SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
{X} ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2002
Commission File Number: 0-21475
EMERGENT GROUP INC.
----------------------
(Exact name of Registrant as specified in its charter)
Nevada 93-1215401
- --------------------------------------------------------------------------------
(State of jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
932 Grand Central Avenue
Glendale, California 91201
- --------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (818) 240-8250
--------------
Former address: 375 Park Avenue, New York, NY 10152
- --------------------------------------------------------------------------------
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: Common Stock,
$.001 Par Value
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days. Yes X . No ___.
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K (ss.229.405 of this chapter) is not contained herein,
and will not be contained, to the best of Registrant's knowledge, in definitive
proxy or information statements incorporated by reference in part III of this
Form 10-K or any amendment to this Form 10-K [ ].
As of February 28, 2003, the number of shares held by non-affiliates
was approximately 31,275,140 shares. Due to the limited and sporadic trading of
the Company's Common Stock in the over-the-counter market, no estimate is
provided of the value of the Company's Common Stock held by non-affiliates since
such information would not be meaningful.
The number of shares outstanding of the Registrant's Common Stock, as
of March 25, 2003, was 67,357,827.
FORWARD-LOOKING STATEMENTS
We believe this annual report contains "forward-looking statements"
within the meaning of the Private Securities Litigation Reform Act of 1995.
These statements are subject to risks and uncertainties and are based on the
beliefs and assumptions of our management, based on information currently
available to our management. When we use words such as "believes," "expects,"
"anticipates," "intends," "plans," "estimates," "should," "likely" or similar
expressions, we are making forward-looking statements. Forward-looking
statements include information concerning our possible or assumed future results
of operations set forth under "Business" and/or "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
Forward-looking statements are not guarantees of performance. They
involve risks, uncertainties and assumptions. Our future results and stockholder
values may differ materially from those expressed in the forward-looking
statements. Many of the factors that will determine these results and values are
beyond our ability to control or predict. Stockholders are cautioned not to put
undue reliance on any forward-looking statements. For those statements, we claim
the protection of the safe harbor for forward-looking statements contained in
the Private Securities Litigation Reform Act of 1995. For a discussion of some
of the factors that may cause actual results to differ materially from those
suggested by the forward-looking statements, please read carefully the
information under "Management's Discussion and Analysis of Financial Condition
and Results of Operations--Risk Factors." In addition to the Risk Factors and
other important factors discussed elsewhere in this annual report, you should
understand that other risks and uncertainties and our public announcements and
SEC filings could affect our future results and could cause results to differ
materially from those suggested by the forward-looking statements.
PART I
Item 1. Business
THE COMPANY
Emergent Group Inc. ("Emergent") is the parent company of Medical
Resources Management, Inc. ("MRM"), its wholly owned and only operating
subsidiary. MRM was acquired by Emergent in July 2001. MRM primarily conducts
its business through its wholly owned subsidiary Physiologic Reps ("PRI").
Emergent, MRM and PRI are referred to collectively hereinafter as the "Company."
PRI is a provider of surgical equipment on a fee for service basis to hospitals,
surgical care centers and other health care providers. PRI serves both large and
small health care providers, including: 1) smaller independent hospitals and
physicians who cannot afford to buy surgical equipment because of budget
constraints or cannot justify buying due to limited usage; and 2) larger,
well-financed hospitals that may be able to purchase equipment for use in their
own facility but may choose not to because reimbursement or utilization rates
for many procedures do not warrant a capital commitment. Additionally,
infrequent utilization may not justify the cost of training and retention of
technicians to operate such equipment. PRI is also able to provide its
technicians to support hospital-owned surgical equipment on a fee for service
basis, thus improving efficiency and reducing costs for the hospital. Reduced
operating costs and improved flexibility for hospitals are elements of the PRI
value proposition to its customers.
PRI makes mobile surgical services available to its customers by
providing surgical equipment on a per procedure basis to hospitals, outpatient
surgery centers, and physician offices. PRI provides mobile lasers and other
2
surgical equipment to customers along with technical support required to ensure
the equipment is working correctly. PRI also provides a limited amount of
non-surgical medical equipment on a rental basis to hospitals and surgery
centers. This non-surgical equipment is used throughout such facilities to
supplement their in-house resources.
PRI's mobile surgical services focus on two areas of the health care
industry: surgical care and cosmetic surgery. In the surgical care area,
physicians can perform minimally invasive surgery at hospitals renting PRI's
laser or other equipment. For cosmetic surgery, physicians benefit from having
different laser technologies available to offer to their patients without a
significant capital investment. In both instances, physicians and hospitals
receive PRI's technical support and expertise that is provided with the
equipment, allowing the staff to concentrate on their patient care duties
without the distraction of setup and running equipment.
PRI has over 600 active surgical service accounts in California, Utah,
Colorado and Nevada and experiences a high rate of repeat business from the
hospitals, surgery centers and doctors it serves. The market encompasses many
disciplines including plastic/cosmetics surgery, dermatology, orthopedic
surgery, otolaryngology, urology, obstetrics, gynecology, ophthalmology, general
surgery, podiatry and dentistry. Equipment is increasingly becoming more
specialized to specific medical procedures, and technical training of the
physician regarding the use of equipment is an integral part of PRI's business.
PRI has begun building a healthcare distribution network that allows
physicians, hospitals and healthcare facilities access to new medical equipment
without the expense of acquisition. PRI is able to help manufacturers bring
advanced medical technologies to market by using its distribution channels and
relationships with doctors, hospitals and healthcare facilities to introduce
selected additional surgical products and services to end users on a `fee per
procedure' model. PRI had revenues of approximately $9.1 million in 2002,
including general medical equipment rental revenues of $580,090, which is being
discontinued, and assisted in more than 13,000 surgical procedures. By making
new technologies available to physicians PRI hopes to become a distributor of
innovative medical device and support services to the healthcare community early
in a product's life cycle.
ACQUISITIONS
Acquisition of Medical Resources Management, Inc.
In July 2001, Emergent completed its acquisition of MRM as per an
Agreement and Plan of Reorganization of Merger (The "Merger Agreement") dated
January 23, 2001. As required by the terms of the Merger Agreement, Emergent
exchanged 5,633,667 shares of its Common Stock, which represented 11% of the
total post-merger outstanding shares, for all the issued and outstanding common
stock of MRM at a conversion ratio of 0.37 shares of Emergent's Common Stock per
share of MRM Common Stock. Based on the average of Emergent's closing stock
price for the 10 days prior to the acquisition, the purchase price for MRM was
$3,897,009 not including assumed debt. Additionally, on the effective date of
the Merger, all outstanding MRM options became options to purchase 564,786
shares of Emergent's Common Stock. The options exchanged had a fair value of
approximately $316,000. Emergent assumed approximately $13,802,071 in existing
MRM debt, capital lease obligations, and other liabilities. As of time of the
merger, the debt obligations had interest rates ranging from 6.3% to 25.5% and
3
were repayable over a one to five year period. Emergent's transaction costs
incurred in completing the merger amounted to approximately $336,000. Goodwill
of approximately $3,421,000 resulted from the merger. The transaction has been
accounted for under the purchase method of accounting. MRM is headquartered in
Glendale, California and operates as a wholly owned subsidiary of Emergent.
Following the merger, Emergent relocated its principal executive office from New
York City, New York to Glendale, California. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
Transfer of Equity with Dynamic International, Ltd. and Formation of
Emergent Group Inc.
Emergent Ventures, LLC ("Ventures"), a Delaware Corporation, was formed
on March 8, 2000 to invest primarily in global private equity opportunities in
information technology, health care and medical technology companies. Ventures'
equity capitalization consisted of a contribution of securities by Emergent
Management Company, LLC ("Manager"), for a fifty-eight percent (58%) interest in
Ventures and a contribution of $7,500,000 in cash by other members in return for
the remaining forty-two percent (42%) interest in Ventures.
On August 31, 2000, Ventures consummated the transactions contemplated
by an Equity Transfer Transaction ("Transfer"), all pursuant to an Equity
Transfer and Reorganization Agreement ("Agreement"), by and among Emergent,
formerly named Dynamic International, Ltd. ("Dynamic Ltd.") and Ventures.
Pursuant to and in accordance with the Agreement and immediately prior to the
consummation of the Transfer, Dynamic Ltd. transferred all of its assets and
liabilities (other than outstanding bank debt in the amount of $250,000) to a
wholly owned subsidiary of Dynamic Ltd., named Dynamic International, Inc.
Dynamic International, Inc. acquired the transferred assets, assumed the
remaining liabilities and indemnified Dynamic Ltd. against any liabilities
relating to or arising out of the transferred assets and the assumed
liabilities. In conjunction with the Transfer, Dynamic International, Inc. was
spun-off from Dynamic Ltd. as a separate entity to its stockholders on a pro
rata basis. Pursuant to the Agreement, Ventures contributed substantially all of
its assets to Dynamic Ltd. in exchange for the issuance of 39,755,178 shares of
Dynamic Ltd. common stock to the members of Ventures. Dynamic Ltd. subsequently
changed its name to Emergent Group Inc. ("Emergent") on November 6, 2000. The
Company retained Dynamic Ltd.'s State of Incorporation in Nevada. For financial
accounting purposes, the Transfer was accounted for as a re-capitalization by
Ventures as the accounting acquiror and with Dynamic Ltd. as the accounting
acquiree. After the Transfer, the former members of Ventures became the
beneficial owners of approximately 39,755,178 shares of Dynamic Ltd.'s common
stock, representing approximately ninety percent (90%) interest in Dynamic Ltd.
with voting control of the Emergent resting in the hands of Manager. Each of the
Directors of Dynamic Ltd. resigned immediately prior to the consummation of the
Transfer or within a few months thereafter. The beneficial owners of the Manager
were elected as directors and executive officers of Emergent. Emergent recorded
goodwill as a result of the Transfer amounting to $250,000. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
Prior to Emergent's acquisition of MRM it was a merchant banking firm.
Merchant banks are essentially in the business of finding opportunities and
sources of funding and, with investors' money and their own capital, financing
growth and facilitating transactions for, and among their clients. The
distinguishing characteristics of a merchant bank are that it commits its own
capital, or the capital of its principals, to a transaction, either in the form
of debt, typically short-term bridge financing, or equity, and that it generally
receives an equity position in the client company as part or all of the
4
compensation for its services. Since July 2001, Emergent ceased its merchant
banking activities to concentrate its management and resources on developing the
mobile surgical equipment rental and services business of MRM.
PRODUCTS AND SERVICES
PRI's technicians provide surgical equipment and associated technical
services support to physicians and operating room ("O.R.") personnel in
hospitals, surgical care centers and other health-related facilities on a
per-procedure basis. Mobile surgical services are ordered from 24 hours to
several months in advance of surgery, and re-confirmed with the customer the day
before the medical procedure by PRI's scheduling department. Upon arrival at the
customer site, PRI's technician posts required warning notices outside the O.R.,
issues safety equipment to the O.R. staff, provides any disposable materials
needed, and supplies equipment certifications and/or documentation required for
hospital record keeping. The technician is responsible for setting the
physician's requested power settings on rented equipment and for helping to
maintain a safe environment with regard to the rental equipment during the
surgical procedure. Technician-only services are made available to hospitals and
surgery facilities, especially those with fluctuating occupancy levels.
Customers find that outsourcing of trained technicians without renting equipment
to be a cost-effective alternative to training and staffing their own personnel.
PRI's laser equipment encompasses CO2, Nd:YAG, Pulse Dye, KTP/YAG and
Holmium YAG laser technology. PRI has established working relationships with
leading laser manufacturers and is sometimes an introducer of laser technology
in its markets. PRI reviews developments in the medical field to stay abreast of
new and emerging technologies and to obtain new surgical medical equipment. In
this regard, PRI has in recent years added equipment to provide for services in
cryosurgery, advanced visualization technology, prostrate surgery, and
brachytherapy. The Company strives to develop and expand strategic relationships
in order to enhance its product lines and improve its access to new medical
devices.
PRI also provides its customers with disposable products and/or
attachments that are needed for a given medical procedure. These disposable
products are primarily related to laser equipment rentals requiring fibers,
tubing, laser drapes and masks. Customers may benefit from this added service by
lowering their inventory levels of infrequently used products.
In the past PRI has offered a broad range of general medical equipment
to its customers. PRI's inventory of equipment included an extensive selection
of devices serving a broad range of hospital departments and needs such as adult
and infant ventilators, carbon dioxide monitors, defibrillators, feeding pumps,
PCA pumps, electro cardiogram monitors, infusion pumps, neo-natal monitors, and
pulse oximeters. In late 2001 the Company decided to discontinue this area of
business in order to focus on its core surgical equipment rental/services
business. In connection with the phase-out of the general medical equipment
rental business and after review of its other operating assets, the Company
recorded impairment charges for property and equipment, and goodwill of
$3,732,223 and $687,906, respectively, as of December 31, 2001. "See
Management's Discussion and Analysis of Financial Condition and Results of
Operations."
MARKETING AND SALES
PRI markets its mobile surgical equipment and services business largely
through the efforts of its direct sales force which focuses on providing
high-quality service and products to its customers and on obtaining new customer
accounts. In conjunction with its sales efforts, PRI sponsors educational
seminars on new laser and other surgical equipment technologies which are
attended by its current and prospective customers. These seminars allow PRI's
direct sales force to introduce new technologies and procedures to its customer
base early in the product's life cycle.
5
PRI's sales representatives attend national and regional physician
medical seminars and trade shows to present PRI's services and products. PRI
also markets its products and services through direct mail marketing of
literature and promotional materials which describe PRI's complete range of
surgical equipment and services to hospitals, surgery centers and physicians.
MARKETS
PRI currently serves customers in California, Colorado, Utah and
Nevada. Each location is staffed with full-time technicians and sales
representatives. During the year ended December 31, 2002 and for the period from
July 2001 (date of acquisition) to December 31, 2001, no customer accounted for
more than 10% of PRI's total sales.
Hospital Mobile Laser/Surgical Services
PRI provides mobile laser/surgical services to customers in each market
served. Each location is staffed with full-time trained technicians and sales
representatives, and is equipped with a variety of surgical equipment to meet
customer needs. During the year ended December 31, 2002 , PRI performed over
13,000 procedures company-wide and revenues from our mobile medical equipment
and services business comprised approximately 75% of our total revenues. We
believe that revenue from our surgical related services will continue to
comprise the majority of our revenues in the foreseeable future.
6
Cosmetic Mobile Laser/Surgical Services
The cosmetic laser business is primarily physician office based. This
market is characterized by rapid changes in specific techniques as new
technology emerges. Recently, cosmetic laser skin resurfacing surgery has shown
significant growth, however, price competition is a constant challenge from
smaller start-up companies. Recent legislation in California and some other
states restricting anesthesia in doctor offices has redirected some of this
cosmetic surgery to hospitals and surgery centers where PRI has existing
customer relationships and the ability to compete more effectively. For the
years ended December 31, 2002 and 2001, revenues from our cosmetic laser
business comprised approximately 17% and 18%, respectively, of our total
revenues.
General Medical Equipment, Rentals
PRI entered the general equipment rental market several years ago.
However, due to lower margins and increased competition and its focus on the
higher margin mobile surgical services business, MRM started phasing out its
general equipment rental business in late 2001 and is in the process of selling
its remaining general medical rental equipment assets.
INVESTMENTS
Investments In Limited Liability Companies
In connection with expanding its business in certain commercial and
geographic areas, PRI will help to form Limited Liability Companies ("LLCs") in
which it will acquire a minority interest and offer the remaining interest to
physicians and other qualified investors. These LLCs acquired certain equipment
for use in their respective business activities which generally focus on
cosmetic and surgical procedures. In prior years, PRI helped to form and
subsequently acquired a minority equity interests in various LLCs in Utah,
Colorado and California and holds minority interest in seven LLCs as of December
31, 2002. PRI helped to form one new LLC during the year ended December 31, 2002
whereby the LLC raised $198,800 in total capital of which PRI contributed
$26,250. In addition, PRI sold certain medical equipment to the LLC for
$145,000, plus sales tax and recorded a net gain on the sale of $118,734 in
2002, which is included in the gain on sale of assets in the accompanying
statement of operations. The Company utilizes the equity method of accounting
for its investments in the various LLCs. For the year ended December 31, 2002
and the period ended December 31, 2001 the Company recorded equity in earnings
(losses) of $(5,508) and $26,773, respectively, from its ownership interest in
such LLCs. In addition, PRI and its affiliates provide operating and
administrative services to the LLCs. For the year ended December 31, 2002 and
the period ended December 31, 2001 the Company earned fees for management,
operational and other services of $1,191,280 and $901,769, respectively. In
addition, PRI billed such LLCs $208,341 for reimbursable selling and general and
administrative expenses incurred during the year ended December 31, 2002. The
balances due from the LLCs at December 31, 2002 and 2001 was $121,543 and
$38,268, which is recorded under "due from related parties" in the accompanying
consolidated balance sheets. PRI intends to withdraw from five of these LLCs
during 2003 due to less than expected operating performance by these entities.
In connection therewith, as of December 31, 2002 PRI has recorded an allowance
for doubtful accounts of $73,568 for estimated uncollected receivables from one
such LLC.
7
Other Investments
As discussed herein, prior to Emergent's acquisition of MRM in July
2001 it acted as a merchant banking firm seeking opportunities and sources of
funding and, with investors' money and/or Emergent's own capital, financing
expected growth of its clients or facilitating transactions for them. During the
course of these activities Emergent's largest investment of $2,000,000 was made
in March 2000 in the securities of Stonepath Group Inc. ("Stonepath") (formerly
Net Value Holdings Inc.), an investment made on Emergent's behalf by a related
party. As of December 31, 2002; 2001 and 2000, the Company recognized realized
and unrealized gains (losses) on this investment of $(1,732,573); $175,760, and
$(1,908,333), respectively.
In October 2000, a related party of Emergent (the "plaintiff")
commenced an action on behalf of Emergent against Stonepath and two of its
officers in the United States District Court for the Southern District of New
York. The action was for negligence and fraud under the federal securities laws
and common law to recover its investment in Stonepath. On April 15, 2002 the
court dismissed the plaintiff's amended Complaint without leave to amend.
Emergent has filed an appeal of the court's decision. The Company does not
intend to conduct any additional merchant banking activities in the future.
GOVERNMENT REGULATION
The healthcare industry is subject to extensive federal and state
regulation. Promulgation of new laws and regulations, or changes in or
re-interpretations of existing laws or regulations, may significantly affect the
Company's business, operating results or financial condition. The Company is not
currently subject to regulation, however, a court or governmental body could
make a determination that the Company's business should be regulated. The
Company's operations might be negatively impacted if it had to comply with
government regulations. Furthermore, the manufacturers of medical equipment
utilized by the Company are subject to extensive regulation by the Food and Drug
Administration ("FDA"). Failure of such manufacturers to comply with FDA
regulations could result in the loss of approval by the FDA of such medical
equipment, which could adversely affect the Company's operating results or
financial condition. In addition, certain of our customers are subject to the
Medicare reimbursement rules and regulations as well as similar state-level
regulations. Our business could be negatively impacted if such customers were
found to be non- compliant with such regulations and/or ineligible for such
reimbursements. As consolidation among physician groups continues and provider
networks continue to be created, purchasing decisions may shift to persons with
whom the Company has not had prior contact. The Company cannot be certain that
it will be able to maintain its physician, vendor and/or manufacturer
relationships under such circumstances.
