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 Ended September 30, 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 September 30, 2002 (unaudited)
and December 31, 2001 3
Unaudited Condensed Consolidated Statements of Operations for the Three
and Nine Months Ended September 30, 2002 and 2001 4
Unaudited Condensed Consolidated Statements of Cash Flows for the Nine
Months Ended September 30, 2002 5
Notes to the Unaudited Condensed Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 13
Item 3. Quantitative and Qualitative Disclosure About Market Risk 19
Item 4. Controls and Procedures 19
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 19
Item 2. Changes in Securities 19
Item 3. Defaults Upon Senior Securities 20
Item 4. Submissions of Matters to a Vote of Security Holders 21
Item 5. Other Information 21
Item 6. Exhibits and Reports on Form 8-K 21
Signatures 22
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Emergent Group Inc. and Subsidiaries
Condensed Consolidated Balance Sheets
September 30, December 31,
2002 2001
---------------- ---------------
ASSETS (unaudited)
Current assets
Cash $ 1,091 $ 482
Accounts receivable, net 1,139 1,455
Due from related parties, net 29 38
Investment securities - 267
Inventories, net 500 545
Prepaid expenses 289 207
Income tax receivable 5 5
Assets held for sale 386 1,939
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Total current assets 3,439 4,938
Equity investment in limited liability companies 66 56
Property and equipment, net 1,551 2,000
Goodwill, net 2,880 2,880
Deposits and other assets, net 155 261
---------------- ---------------
Total assets $ 8,091 $ 10,135
================ ===============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Book overdraft - 146
Line of credit 1,109 1,109
Current portion of capital lease obligations 887 1,726
Current portion of notes payable 1,319 1,773
Convertible notes payable 100 100
Accounts payable 609 943
Accrued expenses 993 979
---------------- ---------------
Total current liabilities 5,017 6,776
Capital lease obligations, net of current portion 692 1,183
Notes payable, net of current portion 700 1,702
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Total liabilities 6,409 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)
Accumulated deficit (11,813) (11,288)
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Total shareholders' equity 1,682 474
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Total liabilities and shareholders' equity $ 8,091 $ 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
Three Months Ended Nine Months Ended
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September 30, September 30,
2002 2001 2002 2001
----------------------- ------------ -----------
Revenue $ 2,150 $ 2,770 $ 6,850 $ 2,770
Cost of goods sold 1,359 2,023 4,165 2,096
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Gross profit 791 747 2,685 674
Selling, general, and administrative expenses 948 809 2,663 1,672
----------------------- ------------ -----------
Income (Loss) from operations (157) (62) 22 (998)
Other income (expense)
Net gain on forgiveness of debt 210 - 1,260 -
Realized gain (loss) on investment securities - (930) (1,733) (2,401)
Interest expense (95) (212) (377) (212)
Equity in net earnings of investment in limited
liability companies 7 - 13 -
Gain (loss) on disposal of property and equipment (4) - 209 -
Other Income (expense), net (11) (4) 81 44
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Total other income (expense) 107 (1,146) (547) (2,569)
----------------------- ------------ -----------
Loss before provision for income taxes (50) (1,208) (525) (3,567)
Provision for income taxes - - - -
----------------------- ------------ -----------
Net loss (50) (1,208) (525) (3,567)
Other comprehensive gain (loss), net of tax
Unrealized gain (loss) on investment securities - - - 137
----------------------- ------------ -----------
Comprehensive loss $ (50) $ (1,208) $ (525) $(3,430)
======================= ============ ===========
Basic and diluted loss per share $ - $ (0.02) $ (0.01) $ (0.07)
======================= ============ ===========
Weighted-average shares outstanding 53,045 49,501 53,045 45,969
======================= ============ ===========
The accompanying notes are an integral part of these condensed financial
statements.
