accounting Standards No. 141 and No. 142. The Company has used July 1, 2001
as the effective date of the recording the transaction. Results of MRM's
operations for the period July 1, through July 6, 2001 were not material.
The following pro forma results of operations are presented to illustrate
the effect of the acquisition on the historical operating results of
Emergent Group Inc. for the three months ended March 31, 2001. These pro
forma results of operations give effect to the acquisition as if it occurred
as of January 1, 2002 and include MRM and its affiliates operating results
for that period. All intercompany transactions have been eliminated.
March 31,
2001
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($ in thousands,
except loss per share data)
Net revenues $ 2,712
Net loss $(1,604)
Basic and diluted loss per share $ (0.03)
Pro forma weighted average shares 49,807
The pro forma results of operations are based on management's current
estimates and may not be indicative of the results of operations that
actually would have occurred if the transaction had been completed at the
dates indicated.
5. 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
9
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
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 at the date of settlement under such 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.
Plaintiff also claims that her termination breached an implied contract of
employment to terminate her only for "good cause", including violation of the
implied covenant of good faith and fair dealing inherent in contracts. The
Plaintiff seeks actual, incidental, consequential, and general damages in an
unspecified amount, punitive damages, costs and attorneys' fees. The Company
disputes the merit of Plaintiff's Complaint and intends to vigorously defend
against this lawsuit.
In addition to the matters noted above, from time to time, we may become
involved in litigation arising out of operations in the normal course of
business. As of March 31, 2002 and as of January 27, 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.
10
6. RELATED PARTY TRANSACTIONS
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
March 31, 2002, the Company has accrued $10,000 with regard to these services
rendered.
During the quarter ended March 31, 2002 the Company billed $288,000 to
affiliated companies for management fees. The Company also incurred expenses on
behalf of the affiliated companies.
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 the two principal officers
of the consulting company, 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.
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.
7. 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.
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.
11
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 consultant 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.
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.
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Forward-Looking Statements
The information contained in this Form 10-Q and documents incorporated herein by
reference are intended to update the information contained in the Company's
Annual Report on Form 10-K for the year ended December 31, 2001 and such
information presumes that readers have access to, and will have read, the
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," "Risk Factors" and other information contained in such Form 10-K
and other Company filings with the Securities and Exchange Commission ("SEC").
This Quarterly Report on Form 10-Q contains forward-looking statements within
the meaning of Section 27A of the Securities Act of 1933, as amended, and
Section 21E of the Securities Exchange Act of 1934, as amended. These
forward-looking statements involve risks and uncertainties, and actual results
could be significantly different than those discussed in this Form 10-Q. Certain
statements contained in Management's Discussion and Analysis, particularly in
"Liquidity and Capital Resources," and elsewhere in this Form 10-Q are
forward-looking statements. These statements discuss, among other things,
expected growth, future revenues and future performance. Although we believe the
expectations expressed in such forward-looking statements are based on
12
reasonable assumptions within the bounds of our knowledge of our business, a
number of factors could cause actual results to differ materially from those
expressed in any forward-looking statements, whether oral or written, made by us
or on our behalf. The forward-looking statements are subject to risks and
uncertainties including, without limitation, the following: (a) changes in
levels of competition from current competitors and potential new competition,
(b) possible loss of significant customer(s), (c) the Company's ability to reach
favorable settlements with its major creditors and its ability to meet the terms
and conditions of its renegotiated debt and lease obligations, and (d) changes
in availability or terms of working capital financing from vendors and lending
institutions. The foregoing should not be construed as an exhaustive list of all
factors that could cause actual results to differ materially from those
expressed in forward-looking statements made by us. All forward-looking
statements included in this document are made as of the date hereof, based on
information available to the Company on the date thereof, and the Company
assumes no obligation to update any forward-looking statements.
Overview
Emergent Group Inc. ("Emergent") is the parent company of Medical Resources
Management, Inc. ("MRM"), its wholly owned and only operating subsidiary. MRM
primarily conducts its business through its wholly owned subsidiary Physiologic
Reps ("PRI"). Emergent, MRM and PRI are referred to collectively hereinafter as
the "Company." All references to MRM include PRI unless the context indicates
otherwise. PRI is a provider of mobile surgical equipment, on a fee for service
basis to hospitals; surgical care centers, and other health care providers. PRI
provides mobile lasers and other surgical equipment with technical support
required to ensure the equipment is working correctly. PRI also provides a
limited amount of non-surgical equipment on a rental basis to hospitals and
surgery centers, although PRI is discontinuing this area of business in order to
focus on its core surgical equipment rental/services business.