POTENTIAL EXPOSURE TO LIABILITY
Physicians, hospitals and other providers in the healthcare industry
are subject to lawsuits, which may allege medical malpractice or other claims.
Many of these lawsuits result in substantial defense costs and judgments or
settlements. The Company does not engage in the practice of medicine, nor does
it control the practice of medicine by physicians utilizing its services or
their compliance with regulatory requirements directly applicable to such
physicians or physician groups. However, the services the Company provides to
physicians, including actions by its technicians, its establishment of protocols
and its training programs, could give rise to liability claims. The Company may
become involved in material litigation in the future and it is possible that a
8
claim or claims arising from such litigation might exceed the Company's
insurance coverage. Currently, the Company's product liability insurance
coverage expires in April 2003. In the future, the Company may not be able to
maintain such insurance coverage or obtain new coverage in the future.
COMPETITION
The market for PRI's mobile surgical services is highly competitive.
Companies, particularly in the laser surgery industry, often compete by price,
thereby impacting profit margins. In addition, PRI faces many existing and
future competitors of various size and scale. Some of our competitors have
significantly greater financial and management resources than the company.
Competitors in our market include two privately held companies by the name of
Mobile Med, Incorporated and Southland Surgical. In spite of such competition,
the Company believes that it can compete successfully but can give no assurances
with regard to its ability to compete. The Company's business could be adversely
affected if our customers elect to purchase surgical equipment directly from the
manufacturers and hire their own technicians.
EMPLOYEES
As of February 28, 2003, the Company employed 77 full-time persons
(including three executive officers), 52 of whom were involved in operations
activities (most of these were active as field technicians), 11 of whom were
involved in sales and marketing, and 14 of whom were involved in administration,
information technology, and accounting. In addition, the Company may employ
part-time and occasional employees as technicians to handle overload situations.
None of our employees are represented by collective bargaining agreements. The
Company believes that its employee relations are good.
Item 2. Properties
The Company leases approximately 14,400 square feet of office/warehouse
space for its operations and headquarters in Glendale, California. The lease
agreement provides for monthly rent of $13,270, plus reimbursements for property
taxes and insurance, and is subject to annual increases based on increases in
the Consumer Price Index. The lease expires in July 2006 and provides for an
option to renew for an additional five years. The Company also leases an
aggregate of approximately 5,000 square feet of space for its field and sales
office under operating lease agreements that expire on various dates through
March 2004 in Northern California, Colorado and Utah. We believe our present
facilities will be adequate for our reasonably foreseeable needs.
Item 3. Legal Proceedings
Stonepath Group, Inc.
In October 2000, a related party of Emergent (the "plaintiff")
commenced an action on behalf of Emergent 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.
Emergent has filed an appeal of the court's decision and this appeal is pending.
9
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
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 due under 39 personal sales contracts. The Company
is current in making all required payments under the settlement agreement and
substantially all of the equipment has been returned.
Charlotte Taylor
In December 2001, Charlotte Taylor commenced a legal proceeding in the
Superior Court of the State of California, County of Orange, against MRM,
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)
10
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 December 31, 2002 and as of February 28, 2003, we are not a
party to any pending legal proceedings the adverse outcome of which could
reasonably be expected to have a material adverse effect on our operating
results or financial position.
Item 4. Submission of Matters to a Vote of Security Holders.
No matters were submitted to a vote of security holders during the
fourth quarter of fiscal 2002.
PART II
Item 5. Market for Registrant's Securities and Related Stockholder Matters.
Our common stock was traded on the OTC Bulletin Board under the symbol
"EMGR" before being removed from listing due to the January 31, 2003 late filing
of Form 10-K for the year ended December 31, 2001. The last closing sales price
of our Common Stock on the bulletin board was $.005 on May 21, 2002. The Company
intends to attempt to obtain a new listing for its common stock on the OTC
Bulletin board or BBX Exchange. No assurances can be given that the Company will
be successful in this regard. Since being removed from the Bulletin Board, our
common stock continues to trade on a limited and sporadic basis in the
Over-the-Counter Market. The following table sets forth the range of high and
low closing prices of our Common Stock for the periods indicated.
Quarters Ended High Low
March 31, 2001.............................................. 1.00 .01
June 30, 2001............................................... 1.25 .25
September 30, 2001.......................................... .56 .15
December 31, 2001........................................... .15 .05
March 31, 2002.............................................. .06 .01
June 30, 2002............................................... .035 .005
September 30, 2002.......................................... .03 .0001
December 31, 2002........................................... .01 .0001
Last Available in 2002
December 20, 2002........................................... .0001 .0001
All quotations reflect inter-dealer prices, without retail mark-up,
markdown or commissions, and may not necessarily represent actual transactions.
11
As of February 28, 2003, there were 1,081 holders of record of our
common stock, although we believe that there are other persons who are
beneficial owners of our common stock held in street name. The Company's
transfer agent is American Stock Transfer & Trust Company, 59 Maiden Lane, New
York, NY 10038.
Dividend Policy
We have never paid any cash dividends and intend, for the foreseeable
future, to retain any future earnings for the development of our business. Our
Board of Directors will determine our future dividend policy on the basis of
various factors, including our results of operations, financial condition,
capital requirements and investment opportunities.
12
Recent Sales of Unregistered Securities
During 2002, the Company made the following sales or issuances of unregistered
securities:
- -------------- ------------------ -------------- ------------------------- -------------------- ----------------------
Consideration Received
and Description of
Underwriting or Other
Discounts to Market If Option, Warrant
Price or Convertible or Convertible
Security, Afforded to Exemption from Security, terms of
Purchasers Registration exercise or
Date of Sale Title of Security Number Sold Claimed conversion
- -------------- ------------------ -------------- ------------------------- -------------------- ----------------------
12/30/02 Common Stock 13,942,994 Services rendered; no Section 4(2) Not applicable.
commissions paid
- -------------- ------------------ -------------- ------------------------- -------------------- ----------------------
12/30/02 Common Stock 3,861,000 Options granted under This stock option 10-year Options were
2002 Stock Option Plan; plan will be granted to
no cash received; no registered on a employees, directors
commissions paid Form S-8 and consultants and
Registration at $.01 per share;
Statement shortly Options generally
after the filing vest in five equal
of this Form 10-K. annual installments
commencing on the
date of grant expire
ten years from date
of grant.
- -------------- ------------------ -------------- ------------------------- -------------------- ----------------------
12/30/02 Common Stock 500,000 Options granted outside Section 4(2) 10-year Options
stock option plan; no exercisable at $.01
commissions paid per share
- -------------- ------------------ -------------- ------------------------- -------------------- ----------------------
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
- -------------- ------------------ -------------- ------------------------- -------------------- ----------------------
12/30/02 Common Stock 370,000 Debt conversion; no Section 4(2) Not applicable
commissions paid
- -------------- ------------------ -------------- ------------------------- -------------------- ----------------------
5/21/02 Common Stock 6,195,880 Options granted under This stock option 10-year Options were
2002 Stock Option Plan; plan will be granted to
no cash received; no registered on a employees/consultants
commissions paid Form S-8 at $.01 per share;
Registration Options generally
Statement shortly vest in five equal
after the filing annual installments
of this Form 10-K. commencing on the
date of grant and
expire ten years
from date of grant.
- -------------- ------------------ -------------- ------------------------- -------------------- ----------------------
13
Equity Compensation Plan
The following summary information is as of February 28, 2003 and relates to
our 2002 Stock Option Plan described in Item 11 pursuant to which we have
granted options to purchase our common stock:
- ------------------------------- ------------------------------ ---------------------- --------------------------------
(a) (b) (c)
- ------------------------------- ------------------------------ ---------------------- --------------------------------
Plan category Number of shares of common Weighted average Number of securities
stock to exercise price of remaining available for
be issued upon exercise outstanding future issuance under
of outstanding options options (1) equity compensation plans
(excluding shares
reflected in column (a)
- ------------------------------- ------------------------------ ---------------------- --------------------------------
Equity compensation
Plans (2) 8,828,267 $.01 4,171,733
- ------------------------------- ------------------------------ ---------------------- --------------------------------
- --------------------
(1) Based upon 8,668,267 options exercisable at $.01 per share, 80,000 options
exercisable at $.05 per share and 80,000 options exercisable at $.20 per
share.
(2) The 2002 Stock Option Plan will be submitted to stockholders for approval
at our next annual meeting.
The following summary information is as of February 28, 2003 and relates to
our 2001 Stock Option Plan described in Item 11 pursuant to which we have
granted options to purchase our common stock:
- ------------------------------- ------------------------------ ---------------------- --------------------------------
(a) (b) (c)
- ------------------------------- ------------------------------ ---------------------- --------------------------------
Plan category Number of shares of common Weighted average Number of securities
stock to exercise price of remaining available for
be issued upon exercise outstanding future issuance under
of outstanding options options (1) equity compensation plans
(excluding shares
reflected in column (a))
- ------------------------------- ------------------------------ ---------------------- --------------------------------
Equity compensation
Plans (2) 585,000 $1.00 -0-
- ------------------------------- ------------------------------ ---------------------- --------------------------------
- --------------------
(1) All options are exercisable at $1.00 per share.
(2) The 2001 Stock Option Plan will be submitted to stockholders for approval
at our next annual meeting. The Plan originally covered 8,000,000 shares
but has been reduced by board resolution to the number of outstanding
options.
14
The following summary information is as of February 28, 2003 and relates to
our Stock Option Plans of MRM described in Item 11 which were assumed by
Emergent and pursuant to which we have granted options to purchase our common
stock:
- ------------------------------- ------------------------------ ---------------------- --------------------------------
(a) (b) (c)
- ------------------------------- ------------------------------ ---------------------- --------------------------------
Plan category Number of shares of common Weighted average Number of securities
stock to exercise price of remaining available for
be issued upon exercise outstanding future issuance under
of outstanding options options (1) equity compensation plans
(excluding shares
reflected in column (a))
- ------------------------------- ------------------------------ ---------------------- --------------------------------
Equity compensation
Plans (2) 51,375 $1.47 -0-
- ------------------------------- ------------------------------ ---------------------- --------------------------------
- --------------------
(1) Based upon 44,530 options exercisable at $.68 per share and 6,845 options
exercisable at $4.05 per share.
(2) The Board of Directors of Emergent does not intend to grant any more options
under the old MRM Plans.
Item 6. SELECTED FINANCIAL DATA
The following selected financial data has been derived from
the Company's consolidated financial statements, which have been
examined by independent certified public accountants. Such financial
data should be read in conjunction with "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and the
audited consolidated financial statements included elsewhere in this
Form 10K.
15
Consolidated Statement of Operations Data
Period from Inception
Year Ended Year Ended (March 8, 2000) to
December 31, December 31, December 31,
2002 2001 (1) 2000
----------------- ---------------- -----------------
Revenue $ 9,096,967 $ 5,244,585 $ -
Cost of goods sold 5,434,923 4,328,935 -
----------------- ---------------- -----------------
Gross profit 3,662,044 915,650 -
Selling, general, and administrative expenses 3,826,334 3,609,439 986,401
Impairment of property and equipment - 3,732,223 -
Impairment of goodwill 2,100,955 687,906 -
----------------- ---------------- -----------------
Income (Loss) from Operations (2,265,245) (7,113,918) (986,401)
Other Income (Expenses):
Realized gain (loss) on investment securities (1,732,573) (2,306,428) (709,703)
Interest expense (455,711) (357,134) -
Equity in net earnings (loss) of investment in limited
liability companies (5,508) 26,773 -
Gain (loss) on disposal of property and equipment 163,880 45,571 -
Other income (expenses), net 67,964 (13,485) 128,284
----------------- ---------------- -----------------
Total Other Income (Expense) (1,961,948) (2,604,703) (581,419)
----------------- ---------------- -----------------
Loss before provision for income taxes and
extraordinary item (4,227,193) (9,718,621) (1,567,820)
Provision for income taxes - 1,600 -
----------------- ---------------- -----------------
Loss before extraordinary item (4,227,193) (9,720,221) (1,567,820)
Extraordinary item
Gain on forgiveness of debt, net of tax 2,468,754 - -
----------------- ---------------- -----------------
Net income (loss) (1,758,439) (9,720,221) (1,567,820)
Other comprehensive gain (loss), net of tax
Unrealized gain (loss) on investment securities - 175,760 (2,042,395)
Reclassification adjustment for gains inclueded
in net loss - 134,062 -
----------------- ---------------- -----------------
Comprehensive income (loss) $ (1,758,439) $ (9,410,399) $ (3,610,215)
================= ================ =================
Basic and diluted income (loss) per share
Before extraordinary item $ (0.08) $ (0.19) $ (0.04)
Extraordinary item 0.05 - -
----------------- ---------------- -----------------
Total basic and diluted income (loss) per share $ (0.03) $ (0.19) $ (0.04)
================= ================ =================
Weighted-average shares outstanding 53,476,172 48,350,262 41,557,789
================= ================ =================
- ----------
(1) Operating results include the operations of MRM from July 6, 2001 (date of
acquisition) to December 31, 2001.
16
Balance Sheet Data
December 31,
---------------- --------------- ---------------
2002 2001 2000
---------------- --------------- ---------------
Total Assets 5,781,772 8,604,442 5,184,747
Long-term Debt 1,026,451 2,884,798 -
Total Shareholders' Equity 562,662 474,585 5,062,910
Weighted Avergage Common Shares
Outstanding - basic and diluted 53,476,172 48,350,262 41,557,789
Critical Accounting Policies
Our discussion and analysis of our financial condition 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.
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
The following discussion should be read in conjunction with our
consolidated financial statements and the notes thereto appearing elsewhere in
17
this Form 10K. All statements contained herein that are not historical facts,
including, but not limited to, statements regarding anticipated future capital
requirements, our future plan of operations, our ability to obtain debt, equity
or other financing, and our ability to generate cash from operations, are based
on current expectations. These statements are forward-looking in nature and
involve a number of risks and uncertainties that may cause the Company's actual
results in future periods to differ materially from forecasted results.
Overview
Emergent is the parent company of MRM, its wholly owned and only
operating subsidiary. MRM primarily conducts its business through its wholly
owned subsidiary, PRI. Emergent Group Inc., MRM and PRI are referred to
collectively hereinafter as the "Company." PRI is a provider of mobile surgical
equipment, on a fee for service basis, to hospitals, surgical care centers and
other health care providers. PRI serves both large and small health care
providers and makes mobile surgical services available to its customers by
providing this equipment on a per procedure basis to hospitals, out patient
surgery centers, and physician offices. PRI provides mobile lasers and other
surgical equipment with technical support required to ensure the equipment is
working correctly. PRI also provides a limited amount of general equipment on a
rental basis to hospitals and surgery centers, although PRI is winding down this
area of business in order to focus on its core surgical equipment
rental/services business. In connection with the phase-out of the general
medical equipment rental business and review of other property and equipment
assets, the Company recorded impairment charges for property and equipment, and
goodwill of $3,732,223 and $687,906, respectively, as of December 31, 2001. In
addition, the Company recognized a write-down of $2,100,955 of goodwill as of
December 31, 2002 due to impairment, which was based on an independent valuation
of this asset. The goodwill was initially recorded in connection with Emergent's
acquisition of MRM in July 2001.
Acquisition of Medical Resources Management, Inc.
Reference is made to "Item 1" for a discussion of the Company's July
2001 acquisition of MRM.
Prior to Emergent's acquisition of MRM, Emergent was a merchant banking
firm. Merchant banks are essentially in the business of finding opportunities
and sources of funding and, with investors' money and their own capital,
financing growth and facilitating transactions for, and among their clients. The
distinguishing characteristics of a merchant bank are that it commits its own
capital, or the capital of its principals, to a transaction, either in the form
of debt, typically short-term bridge financing, or equity, and that it generally
receives an equity position in the client company as part or all of the
compensation for its services. In late 2000 Emergent made convertible loans to
MRM. Since July 2001 we have ceased our merchant banking activities in order to
concentrate the Company's management and resources on developing the mobile
surgical equipment and services business of MRM.
Transfer of Equity with Dynamic International, Ltd. and Formation of
Emergent Group Inc.
Reference is made to "Item 1" for a discussion of an equity transfer
and spin-off of assets to Dynamic International, Inc.s and the former members of
Emergent Ventures, LLC's acquisition of control of Dynamic International, Ltd.
18
Results of Operations
The following table sets forth certain selected condensed consolidated statement
of operations data for the periods indicated:
Statement of Operations Data
Period from
March 8, 2000
Year Ended December 31, (Inception) to
December 31,
------------------------------------------------ ---------------------
2002 % 2001 (1) % 2000
- -
---------------- ---------------- -------------------
Revenue $ 9,096,967 100% $ 5,244,585 100% $ -
Cost of goods sold 5,434,923 60% 4,328,935 83% -
---------- --- ---------- --- --------------
Gross profit 3,662,044 40% 915,650 17% -
Selling, general, and administrative expenses 3,826,334 42% 3,609,439 69% 986,401
Impairment of property and equipment - - 3,732,223 71% -
Impairment of goodwill 2,100,955 23% 687,906 13% -
---------- --- ---------- --- --------------
Loss from operations (2,265,245) -25% (7,113,918) -136% (986,401)
Other (expense) (1,961,948) -22% (2,604,703) -50% (581,419)
---------- --- ---------- --- --------------
Loss before provision for income taxes
and extraordinary item (4,227,193) -46% (9,718,621) -185% (1,567,820)
Provision for income taxes - 0% 1,600 0% -
---------- --- ---------- --- --------------
Net income (loss) before extraordinary item $(4,227,193) -46% $(9,720,221) -185% $ (1,567,820)
============ ==== ============ ===== ==============
Extraordinary item
Gain on forgiveness of debt, net of tax 2,468,754 27% - 0% -
---------- --- ---------- --- --------------
Net income (loss) $(1,758,439) -19% $(9,720,221) -185% $ (1,567,820)
============ ==== ============ ===== ==============
Basic and Diluted Net Income (Loss) Per Share
Before extraordinary item $(0.08) $ (0.19) $ (0.04)
Extraordinary item 0.05 - -
-------- -------- --------
Total basic and diluted income (loss) per share $ (0.03) $ (0.19) $ (0.04)
======== ======== ========
Statement of Operations Data
Emergent conducted no significant operations, other than its investing
activity prior to its acquisition and merger with MRM on July 6, 2001. The
condensed consolidated financial statements of the Company for the periods ended
December 31, 2002; 2001 and 2000 reflect net losses of $(1,758,439);
$(9,720,221) and $(1,567,820), respectively, on net revenues of $9,096,967;
$5,244,585 and $-0-, respectively. In addition, in late 2001 the Company decided
to discontinue rental of general medical equipment to hospitals and physicians,
which accounted for approximately 6%; 11% and 0% of revenues for the periods
ended December 31, 2002; 2001 and 2000, respectively.