4
Emergent Group Inc. and Subsidiaries
Condensed Consolidated Statements of Cash Flows
Nine Months ended
September 30,
2002 2001
---------------- -----------
Cash flows from operating activities
Net loss $ (525) $ (3,567)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Gain on disposal of property and equipment (209) -
Gain on forgiveness of debt (1,260)
Realized loss on investment securities 1,733 2,401
Depreciation and amortization 457 888
Write-off of loan fees, net 88 -
Compensation expense on issuance of stock options - 14
Equity in net gain of investment in limited liability companies (13) -
Allowance for doubtful accounts 5 -
(Increase) decrease in assets
Accounts receivable 1,565 107
Inventory 45 (121)
Due from related party (879) 467
Prepaid expenses (83) (53)
Deposits and other assets 5 (55)
Increase (decrease) in liabilities
Accounts payable (302) -
Accrued expenses and other, net 225 (695)
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Net cash provided by (used in) operating activities 852 (614)
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Cash flows from investing activities
Investment in limited liability companies (26) -
Purchase of property and equipment (38) (32)
Proceeds from the sale of property and equipment 293 -
Purchase of investments, net (656)
Proceeds from the sale of investments 267 500
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Net cash provided by (used in) investing activities 496 (188)
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Cash flows from financing activities
Net change in book overdraft (146) -
Borrowings on notes payable - 369
Payments on notes payable (288) (594)
Payments on capital lease obligations (305) (105)
Advance on stock subscriptions 598
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Net cash provided by (used in) financing activities (739) 268
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Net increase (decrease) in cash 609 (534)
Cash, beginning of period 482 751
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Cash, end of period $ 1,091 $ 217
================ ===========
Supplemental disclosures of cash flow information:
Interest paid and/or forgiven $ 377 $ 243
================ ===========
The accompanying notes are an integral part of these condensed financial
statements.
5
Acquisition of MRM:
Fair value of assets acquired $ - $ 11,814
Less: issuance of common stock and options - (3,561)
Notes payable and liabilities assumed $ - $ 8,253
================ ===========
Supplemental disclosures of non-cash investing and financing activities -
During the nine months ended September 30, 2002 the Company billed $879,000 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.
6
EMERGENT GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
1. BUSINESS
Emergent Group Inc. ("Emergent") is the parent company of Medical Resources
Management, Inc. ("MRM"), its wholly owned and only operating subsidiary.
Emergent acquired MRM in July 2001 as per an Agreement and Plan of
Reorganization of Merger ("Merger Agreement"), dated January 23, 2001. MRM
primarily conducts its business through its wholly owned subsidiary
Physiologic Reps ("PRI"). Emergent, MRM and PRI are referred to collectively
hereinafter as the "Company." PRI is a provider of mobile surgical equipment
on a fee for service basis to hospitals, surgical care centers and other
health care providers. PRI also provides technical support required to
ensure the equipment is working correctly. PRI provides a limited amount of
non-surgical equipment on a rental basis to hospitals and surgery centers,
although PRI 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 and nine months ended
September 30, 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
September 30, 2002 and December 31, 2001 the Company had a working capital
deficits of $1.6 million and $1.8 million, respectively. For the three and
nine months ended September 30, 2002, the Company reported net losses of
$(50,000) and $(525,000), respectively. There can be no assurances that once
the Company completes its efforts to restructure its outstanding debt
obligations, as discussed herein, that it will achieve positive operating
results in future periods. The financial statements do not include any
adjustments to reflect the possible future effects on the recoverability and
classification of assets or the amounts and classification of liabilities
that may result from the outcome of this uncertainty.
Principles of Consolidation
The condensed consolidated financial statements include the accounts of all
majority-owned subsidiaries. All significant intercompany transactions have
been eliminated in consolidation.
Use of Estimates
The preparation of the condensed consolidated financial statements in
accordance with generally accepted accounting principles requires management
to make estimates and assumptions that affect the reported amounts of assets
and liabilities and disclosure of contingent assets and liabilities at the
date of the financial statements and the reported amounts of income (loss)
and expenses during the reporting period. Actual results could differ
significantly from those estimates.