Merger with Medical Resources Management, Inc.
Effective July 6, 2001, the Emergent Group Inc. completed its acquisition
of Medical Resources Management, Inc. ("MRM") as per the Merger Agreement. The
transaction has been accounted for under the purchase method of accounting in
accordance with Statements of Financial Accounting Standards No. 141 and No.
142. The Company has used July 1, 2001 as the effective date of the recording
the transaction. Results of MRM's operations for the period July 1, through July
6, 2001 were not material.
Critical Accounting Policies
Our discussion and analysis of our financial conditions and results of
operations are based upon our financial statements, which have been prepared in
accordance with generally accepted accounting principles in the United States.
The preparation of financial statements require managers to make estimates and
disclosures on the date of the financial statements. On an on-going basis, we
evaluate our estimates including, but not limited to, those related to revenue
recognition. We use authoritative pronouncements, historical experience and
other assumptions as the basis for making judgments. Actual results could differ
from those estimates. We believe that the following critical accounting policies
affect our more significant judgments and estimates in the preparation of our
financial statements.
Revenue Recognition. We are required to make judgments based on historical
experience and future expectations, as to the realizability of goods and
services billed to our customers. These judgments are required to assess the
propriety of the recognition of revenue based on Staff Accounting Bulletin
("SAB") No. 101, "Revenue Recognition," and related guidance. We make such
assessments based on the following factors: (a) customer-specific information,
and (b) historical experience for issues not yet identified.
Inventory Valuation. We are required to make judgments based on historical
experience and future expectations, as to the realizability of our inventory. We
make these assessments based on the following factors: (a) existing orders and
usage, (b) age of the inventory, and (c) historical experience.
Property and Equipment. We are required to make judgments based on historical
experience and future expectations, as to the realizability of our property and
equipment. We made these assessments based on the following factors: (a) the
estimated useful lives of such assets, (b) technological changes in our
industry, and (c) the changing needs of our customers.
13
Results of Operations
The following table sets forth certain selected unaudited condensed consolidated
income statement data for the periods indicated in thousands of dollars and as a
percentage of total net revenues. The following discussion relates to our
results of operations for the periods noted and are not necessarily indicative
of the results expected for any other interim period or any future fiscal year.
In addition, we note that the period-to-period comparison may not be indicative
of future performance due to the fact that the Company did not have any revenues
for the three months ended March 31, 2001. Emergent did not have an operating
business until the acquisition of MRM in July 2001.
Results of Operations
($ in thousand)
Three Months Ended
March 31,
----------------------------
2002 % 2001 %
---------- -----------
Revenue $2,502 100% $ - -
Cost of goods sold 1,414 57% - -
---- --- -----
Gross profit 1,088 43% - -
-
Selling, general, and administrative expenses 871 35% 412 -
---- --- -----
-
Income (Loss) from operations 217 9% (412) -
---- --- -----
Other income (expense) -
Net gain on forgiveness of debt 227 9% -
Realized gain (loss) on investment securities - 0% (688) -
Interest expense (154) -6% - -
Equity in net earnings of investment in limited -
liability companies 7 0% - -
Gain on disposal of property and equipment 81 3% - -
Other Income (expense), net 88 4% 34 -
---- --- -----
-
Total other income (expense) 249 10% (654) -
---- --- -----
-
Income (loss) before provision for income taxes 466 19% (1,066) -
Provision for income taxes - - - -
---- --- -----
Net income (loss) 466 19% (1,066) -
---- --- -----
Other comprehensive gain, net of tax
Unrealized gain on investment securities - 0% 3 -
---- --- -----
Comprehensive income (loss) $ 466 19% $(1,063)
====== --- ========
Comparison of the Three Months ended March 31, 2002 to March 31, 2001
We generated revenues of $2,502,000 in 2002 compared to $0 in 2001. Revenues for
2002 were generated by MRM, which Emergent acquired in July 2001. Emergent
conducted no significant operations, other than its investing activity prior to
its acquisition of MRM. Revenues from surgical and cosmetic services represent
approximately 69% and 20%, respectively, of total revenues for 2002. Revenues
from medical equipment rentals comprised approximately 9% of revenues. Medical
rental revenues, in terms of absolute dollars and as a percentage of total
revenues, are expected to decrease in future periods as we wind down this area
of our business in order to focus on our core mobile surgical equipment rental
and technical services business.
Cost of revenues was $1,414,000 in 2002 compared to $0 for the same period in
2001 as such expenses were not incurred until the acquisition of MRM. Cost of
revenues include payroll and related expenses for technicians, cost of
disposables used in providing surgical and cosmetic services, depreciation and
amortization and other expenses related to delivery of our mobile surgical
equipment rental and technical services.