19
Year Ended December 31, 2002 Compared to the Year Ended December 31, 2001
The Company generated revenues of $9,096,967 in 2002 compared to
5,244,585 in 2001. The increase in revenues in 2002 of $3,852,382 is due to the
fact that 2002 includes a full year of operations for MRM compared to only six
months in 2001. Revenues for 2002 compared to annualized revenues for 2001 were
generally lower due to the phase out of our general medical equipment rental
business. Revenues for 2001 were generated by MRM during the period from July 6,
2001 (date of acquisition) to December 31, 2001. Emergent had no operations
prior to the acquisition of MRM. Approximately 75% and 68% of revenues for 2002
and 2001, respectively, were generated from MRM mobile surgical equipment
services with the balance primarily generated from cosmetic services and
non-surgical equipment rentals.
Cost of goods sold was $5,434,923 in 2002 compared to $4,328,935 for
2001. The increase in cost of goods sold of $1,105,988 for 2002 is due to the
inclusion of MRM's operations in Emergent's consolidated results for the full
year in 2002 compared to only six months in 2001. In addition, cost of sales for
2002 is lower compared to 2001 on an annualized basis due to a decrease in
depreciation expense in connection with the write-down of our property and
equipment as a result of an impairment as of December 31, 2001, which was
primarily due to the phase out of our general equipment rental business during
2002, lower overall revenues in 2002 compared to annualized revenues for 2001
and due to equipment returned to debt holders in connection with our
restructuring efforts during 2002. Cost of goods sold primarily consist of
payroll costs and related expenses for technicians, cost of disposables
consumed, insurance costs and other operating costs incurred in rendering such
services.
Gross profit from operations was $3,662,044 in 2002 compared to
$915,650 for 2001. Gross profit as a percentage of revenues was 40% in 2002
compared to 17% for 2001. The improvement in gross profit relates to lower
depreciation expense in 2002 compared to 2001 due to a decrease in depreciation
expense in connection with the write-down of our property and equipment as a
result of impairment as of December 31, 2001, which was primarily related to the
phase out of our general equipment rental business during 2002 and as a result
of returning various equipment to debt holders in connection with our
restructuring efforts during 2002. The lower gross margin rate for 2001 related,
in part, to certain inventory write-offs in connection with the merger with MRM
in July 2001. Gross margin rates are dependent upon various factors including
product and services mix, pricing considerations, and equipment and technician
utilization rates. The gross margin for 2002 is not necessarily indicative of
the margins that may be realized in future periods.
Selling, general and administrative expenses were $3,826,334 in 2002
compared to $3,609,439 for 2001. The increase of $216,895 in such expenses
relate to the inclusion of operating results for MRM for the full year in 2002
compared to only six months in 2001. MRM incurred selling, general and
administrative expenses of $3,715,832 in 2002 compared to 1,875,391 in 2001 due
to the inclusion of MRM operations from July 1, 2001 (date of acquisition) to
December 31, 2001. The inclusion of MRM selling, general and administrative
expenses in Emergent's consolidated results for 2002 was offset by a decrease of
$1,623,548 in selling, general and administrative expenses incurred by Emergent
in 2002 and other factors including the elimination of duplicate functions as a
result the merger with MRM, and improved cost control efforts. Selling, general
and administrative expenses as a percent of revenues was 42% in 2002 compared to
69% in 2001. We anticipate that selling, general and administrative expenses as
a percentage of revenues will continue to show moderate improvement as we
continue to implement cost control policies and procedures.
20
The Company recognized an impairment charge of $3,732,223 as of
December 31, 2001 primarily in connection with the revaluation of its general
rental equipment. No such charges were incurred in 2002. In late 2001, the
Company decided to discontinue its general rental business due to poor
performance and in order to focus on its core business of providing mobile
surgical equipment and services. The Company is in the process of selling its
remaining general rental equipment through the use of independent equipment
brokers. From January 1, 2002 to December 31, 2002, the Company sold general
rental equipment with an aggregate net book value of $504,044 and had recognized
net gains on such dispositions of approximately $163,880. The Company expects to
continue its disposition activities until all such general rental equipment is
sold.
The Company recognized goodwill impairment charges of $2,100,955 for
2002, compared to a charge of $687,906 for 2001. The write-down of $2,100,955
for 2002 is due to impairment based on an independent valuation of this asset.
The write-down for 2001 primarily resulted from our decision to discontinue the
non-surgical general rental business in late 2001. Emergent initially recorded
such goodwill in connection with its acquisition and merger with MRM in July
2001. The Company will continue to review the value of its tangible and
intangible assets in the future as events and circumstances warrant and it may
be required to record additional impairment charges if the carrying amount of
its assets is deemed to be unrecoverable.
Other expense was $1,961,948 in 2002 compared to $2,604,703 in 2001.
For 2002 other expense primarily consists of a realized loss on investment
securities of $1,732,573 and interest expense of $455,711; offset by gains on
the sale of assets of $163,880 and other miscellaneous income of $67,964. For
2001 other expense primarily consists of realized losses on investment
securities of $2,306,428 and interest expense of $357,134; offset by other
miscellaneous income and expense items. The realized loss on investment
securities in 2002 related to the disposition of the investment in Stonepath,
which was purchased by Emergent in 2000 as discussed elsewhere in the Form 10-K.
The realized losses in 2001 relate primarily to the permanent impairment of
several investments in common stocks of unaffiliated companies, which were
acquired by Emergent in 2000.
The Company recognized a gain on forgiveness of debt, net of tax, of
$2,468,754, which is presented as an extraordinary item in the accompanying
consolidated statement of operations for the year ended December 31, 2002. As
discussed elsewhere in this Form 10-K, in order to avoid ceasing our operations,
a possible bankruptcy filing and in an effort to improve our financial
condition, during the first quarter of 2002 we began the process of
renegotiating substantially all of our outstanding debt, lease, and trade
obligations with our key creditors. The gain on forgiveness of debt is directly
related to the results of these efforts. As of December 31, 2002, we have
substantially completed our debt restructuring whereby we have renegotiated
outstanding debt and lease obligations with principal balances outstanding as of
December 31, 2001 of $5,036,449 and have recorded $2,104,034 in net gains on
forgiveness of debt. In addition, we have renegotiated certain trade debt
obligations resulting in gains on forgiveness of debt of $364,720.
Year Ended December 31, 2001 Compared to the period from March 8, 2000
(inception) to December 31, 2000
The Company generated revenues of $5,244,585 in 2001 compared to $0 in
2000. Revenues for 2001 were generated by MRM during the period from July 6,
2001 (date of acquisition) to December 31, 2001. The Company had no operations
prior to the acquisition of MRM. Approximately 68% of revenues for 2001 were
21
generated from MRM mobile surgical equipment services with the balance primarily
generated from cosmetic services and non-surgical equipment rentals.
Cost of goods sold of amounted to $4,328,935 for 2001, compared to $0
for 2000. Such costs were incurred by MRM during the period from July 6, 2001 to
December 31, 2001 in connection with its mobile surgical equipment services
business. No such costs were incurred during 2000 as discussed herein. Costs of
good sold primarily consist of payroll costs and related expenses for
technicians, cost of disposables consumed, insurance costs and other operating
costs incurred in rendering such services.
Gross profit from operations was $915,650 for 2001 compared to $0 for
the period ended December 31, 2000. Gross profit represented 17.4% of revenues
for 2001 and is not necessarily indicative of the margins that may be realized
in future periods. We anticipate that operating margins will improve in future
periods as we complete our financial restructuring efforts and continue to
improve our operating procedures.
Selling, general and administrative expenses were $3,732,223 for 2001,
compared to $986,401 for 2000. The increase in such expenses relate to the
inclusion of operating results for MRM for the period from July 6, 2001 (date of
acquisition) to December 31, 2001, while no such expenses were incurred in 2000.
As discussed elsewhere in this Form 10-K, the Company, as the successor to
Dynamic International, Ltd., is deemed to have been formed for financial
reporting purposes on March 8, 2000 and as a result incurred general and
administrative expenses from the date of formation to December 31, 2000, while
general and administrative expenses were incurred for the full year in 2001.
The Company recognized an impairment charge of $3,609,439 as of
December 31, 2001 primarily in connection with the revaluation of its general
rental equipment. In late 2001, the Company decided to discontinue its general
rental business due to poor performance and in order to focus on its core
business of providing mobile surgical equipment and services. The Company is in
the process of selling its remaining general rental equipment through the use of
independent equipment brokers. From January 1, 2002 to December 31, 2002, the
Company sold general rental equipment with an aggregate net book value of
$504,044 and had recognized net gains on such dispositions of approximately
$163,880. The Company expects to continue its disposition activities until all
such general rental equipment is sold.
The Company recognized an impairment charge of $687,906 related to
recorded goodwill as of December 31, 2001. Such amount represents a portion of
the goodwill recorded in connection with the acquisition and merger with MRM in
July 2001. The write-down of goodwill related to the MRM merger primarily
resulted from the Company's decision to discontinue the non-surgical rental
business in late 2001. The Company will continue to review the value of its
tangible and intangible assets in the future as events and circumstances warrant
and it may be required to record additional impairment charges if the carrying
amount of its assets is deemed to be unrecoverable.
Realized losses on investment securities amounted to $2,306,428 in
2001, compared to $709,703 in 2000. The realized losses in 2001 relate primarily
to the permanent impairment of several investments in common stocks of
unaffiliated companies, which were acquired by Emergent in 2000.
Interest expense amounted to $357,134 in 2001 compared to $0 in 2000.
Interest expense was incurred by MRM in connection with its debt and capital
lease obligations.
22
Recently Issued Accounting Pronouncements
Between June 2001 and December 2002, the Financial Accounting Standards
Board ("FAB") issued SFAS No. 141 through SFAS No. 148. These pronouncements and
any anticipated effect on us are described in Note 3 in the notes to our
consolidated financial statements, which are incorporated herein by reference in
this Item 7.
Liquidity and Capital Resources
Our consolidated financial statements have been prepared on a
going-concern basis which contemplates the realization of assets and
satisfaction of liabilities in the normal course of our business. As of December
31, 2002 and 2001 we had deficiencies in working capital of $(1,242,858) and
$(2,246,008), respectively, and incurred net losses of $(1,758,439) and
$(9,720,221), respectively, for the years then ended. In order to avoid ceasing
our operations, a possible bankruptcy filing and in an effort to improve our
financial condition, during the first quarter of 2002 we began the process of
renegotiating substantially all of our outstanding debt, lease, and trade
obligations with our key creditors. As of December 31, 2002, we have
substantially completed this process whereby we have renegotiated outstanding
debt and lease obligations with principal balances outstanding as of December
31, 2001 of $5,036,449 and have recorded net gains on forgiveness of debt of
$2,104,034. 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 installment for the balance of
such obligations. In connection with our renegotiations with creditors we
returned equipment with a net book value of $1,530,747. Generally, in the event
of default by the Company we are required to repay all amounts previously
forgiven and all amounts then outstanding are accelerated and become immediately
due and payable. In addition, we have renegotiated outstanding trade debt with
our major vendors in the amount of $458,683 and have recorded gains on
forgiveness of vendor debt in the amount of $364,720. As of the filing date of
this Annual Report on Form 10K, we are in compliance with the terms and
conditions of our renegotiated debt agreements. However, as of December 31, 2002
the Company continues to be in default under certain lease obligations
with aggregate principal balances outstanding of $162,347. 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, 2002 we had a bank loan (the "Bank Term Loan")
outstanding in the amount of $599,774. The loan agreement provides for monthly
payments of principal of $33,333 and interest at the prime rate plus 4.00%.
Pursuant to the loan agreement principal and interest are due in 60 monthly
installments through May 2004. As of December 31, 2001 we were in default under
the loan agreement and as a result all principal and interest were accelerated
and became immediately due and payable. However, in connection with the
renegotiation of our debt obligations the due date for the principal and
interest was extended to March 31, 2003. In addition, the lender has agreed to
accept reduced principal payments of $16,667 per month through March 31, 2003.
The Company assumed this loan obligation in July 2001 in connection with its
acquisition of MRM. We also have an outstanding bank line of credit (the "Bank
Line of Credit") in the amount of $1,108,700 with the same lender. This Bank
Line of Credit provides for interest at the prime rate, plus 2.75%, with
23
borrowings based upon eligible accounts receivable as defined. The amount
outstanding under the Bank Line of Credit exceeded the eligible borrowing base
as of December 31, 2001, and the Company was in default under the credit
agreement. As a result this facility is not available for use as of the filing
date of this Form 10-K. We have agreed with the lender to pay down the Bank Line
of Credit using 50% of proceeds from the sale of medical rental equipment, not
pledged to other lenders, as such transactions occur. No amounts have been
repaid from such sales as of December 31, 2002. The Bank Line of Credit has been
extended to March 31, 2003. We are currently in discussions with the lender to
extend the bank loan and line of credit for six months on the same terms and
conditions discussed herein. 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 December 31, 2002, and the filing date of this Form 10-K, we were not in
compliance with certain financial covenants of such agreements. As a result, we
have classified all of the bank loan facilities as current liabilities in the
accompanying balance sheet as of December 31, 2002.
The Company had cash and cash equivalents of $957,242 at December 31,
2002. Cash provided by operating activities for the year ended December 31, 2002
was $973,209. Such amount primarily related to the inclusion in net loss of
certain non-cash write-downs, including, write-down of investments of
$1,732,573, impairment of goodwill of $2,100,955, depreciation and amortization
of $594,538, and a net increase in working capital. Cash provided from investing
activities amounted to $470,983 due to net proceeds from the sale of investments
of $267,427, and the proceeds from the sale of property and equipment of
$615,603 offset by the purchase of property and equipment for $119,442 and cash
paid to limited liability companies of $292,605. Cash used by financing
activities of $969,115, was primarily the result of the pay down of debt
obligations and related fees of $822,688 and the payment of a bank overdraft of
$146,427.
Our auditors have included an explanatory paragraph relating to our
ability to continue as a going concern as of and for the year ended December 31,
2002, in their Report of Independent Certified Public Accountants included in
our audited financial statements contained elsewhere in this report. For the
year ended December 31, 2002, we incurred a net loss before extraordinary item
of $(4,227,193). Our accumulated deficit amounted to $(13,046,480) at December
31, 2002. Our auditors considered these factors, among others, to raise doubt
about our ability to continue as a going concern. Recovery of our assets in the
normal course of business is dependent upon future events, the outcome of which
is indeterminable.
We anticipate that our future liquidity requirements will arise from
the need to finance our accounts receivable and inventories, and from the need
to fund our current debt obligations and capital expenditure needs. The primary
source of funding for such requirements will be cash generated from operations,
raising additional capital from the sale of equity or other securities,
borrowings under debt facilities and trade payables. However, there can be no
assurances that we will have sufficient liquidity to fund our future operations
or fulfill our restructured debt, lease and vendor obligations. The financial
statements do not include any adjustments to reflect the possible future effects
on the recoverability and classification of assets or the amounts and
classification of liabilities that may result from the outcome of this
uncertainty.
24
RISK FACTORS
WE HAVE INCURRED LOSSES AND MAY CONTINUE TO INCUR LOSSES.
We incurred a net loss before extraordinary item of $(4,227,193) for
the year ended December 31, 2002 due to a number of factors including a loss
from operations of $(2,265,245), and a realized loss on the sale of investments
of $1,732,573. In addition, the report of our independent auditors for the year
ended December 31, 2002 contains a going concern opinion as a result of
continuing net losses, a deficiency in working capital as of December 31, 2002
and defaults under certain debt and lease agreements. These matters raise
substantial doubt about our ability to continue as a going concern. While many
of these losses were primarily attributed to the matters noted herein, there can
be no assurances that we will achieve profitability in the future.
OUR CORE BUSINESS IN MOBILE SURGICAL SERVICES HAS BEEN VERY PRICE COMPETITIVE.
The market for our services and equipment is highly competitive.
Competitors often compete by lowering prices, thus impacting profit margins. We
can provide no assurances that we will be successful (profitable) in a highly
competitive market.
WE MAY NEED SUBSTANTIAL ADDITIONAL FINANCING TO ACHIEVE OUR STRATEGIC GOALS AND
TO RETIRE DEBT.
Much of our future growth depends upon our ability to expand our
customer base and on our ability to acquire new technologies related to medical
surgical equipment. Such endeavors will require additional capital resources. In
addition, we will need to generate funds to meet our existing debt obligations,
most of which was recently restructured. These initiatives may require us to
raise significant sums of additional capital, which may or may not be available.
In addition, raising additional capital may result in substantial dilution to
existing shareholders. We can provide no assurances that such financing will be
available to us on satisfactory terms, if at all.
OUR BUSINESS IS SUBJECT TO ADVERSE CHANGES IN GOVERNMENT REGULATION.
Many aspects of our business in delivering surgical equipment and
related services may be impacted by changes in federal and state regulations. We
could encounter difficulties in meeting the requirements of new or changing
regulations. In addition, certain of our customers are subject to the Medicare
reimbursement rules and regulations as well as similar state-level regulations.
Our business could be negatively impacted if such customers were found to be
non- compliant with such regulations and/or ineligible for such reimbursements.
25
WE MAY HAVE DIFFICULTIES IN ESTABLISHING SERVICE CAPABILITIES WITH NEW MEDICAL
DEVICES UNRELATED TO OUR CURRENT BUSINESS.
Establishing a market presence with new technologies may require us to
build a new sales and support infrastructure. We may have difficulty hiring the
appropriate personnel and establishing the necessary relationships for us to
successfully penetrate any new market.
THERE MAY NOT BE AN ACTIVE TRADING MARKET FOR OUR STOCK.
In the past, there has been an irregular and relatively illiquid public
market for our common stock. Our common stock was removed from listing and
trading on the OTC Electronic Bulletin Board due to the late filing of Form 10-K
for the year ended December 31, 2001. Our common stock trades periodically and
on a limited basis in the Over-the-Counter Market. We intend to attempt to
obtain a broker-dealer to file a new listing of our common stock on the OTC
Electronic Bulletin Board or BBX Exchange, as the case may be. There can be no
assurances that we will be successful in this regard nor can we provide
assurance when and if, or to what extent, a more regular and/or liquid trading
market may develop. This may make it difficult for you to sell your shares of
our common stock.
THE PRICE OF OUR STOCK MAY FLUCTUATE
The market price of our common stock may be as highly volatile, or more
so, as the stock market in general or, for that of micro cap stocks, and the
technology sector more specifically. Stockholders may have difficulty selling
their common stock following periods of such volatility due to the market's
adverse reaction to such volatility. Many of the factors leading to such
volatility are well beyond our control and could include:
o conditions and trends in our industry;
o changes in the market valuation of companies similar to us;
o actual or expected variations in our operating results;
o announcements by us or our competitors of the development
of new products or technologies or strategic alliances or
acquisitions; and
o changes in members of our senior management or other key employees.
These and other factors may adversely affect the price of our common
stock, regardless of its future operating results and we cannot assure you that
our common stock will trade at prices similar to the stock of our competitors or
other similar companies.
26
WE MAY EXPERIENCE QUARTERLY AND ANNUAL FLUCTUATIONS IN OUR OPERATING RESULTS IN
THE FUTURE, WHICH MAKES OUR PAST PERFORMANCE AN UNRELIABLE INDICATION OF FUTURE
PERFORMANCE.