7
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 and nine months ended September 30, 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
Accounting Research Bulletin No. 51, "Consolidated Financial Statements," to
eliminate the exception to consolidation for a subsidiary for which control
8
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 and second quarters 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 September 30, 2002 we had renegotiated notes and
lease obligations with principal balances outstanding as of December 31,
2001 of approximately $3.4 million and have recorded net gains on
forgiveness of debt of $925,000. 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 $1.5 million
9
during the nine months ended September 30, 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 September 30, 2002 and
December 31, 2002, we have renegotiated outstanding trade debt with our
vendors in the amount of $446,000 and have recorded net gains on forgiveness
of vendor debt in the amount of $335,000. 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 September 30, 2002 we had a bank loan (the "Bank Term Loan") outstanding
in the amount of $650,000. 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 September
30, 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 September 30, 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 September 30, 2002, nor 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 September 30, 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 September 30, 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 nine months ended September 30, 2001. These pro
forma results of operations give effect to the acquisition as if it occurred
as of January 1, 2001 and include MRM and its affiliates operating results
for that period. All intercompany transactions have been eliminated.
Pro Forma Results of Operations
Nine Months
Ended
September 30,
2001
------------------
($ in thousand except loss per share)
Net revenues $ 8,477
Net loss $(5,609)
Basic and diluted loss per share $ (0.11)
Pro forma weighted average shares 51,603
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.
10
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 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 make sixty (60) monthly
payments of $18,013 for a total of $1,080,781. In the event the Company
fails to make all required payments when due, and an event of default occurs
which is not cured, the Company would owe General Electric the original
amounts due at the date of settlement under 39 personal sales contracts. The
Company is current in making all required payments under the settlement
agreement.
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
11
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 September 30, 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.
6. 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. In addition, total options to purchase 268,026 were issued to
two consultants as the same terms as those issued to employees.
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.
7. 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. During
the nine months ended September 30, 2002, the Company has accrued $10,000 with
regard to these services rendered.
During the nine months ended September 30, 2002 the Company billed $879,000
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.
8. SUBSEQUENT EVENTS
The Company issued to employees options to purchase 351,000 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.
12
The Company issued options to purchase 2,810,000 shares of common stock under
the 2002 Plan to various consultants. The options vest between December 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 Financial
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 as of December 31, 2002.
The Company cancelled options to purchase 351,343 shares of common stock under
the 1996 Plan due to employee terminations as of December 31, 2002.
The Company cancelled options to purchase 370,000 shares of common stock under
the 2001 Plan due to employee terminations as of December 31, 2002.
The Company continued its debt re-negotiations with capital lease and note
payable holders, resulting in the forgiveness of $954,000 of debt and $216,000
of accrued interest charges. In connection with these transactions, the Company
recorded a net gain on forgiveness of debt of $1,170,000.
The Company sold medical rental, and transportation equipment with an aggregate
net book value of $420,000 and recognized a net loss of $74,000 after sales
commissions.
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
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.
13
Overview
Emergent Group Inc. ("Emergent") is the parent company of Medical Resources
Management, Inc. ("MRM"), its wholly owned and only operating subsidiary. MRM
primarily conducts its business through its wholly owned subsidiary Physiologic
Reps ("PRI"). Emergent Group Inc., MRM and PRI are referred to collectively
hereinafter as the "Company." All references to MRM include PRI unless the
context indicates otherwise. PRI is a provider of mobile surgical equipment, on
a fee for service basis to hospitals; surgical care centers, and other health
care providers. PRI provides mobile lasers and other surgical equipment with
technical support required to ensure the equipment is working correctly. PRI
also provides a limited amount of non-surgical equipment on a rental basis to
hospitals and surgery centers, although PRI is winding down this area of
business in order to focus on its core surgical equipment rental/services
business
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.
14
Results of Operations
The following table sets forth certain selected unaudited condensed consolidated
statement of operations 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 Emergent did not have
any revenues for the six-month period ended June 30, 2001. Emergent did not have
an operating business until the acquisition of MRM in July 2001.