Gross margin was $1,088,000 for 2002 or 43% of net revenues. Gross margins will
vary period-to-period depending upon a number of factors including mix of
services, pricing, cost of disposables consumed during such procedures,
contractual agreements and the like.
14
We began our debt restructuring efforts during the quarter ended March 31, 2002.
Such efforts resulted in a net gain on forgiveness of debt of $227,000 as of
March 31, 2002. We had no such activity during the quarter ended March 31, 2001.
Realized loss on investments was $0 in 2002 compared to a loss of $(688,000) in
2001. As discussed herein, Emergent was essentially a merchant banking firm
prior to its acquisition of MRM in July 2001. Emergent ceased such activities
concurrent with its acquisition of MRM in July 2001 in order to focus on MRM's
mobile surgical equipment rental and services business.
Net interest expense of $154,000 was incurred in 2002 compared to $0 in 2001.
Interest expense primarily relates to MRM's note and lease obligations. Net
interest expense is expected to decrease as a percentage of revenue in future
quarters as we continue our debt restructuring efforts.
Gain on disposal of property and equipment was $81,000 for the quarter ended
March 31, 2002 compared to $0 in 2001. As discussed herein, we began to wind
down our medical equipment rental business in late 2001 in order to focus
resources on development of our mobile surgical equipment rental and services
business. In this regard we began to dispose of our medical rental equipment.
Equipment with a net book value of $31,000 was sold during the quarter resulting
in net proceeds of $112,000 and a net gain of $81,000.
Other income was $88,000 in 2002 compared to $34,000 in 2001. The increase of
$54,000 in other income in 2002 primarily relates to proceeds of an insurance
settlement relating to equipment damaged in an accident during the first
quarter.
Net income (loss) was $466,000 in 2002 compared to a loss of $(1,066,000) in
2001. No provision for income taxes is provided for in 2002 due to the
availability of net operating loss carryforwards to offset against state and
Federal taxes on such income.
Liquidity and Capital Resources
Our consolidated financial statements have been prepared on a going-concern
basis that contemplates the realization of assets and satisfaction of
liabilities in the normal course of our business. During the first quarter of
2002 the Company was in default on most of its note and lease obligations due to
delinquent principal and interest payments. In order to avoid ceasing our
operations or a possible bankruptcy filing and in an effort to improve our
financial condition, during the first quarter of 2002 we began the process of
renegotiating substantially all of our outstanding debt, lease, and trade
obligations with our key creditors. As of March 31, 2002 we had renegotiated
notes and lease obligations with principal balances outstanding as of December
31, 2001 of approximately $1.1 million and have recorded net gains on
forgiveness of debt of $227,000. Further, as of December 31, 2002, we have
substantially completed our debt restructuring efforts whereby we have
renegotiated outstanding note and lease obligations with principal balances
outstanding as 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 collateralize such obligations, if applicable, and certain periodic and
monthly installments for the balance of such obligations. In connection with our
renegotiations with creditors we returned equipment with a net book value of
approximately $638,000 as of March 31, 2002. Generally, in the event of default
by the Company we are required to repay all amounts previously forgiven and all
amounts then outstanding are accelerated and become immediately due and payable.
In addition, as of March 31, 2002 and December 31, 2002 we have renegotiated
outstanding trade debt with our vendors in the amount of $30,000 and $446,000,
respectively, and have recorded net gains on forgiveness of vendor debt in the
amount of $12,000 and $335,000, respectively. As of the filing date of this
Quarterly Report on Form 10Q 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, as amended, 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 and March 31, 2002 we
15
were in default under the loan agreement and as a result all principal and
interest were accelerated and became immediately due and payable. However,
during November 2002, 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 $1,109,000 with the same lender. This Bank Line of Credit provides for
interest at the prime rate, plus 2.75%, with borrowings based upon eligible
accounts receivable as defined. The amount outstanding under the Bank Line of
Credit exceeded the eligible borrowing base as of December 31, 2001 and March
31, 2002 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 Quarterly
Report on Form 10-Q. 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 completed 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 March 31, 2002 and as of the filing date of this Form 10-Q, we were not in
compliance with certain financial covenants of such agreements. As a result, we
have classified all of the bank loan facilities as current liabilities in the
accompanying balance sheet as of March 31, 2002.