Our operating results may vary significantly from quarter to quarter
and from year to year in the future. A number of factors, many of which are
outside of our control, may cause these variations, including:
o fluctuations in demand for our products and services;
o the introduction of new products, services or technologies by
competitors, entry of new competitors, pricing pressures and
other competitive factors;
o our ability to obtain and introduce new surgical equipment products,
services and technologies in a timely manner;
o the rate of market acceptance of any new surgical equipment products or
services that we offer;
o delays or reductions in customer orders of our products and services in
anticipation of the introduction of new or enhanced products and
services by our competitors or us;
o our ability to control expenses;
o the timing of regulatory approvals and changes in domestic and regulatory
environments;
o the level of capital spending of our customers;
o costs related to acquisitions or alliances, if any; and
o general economic conditions.
Due to these and other factors, we believe that our operating results
in future quarters and years may differ from expectations, and
quarter-to-quarter and year-to-year comparisons of our past operating results
may not be meaningful. You should not rely on our results for any quarter or
year as an indication of future performance.
OUR INDUSTRY IS UNPREDICTABLE AND CHARACTERIZED BY RAPID TECHNOLOGICAL CHANGES
AND EVOLVING STANDARDS, AND, IF WE FAIL TO ADDRESS CHANGING MARKET CONDITIONS,
OUR BUSINESS AND OPERATING RESULTS WILL BE HARMED.
Our industry is characterized by rapid technological change, frequent
new product introductions, changes in customer requirements and evolving
industry standards. Our equipment could quickly become obsolete due to new
technological developments in medical devices. This could lead to a significant
financial impact since most of our equipment is generally financed over a period
of several years. Because this market is subject to rapid change, it is
difficult to predict our potential size or future growth rate. Our success in
27
generating revenues in this market will depend on, among other things:
o maintaining and enhancing our relationships with customers;
o the education of potential customers about the benefits of our products
and services; and
o our ability to accurately predict and obtain new products, services and
technologies to meet industry standards.
We cannot assure you that our expenditures for the acquisition of new
products and technologies will result in their introduction or, if such products
or technologies are introduced, that they or the related services will achieve
sufficient market acceptance. We may need to expend significant resources to
acquire new products and services in the future, which may adversely impact our
profitability. However, the failure to make such expenditures to address rapid
technological changes in the industry could adversely affect our business.
FAILURE TO SUCCESSFULLY COMPLETE AND MANAGE GROWTH STRATEGIES COULD ADVERSELY
AFFECT OUR BUSINESS, PROFITABILITY AND GROWTH PROSPECTS.
Part of our growth strategy may include acquisitions and alliances
involving complementary products, services, technologies and businesses. If we
are unable to overcome the potential problems and inherent risks related to such
acquisitions and alliances, our business, profitability and growth prospects
could suffer. Our ability to expand successfully through acquisitions and
alliances depends on many factors, including our ability to identify appropriate
prospects and negotiate and close transactions. Even if future acquisitions or
alliances are completed:
o we could fail to select the best acquisition or alliance partners;
o we could fail to effectively plan and manage acquisition or alliance
strategies;
o management's attention could be diverted from other business concerns;
o we could encounter problems integrating the acquired or allied
operations, technologies or products; and
o the acquisition or alliance could have adverse effects on our existing
business relationships with suppliers and/or customers.
Many companies compete for acquisition and alliance opportunities in
our industry. Some of our competitors are companies that have significantly
greater financial and management resources than us. This may reduce the
likelihood that we will be successful in completing alliances necessary to the
future success of our business.
Anticipated growth in the number of employees and in sales, combined
with the challenges of managing geographically dispersed operations, may place a
significant strain on our management systems and resources. We expect that we
will need to continue to improve our information technology systems, financial
and managerial controls, reporting systems and procedures and continue to
expand, train and manage our work force. The failure to effectively manage
growth could disrupt our business and adversely affect our operating results.
28
IF WE LOSE SENIOR MANAGEMENT AND KEY EMPLOYEES ON WHOM WE DEPEND, OUR BUSINESS
COULD SUFFER.
Effective December 30, 2002, we entered into 18- month employment
contracts with Bruce J. Haber and Louis Buther who are key employees and
officers of the Company. We believe that our future success will depend to a
significant extent upon retaining the services of Messrs. Haber and Buther and
other key employees. Our business could be materially and adversely affected if
we lose the services of Messrs. Haber and Buther. We currently do not have
"key-person" life insurance policies to cover the lives of Messrs. Haber and
Buther or any other key employees. The ability to continue to attract and retain
highly skilled personnel will be a critical factor in determining our future
success. Competition for highly skilled personnel is intense and we may not be
successful in attracting, assimilating or retaining qualified personnel to
fulfill current or future needs. If we cannot recruit, train, retain and
effectively manage key employees, our business, profitability and growth
prospects could suffer.
SOME OF OUR PRODUCTS ARE COMPLEX IN DESIGN AND MAY CONTAIN DEFECTS THAT ARE NOT
DETECTED UNTIL DEPLOYED BY CUSTOMERS, WHICH COULD INCREASE OUR COSTS AND REDUCE
OUR REVENUES.
Many of our products are inherently complex in design and require
ongoing regular maintenance. As a result of the technical complexity of the
equipment and certain fibers used in the delivery of our services, changes in
our suppliers' manufacturing processes or the inadvertent use of defective or
contaminated materials by such suppliers could result in a material adverse
effect on our ability to achieve acceptable product reliability. To the extent
that such product reliability is not achieved, we could experience, among other
things:
o damage to our business reputation;
o loss of customers;
o failure to attract new customers or achieve market acceptance;
o diversion of resources; and
o legal actions by customers.
The occurrence of any one or more of the foregoing factors could
seriously harm our business, our financial condition and results of operations.
WE FACE INTENSE COMPETITION.
The surgical equipment rental and services industry is highly
competitive. Our operations compete with services provided by numerous local,
regional and national equipment and service providers. Certain of these
competitors are larger or have greater financial resources than us. There can be
no assurance that we will not encounter increased competition, which could have
a negative impact on our business, results of operations or financial condition.
29
Forward-Looking Statements
The Private Securities Litigation Reform Act of 1995 (the Act)
provides a safe harbor for forward-looking statements made by or on behalf of
our Company. Our Company and its representatives may from time to time make
written or verbal forward-looking statements, including statements contained in
this report and other Company filings with the Securities and Exchange
Commission and in our reports to stockholders. Statements which relate to other
than strictly historical facts, such as statements about the Company's plans and
strategies and expectations for future financial performance are forward-looking
statements within the meaning of the Act. Generally, the words "believe,"
"expect," "intend," "estimate," "anticipate," "will" and other similar
expressions identify forward-looking statements. The forward-looking statements
are and will be based on management's then current views and assumptions
regarding future events and operating performance, and speak only as of their
dates. The Company undertakes no obligation to publicly update or revise any
forward-looking statements, whether as a result of new information, future
events or otherwise. See Risk Factors for a discussion of events and
circumstances that could affect our financial performance or cause actual
results to differ materially from estimates contained in or underlying our
forward-looking statements.
30
Item 7(a). Quantitative and Qualitative Disclosures about Market Risk.
The Company is not exposed to financial market risks from changes in
foreign currency exchange rates or changes in interest rates. The Company does
not use derivative financial instruments.
The Company's debt obligations are primarily fixed rate, with the
exception of its working capital loans. If the Company were to pursue
re-financing of its fixed rate debt or lease obligations, it could potentially
be exposed to changes in interest rates.
Item 8. Financial Statements and Supplementary Data.
Financial Statements
Quarterly Results
The following table sets forth certain unaudited quarterly financial
data for 2002 and 2001. In our opinion, this unaudited information has been
prepared on the same basis as the audited information and includes all
adjustments (consisting only of normal recurring adjustments, except as noted)
necessary to present fairly the information set forth therein. The operating
results for any one quarter are not necessarily indicative of results for any
future period.
31
Quarterly Results of Operations
Quarter Ended
-------------------------------------------------------------------
March 31, June 30, September 30, December 31,
2002 2002 2002 2002
---------------- ---------------- ---------------- ----------------
Revenue $ 2,502,521 $ 2,197,824 $ 2,150,221 $ 2,246,401
Cost of goods sold 1,414,533 1,391,662 1,359,081 1,269,647
---------------- ---------------- ---------------- ----------------
Gross profit 1,087,988 806,162 791,140 976,754
Selling, general, and administrative expenses 870,694 844,863 947,828 1,162,949
Impairment of property and equipment -
Impairment of goodwill 2,100,955
---------------- ---------------- ---------------- ----------------
Income (Loss) from operations 217,294 (38,701) (156,688) (2,287,150)
Other income (expense):
Realized gain (loss) on investment securities - (1,732,573) - -
Interest expense (153,748) (128,812) (94,658) (78,493)
Equity in net earnings (loss) of investment in limited -
liability companies 7,222 (1,048) 7,243 (18,925)
Gain (loss) on disposal of property and equipment 81,268 131,554 (3,683) (45,259)
Other Income (expense), net 86,563 5,800 (12,068) (12,331)
---------------- ---------------- ---------------- ----------------
Total other income (expense) 21,305 (1,725,079) (103,166) (155,008)
---------------- ---------------- ---------------- ----------------
Income (loss) before provision for income taxes
and extraordinary item 238,599 (1,763,780) (259,854) (2,442,158)
Provision for income taxes - - - -
---------------- ---------------- ---------------- ----------------
Income (loss) before extraordinary item 238,599 (1,763,780) (259,854) (2,442,158)
Extraordinary item
Gain on forgiveness of debt, net of tax 226,517 823,865 209,695 1,208,677
---------------- ---------------- ---------------- ----------------
Net income (loss) $ 465,116 $ (939,915) $ (50,159) $ (1,233,481)
================ ================ ================ ================
Income (Loss) Per Share Data:
Before extraordinary item $ 0.004 $ (0.033) $ (0.005) $ (0.046)
Extraordinary item $ 0.004 $ 0.016 $ 0.004 $ 0.023
---------------- ---------------- ---------------- ----------------
Basic and diluted income (loss) per share $ 0.01 $ (0.02) $ (0.00) $ (0.02)
================ ================ ================ ================
Weighted-average common shares outstanding 53,044,821 53,044,821 53,044,821 53,176,743
================ ================ ================ ================
(1) The Company recorded an impairment charge of $2,100,955 during the
fourth quarter of 2002 as a result of an independent valuation of this
asset as of December 31, 2002.
(2) Certain reclassifications are reflected in the above quarterly data
since the filing of such quarterly reports on Form 10-Q.
32
Quarter Ended
------------------------------------------------------------------
March 31, June 30, September 30, December 31,
2001 (2) 2001 (2) 2001 (2) 2001 (1)
---------------- --------------- ----------------- ---------------
Revenue $ - $ - $ 2,769,622 $ 2,474,963
Cost of goods sold - - 2,002,538 2,326,397
---------------- --------------- ----------------- ---------------
Gross profit - - 767,084 148,566
Selling, general, and administrative expenses 411,853 525,138 831,108 1,841,340
Impairment of property and equipment 3,732,223
Impairment of goodwill 687,906
---------------- --------------- ----------------- ---------------
Income (Loss) from operations (411,853) (525,138) (64,024) (6,112,903)
Other income (expense):
Realized gain (loss) on investment securities (687,500) (783,075) (930,396) 94,543
Interest expense - - (211,776) (145,358)
Equity in net earnings of investment in limited
liability companies - - 24,098 2,675
Gain (loss) on disposal of property and equipment - - 1,483 44,088
Other Income (expense), net 33,219 15,851 (27,453) (35,102)
---------------- --------------- ----------------- ---------------
Total other income (expense) (654,281) (767,224) (1,144,044) (39,154)
---------------- --------------- ----------------- ---------------
Loss before provision for income taxes (1,066,134) (1,292,362) (1,208,068) (6,152,057)
Provision for income taxes - - - 1,600
---------------- --------------- ----------------- ---------------
Net loss (1,066,134) (1,292,362) (1,208,068) (6,153,657)
Other comprehensive gain (loss), net of tax
Unrealized gain (loss) on investment securities 3,105 133,834 - 38,821
Reclassification adjustment for gains included
in net loss (2) - - - 134,062
---------------- --------------- ----------------- ---------------
Comprehensive loss $(1,063,029) $(1,158,528) $ (1,208,068) $ (5,980,774)
================ =============== ================= ===============
Loss Per Share Data:
Basic and diluted loss per share $ (0.02) $ (0.03) $ (0.02) $ (0.12)
================ =============== ================= ===============
Weighted-average common shares outstanding 44,173,280 44,173,280 49,501,000 49,998,000
================ =============== ================= ===============
(1) In connection with the acquisition of substantially all of the assets and
liabilities of MRM in July 2001, Emergent recorded an excess of cost over
the fair value of assets acquired of $3,420,862. For the quarter ended
December 31, 2001, we recorded an expense of $687,906 in connection with
the impairment of this asset. In addition, we recorded a net expense of
$3,732,223 in connection with a review of property and equipment for
impairment. Also, we increased the reserve for inventory obsolescence by
$50,000 in December 2001, which is included in cost of goods sold.
(2) Certain reclassifications are reflected in the above quarterly data since
the filing of such quarterly reports on Form 10-Q.
The report of the Independent Accountants, Financial Statements and Schedules
are set forth beginning on page F-1 of this Annual Report on Form 10-K.
33
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.
On January 25, 2001 we dismissed Moore Stephens, P.C. ("MS") as our
independent auditor. MS was the independent auditor for Dynamic International,
Ltd. ("Dynamic") at the time of the merger with Emergent Ventures, LLC in August
2000. MS reported on Dynamic's financial statements for each of the two fiscal
years ended April 30, 2000 and 1999, respectively (collectively, the "Prior
Fiscal Years"). Such reports were each modified in their reference to the
uncertainty of Dynamic's ability to continue as a going concern. Except for this
reference, such reports did not contain an adverse opinion or disclaimer of
opinion, nor were such reports qualified or modified as to uncertainty, audit
scope or accounting principles. For the period from August 2000 through January
25, 2001 (the "Interim Period") there were no disagreements ("Disagreements")
between us and MS on any matter of accounting principles or practices, financial
statement disclosure, or auditing scope or procedure, which Disagreement, if not
resolved to the satisfaction of MS, would have caused MS to make reference to
the subject matter of the Disagreement in connection with its reports for the
Prior Fiscal Years. There were no "Reportable Events," as such term is defined
in Item 304(A)(1)(v) of Regulation S-K, during either (i) the Prior Fiscal Years
or (ii) the Interim Period. Subsequently, we engaged Arthur Andersen LLP ("AA")
as our independent public accountants for our fiscal year ended December 31,
2000. We did not consult AA with respect to either (i) the Prior Fiscal Years,
(ii) the Interim Period with respect to either the application of accounting
principles to a specified transaction, either completed or proposed, or the type
of audit opinion that might be rendered on our financial statements, or (iii)
any matter that was either the subject of a Disagreement or a Reportable Event.
On March 5, 2002 AA notified us that AA was no longer our independent
auditor and effectively resigned from such capacity. AA's report on our
financial statements for the period from March 8, 2000 (the date of inception of
Emergent Ventures LLC) to December 31, 2000 (collectively, the "Prior Fiscal
Year"), did not contain an adverse opinion or disclaimer of opinion, nor was
such report qualified or modified as to uncertainty, audit scope or accounting
principles. The decision of AA to resign was not recommended or approved by our
Board of Directors. There were no disagreements ("Disagreements") between us and
AA during either (i) the Prior Fiscal Year, or (ii) the period January 1, 2001
through March 5, 2002 (the "Interim Period") on any matter of accounting
principles or practices, financial statement disclosure, or auditing scope or
procedure, which Disagreement, if not resolved to the satisfaction of AA, would
have caused AA to make reference to the subject matter of the Disagreement in
connection with its report for the Prior Fiscal Year. There were no "Reportable
Events," as such term is defined in Item 304(A)(1)(v) of Regulation S-K, during
either (i) the Prior Fiscal Year or (ii) the Interim Period. We have engaged
Singer Lewak Greenbaum & Goldstein LLP ("SLGG") as our independent auditor for
our fiscal year ended December 31, 2001. We did not consult SLGG with respect to
either (i) the Prior Fiscal Year, (ii) the Interim Period with respect to either
the application of accounting principles to a specified transaction, either
completed or proposed, or the type of audit opinion that might be rendered on
our financial statements, or (iii) any matter that was either the subject of a
Disagreement or a Reportable Event.
34
PART III
Item 10. Directors and Executive Officers of the Registrant.
The names, ages and principal occupations of the Company's
present officers and directors are listed below.
First Became
Name (1) Age Director and/or Position
-------- --- --------------- --------
Officer
Bruce J. Haber 50 2003 Chairman of the Board and Chief
Executive Officer
Louis Buther 49 2003 President and Chief Operating Officer
William M. McKay 48 2002 Chief Financial Officer, Treasurer
and Secretary
Daniel Yun 35 2000 Director
Mark Waldron 35 2000 Director
Howard Waltman 70 2001 Director
Matthew K. Fong, Sr 49 2001 Director
- ------------------
(1) Directors are elected at the annual meeting of stockholders and hold
office until the following annual meeting.
Bruce J. Haber is Chairman of the Board and Chief Executive Officer.
Louis Buther is President of the Company. William M. McKay, who joined the
Company in August 2002, is Chief Financial Officer, Secretary and Treasurer. The
terms of all officers expire at the annual meeting of directors following the
annual stockholders meeting. Officers serve at the pleasure of the Board and may
be removed, either with or without cause, by the Board of Directors, and a
successor elected by a majority vote of the Board of Directors, at any time.
Bruce J. Haber has served as Chairman of the Board and Chief Executive
Officer since January 31, 2003. Mr. Haber is currently President of BJH
Management, LLC, a management firm specializing in turnaround consulting and
private equity investments, which served as a consultant to the Company between
October 2001 and January 2003. From October 2001 until December 2002, Mr. Haber
served on the Board of Directors of EB2B Commerce, Inc. a computer software
company. From March 2002 to December 2002 Mr. Haber served as Chairman of the
Board and as a turnaround consultant to EB2B. Mr. Haber was founder, President
and CEO of MedConduit.com, Inc., a healthcare e-commerce B2B from 2000 to 2001.
Mr. Haber served as Executive Vice President and a Director of Henry Schein,
Inc., an international distributor of healthcare products, as well as President
of their Medical Group from 1997 to 1999. From 1981 to 1997, Mr. Haber served as
President, CEO and Director of Micro Bio-Medics, Inc., and Caligor Medical
Supply Company, a distributor of physician and hospital supplies, which merged
with Henry Schein in 1997. Mr. Haber holds a Bachelor of Science degree from the
City College of New York and a Master of Business Administration from Baruch
College in New York.