($ in thousand)
Three Months Ended Nine Months Ended
September 30, September 30,
--------------------------- -------------------------
2002 % 2001 % 2002 % 2001 %
---------- ---------- --------- ----------
Revenue $ 2,150 100% $2,770 100% $ 6,850 100% $ 2,770 100%
Cost of goods sold 1,359 63% 2,023 73% 4,165 61% 2,096 76%
------- ---- ------- ---- -------- ---- --------- ----
Gross profit 791 37% 747 27% 2,685 39% 674 24%
Selling, general, and administrative expenses 948 44% 809 29% 2,663 39% 1,672 60%
------- ---- ------- ---- -------- ---- --------- ----
Income (Loss) from operations (157) -7% (62) -2% 22 0% (998) -36%
------- ---- ------- ---- -------- ---- --------- ----
Other income (expense)
Net gain on forgiveness of debt 210 10% - - 1,260 18% - -
Realized gain (loss) on investment securities - 0% (930) -34% (1,733) -25% (2,401) -87%
Interest expense (95) -4% (212) -8% (377) -6% (212) -8%
Equity in net earnings of investment in limited
liability companies 7 0% - - 13 0% - -
Gain on disposal of property and equipment (4) 0% - - 209 3% - -
Other Income (expense), net (11) -1% (4) 0% 81 1% 44 2%
------- ---- ------- ---- -------- ---- --------- ----
Total other income (expense) 107 5% (1,146) -41% (547) -8% (2,569) -93%
------- ---- ------- ---- -------- ---- --------- ----
Loss before provision for income taxes (50) -2% (1,208) -44% (525) -8% (3,567) -129%
Provision for income taxes - - - - - - - -
------- ---- ------- ---- -------- ---- --------- ----
Net loss $ (50) -2% $(1,208) -44% $ (525) -19% $ (3,567) -129%
======= ==== ======== ==== ======== ==== ========= =====
Comparison of the Three Months Ended September 30, 2002 to September 30, 2001
We generated revenues of $2,150,000 in 2002 compared to $2,770,000 in 2001.
Revenues for 2002 and 2001 were generated by MRM, which Emergent acquired in
July 2001. The decrease in revenues of $620,000 in 2002 compared to 2001
primarily relate to decreases in cosmetic and surgical revenues of $366,000, and
medical rental revenues of $222,000. Revenues from surgical and cosmetic
services represented approximately 78% and 16%, respectively, of total revenues
for 2002 and 68% and 18% for 2001, respectively. Revenues from medical equipment
rentals comprised approximately 5% and 11% of revenues for 2002 and 2001,
respectively. 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 service business.
Cost of revenues was $1,359,000 or 63% of revenues in 2002 compared to
$2,023,000 or 73% of revenues in 2001. Cost of revenues include payroll and
related expenses for technicians, cost of disposables used in providing surgical
and cosmetic services, depreciation and amortization and other expenses
primarily related to delivery of our mobile surgical equipment rental and
technical services. The decrease in cost of revenues of $664,000 in 2002 is
primarily related to the decline in revenues as discussed above, and a decrease
of $354,000 in depreciation expense related to MRM's property and equipment. As
discussed elsewhere in the Form 10-Q, the Company recognized an impairment
charge of approximately $3.7 million as of December 31, 2001 in connection with
the revaluation of its general rental equipment The Company decided to exit the
medical rental business in late 2001 in order to focus on its core mobile
surgical equipment rental and services business. The write down of such
equipment has resulted in lower depreciation charges in 2002.
15
Gross margin was $791,000 in 2002 or 37% of net revenues compared to $747,000 in
2001 or 27% of 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. The
improvement in gross margin in 2002 is generally related to lower overall costs
of revenues as a result of cost cutting measures implemented in the latter part
of 2001 and lower depreciation expenses in 2002, as discussed in the preceding
paragraph.
We began our debt restructuring efforts during the first quarter of 2002. Such
efforts resulted in a net gain on forgiveness of debt of $210,000 for the
quarter ended September 30, 2002. We had no such activity during the quarter
ended September 30, 2001.
Realized loss on investments was $0 in 2002 compared to a loss of $930,000 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. The realized loss in
2001 relates to investments made by Emergent in connection with such merchant
banking activities in 2000.
Net interest expense of $95,000 was incurred in 2002 compared to $212,000
in 2001. Interest expense primarily relates to MRM's note and lease obligations.
The decrease in net interest expense is principally related to a decrease in our
outstanding debt and lease obligations as a result of debt restructuring efforts
initiated in early 2002, as discussed elsewhere in this Form 10-Q. Net interest
expense is expected to decrease as a percentage of revenue in future quarters as
we continue our debt restructuring efforts.
The loss on disposal of property and equipment was $4,000 for the quarter ended
September 30, 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 $29,000 was sold during the quarter resulting
in net proceeds of $25,000 and a net loss of $4,000.