The Company had cash and cash equivalents of $653,000 at March 31, 2002. Cash
provided by operating and investing activities for the quarter ended March 31,
2002 was $387,000. Such increase in cash primarily related to net income of
$466,000, depreciation and amortization of $154,000 and proceeds from the sale
of property and equipment of $112,000, offset by total gains on forgiveness of
debt and sale of property equipment of $308,000. Cash used in financing
activities was $216,000 due to principal payments on capital lease obligations
of $78,000 and the repayment of bank overdrafts of $138,000.
Net cash used in operating activities for the three months ended March 31, 2001
was $266,000, which primarily related to the net loss of $(1,063,000) offset by
a realized loss on investments of $688,000 and an increase in accounts payable
and accrued expenses of $106,000. Net cash used in investing activities was
$175,000 that related to the purchase of investments.
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 which is included our
Annual Report on Form 10-K. For the year ended December 31, 2001, we incurred a
net loss of $(9,720,221). The net loss for 2001 included impairment charges for
property and equipment, and goodwill of $3,732,223 and $687,906, respectively.
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.
Item 3. Quantitative and Qualitative Disclosure 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
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.
16
PART II. OTHER INFORMATION
Item 1. Legal Proceedings:
Reference is made to Note 5 of the Notes to Consolidated Financial
Statements for a description of certain legal proceedings.
Item 2. Changes in Securities.
(a) Not applicable. (b) Not applicable.
(c) 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
Title of Security Number Sold Claimed conversion
Date of Sale
- -------------- ------------------ -------------- ------------------------- -------------------- ----------------------
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 (1) Options granted under This stock option 10-year Options were
2002 Stock Option Plan; plan will be granted to 11
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
forgiveness; 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 (1) 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 shortly vest in five equal
after the filing annual installments
of this Form 10-K commencing on the
17
and other required date of grant and
Exchange Act expire ten years
Reports. from date of grant.
- -------------- ------------------ -------------- ------------------------- -------------------- ----------------------
11/1/01 Common Stock 970,000 Options granted under This stock option Options vest over a
(2) 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 shortly 31, 2005.
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
- -------------- ------------------ -------------- ------------------------- -------------------- ----------------------
(1) Total options of 1,389,271 issued under the 2002 Plan were cancelled as
of December 31, 2002 due to employee terminations.
(2) Total options of 385,000 issued under the 2001 Plan were cancelled as
of December 31, 2002 due to employee terminations. In addition, the authorized
number of shares issuable under the Plan was reduced to 585,000.
(d) Not applicable.
Item 3. Defaults Upon Senior Securities:
(a) Reference is made to Note 3 in the Notes to Financial
Statements for a description of certain defaults of the
Company on most of its note and lease obligations due to
delinquent principal and interest payments.
(b) The Company is not in arreage in the payment of dividends with
respect to any class of securities.
Item 4.Submissions of Matters to a Vote of Security Holders: None
During the quarter ended March 31, 2002, no matter was
submitted to a vote of security holders.
18
Item 5. Other Information:
-----------------
On or about the filing date of this Form 10-Q for the quarter
ended March 31, 2002, the Company filed its Form 10-K for its
fiscal year ended December 31, 2001, Form 10-Q for the quarter
ended June 30, 2002 and Form 10-Q for the quarter ended
September 30, 2002. The information contained in each of the
foregoing reports which have been filed contemporaneously with
the filing of this Form 10-Q are incorporated herein by
reference and provide additional information which should be
read together with this report.
Item 6. Exhibits and Reports on Form 8-K:
(a) 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)
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).
- ---------------------------
(1) Filed as an exhibit to the Registrant's Current Report on Form 8-K,
dated January 29, 2001 and incorporated herein by reference.
(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) Incorporated by reference to the Company's Form 10-K for the fiscal
year ended December 31, 2001.
(5) Incorporated by reference to the Registrant's Form S-4 Registration
Statement filed May 8, 2001.
(b) Reports on Form 8-K.
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.
19
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
EMERGENT GROUP INC.
Date: January 27, 2003 By: /s/ Mark Waldron
--------------------------------
Mark Waldron, President and
Chief Executive Officer
Date: January 27, 2003 By: /s/ William M. McKay
--------------------------------
William M. McKay,
Chief Financial Officer
20
CERTIFICATION
I, Mark Waldron, Chief Executive Officer of the Registrant, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Emergent Group
Inc.;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by this
quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report.
Date: January 27, 2003 /s/ Mark Waldron
----------------
Mark Waldron,
Chief Executive Officer
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CERTIFICATION
I, William M. McKay, Chief Financial Officer of the Registrant, certify
that:
1. I have reviewed this quarterly report on Form 10-Q of Emergent Group
Inc.;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by this
quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report.
Date: January 27, 2003 /s/ William M. McKay
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William M. McKay,
Chief Financial Officer
22