Louis Buther has served as President of the Company since January 31,
2003. Mr. Buther has served as an independent consultant since 2000, including
providing consulting services to the Company between October 2001 and January
2003. From 1997 through 2000, Mr. Buther was Senior Vice President of the
Medical Division of Henry Schein, Inc. From 1983 to 1997, Mr. Buther served as
Vice President of Micro Bio-Medics, Inc., and Caligor Medical Supply Company
which merged with Henry Schein in 1997. Mr. Buther holds an Associates Art
Science Degree in Chemistry from Bronx Community College and a Bachelor of
Science Degree in Pharmacy from Long Island University.
35
William M. McKay has served as Chief Financial Officer of the Company
since August 2002. From August 2000 to August 2002, he served as Chief Financial
Officer and as a consultant for EV Global Motors Company, a privately held
consumer products company. From December 1998 to July 2000 Mr. McKay served as
Chief Financial Officer and Secretary for Internet Dynamics, Inc., a privately
held software development company. From February 1998 to November 1998, he
served as Chief Financial Officer for Koo Koo Roo, Inc., a publicly held food
services company. From May 1995 to February 1998, Mr. McKay served as Chief
Financial Officer and Secretary for View Tech, Inc., a publicly held technology
company. Mr. McKay also has ten years of public accounting experience with
Deloitte & Touche, where he last served as a senior manager in its audit
department. Mr. McKay is a member of the American Institute of Certified Public
Accountants and the California Society of Certified Public Accountants, and
holds a B.S. in business administration with an emphasis in accounting from the
University of Southern California - Los Angeles.
Daniel Yun has served as a director of the Company since August 2000.
Mr. Yun became Chairman of the Board of the Company and served in this capacity
between August 2000 and January 2003. Mr. Yun has also served as a director of
its subsidiary, Medical Resources Management, Inc., since September 2000. Mr.
Yun is Chairman of the board of Voyager Advisors, LLC, a Securities and Exchange
Commission registered investment advisor. During approximately the past four
years, Mr. Yun's principal occupation has been as a private investor. He has
served as Manager of Emergent Capital Investment Management LLC since October
1998. Between May 1994 and August 1998, Mr. Yun served as vice president in
charge of middle market derivatives at Lehman Brothers. Before joining Lehman
Brothers, Mr. Yun was an associate in the fixed income division of Goldman,
Sachs & Co. from 1993 to 1994. Upon graduating from the United States Military
Academy at West Point with a Bachelor of Science in Economics, Mr. Yun was
commissioned as a second lieutenant in the US Army, and was later appointed as a
commanding officer in charge of 220 multinational soldiers in Korea. While in
the army, Mr. Yun attended the Airborne, Air Assault and Ranger Schools, and
obtained a Master in Public Administration from the University of Oklahoma. His
professional publications include "Understanding Exotic Derivatives" in
Controlling and Managing Interest Rate Risk, (ed. Robert Klein, Prentice Hall,
1996). Mr. Yun currently serves on the Rand Corporation Advisory Board.
Mark Waldron has served as a director of the Company since August,
2000. Mr. Waldron also served as President and Chief Executive Officer of the
Company between August 2000 and January 2003. . Mr. Waldron has served as a
director of Medical Resources Management, Inc. since September 2000. Since
January 2003 (and previously between 1998 and 2001), Mr. Waldron's principal
occupation has been as a private investor. Mr. Waldron is a former vice
president of J.P. Morgan in New York and was with the firm from June 1993 to
June 1998. Mr. Waldron received his MBA from Northwestern University's Kellogg
School of Management through the School's accelerated one-year program, where he
attained Dean's List standing. Mr. Waldron was an Associate at Bankers Trust
Company before attending business school, and received a B.A. with honors from
the Richard Ivey School of Business at the University of Western Ontario. Mr.
Waldron is a member of the Foreign Policy Association and MENSA, and is a
citizen of Canada.
Howard Waltman has served as a director of the Company since 2001.
Since 2000, Mr. Waltman has acted as a private investor for a family limited
liability corporation. Since 1986, Mr. Waltman has served as a director of
Express Scripts, Inc. ("ESI"), and as its Chairman from 1986 to 2000. ESI was
formed in 1986 as a subsidiary of Sanus, a company formed in 1983 by Mr.
36
Waltman, who served as its Chairman of the Board from 1983 to 1987. Sanus was
acquired by New York Life Insurance Company in 1987. ESI provides mail order
pharmacy services and pharmacy claims processing services and was spun out of
Sanus and taken public in June 1992. Mr. Waltman also founded Bradford National
Corp. in 1968, which was sold to McDonnell Douglas Corporation in 1981. From
1996 to 2000, Mr. Waltman served as a director of Computer Outsourcing Services,
Inc. Mr. Waltman is currently a director of a number of privately held
companies.
Matthew K. Fong, Sr. has served as a director of the Company since
2001. Mr. Fong has served as a senior counsel with Sheppard, Mullin, Richter &
Hampton, a law firm with offices in both San Francisco and Los Angeles since
2000. Since 1999, he has served as President of Strategic Advisory Group of
Industry, CA, a business strategy consulting company. Mr. Fong was the
Republican candidate for the U.S. Senate in California in 1998, in which he ran
against Democrat Senator Barbara Boxer. From 1995 to 1999, Mr. Fong was the
Treasurer of the State of California. Mr. Fong holds a BS in International
Affairs from the US Air Force Academy, an MBA from Pepperdine University, and a
JD from Southwestern University.
37
Committees
Prior to November 2001, the Company had no standing audit, nominating
and compensation committees of the Board of Directors or committees performing
similar functions.
On November 1, 2001, the Company's Board established a Compensation
Committee with Messrs. Waltman, Fong and Yun as its members. On November 1,
2001, the Company's Board also established an Audit Committee with Messrs.
Waltman and Fong and Dr. Bernard Rineberg, a former director, as its members. On
December 19, 2002, the Board approved each of the following: (i) a resolution
that upon the effective date of Mr. Bruce J. Haber becoming a director of the
Company (i.e. January 31, 2003), the members of the Compensation Committee shall
be changed to include Messrs. Haber, Waltman and Yun and (ii) a resolution
reducing the number of Audit Committee members to two with Messrs. Waltman and
Fong as its members.
Audit Committee
The members of the Company's audit committee consists of Howard Waltman
and Matthew Fong Sr., each of whom are deemed by Management to be independent
directors. The definition of "independent director" is defined in Rule
4200(a)(14) of the NASD's Listing Standards. The NASD's listing standards define
an "independent director" generally as a person, other than an officer of the
Company, who does not have a relationship with the company that would interfere
with the director's exercise of independent judgment. The Board intends to adopt
a written charter. Such charter would be expected to include, among other
things:
. annually reviewing and reassessing the adequacy of the committee's
formal charter;
. reviewing the annual audited financial statements with the Company's
management and its independent auditors and the adequacy of its
internal accounting controls;
. reviewing analyses prepared by the Company's management and independent
auditors concerning significant financial reporting issues and
judgments made in connection with the preparation of its financial
statements;
. being directly responsible for the appointment, compensation and
oversight of the independent auditor, which shall report directly to
the Audit Committee, including resolution of disagreements between
management and the auditors regarding financial reporting for the
purpose of preparing or issuing an audit report or related work;
. reviewing the independence of the independent auditors;
. reviewing the Company's auditing and accounting principles and
practices with the independent auditors and reviewing major changes to
its auditing and accounting principles and practices as suggested by
the independent auditor or its management;
38
. reviewing all related party transactions on an ongoing basis for
potential conflict of interest situations; and
. all responsibilities given to the Audit Committee by virtue of the
Sarbanes-Oxley Act of 2002, which was signed into law by President
George W. Bush on July 30, 2002.
Code of Ethics
Effective March 3, 2003, the Securities & Exchange Commission requires
registrants like the Company to either adopt a code of ethics that applies to
the Company's Chief Executive Officer and Chief Financial Officer or explain why
the Company has not adopted such a code of ethics. For purposes of item 406 of
Regulation S-K, the term "code of ethics" means written standards that are
reasonably designed to deter wrong doing and to promote:
o Honest and ethical conduct, including the ethical handling of actual or
apparent conflicts of interest between personal and professional
relationships;
o Full, fair, accurate, timely and understandable disclosure in reports
and documents that the Company files with, or submits to, the Securities
& Exchange Commission and in other public communications made by the
Company;
o Compliance with applicable governmental law, rules and regulations;
o The prompt internal reporting of violations of the code to an
appropriate person or persons identified in the code; and
o Accountability for adherence to the code.
While the Company has not adopted a code of ethics because of the short
time period that has followed between the effective date of March 3, 2003 and
the filing date of this Form 10-K, it intends to do so in the second quarter of
2003.
Compliance with Section 16(a) of the Exchange Act
Section 16(a) of the Securities Exchange Act of 1934, as amended,
requires our officers and directors, and persons who own more than ten percent
of a registered class of our equity securities, to file reports of ownership and
changes in ownership with the Securities and Exchange Commission (the
"Commission"). Officers, directors and greater than ten percent stockholders are
required by the Commission's regulations to furnish us with copies of all
Section 16(a) forms they file. During fiscal 2002, none of our officers,
directors or 10% or greater stockholders filed any forms late to the best of our
knowledge, except as follows. Al Guadagno, formerly Chief Financial Officer of
MRM, filed a Form 5 late in June 2002 to report transactions that occurred in
2001 and filed a Form 4 later in September 2002. Mr. Guadagno is no longer a
reporting person In March 2003, Matthew Fong and Howard Waltman each filed late
Form 5's in lieu of a Form 3 for August 2001 and in lieu of Form 4 for November
2001, which forms Messrs. Fong and Waltman failed to file. In March 2003, Daniel
Yun filed late a Form 5 in lieu of a Form 4 which Mr. Yun failed to file for the
month of May 2002.
39
Item 11. Compensation of Directors and Executive Officers.
The following table provides a summary compensation table with respect
to Mark Waldron, who served as the Company's Chief Executive during 2002 and Al
Guadagno, former Vice President and Chief Financial Officer of MRM during 2002.
No other executive officer of the Company received salary and bonuses amounting
to $100,000 or more in 2002. During the past three fiscal years, the Company has
not granted stock appreciation rights to its executive officers. In addition,
the Company does not have a defined benefit or actuarial plan.( The following
table and notes thereto do not include Bruce J. Haber who became Chief Executive
Officer of the Company on January 31, 2003, Louis Buther who became President of
the Company on January 31, 2003 and William M. McKay who commenced serving as
Chief Financial Officer of the Company on August 19, 2002. Mr. McKay's
compensation for 2002 did not aggregate $100,000 or more in salary and bonuses.)
SUMMARY COMPENSATION TABLE
- ---------------------------------------------------------------------------- ------------------------------------------- -----------
Long Term Compensation
- -------------------------- -------- ---------------------------------------- ------------------------------ ------------ -----------
Annual Compensation Awards Payouts
- -------------------------- -------- ---------------------------------------- ------------------------------ ------------ -----------
Name and Year Salary ($) Bonus ($) Other Annual Restricted Number of LTIP All Other
Principal Position Compensation Stock Options Payout ($) Compensation
($) Award(s) ($) ($)
- -------------------------- -------- ------------ ---------- ---------------- --------------- -------------- ------------ -----------
Mark Waldron, former
Chief Executive Officer
of the Company 2002 116,250(1) 0 _22,618(1) 0 0 0 0
2001 70,000(1) 0 17,821(1) 0 0 0 0
2000 0 0 0 0 3,700(2) 0 0
- - -
- -------------------------- -------- ------------ ---------- ---------------- --------------- -------------- ------------ -----------
Al Guadagno, former
Executive Vice President
and Chief Financial
Officer of MRM 2002 155,686 0 0 0 150,000(3) 0 0
2001 135,938 0 0 0 148,000 0 0
2000 50,000 0 0 0 0 0 0
- -------------------------- -------- ------------ ---------- ---------------- --------------- -------------- ------------ -----------
40
- --------------
(1) Mr. Waldron did not receive a salary during 2001. However, pursuant to
a consulting agreement entered into with Mr. Waldron in December 2002
the Company allocated $70,000 of fees provided for under the agreement
to services performed by Mr. Waldron in 2001 as the Company's CEO for
which he was not previously compensated. In addition, the compensation
amount for 2002 includes $10,000 of such fees for the period from
January 1, 2002 to March 31, 2002. Such amounts will be paid in 2003.
In addition, the Company reimbursed Mr. Waldron $22,618 and $17,821 for
his rent, automobile, automobile insurance, and relocation expenses
incurred during 2002 and 2001, respectively.
(2) Originally options to purchase 10,000 shares of Common Stock of MRM
granted on September 25, 2000 and assumed by the Company pursuant to
its Merger Agreement with MRM and now exercisable to purchase 3,700
shares at $.68 per share.
(3) Options granted in 2002 include ten-year non-statutory stock options to
purchase 150,000 shares exercisable at $.01 per share granted in
December 2002 pursuant to a Termination Agreement dated August 2002,
but does not include options to purchase approximately 625,000 shares
granted in May 2002, which were canceled in September 2002 as part of
his termination agreement. Options granted in 2001 include options to
purchase 148,000 shares at an exercise price of $.68 per share granted
in July 2001 in connection with the Company's acquisition of MRM and
the resulting exchange of option shares of MRM for option shares of the
Company.
Consulting Agreement with BJH Management, LLC
On October 15, 2001, the Company entered into a consulting agreement
(the "Consulting Agreement") with BJH Management, LLC ("BJH"), a New York based
company, to act as a consultant to the Company for an initial three-month
period, which the parties verbally agreed to extend to December 31, 2002.
Pursuant to the Consulting Agreement, BJH assigned Bruce J. Haber and Louis
Buther to assist the Company with strategic decisions, and day-to-day
operations. As compensation for its services, the Company paid BJH a monthly fee
of $25,000, plus reimbursement of reasonable and necessary business expenses,
subject to prior approval by the Company's Board of Directors. The Consulting
Agreement provided for a bonus in the form of a 12.5% equity interest in the
Company, on a post-funding basis, if the Company raised a minimum of $1 million
in equity capital by the conclusion of the consulting period, or if the Company
concluded that it no longer required any or all such additional equity as a
result of a debt restructuring on terms acceptable to the Company. Further, BJH
was entitled to receive such bonus if either of Messrs. Haber or Buther chose to
accept an executive position with the Company after the completion of a funding
transaction or debt restructuring. If no such positions were accepted, then the
equity participation would have been reduced to 7.5%. In the event the Company
was sold within a six-month period commencing on October 22, 2001, BJH would
have been entitled to a 10% equity interest.
41
Stock Issuance Agreement with BJH Management, LLC
The Company has determined that BJH, through its efforts in renegotiating and
restructuring of certain of the Company's outstanding debt obligations with key
creditors, had satisfied a significant portion of the Company's funding and
liquidity needs. In addition, Messrs. Haber and Buther agreed to join the
Company as executive officers as set forth in the "Employment Agreements
"between the Company and Bruce J. Haber and Louis Buther as described below.
Therefore, pursuant to the terms of a Stock Issuance Agreement and as additional
consideration for agreeing to enter into the Employment Agreements, the Company
agreed to issue to BJH 13,942,994 shares of common stock, which is equal to
17.5% of the fully diluted common shares outstanding (the "Initial Shares"). The
fully diluted common shares outstanding is defined as the outstanding shares of
the Company plus the number of shares issuable upon exercise of options/warrants
that are exercisable at $.25 or less.
The Stock Issuance Agreement also provides for the following: On or
before January 31, 2004, provided that (i) that the Employment Agreements are
then still in full force and effect on December 31, 2003 (the "Anniversary
Date"), and (ii) during the period commencing on January 1, 2003 and ending on
the Anniversary Date (the "One-Year Period"), the Company has sold additional
shares of Common Stock or Common Stock equivalents (exclusive of any shares of
Common Stock issued pursuant to the exercise or conversion, as the case may be,
of options, warrants, convertible debt or other derivative securities
outstanding on the date hereof), BJH shall have the right (the "Anti-Dilution
Right") to purchase from the Company, at a purchase price of $.005 per share,
additional shares of Common Stock (the "Additional Shares"), such that, upon the
purchase of such Additional Shares, BJH's ownership interest in the Company, on
a fully diluted basis, after the purchase of any such Additional Shares, when
aggregated with the Initial Shares, equals 17 1/2 % of the Company on a fully
diluted basis as of the Anniversary Date, provided, however, that such
Anti-Dilution Right shall only apply to up to $2,000,000 of actual Equity
Issuances (meaning stock or common stock equivalents sold for cash consideration
in a private placement or public offering) closed by the Company during the One
Year Period. For the avoidance of doubt, it is expressly understood and agreed
by the parties that the foregoing Anti-Dilution Right only applies to the first
$2,000,000 (or such lesser amount) of Equity Issuances actually closed by the
Company during the One Year Period. Consequently, in the event and to the extent
that the Company affects Equity Issuances during the One Year Period in excess
of $2,000,000, BJH's ownership interest in the Company will be diluted
accordingly. Should the Employment Agreements be terminated prior to the
Anniversary Date, any Additional Shares acquired by BJH prior to the Anniversary
Date shall be forfeited and BJH, simultaneously with the termination of such
Employment Agreements, shall be required to sell such Additional Shares back to
the Company at the same price paid for the Additional Shares by BJH.
The Stock Issuance Agreement also provides that the shares acquired by
BJH from the Company may not be sold, transferred, assigned, pledged, encumbered
or otherwise disposed of for a period of 12 months from the execution of the
Stock Issuance Agreement except in the case of a change in control of the
Company or to Messrs. Haber or Buther and/or their immediate family members as
defined in the Agreement. The Stock Issuance Agreement also provides for certain
piggy-back registration rights to register the shares for resale with the
Securities and Exchange Commission and notice provisions of at least 30 days
before the initial filing of the Registration Statement with the Commission.
42
The Company paid BJH consulting fees and reimbursable expenses of
$439,975 and $69,355 for the year ended December 31, 2002, and the period from
October 2001 to December 31, 2001, respectively..
Employment Agreements with Bruce J. Haber and Louis Buther
Effective December 30, 2002, the Company has entered into Employment
Agreements (the "Employment Agreements") with Bruce J. Haber and Louis Buther
for an initial term of 18 months subject to an automatic annual renewal unless
terminated 90 days prior to the end of the term of these Agreements. Pursuant to
the Agreements, effective January 31, 2003, Mr. Haber became the Company's Chief
Executive Officer and was elected to the Company's Board of Directors, initially
as Chairman and Mr. Buther became its President. Messrs. Haber and Buther are
each performing the duties customary for an executive of such rank with a public
company. Messrs. Haber and Buther are each based in New York and are not
required to relocate without each person's respective consent. Mr. Haber is not
required to devote his full-time to the Company, but is required to devote such
time as is necessary for the performances of his duties. Mr. Buther is required
to devote his full business time to the Company.
For Mr. Haber's services, he is receiving an annual base compensation
of $175,000 (the "Haber Base Salary") payable in semi-monthly installments or
otherwise in accordance with Company policies. For Mr. Buther's services, he
will receive annual base compensation of $161,000 (the "Buther Base Salary"),
payable in semi-monthly installments or otherwise in accordance with Company
policies. In addition, in the event that pre-tax profits before Management's
bonuses are at least $1,035,000 for a calendar year, then Messrs. Haber and
Buther shall receive a bonus of $50,000 each, increasing to $75,000 each, if
pre-tax profits are $1,150,000 plus 6% each of pre-tax profits over $1,150,000.