Other expense for 2002 was $11,000 compared to $4,000 in 2001. Other income and
expense include such non-recurring items as insurance proceeds/refunds, sales
tax refunds and other miscellaneous income and expense amounts.
Net loss was $(50,000) in 2002 compared to a loss of $(1,208,000) in 2001. No
provision for income taxes is provided for in 2002 and 2001 due to the net
losses incurred.
Comparison of Nine Months Ended September 30, 2002 to September 30, 2001
We generated revenues of $6,850,000 in 2002 compared to $2,770,000 in 2001.
Revenues for 2002 and 2001 were generated by MRM, which Emergent acquired in
July 2001. The increase in revenues of $4,080,000 in 2002 compared to 2001
primarily relate to the fact that revenues for 2001 include MRM's operations for
the three month period from July 1, 2002 to September 30, 2001 versus nine
months of operations in 2002. Revenues from surgical and cosmetic services
represented approximately 73% and 18%, respectively, of total revenues for 2002
and 68% and 18% for 2001, respectively. Revenues from medical equipment rentals
comprised approximately 7% and 11% of revenues for 2002 and 2001, respectively.
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 service business.
Cost of revenues was $4,165,000 or 61% of revenues in 2002 compared to
$2,096,000 in 2001 or 76% of revenues. Cost of revenues include payroll and
related expenses for technicians, cost of disposables used in providing surgical
and cosmetic services, depreciation and amortization and other expenses
primarily related to delivery of our mobile surgical equipment rental and
technical services. The increase in cost of revenues of $2,069,000 in 2002
compared to 2001 primarily relates to the fact that such costs include MRM's
operations for nine months in 2002 versus a three-month period in 2001.
16
Gross margin was $2,685,000 in 2002 or 39% of revenues compared to $674,000 in
2001 or 24% 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. The
improvement in gross margin in 2002 is generally related to lower overall costs
of revenues as a result of cost cutting measures implemented in the latter part
of 2001 and lower depreciation expenses in 2002, as discussed herein.
We began our debt restructuring efforts during the first quarter of 2002. Such
efforts resulted in a net gain on forgiveness of debt of $1,260,000 for the nine
months ended September 30, 2002. We had no such activity during the quarter
ended September 30, 2001.
Realized loss on investments was $1,733,000 in 2002 compared to a loss of
$2,401,000 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. The realized
losses in 2002 and 2001 relate to investments made by Emergent in connection
with such merchant banking activities in 2000.
Net interest expense was $377,000 in 2002 compared to $212,000 in 2001. Interest
expense primarily relates to MRM's note and lease obligations. The increases in
net interest expense is principally related to the fact the 2002 includes MRM's
operations for a nine month period versus a three month period in 2001. Net
interest expense is expected to decrease as a percentage of revenue in periods
as we continue our debt restructuring efforts.
The gain on disposal of property and equipment was $209,000 for the nine months
ended September 30, 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 in early 2002. Equipment with a net book value of $55,000 was sold
during the nine month period ended September 30, 2002, resulting in net proceeds
of $267,000 and a net gain of $212,000.
Other income was $81,000 for the nine months ended September 30, 2002 compared
to $44,000 in 2001. Other income and expense include such non-recurring items as
insurance proceeds/refunds, sales tax refunds and other miscellaneous income and
expense amounts.
Net loss was $(525,000) in 2002 compared to a loss of $(3,567,000) in 2001. No
provision for income taxes is provided for in 2002 and 2001 due to the net
losses incurred.
Liquidity and Capital Resources
The accompanying condensed consolidated financial statements have been prepared
on a going-concern basis that contemplates the realization of assets and
satisfaction of liabilities in the normal course of our business. During the
nine months ended September 30, 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 September 30, 2002 we
had renegotiated notes and lease obligations with principal balances outstanding
as of December 31, 2001 of approximately $3.4 million and have recorded net
gains on forgiveness of debt of $925,000. 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
17
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 $1.5 million as of September 30, 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 September 30, 2002 and December 31, 2002 we have
renegotiated outstanding trade debt with our vendors in the amount of $446,000
and have recorded net gains on forgiveness of vendor debt in the amount of
$335,000 at the end of each such period. 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 September 30, 2002 we had a bank loan (the "Bank Term Loan") outstanding in
the amount of $650,000. 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 September 30, 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
September 30, 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 September 30, 2002, nor 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 September 30, 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 September 30, 2002.