Such bonus, if earned, will be paid within 30 days after the end of each fiscal
year end of the Company. The Company reimburses Messrs. Haber and Buther for all
ordinary and necessary business expenses incurred in connection with the
performance of their duties and responsibilities. Messrs. Haber and Buther shall
be entitled to indemnification for any claim or lawsuit, which may be asserted
against them when acting in a capacity for the Company or any subsidiary or
affiliated business. Messrs. Haber and Buther shall also be entitled to
participate in officers and directors liability insurance maintained by the
Company and any subsidiary or affiliated business.
The Employment Agreements provide that all proprietary information
inventions and trade secret information of the Company shall belong exclusively
to the Company, including all patents, copyrights and other rights in connection
therewith. At all times, both during the term of the Employment Agreements and
after termination thereof for any reason whatsoever, Messrs. Haber and Buther
agree to keep in strict confidence and trust all proprietary information and
that they will not use or disclose any proprietary information except as may be
necessary in the ordinary course of performing their duties under the Services
Agreements. All inventions and invention ideas developed by Messrs. Haber and
Buther in connection with their Employment Agreements shall belong to the
Company as its sole property and each person grants to the Company an assignment
of all right, title and interest pertaining thereto. During the term of the
Employment Agreements and for a period of six months thereafter, Messrs. Haber
and Buther and BJH agree that they will not (i) directly or indirectly engage in
or become interested in any business enterprise which is engaged in the current
business of the Company, other than a maximum ownership interest of 5% of any
publicly traded company that is in the current business of the rental of
43
surgical equipment to healthcare providers; (ii) directly or indirectly
participate for their own benefit in the solicitation of any business of any
type conducted by the Company from any person or entity which was a client or
customer of the Company during the term of the Services Agreements; or (iii)
directly or indirectly recruit for employment, or induce or seek to cause such
person to terminate his or her employment with the Company, any person who is
then an employee of the Company or was an employee of the Company during the
preceding six months, provided that the foregoing shall not apply to the
recruiting for employment of Messrs. Haber and Buther and Fran Barr. The
Employment Agreements provide for termination of the Agreements for cause after
giving notice to Messrs. Haber and/or Buther or if they violate the restrictive
covenants, they are found to have committed an act of fraud, embezzlement, or
theft against the property or personnel of the Company or convicted of a felony
or other criminal conduct that would be expected to materially adversely affect
the Company's business, prospects, results of operations or financial condition.
The Employment Agreements may be terminated by the Company upon the death or
12-month disability of Messrs. Haber or Buther or without cause by giving
written notice.. Messrs. Haber and/or Buther may also terminate their respective
Employment Agreements at any time by giving 30 days prior written notice to the
Company. In all such cases, Messrs Haber and Buther shall be entitled to receive
their earned and unpaid base salary and Bonuses earned and unpaid through the
effective date of termination. In the case of termination without cause, Mr.
Haber shall be entitled to receive an amount equal to 50% of the then current
annual Haber Base Salary and reasonably incurred expenses through the
termination date. Mr. Buther shall be entitled to receive an amount equal to the
unpaid Buther Base Salary through the termination date of his Employment
Agreement. Upon termination of the Employment Agreement for cause, Haber shall
immediately resign as a director of the Company unless otherwise agreed to by
the Company and Haber.
Consulting Agreement with Mark Waldron
On December 30, 2002, the Company entered into a non-exclusive
Consulting Agreement (the "Waldron Consulting Agreement" or "Agreement") with
JIMA Management LLC and Mark Waldron for the period from January 15, 2003 to
September 15, 2003. JIMA Management LLC agrees to provide the Company with the
non-exclusive services of Mr. Waldron as may be required by the Company from
time-to-time during the term of the agreement. Mr. Waldron's consulting services
will include advising the Company on commercial strategies, management and
operations, and assisting the Company with identifying and pursuing suitable
business opportunities. Pursuant to the Agreement, JIMA Management LLC will be
paid $10,000 per month. Such fees will also compensate JIMA Management LLC for
services provided by Mr. Waldron during the term of this agreement as well as
services provided to the Company and expensed on the Company's books and records
for the period from July 1, 2001 to March 31, 2002 during which time Mr. Waldron
served as the Company's Chief Executive Officer and did not receive a salary.
The Waldron Consulting Agreement also provides for certain piggy-back
registration rights to have his Common Stock registered for sale with the
Securities and Exchange Commission and notice provisions of at least 30 days
before the initial filing of the registration statement with the Commission.
44
In the first three months of 2002, Mr. Waldron did not receive a
salary, but received payment of his rent, automobile and automobile insurance as
benefits from the Company. Between April 2002 and January 2003, MRM was paying
him a salary at the monthly rate of $12,500 and has discontinued all other
benefits described above, except a monthly auto allowance.
The Company expensed fees of $70,000 and $10,000 as of December 31,
2001 and March 31, 2002, respectively, in connection with services provided
under the Waldron Consulting Agreement. The Company will expense the remaining
fees of $10,000 due under the Agreement in 2003.
Employment Arrangement - William M. McKay
In August 2002, William M. McKay became the Company's Chief Financial
Officer ("CFO") pursuant to an engagement letter. As CFO, he is currently
receiving a salary of $140,000 per annum, first year bonuses of up to $45,000,
and options to purchase 1,200,000 shares of the Company's Common Stock
exercisable at $.01 per share with said options vesting in five equal
installments on December 30, 2002, August 19, 2003, August 19, 2004, August 19,
2005 and August 19, 2006. In the event that the Company terminates Mr. McKay
without cause, he shall be entitled to receive six months severance pay.
Other Agreements
In August 2000, MRM entered into a two-year employment arrangement with
Al Guadagno, its Executive Vice President and Chief Financial Officer. The
principal terms of this arrangement are an annual base compensation of $150,000,
an annual bonus based upon performance, and the issuance of non-qualified stock
options at the inception of the arrangement. In addition, the arrangement
provided that, if Mr. Guadagno is terminated, he will then be entitled to
receive severance compensation through August 2002. The Company notified Mr.
Guadagno that his contract would not be renewed in August 2002.
In January 2000, MRM entered into a three-year employment contract with
Richard Whitman, MRM's former Chairman, President and Chief Executive Officer.
This contract provided for an annual base compensation of $180,000, an annual
bonus based upon performance, and the issuance of non-qualified stock options of
MRM at the inception of the contract (equal to 10% of the fully diluted shares
outstanding at the inception of this contract). In addition, the contract
provided that, if Mr. Whitman is terminated prior to the end of the contract, he
will then be entitled to receive compensation through the end of the contract.
Pursuant to an agreement dated August 20, 2001, as amended November 30, 2001.
Mr. Whitman, the Company and MRM agreed as follows:
o To terminate the January 2000 Agreement;
o To retain Mr. Whitman as a non-exclusive consultant for the
Company and MRM in the area of business development, fund
raising and corporate development through January 9, 2003;
o To pay Mr. Whitman a salary at the annual rate of $187,200
between October 1, 2001 and December 31, 2001 and thereafter
at the rate of $8,000 per month;
o The Company shall pay Mr. Whitman $31,650 (in 24 equal
installments), which amount represents the difference between
the amounts that he will have been paid to September 30, 2001
pursuant to his original employment contract and the
compensation to which he was entitled to be paid to September
30, 2001.
45
o Reaffirm Mr. Whitman's right to receive stock options and
registration rights in accordance with the January 2000
Agreement as adjusted to give effect to the conversion ratio
applied to other MRM stockholders.
o For Mr. Whitman to convert his $60,000 note into 237,874
shares of the Company's Common Stock with registration rights
subject to a lock-up agreement until August 15, 2002.
Pursuant to a Settlement Agreement dated November 26, 2002, Mr. Richard
Whitman and the Company entered into an agreement whereby the Company agreed to
pay Mr. Whitman $25,000 upon the execution of this agreement and an additional
$17,000 on or before March 31, 2003 (less payroll deductions) in full
satisfaction of all monies then due and owing to him. If timely payments are not
made, then the Company would owe him $213,000 less any payments made under their
Settlement Agreement. The Settlement Agreement also included Mr. Whitman's
waiver of registration rights effective immediately. On February 3, 2003, the
Company entered into a one-year Consulting Agreement with Mr. Whitman to retain
his non-exclusive services to provide advice upon request with respect to
commercial strategies, management and the operational aspects of the Company's
business. As consideration for his anticipated services, the Company granted him
ten-year options to purchase 250,000 shares of its common stock exercisable at
$.01 per share.
MRM has adopted a defined contribution retirement plan, which qualifies
under Section 401(k) of the Internal Revenue Code. This Plan covers
substantially all employees with over one year of service. MRM currently
provides matching contributions of 15% of each participant's deferral up to a
maximum of 6% of compensation. Except for MRM's 401(k) Plan, the Company has no
other annuity, pension, or retirement benefits for its employees.
Directors' Compensation
Directors do not presently receive compensation for serving on the
Board or on its committees other than the grant of stock options. Depending on
the number of meetings and the time required for the Company's operations, the
Company may decide to compensate its directors in the future.
2002 Employee and Consulting Compensation Plan
On April 1, 2002, the Company established an Employee Benefit and
Consulting Compensation Plan (the "2002 Plan") covering 13,000,000 shares. In
the event that stockholder approval is not obtained by April 1, 2003, then all
outstanding Incentive Stock Options granted under the 2002 Plan shall become
Non-Statutory Stock Options and no Incentive Stock Options could be thereafter
granted under the 2002 Plan.
Administration
Our Board of Directors, Compensation Committee or both, in the sole
discretion of our Board, administer the 2002 Plan. The Board, subject to the
provisions of the 2002 Plan, has the authority to determine and designate
officers, employees, directors and consultants to whom awards shall be made and
46
the terms, conditions and restrictions applicable to each award (including, but
not limited to, the option price, any restriction or limitation, any vesting
schedule or acceleration thereof, and any forfeiture restrictions). The Board
may, in its sole discretion, accelerate the vesting of awards. The Board of
Directors must approve all grants of Options and Stock Awards issued to our
officers or directors.
47
Types of Awards
The 2002 Plan is designed to enable us to offer certain officers,
employees, directors and consultants of us and our subsidiaries equity interests
in us and other incentive awards in order to attract, retain and reward such
individuals and to strengthen the mutuality of interests between such
individuals and our stockholders. In furtherance of this purpose, the 2002 Plan
contains provisions for granting incentive and non-statutory stock options and
Common Stock Awards.
Stock Options. A "stock option" is a contractual right to purchase a
number of shares of Common Stock at a price determined on the date the option is
granted. The option price per share of Common Stock purchasable upon exercise of
a stock option and the time or times at which such options shall be exercisable
shall be determined by the Board at the time of grant. Such option price shall
not be less than 100% of the fair market value of the Common Stock on the date
of grant (110% of the fair market value in the case of Incentive Stock Options
granted to any 10% or greater stockholders). The option price must be paid in
cash, money order, check or Common Stock of the Company. Non-Statutory Stock
Option may also contain at the time of grant, at the discretion of the Board,
certain other cashless exercise provisions.
Options shall be exercisable at the times and subject to the conditions
determined by the Board at the date of grant, but no option may be exercisable
more than ten years after the date it is granted. If the Optionee ceases to be
an employee of our company for any reason other than death, any incentive stock
option exercisable on the date of the termination of employment may be exercised
for a period of thirty days or until the expiration of the stated term of the
option, whichever period is shorter. In the event of the Optionee's death, any
incentive stock option exercisable at the date of death may be exercised by the
legal heirs of the Optionee from the date of death until the expiration of the
stated term of the option or six months from the date of death, whichever event
first occurs. In the event of disability of the Optionee, the Incentive Stock
Options shall expire on the stated date that the Option would otherwise have
expired or 12 months from the date of disability, whichever event first occurs.
The termination and other provisions of a non-statutory stock option shall be
fixed by the Board of Directors at the date of grant of each respective option.
Common Stock Award. "Common Stock Award" are shares of Common Stock
that will be issued to a recipient at the end of a restriction period, if any,
specified by the Board if he or she continues to be an employee, director or
consultant of us. If the recipient remains an employee, director or consultant
at the end of the restriction period, the applicable restrictions will lapse and
we will issue a stock certificate representing such shares of Common Stock to
the participant. If the recipient ceases to be an employee, director or
consultant of us for any reason (including death, disability or retirement)
before the end of the restriction period unless otherwise determined by the
Board, the restricted stock award will be terminated.
Eligibility
Our officers, employees, directors and consultants of Emergent Group
and our subsidiaries are eligible to be granted stock options, and Common Stock
Awards. Eligibility shall be determined by the Board; however, all Options and
Stock Awards granted to officers and directors must be approved by the Board.
48
Termination or Amendment of the 2002 Plan
The Board may at any time amend, discontinue, or terminate all or any
part of the 2002 Plan, provided, however, that unless otherwise required by law,
the rights of a participant may not be impaired without his or her consent, and
provided that we will seek the approval of our stockholders for any amendment if
such approval is necessary to comply with any applicable federal or state
securities laws or rules or regulations.
Awards
During 2002 and the first two months of 2003, we granted options to
purchase 10,306,880 shares of our Common Stock under the 2002 Plan. The options
are exercisable at $.01 per share (except for 80,000 options exercisable at $.05
per share and 80,000 options exercisable at $.20 per share), 1,478,613 of which
have been terminated as a result of employees terminating their employment with
the Company. Unless sooner terminated, the 2002 Plan will expire on March 31,
2012 and no awards may be granted after that date. Unless stockholder approval
of the 2002 Plan is obtained by April 1, 2003, all incentive stock options
granted under the 2002 Plan shall become non-statutory stock options.
It is not possible to predict the individuals who will receive future
awards under the 2002 Plan or the number of shares of Common Stock covered by
any future award because such awards are wholly within the discretion of the
Board. The table below contains information as of February 28, 2003 on the known
benefits provided to certain persons and group of persons under the 2002 Plan.
49
----------------------------------------------------- ---------------- ----------------- -----------------------
Number of Range of Value of unexercised
---------------------------------------------------- Shares subject exercise price options at Feb. 28
to Options ($) per Share 2003(1)
Name and Position
----------------------------------------------------- ---------------- ----------------- -----------------------
Bruce J. Haber
Chief Executive Officer -0- -0- -0-
----------------------------------------------------- ---------------- ----------------- -----------------------
Louis Buther, President -0- -0- -0-
----------------------------------------------------- ---------------- ----------------- -----------------------
William M. McKay, Chief Financial Officer 1,200,000 .01 (1)
----------------------------------------------------- ---------------- ----------------- -----------------------
Three Executive Officers
As a group 1,200,000 .01 (1)
----------------------------------------------------- ---------------- ----------------- -----------------------
Three Non-Employee
Directors as a group 2,000,000 .01 (1)
----------------------------------------------------- ---------------- ----------------- -----------------------
Non-Executive Officer
Employees and Consultants 6,217,609 .01 (1)
----------------------------------------------------- ---------------- ----------------- -----------------------
- -----------
(1) Value is normally calculated by multiplying (a) the difference between
the market value per share at February 28, 2003 and the option exercise
price by (b) the number of shares of Common Stock underlying the option.
Due to the limited and sporadic trading of the Company's Common Stock at
year end, no value is given to the options as of February 28, 2003.
2001 Stock Option Plan
On November 1, 2001, we adopted a 2001 Stock Option Plan, subject to
stockholder approval, similar to our 2002 Plan except that the 2001 Plan which
covers 8,000,000 shares does not provide for the direct issuance of stock and it
has no cashless exercise provisions. The Company granted options to purchase
970,000 shares under the 2001 Plan Exercisable at $1.00 per shares, 385,000 of
which have been terminated as a result of employees terminating their employment
with the Company. Since stockholder approval was not obtained on or before
November 1, 2002, all incentive stock options granted under the Plan have
automatically become non-statutory stock options and the Board is limited to
granting non-statutory stock options under the Plan. The Board of Directors has
no plans to issue any additional options under the 2001 Plan and on December 19,
2002, it approved a resolution reducing the number of authorized options under
the Plan to 585,000 shares of Common Stock, representing the number of
outstanding options under the Plan as of that date. The exercisability of
options outstanding under the 2001 Plan is subject to stockholder approval.
MRM Stock Option Plan
In September 1996, MRM adopted the 1996 Stock Incentive Plan ("1996
Plan") to allow officers, employees and certain non-employees to receive certain
options to purchase common stock and to receive grants of common stock subject
to certain restrictions. Under the Plan, regular salaried employees and
50
directors may be granted options exercisable at not less than 100% of the fair
market value of the shares at the date of grant. The exercise price of any
option granted to an optionee who owns stock possessing more than 10% of the
voting power of all classes of common stock of MRM must be 110% of the fair
market value of the common stock on the date of grant, and the duration may not
exceed five years. Options generally become exercisable at a rate of one-third
of the shares subject to option on each of the first, second and third
anniversary dates of the grant. The duration of options may not exceed ten
years. A maximum number of 1,500,000 shares of MRM's common stock were issuable
under the Plan.
In February 2000, MRM adopted the 2000 Stock Incentive Plan ("2000
Plan") to allow officers, employees and certain non-employees to receive certain
options to purchase common stock and to receive grants of common stock subject
to certain restrictions. Under the 2000 Plan, regular salaried employees,
including directors, who are full time employees, may be granted options
exercisable at not less than 100% of the fair market value of the shares at the
date of grant. The exercise price of any option granted to an optionee who owns
stock possessing more than 10% of the voting power of all classes of common
stock of MRM must be 110% of the fair market value of the common stock on the
date of grant, and the duration may not exceed five years. Options generally
become exercisable at a rate of one-third of the shares subject to option on
each of the first, second and third anniversary dates of the grant. The duration
of options may not exceed ten years. A maximum number of 2,500,000 shares of
common stock were issuable under the 2000 Plan.
Pursuant to the Merger Agreement between the Company and MRM in July
2001, each outstanding MRM stock option automatically became an option in shares
of the Company's common stock, on the same terms and conditions as were
applicable under such MRM option, to purchase the same number of shares of the
Company's common stock as the holder of MRM would have been entitled to receive
pursuant to the merger had such holder exercised such option in full immediately
prior to the effective time of the merger at a price per share (rounded up to
the nearest whole cent) equal to (y) the aggregate exercise price for the shares
of MRM otherwise purchasable pursuant to the MRM option divided by (z) the
number of full shares of the Company's common stock deemed purchasable pursuant
to such MRM option in accordance with the foregoing. At July 6, 2001, the
effective time of the merger, Emergent assumed MRM outstanding options to
purchase 564,786 shares of Emergent's Common Stock at exercise prices ranging
from $.68 per share to $4.05 per share. Of the 564,786 options, 51,375 are
currently outstanding as of February 28, 2003 and none have been exercised. The
Company does not intend to grant any more options under the MRM plans.
51
OPTION GRANTS TABLE
The information provided in the table below provides information with
respect to individual grants of stock options during 2002 of each of the
executive officers named in the summary compensation table above. The Company
did not grant any stock appreciation rights during 2001.