The Company had cash and cash equivalents of $1,091,000 at September 30, 2002.
Cash provided by operating activities for the nine months ended September 30,
2002 was $852,000. Cash from operations includes a non-cash realized loss on
investment securities of $1,733,000, depreciation and amortization expense of
$457,000 and a decrease in accounts receivable, offset by the net loss of
$(525,000), gain on disposal of property and equipment of $209,000 and gain on
forgiveness of debt of $1,260,000. Cash provided by investing activities was
$496,000 primarily from proceeds from the sale of property and equipment of
$293,000 and from the sale of investments of $267,000. Cash used in investing
activities was $739,000, which principally related to payments on debt and lease
obligations of $593,000 and the repayment a bank overdraft of $146,000.
The Company had cash and cash equivalents of $217,000 at September 30, 2001.
Cash used in operating activities was $614,000. This was primarily the result of
the net loss of $(3,567,000) and a decrease in accounts payable and accrued
expenses of $695,000, offset by write-downs of investments of $2,401,000 and
depreciation and amortization expense of $888,000. Net cash used in investing
activities was $188,000 related to the purchase of investments of $656,000
offset by proceeds from the sale of investments of $500,000. Net cash provided
by financing activities was $268,000 related to cash received from stock
subscriptions of $598,000 and borrowings under notes payable of $369,000, offset
by total principal payments on long-term debt and lease obligations of $699,000.
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 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.
18
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
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 4. Controls and Procedures
The Company maintains disclosure controls and procedures that are designed to
ensure that information required to be disclosed in the Company's Exchange Act
reports is recorded, processed, summarized and reported within the time periods
specified in the SEC's rules and forms, and that such information is accumulated
and communicated to the Company's management, including its Chief Executive
Officer and Chief Financial Officer, as appropriate, to allow timely decisions
regarding required disclosure based closely on the definition of "disclosure
controls and procedures" in Rule 13a-14(c). In designing and evaluating the
disclosure controls and procedures, management recognized that any controls and
procedures, no matter how well designed and operated, can provide only
reasonable assurance of achieving the desired control objectives, and management
necessarily was required to apply its judgment in evaluating the cost-benefit
relationship of possible controls and procedures. Within 90 days prior to the
date of this report, the Company carried out an evaluation, under the
supervision and with the participation of the Company's management, including
the Company's Chief Executive Officer and the Company's Chief Financial Officer,
of the effectiveness of the design and operation of the Company's disclosure
controls and procedures. Based on the foregoing, the Company's Chief Executive
Officer and Chief Financial Officer concluded that the Company's disclosure
controls and procedures were effective. There have been no significant changes
in the Company's internal controls or in other factors that could significantly
affect the internal controls subsequent to the date the Company completed its
evaluation. Therefore, no corrective actions were taken.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings:
Reference is made to Note 5 of the Notes to Condensed
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:
19
- -------------- ------------------ -------------- ------------------------- -------------------- ----------------------
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
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
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
Statement shortly December 31, 2005.
after the filing
of this Form 10-K
and other required
Exchange Act
Reports.
20
- -------------- ------------------ -------------- ------------------------- -------------------- ----------------------
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 September 30, 2002, no matter was
submitted to a vote of security holders.
Item 5. Other Information:
On or about the filing date of this Form 10-Q for the quarter ended September
30, 2002, the Company filed its Annual Report on 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 March 31, 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)
21
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.
No reports on Form 8-K were filed during the quarter ended September 30,
2002.
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
22
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;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure control and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entitles, particularly
during the period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our evaluation
as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed,
based on our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent functions):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in
this quarterly report whether there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: January 27, 2003 /s/ Mark Waldron
----------------
Mark Waldron,
Chief Executive Officer
23
CERTIFICATION
I, William M. McKay, Chief Financial Officer of the Registrant, certify
that:
1. I have reviewed this quarterly report on Form 10-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;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure control and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entitles, particularly
during the period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our evaluation
as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed,
based on our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent functions):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in
this quarterly report whether there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: January 27, 2003 /s/ William M. McKay
--------------------
William M. McKay,
Chief Financial Officer
24