Option Grants in Last Fiscal Year
Individual Grants Potential
Realizable Value at
Assumed Annual
Rates of Stock Price
Appreciation
for Option Term (2)
Name Options (c)% of Total Exercise Price Expiration Date 5% ($) 10% ($)
Granted (#) Options/Granted to ($/Sh)
Employees in Fiscal
Year (1)
Mark Waldron 0 0 N/A N/A N/A N/A
A. Guadagno 150,000 1% .01 5/20/12 944 2,400
N/A - Not Applicable.
- -------------
(1) The percentage of total options granted to employees in fiscal year is
based upon options granted to officers, directors and employees.
(2) The potential realizable value of each grant of options assumes that
the market price of the Company's Common Stock appreciates in value
from the date of grant to the end of the option term at annualized
rates of 5% and 10%, respectively, and after subtracting the exercise
price from the potential realizable value.
52
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR
AND FY-END OPTION VALUES
The information provided in the table below provides information with
respect to each exercise of stock option during 2002 by each of the executive
officers named in the summary compensation table and the fiscal year end value
of unexercised options.
(a) (b) (c) (d) (e)
Value of
Number of Unexercised
Shares Unexercised In-the-Money
Acquired on Options at Options
Exercise Value FY-End (#) at Fy-End($)
( # ) Realized Exercisable/ Exercisable/
Name ($)(1) Unexercisable Unexercisable(1)
---- ------ - ------------- ----------------
Mark Waldron -0- -0- 3,700/0 -0- / -0-
Al Guadagno -0- -0- 0/150,000(2) -0- / -0-
(1) The aggregate dollar values in column (c) and (e) are calculated by
determining the difference between the fair market value of the Common
Stock underlying the options and the exercise price of the options at
exercise or fiscal year end, respectively. In calculating the dollar
value realized upon exercise, the value of any payment of the exercise
price is not included. Fiscal year end value based upon a market price
of $.00001 per share determined as of the close of business on December
20, 2002, the last reported sale before the end of our 2002 fiscal
year.
(2) These options become exercisable on May 21, 2003.
53
Item 12. Security Ownership of Certain Beneficial Owners and Management.
As of February 28, 2003, the Company had outstanding 67,357,827 shares
of Common Stock. The only persons of record who presently hold or are known to
own (or believed by the Company to own) beneficially more than 5% of the
outstanding shares of such class of stock is listed below. The following table
also sets forth certain information as to holdings of the Company's Common Stock
of all officers and directors individually, and all officers and directors as a
group.
- ------------------------------------------------------------- ------------------------------- ------------------------
Name and Address of Beneficial Owner (1) Number of Common Approximate
Shares Percentage
- ------------------------------------------------------------- ------------------------------- ------------------------
Daniel Yun
375 Park Avenue, Suite 3607
New York, NY 10152 11,472,036 (2) 17.0
- ------------------------------------------------------------- ------------------------------- ------------------------
Mark Waldron
932 Grand Central Avenue
Glendale, CA 91201 10,247,377 (3) 15.2
- ------------------------------------------------------------- ------------------------------- ------------------------
Howard Waltman
140 Deerfield
Tenafly, NJ 07670 3,453,355 (4) 4.9
- ------------------------------------------------------------- ------------------------------- ------------------------
Matthew Fong and Paula Fong
13191 Crossroads Parkway, Suite 285
Industry, CA 91746 1,000,000 (5) 1.5
- ------------------------------------------------------------- ------------------------------- ------------------------
William M. McKay
932 Grand Central Avenue
Glendale, CA 91201 240,000 (6) *
- ------------------------------------------------------------- ------------------------------- ------------------------
Bruce J. Haber
c/o BJH Management, LLC
145 Huguenot Street, Suite 405
New Rochelle, NY 10801 7,967,425 (7) 11.8
- ------------------------------------------------------------- ------------------------------- ------------------------
Louis Buther
205 Ridgefield Avenue
South Salem, NY 10590 5,975,569(7) 8.9
- ------------------------------------------------------------- ------------------------------- ------------------------
All current and proposed executive officers and directors
as a group (seven) persons 40,355,762 (8) 56.4
- ------------------------------------------------------------- ------------------------------- ------------------------
The Jessica L. Haber Trust, Michela I. Haber, Trustee
65 The Oaks
Roslyn Heights, NY
7,967,425 (7) 11.8
- ------------------------------------------------------------- ------------------------------- ------------------------
Adventure Capital LLC
525 North Broadway, Suite 210
White Plains, NY 10603 5,737,247 (9) 8.5
- ------------------------------------------------------------- ------------------------------- ------------------------
54
- ---------------
(*) Represents less than 1% of the outstanding shares of the Company's
Common Stock.
(1) All shares are directly owned, and the sole investment and voting
power is held, by the persons named unless otherwise noted.
(2) Includes 1,233,334 shares owned by Emergent Capital L.P., which
Mr. Yun has sole voting and disposition power, 700,000
shares gifted to 17 persons and options to purchase 3,700 shares.
(3) Includes options to purchase 3,700 shares.
(4) Includes 453,255 shares owned by his family in the name of The THW
Group LLC, over which shares Mr. Waltman exercises voting and
investment control and options to purchase 3,000,000 shares,
exercisable within 60 days of the filing date of this Form 10-K.
(5) Includes options to purchase 1,000,000 shares which are exercisable
within 60 days of the filing date of this Form 10-K.
(6) Represents options to purchase shares of the Company's Common Stock
which are exercisable within 60 days of the filing date of this Form
10-K.
(7) BJH Management LLC is a company owned by Mr. Bruce J. Haber. BJH
acquired 13,942,994 shares of Common Stock of the Company. Of the
13,942,994 shares, 7,967,425 shares were gifted by Mr. Haber to an
irrevocable trust for the benefit of his daughter, Jessica L. Haber
with his wife, Michela I. Haber, as Trustee. The remaining 5,975,569
shares were transferred to Louis Buther. BJH Management has certain
anti-dilution rights to maintain on behalf of itself (and/or its
transferees) a combined 17.5% of the Company's outstanding shares on a
fully diluted basis as more fully described in item 11.
(8) See footnotes (2) through (5) above.
(9) Controlled by Paul Wasserman.
Voting Agreement
During December 2002, the Company's former Chairman of the Board, Mr.
Daniel Yun and former Chief Executive Officer, Mr. Mark Waldron entered into a
Voting Agreement (the "Voting Agreement"), whereby they agreed to vote all of
their common stock in unison. However, to the extent that Messrs. Yun and
Waldron do not agree on any particular matter, then each of them shall vote
their shares of common stock in a manner consistent with the recommendation of
the majority of the Company's Board of Directors. The Voting Agreement
terminates on the earlier of five years from the effective date, or upon the
sale of such shares by Messrs. Yun or Waldron to a non-related or unaffiliated
party.
The Company does not know of any arrangement or pledge of its
securities by persons now considered in control of the Company that might result
in a change of control of the Company.
55
Securities Authorized for Issuance under Equity Compensation Plans.
For a description of information pertaining to securities authorized
for issuance under equity compensation plans, see "Item 5"
Item 13. Certain Relationships and Related Transactions.
MRM Transactions
In April 2000, MRM borrowed $100,000 from Edward Whitman, the father of
MRM's former Chairman, President and Chief Executive Officer. This loan was in
the form of a note payable to Mr. Whitman and bore interest at a rate of 10% per
annum, with interest payable monthly and principal originally due in full in
April 2001 but subsequently extended to April 2002. In addition, Mr. Whitman
received 50,000 non-qualified stock options with an exercise price of $0.025 per
share at the time that the loan proceeds were received by MRM, which resulted in
deemed compensation of $28,000 in the aggregate. The terms and conditions of
this loan was believed to be the same as would be offered to an independent
third party by MRM.
In September 2000, MRM sold 6,666,666 shares of its common stock for
$0.30 per share, or an aggregate of $2.0 million. Emergent Capital L.P.
purchased 3,333,333 of these shares for $1.0 million.
During November and December 2000, MRM issued $60,000 in convertible
subordinated debt to Richard Whitman, an affiliate of MRM. This instrument bore
interest at the rate of 8% per annum, originally was to mature three months from
date of issuance but subsequently was extended and was converted into 237,874
shares of Emergent's stock. Between November 2000 and May 10, 2001, MRM received
$515,000 of loans from the Emergent, which were convertible into 5,150,000
shares of MRM Common Stock. For a description of certain other transactions with
Mr. Whitman, see Item 11.
In December 2000, MRM sold 1,333,333 shares of its common stock. These
shares were sold at a price of $0.30 per share, with minimal offering expenses
comprised of mostly legal expenses, and resulted in net proceeds of $400,000.
On May 7, 2001, MRM borrowed $100,000 from Edward Whitman and issued a
promissory note convertible into MRM Common Stock. On November 4, 2002, the
Company entered into a Settlement Agreement with Edward Whitman pursuant to
which it agreed to pay Mr. Whitman $20,000 upon the execution of the agreement
and an additional $20,000 on or before March 31, 2003 and to issue 370,000
shares of the Company's common stock in full settlement of all outstanding
obligations, including, but not limited to, a $100,000 convertible promissory
note issued on May 7, 2001 and a $100,000 promissory note which originated in
April 2000.
Allen Bonnifield, a founder and former significant stockholder of MRM,
has executed personal guarantees for certain of MRM's leases and to a bank for
its current bank loan facility.
56
During the year ended December 31, 2001, the Company transferred
$227,013 of property and equipment to a related party, for which the Company
recorded a receivable in like amount. This is included in "Due from Related
Parties, Net" on the accompanying consolidated balance sheet. For a description
of the related party, see "Investments In Limited Liability Companies."
57
Emergent Group Inc. Transactions
Reference is made to "Item 1" for a discussion of an equity transfer
and spin-off of assets to Dynamic International Ltd. and the former members of
Emergent Ventures, LLC's acquisition of control of Dynamic Ltd.
Emergent's Acquisition of MRM
Reference is made to "Item 1" for a discussion of the Company's July
2001 acquisition of MRM.
Transactions with BJH Management LLC, Bruce J. Haber and Louis Buther
Reference is made to Item 11 for a description of transactions between
the Company, BJH, Bruce J. Haber and Louis Buther.
Consulting Agreement with Mark Waldron
Reference is made to Item 11 for a description of the Company's
Consulting Agreement with Mr. Waldron.
Employment Arrangement - William M. McKay
Reference is made to Item 11 for a description of the Company's
employment arrangement with William M. Mckay.
Other Agreements - Richard Whitman
Reference is made to Item 11 for a description of the Company's
agreements with Richard Whitman, MRM's former Chairman of the Board.
Loans from Shareholders to the Company and Transactions Between the Company
and Emergent Capital Investment Management, LLC.
From March 2001 through September 2001, Mark Waldron and Daniel Yun
loaned Emergent Ventures and the Company $1,045,123. The loans were issued as
Demand Notes with an interest rate of 10% per annum. Since the Company's
inception in March 2000 through September 2001, the Company has engaged in
numerous transactions with Emergent Capital Investment Management, LLC ("ECIM").
The Company and ECIM were related parties due to common ownership of both
entities. Daniel Yun and Mark Waldron were the sole members of ECIM and the
beneficial owners of 22,718,383 common shares of the Company, representing 43.0%
of the Company's outstanding shares as of September 30, 2001. These related
party transactions have been disclosed in the Company's Notes to the
Consolidated Financial Statements. The transactions between the Company and ECIM
consist of loans, the reimbursement of expenses and the sale of assets. As of
December 31, 2000, ECIM owed the Company $467,519. As of September 30, 2001, the
balance owed by ECIM to the Company increased to a total of $1,045,123. The
majority of this increase was due to the sale, from the Company to ECIM, of
fixed assets and security deposit associated with the Company's New York office.
58
The fixed assets consisted of leasehold improvements, furniture and office
equipment totaling $191,504, net of depreciation, and a security deposit of
$208,272. The Company decided to sell these assets given the move of its
corporate headquarters from New York to California. The Company has agreed to
sell to ECIM, at cost net of depreciation, a remaining $84,917 in office
equipment.
As of September 30, 2001, the Company owed a principal amount of
$1,045,123 to Messrs. Yun and Waldron, as described above, and ECIM, an entity
owned by Messrs. Yun and Waldron, owed the Company $1,045,123, as described
above. Effective September 30, 2001, Messrs. Yun and Waldron and the Company
agreed to offset the principal and accrued interest on the loans owned to
Messrs. Yun and Waldron, against the amount owed by ECIM to the Company.
Other Transactions
On January 10, 2000, the Company entered into an agreement with Tahoe
Carson Management Consulting ("Tahoe"), which is managed by Allen Bonnifield,
the founder of MRM, pursuant to which it was to receive a monthly fee of $16,633
per month. On August 20, 2001, the Company entered into a revised agreement with
Tahoe for Tahoe to provide consulting services to the Company in exchange for
$6,000 per month from September 1, 2001 to January 9, 2003 plus the options
described in the preceding paragraph. Other than two payments of $6,000 that
were made subsequent to August 20, 2001, the Company was in arrears for the
payment of these consulting fees totaling approximately $232,035. In December
2002, the Company entered into a Settlement Agreement with Tahoe pursuant to
which the Company agreed to pay Tahoe $35,000 as follows: $10,000 on or before
December 18, 2002, $12,500 on or before March 31, 2003 and $12,500 on or before
June 30, 2003 and to issue options to purchase 150,000 shares of Common Stock
exercisable at $.01 per share through December 2012.
In July, 2001, the Company sold 3,000,000 shares of its Common Stock
for $600,000 to a non-affiliated person, who became the owner of 5.68% of the
Company's outstanding shares of Common Stock.
On November 1, 2001, the Board of Directors approved two-year
consulting agreements with Howard Waltman and Paula Fong. Pursuant to these
agreements, Mr. Waltman and Mrs. Fong were to provide certain consulting
services to the Company in exchange for the grant of options described in the
paragraph below. These agreements were terminated by the Board in December 2002,
thereby fully vesting the options granted to them. On the same date, the Board
also approved an employment agreement with Calvin Yee. Mr. Yee is no longer
employed by the Company. However, Mr. Yee received options granted in connection
with the employment contract which are described in the paragraph below.
On November 1, 2001, the Company's Board of Directors approved the
grant of options to purchase 1,500,000 shares to Howard Waltman, exercisable at
$.20 per share until December 31, 2004. On the same date, the Board approved the
grant of 500,000 options to Paula Fong, exercisable at $.20 per share. Of the
500,000 options, one-half became exercisable on September 1, 2002 and the
balance of the options will become exercisable on September 1, 2003. These
500,000 options expire on December 31, 2004. Also, on November 1, 2001, the
Board approved the grant of options to purchase 500,000 shares to Calvin Yee,
59
formerly a vice president of the Company and chief operating officer of MRM, and
warrants to purchase 500,000 shares to Patterson Travis, Inc., exercisable at
$.01 per share until December 31, 2004. On November 1, 2001, Martin Stein, Esq.
received options to purchase 200,000 shares with one-half exercisable at $.01
per share and the balance at $.20 per share and expiring December 31, 2004. On
November 1, 2001, the Board ratified the grant of options to Rick Friedman to
purchase 988,436 shares at $.01 per share, with 329,000 becoming exercisable on
July 1, 2002, an additional 329,000 becoming exercisable on July 1, 2003 and the
balance of the options becoming exercisable on July 1, 2004 and expiring
December 31, 2004. All the foregoing options and warrants were not granted under
a Stock Option Plan.
On November 1, 2001, the Board granted 50,000 options to Medical
Marketing Group, 25,000 options to Board Partners, 100,000 options to Amy Lai,
10,000 options to Vanessa Quintana, 150,000 options to Tahoe, 100,000 options to
George Morvis, and 50,000 warrants to Cura Capital. The foregoing grants were at
exercise prices ranging from $.01 per share to $1.00 per share with various
exercise and vesting dates and, for the most part, with options/warrants
expiring in 2004. All of the foregoing options and warrants were not granted
under a Stock Option Plan.
On November 1, 2001, the Company also granted to 61 employees of MRM
options to purchase 1,070,000 shares of the Company's Common Stock at $1.00 per
share. These options expire no later than December 31, 2005 under the Company's
2001 Stock Option Plan. All of these options terminate 90 days after the grantee
ceases to perform services to the Company.
In November 2001, the Company entered into an Employment Contract with
Calvin Yee, its former Vice President, and Chief Operating Officer of MRM. The
agreement called for a base salary of $125,000 per year and options to purchase
500,000 shares of the Company's Common Stock at $.01 per share, which options
expire on December 31, 2004. In 2002, this agreement was terminated and Mr. Yee
retained his options.
On November 1, 2001, the Board of Directors adopted a resolution which
states as follows: "RESOLVED, that no further related party transaction between
the Company and Daniel Yun ("Yun"), Mark Waldron ("Waldron"), or any other
entity in which Yun or Waldron are directors, principals or shareholders shall
be authorized without prior approval of a majority of outside, or
non-interested, members of the Board of Directors."
On May 21, 2002, the Company granted options to purchase 6,195,880
shares of the Company's Common Stock to employees/consultants of the Company at
an exercise price of $.01 per share. These options were granted under the
Company's 2002 Stock Option Plan and have a term of 10 years.
On September 4, 2002, the Company terminated the services of Al
Guadagno, who served as MRM's chief financial officer. MRM agreed to continue
his salary and benefits through November 12, 2002 and medical benefits, but in
no event after March 7, 2003. Mr. Guadagno agreed to terminate his 625,395
incentive stock options granted under the 2002 Stock Option Plan and to receive
in its place, options to purchase 150,000 shares also exercisable at $.01 per
share at any time between May 21, 2003 and May 20, 2012 in accordance with the
2002 Stock Option Plan.
60
Effective December 30, 2002, the Company granted options to purchase
3,861,000 shares of the Company's Common Stock to employees/consultants of the
Company at an exercise price of $.01 per share. These options were granted under
the Company's 2002 Stock Option Plan and have a term of 10 years. On the same
date, the Company approved the grant of warrants to purchase 30,000 shares of
Common Stock, exercisable at $.01 per share through February 28, 2005 to a
non-affiliated person in connection with debt forgiveness of $3,100.
61
Item 14. 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.
62
Item 15. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.
(a)(1)(2) Financial Statements and Financial Statement Schedules.
A list of the Financial Statements and Financial Statement Schedules filed
as a part of this Report is set forth in Item 8, and appears at Page F-1 of this
Report, which list is incorporated herein by reference.
(a)(3) Exhibits
Number Exhibit Description
- ------ ------------ -------------
2.1 Agreement and Plan of Reorganization and Merger, dated as of January
23, 2001, among MRM, Registrant and MRM Acquisition Inc. (1)
2.2 Agreement to transfer equity dated August 10, 2000. (3)
3.1 Articles of Incorporation of Registrant. (5)
3.2 Amendment to Articles of Incorporation.(5)
3.3 By-laws of Registrant.(5)
9.1 Voting Trust Agreement between Daniel Yun and Mark Waldron(4)
10.1 Consulting Agreement dated October 15, 2001 with BJH Management LLC.(4)
10.2 Stock Issuance Agreement dated December 30, 2002 with BJH Management
LLC.(4)
10.3 Employment Agreement dated December 30, 2002 with Bruce J. Haber.(4)
10.4 Employment Agreement dated December 30, 2002 with Louis Buther.(4)
10.5 Consulting Agreement dated December 30, 2002 with JIMA Management LLC
and Mark Waldron.(4)
10.6 Consulting Agreement dated September 1, 2001 with Howard Waltman, which
was terminated by the Company on December 19, 2002.(4)
10.7 Consulting Agreement dated September 1, 2001 with Paula Fong, which
was terminated by the Company on December 19, 2002.(4)
10.8 Facility Lease - Glendale, California(4)
10.9 Settlement Agreement with Al Guadagno. (4)
10.10 Settlement Agreement with Richard Whitman.(4)
10.11 Consulting Agreements and Settlement Agreement with Tahoe Carson
Management Consulting.(4)
10.12 Employment Agreement - Calvin Yee, approved by the board on November 1,
2001 (4).
10.13 Engagement Letter - William M. McKay (4)
10.14 Consulting Agreement dated February3, 2003 - Richard Whitman (6)
11.1 Statement re: computation of per share earnings (see consolidated
financial statements and notes thereto).
21.1 Subsidiaries of Registrant listing the state or other jurisdiction of
each subsidiary other than subsidiaries which would not constitute a
significant subsidiary in Rule 1-02(w) of Regulation S-X. (6)
99.1 2002 Stock Option Plan.(4)
99.2 2001 Stock Option Plan.(4)
- --------------------------------------------------------------------------------
63
(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 Registrant's Form 10-K for its fiscal
year ended December 31, 2001.
(5) Incorporated by reference to the Registrant's Form S-4 Registration
Statement filed May 8, 2001.
(6) Filed herewith.
The following exhibits were filed or incorporated by reference in Medical
Resources Management, Inc.'s Form 10-KSB or Form 10-KSB/A for its fiscal year
ended October 31, 2000. The exhibits referenced therein are incorporated by
reference into the Registrant's Form 10-K.
Exhibit Exhibit Description
Number
3.1 Articles of Incorporation and Amendments thereto. (1)
3.2 By-Laws of the Registrant. (1)
10.1 Copy of a Warrant Agreement and Warrant issued between November 1996 and March
1997 to investors in the Registrant's Private Placement. (1)
10.2 Registrant's 1996 Stock Incentive Plan. (1)
10.3 Equipment Note Loan and Security Agreement dated April 24, 1997 between the
Registrant and LINC Capital Management, a division of LINC Capital, Inc. (1)
10.4 Collateral Note No. 1 dated April 28, 1997 between the Registrant and LINC
Capital, Inc. (1)
10.5 Lease Modification Agreement dated April 24, 1997 between Pulse Medical
Products, Inc. and LINC Capital Management, a division of LINC Capital, Inc.
(1)
10.6 Warrant Purchase Agreement dated April 24, 1997 between the Registrant and
LINC Capital Management, a division of LINC Capital, Inc. (1)
10.7 Warrant to Purchase Shares of Common Stock dated April 24, 1997 between the
Registrant and LINC Capital Management, a division of LINC Capital, Inc. (1)
10.8 Amendment to Warrant Agreement--Class A Redeemable Warrant, dated September 26,
1999. (5)
10.9 Amendment to Warrant Agreement--Class B Redeemable Warrant, dated September 26,
1999. (5)
10.10 Loan Agreement dated March 30, 1999 between Physiologic Reps and Santa Monica
Bank. (5)
64
10.11 Promissory Note dated March 30, 1999 between Physiologic Reps and Santa Monica
Bank (Line of Credit). (5)
10.12 Promissory Note dated March 30,1999 between Physiologic Reps
and Santa Monica Bank (Term Loan). (5)
10.13 Registrant's 2000 Stock Incentive Plan. (7)
10.14 Agreement and Plan of Reorganization and Merger among Medical Resources
Management, Inc., Emergent Group, Inc. and MRM Acquisition, Inc. dated as of
January 23, 2001. (6)
10.15 Employment Contract between the Registrant and Richard Whitman, Chairman,
President and CEO dated January 10, 2000. (7)
21.0 Subsidiaries of the Registrant. (7)
(1) Exhibit filed with Registrant's Form 10-SB on May 16, 1997 and incorporated
by reference herein.
(2) Exhibit filed with Registrant's Form 10-QSB for the quarter ended July 31,
1997 and incorporated by reference herein.
(3) Exhibit filed with Registrant's Form 10-KSB for the fiscal year ended
October 31, 1997 and incorporated by reference herein.
(4) Exhibit filed with Registrant's Form 10-QSB for the quarter ended January
31, 1998 and incorporated by reference herein.
(5) Exhibit filed with Registrant's Form 10-KSB for the fiscal year ended
October 31, 1999 and incorporated by reference herein.
(6) Exhibit filed with Registrant's Form 8-K filed on January 31, 2001. (7)
Exhibit filed with Registrant's Form 10-KSB or 10-KSB/A for the fiscal year
ended October 31, 2000 and incorporated by reference herein.
(b) Reports on Form 8-K.
No Reports on Form 8-K were filed or required to be filed during the
quarter ended December 31, 2002.
65
EMERGENT GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2002 AND 2001 AND
FOR THE PERIOD FROM MARCH 8, 2000 (INCEPTION) TO DECEMBER 31, 2000
q:\shared\finance\...\Emergent Group Dec02 Aud #2356
q:\shared\finance\...\\Emergent Group Dec02 Aud Excel
EMERGENT GROUP, INC. AND SUBSIDIARIES
CONTENTS
December 31, 2002
- -------------------------------------------------------------------------------------------------------------------
Page
INDEPENDENT AUDITOR'S REPORT F1 - F2
CONSOLIDATED FINANCIAL STATEMENTS
Consolidated Balance Sheets F3 - F4
Consolidated Statements of Operations and Comprehensive Loss F5 - F6
Consolidated Statements of Shareholders' Equity F7 - F9
Consolidated Statements of Cash Flows F10 - F13
Notes to Consolidated Financial Statements F14 - F40
INDEPENDENT AUDITOR'S REPORT
Board of Directors and Shareholders
Emergent Group, Inc. and subsidiaries
We have audited the accompanying consolidated balance sheets of Emergent Group,
Inc. and subsidiaries as of December 31, 2002 and 2001, and the related
consolidated statements of operations and comprehensive loss, shareholders'
equity, and cash flows for the years then ended and for the period from March 8,
2000 (inception) to December 31, 2000. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audit in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Emergent Group, Inc.
and subsidiaries as of December 31, 2002 and 2001, and the results of their
operations and their cash flows for the years then ended and for the period from
March 8, 2000 (inception) to December 31, 2000 in conformity with accounting
principles generally accepted in the United States of America.
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed in Note 2 to the
financial statements, during the year ended December 31, 2002, the Company has
incurred a net loss of $1,758,439. In addition, the Company had negative working
capital of $1,242,858 and an accumulated deficit of $13,046,480 at December 31,
2002. In addition, as detailed in Note 9, the Company has exceeded its borrowing
base under its line of credit and is in default of various covenants. This
raises substantial doubt about the Company's ability to continue as a going
concern. Management's plans in regard to these matters are also described in
Note 2. The consolidated financial statements do not include any adjustments
that might result from the outcome of this uncertainty.
SINGER LEWAK GREENBAUM & GOLDSTEIN LLP
Los Angeles, California
February 27, 2003
F-1
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS - THIS IS A COPY OF ARTHUR ANDERSEN
LLP'S REPORT DATED MARCH 23, 2001 AND THIS REPORT HAS NOT BEEN RE-ISSUED BY
ARTHUR ANDERSEN LLP.
To the Stockholders of
Emergent Group Inc.:
We have audited the accompanying consolidated balance sheet of Emergent Group
Inc. (a Nevada corporation), and the related consolidated statement of
operations, changes in stockholders' equity and cash flows for the period from
inception (March 8, 2000) to December 31, 2000. These consolidated financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted our audit in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Emergent Group Inc.
as of December 31, 2000, and the results of its operations, and cash flows for
the period from inception (March 8, 2000) to December 31, 2000 in conformity
with accounting principles generally accepted in the United States.
/s/ ARTHUR ANDERSEN LLP
New York, NY
March 23, 2001
F-2
EMERGENT GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31,
ASSETS
2002 2001
---- ----
Current assets
Cash $ 957,242 $ 482,165
Accounts receivable, net of allowance for doubtful
accounts of $73,650 and $60,253 1,306,055 1,455,034
Due from related parties, net 121,543 38,268
Investment securities - 267,427
Inventory, net 295,069 544,895
Prepaid expenses 265,062 206,432
Income tax receivable 4,830 4,830
----------- ------------
Total current assets 2,949,801 2,999,051
Equity investment in limited liability companies 31,134 55,521
Property and equipment, net 1,888,688 2,408,622
Goodwill, net of accumulated amortization of $2,203,423
and $102,468, respectively 779,127 2,880,488
Deposits 72,539 86,674
Finance fees, net of accumulated amortization
of $176,011 and $125,959 60,483 174,086
----------- ------------
Total assets $ 5,781,772 $ 8,604,442
============ ============
The accompanying notes are an integral part of these financial statements.
F-3
EMERGENT GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31,
LIABILITIES AND SHAREHOLDERS' EQUITY
2002 2001
---- ----
Current liabilities
Book overdraft $ - $ 146,427
Line of credit 1,108,700 1,108,700
Current portion of capital lease obligations 677,973 907,879
Current portion of notes payable 807,908 1,060,776
Convertible note payable - 100,000
Accounts payable 544,835 943,093
Accrued expenses 1,053,243 978,184
----------- ------------
Total current liabilities 4,192,659 5,245,059
Capital lease obligations, net of current portion 368,618 1,183,393
Notes payable, net of current portion 657,833 1,701,405
----------- ------------
Total liabilities 5,219,110 8,129,857
----------- ------------
Commitments and contingencies
Shareholders' equity
Preferred stock, $0.001 par value, non-voting
10,000,000 shares authorized
no shares issued and outstanding - -
Common stock, $0.001 par value
100,000,000 shares authorized
64,917,791 and 53,044,821 shares issued and
outstanding 64,918 53,045
Committed common stock, 2,440,024 shares 2,440 -
Additional paid-in capital 13,541,784 13,442,154
Accumulated other comprehensive loss - (1,732,573)
Accumulated deficit (13,046,480) (11,288,041)
----------- ------------
Total shareholders' equity 562,662 474,585
----------- ------------
Total liabilities and shareholders' equity $ 5,781,772 $ 8,604,442
============ ============
The accompanying notes are an integral part of these financial statements.
F-4
EMERGENT GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
FOR THE YEARS ENDED DECEMBER 31, 2002 AND 2001 AND
FOR THE PERIOD FROM MARCH 8, 2000 (INCEPTION) TO DECEMBER 31, 2000
For the
Period from
March 8, 2000
For the Year Ended (Inception) to
December 31, December 31,
------------
2002 2001 2000
---- ---- ----
Revenue $ 9,096,967 $ 5,244,585 $ -
Cost of goods sold 5,434,923 4,328,935 -
----------- ----------- ---------
Gross profit 3,662,044 915,650 -
Selling, general, and administrative
expenses 3,826,334 3,609,439 986,401
Impairment of property and
equipment - 3,732,223 -
Impairment of goodwill 2,100,955 687,906 -
----------- ----------- ---------
Loss from operations (2,265,245) (7,113,918) (986,401)
----------- ----------- ---------
Other income (expense)
Realized loss on investment securities (1,732,573) (2,306,428) (709,703)
Interest expense (455,711) (357,134) -
Equity in net gain of investment in limited
liability companies (5,508) 26,773 -
Gain on disposal of property and
equipment 163,880 45,571 -
Other income (expense), net 67,964 (13,485) 128,284
----------- ----------- ---------
Total other income (expense) (1,961,948) (2,604,703) (581,419)
----------- ----------- ---------
Loss before provision for income
taxes and extraordinary item (4,227,193) (9,718,621) (1,567,820)
Provision for income taxes - 1,600 -
----------- ----------- ---------
The accompanying notes are an integral part of these financial statements.
F-5
EMERGENT GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
FOR THE YEARS ENDED DECEMBER 31, 2002 AND 2001 AND
FOR THE PERIOD FROM MARCH 8, 2000 (INCEPTION) TO DECEMBER 31, 2000
For the
Period from
March 8, 2000
For the Year Ended (Inception) to
December 31, December 31,
------------
2002 2001 2000
---- ---- ----
Loss before extraordinary item $(4,227,193) $(9,720,221) $(1,567,820)
Extraordinary item
Gain on forgiveness of debt, net of tax 2,468,754 - -
----------- ----------- ---------
Net loss (1,758,439) (9,720,221) (1,567,820)
Other comprehensive income (loss),
net of tax
Unrealized gain (loss) on investment
securities - 175,760 (2,042,395)
Reclassification adjustment for gains
included in net loss - 134,062 -
----------- ----------- ---------
Comprehensive income (loss) $(1,758,439) $(9,410,399) $(3,610,215)
============ ============ ============
Basic and diluted earnings (loss) per
share
Before extraordinary item $ (0.08) $ (0.19) $ (0.04)
Extraordinary item 0.05 - -
----------- ----------- ---------
Total basic and diluted earnings
(loss) per share $ (0.03) $ (0.19) $ (0.04)
============ ============ ============
Weighted-average shares outstanding 53,476,172 48,350,262 41,557,789
============ ============ ============
The accompanying notes are an integral part of these financial statements.
F-6
EMERGENT GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 2002 AND 2001 AND
FOR THE PERIOD FROM MARCH 8, 2000 (INCEPTION) TO DECEMBER 31, 2000
Accumulated
Other
Committed Additional Compre-
Common Stock Common Paid-In hensive Accumulated
Shares Amount Stock Capital Loss Deficit Total
---------- -------- ------- ----------- ------------ ------------- -----------
Balance, March 8, 2000
(inception) - $ - $ - $ - $ - $ - $ -
Capital contribution by
members 7,500,000 7,500,000
Contribution of investment
securities by a member 1,173,125 1,173,125
Recapitalization of capital
accounts as a result of
Dynamic International,
Ltd. Transfer 44,173,280 44,173 (44,173) -
Unrealized loss on
investment securities (2,042,395) (2,042,395)
Net loss (1,567,820) (1,567,820)
---------- -------- ------- ----------- ------------ ------------- -----------
Balance, December 31,
2000 44,173,280 44,173 - 8,628,952 (2,042,395) (1,567,820) 5,062,910
Issuance of common stock
In connection with the
acquisition of
MRM, Inc. 5,633,667 5,634 3,239,358 3,244,992
For cash 3,000,000 3,000 597,000 600,000
The accompanying notes are an integral part of these financial statements.
F-7
EMERGENT GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 2002 AND 2001 AND
FOR THE PERIOD FROM MARCH 8, 2000 (INCEPTION) TO DECEMBER 31, 2000
Accumulated
Other
Committed Additional Compre-
Common Stock Common Paid-In hensive Accumulated
Shares Amount Stock Capital Loss Deficit Total
---------- -------- ------- ----------- ------------ ------------- -----------
In exchange for the
conversion of a note
payable 237,874 $ 238 $ 59,762 $ 60,000
Issuance of options in
connection with the
acquisition of MRM, Inc. 316,191 316,191
Compensation expense
to employees relating
to stock options granted
below the fair market
value 75,000 75,000
Compensation expense
to non-employees
relating to stock options
granted below the
fair market value 525,891 525,891
Realized loss on
investment securities $ 134,062 134,062
Unrealized gain on
investment securities 175,760 175,760
Net loss $(9,720,221) (9,720,221)
---------- -------- ------- ----------- ------------ ------------- -----------
The accompanying notes are an integral part of these financial statements.
F-8
EMERGENT GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 2002 AND 2001 AND
FOR THE PERIOD FROM MARCH 8, 2000 (INCEPTION) TO DECEMBER 31, 2000
Accumulated
Other
Committed Additional Compre-
Common Stock Common Paid-In hensive Accumulated
Shares Amount Stock Capital Loss Deficit Total
---------- -------- ------- ----------- ------------ ------------- -----------
Balance, December 31,
2001 53,044,821 $53,045 $ - $13,442,154 $(1,732,573) $(11,288,041) $ 474,585
Issuance of common stock
In exchange for the
conversion of a note
payable 370,000 370 99,630 100,000
In exchange for services 11,502,970 11,503 2,440 13,943
Realized loss on
investment securities 1,732,573 1,732,573
Net income (1,758,439) (1,758,439)
---------- -------- ------- ----------- ------------ ------------- -----------
Balance, December 31,
2002 64,917,791 $64,918 $ 2,440 $13,541,784 $ - $(13,046,480) $ 562,662
========== ======== ======= =========== ============ ============= ===========
The accompanying notes are an integral part of these financial statements.
F-9
EMERGENT GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2002 AND 2001 AND
FOR THE PERIOD FROM MARCH 8, 2000 (INCEPTION) TO DECEMBER 31, 2000
For the
Period from
March 8, 2000
For the Year Ended (Inception) to
December 31, December 31,
------------
2002 2001 2000
---- ---- ----
Cash flows from operating activities
Net income (loss) .......................... $(1,758,439) $(9,720,221) $(1,567,820)
Adjustments to reconcile net income
(loss) to net cash provided by (used in)
operating activities, net of effect of
acquisition with MRM, Inc. .............
Gain on disposal of property and
equipment ....................... (163,880) (45,571) --
Gain on forgiveness of debt ......... (2,468,754) -- --
Realized loss on investment
securities ...................... 1,732,573 2,306,428 709,703
Depreciation and amortization of
property and equipment .......... 594,538 1,117,661 33,844
Write off of loan fees, net ......... 63,550 -- --
Equity in net gain of investment in
limited liability companies ..... 5,508 (26,773) --
Amortization of finance fees ........ 50,052 23,726 --
Impairment of property and
equipment ....................... -- 3,732,223 --
Impairment of goodwill .............. 2,100,955 687,906 --
Amortization of goodwill ............ -- 74,690 27,778
Issuance of stock for services
performed ....................... 13,943 -- --
Compensation expense to non-
employees for issuance of stock
options below the fair market
value ........................... -- 525,891 --
Compensation expense to
employees for stock options
issued below the fair market
value ........................... -- 75,000 --
Allowance for doubtful accounts ..... 13,397 3,415 --
The accompanying notes are an integral part of these financial statements.
F-10
EMERGENT GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2002 AND 2001 AND
FOR THE PERIOD FROM MARCH 8, 2000 (INCEPTION) TO DECEMBER 31, 2000
For the
Period from
March 8, 2000
For the Year Ended (Inception) to
December 31, December 31,
------------
2002 2001 2000
---- ---- ----
(Increase) decrease in
Accounts receivable ............. $ 1,959,323 $ 1,404,318 $ --
Due from related parties ........ (1,399,625) (901,769) (467,519)
Inventory ....................... (40,098) 392,575 --
Prepaid expenses ................ (58,630) (122,616) (24,969)
Income tax receivable ........... -- (4,830) (195,672)
Deposits ........................ 14,135 (74,947) --
Increase (decrease) in
Accounts payable ................ (187,141) 653,206 121,837
Accrued expenses ................ 501,802 169,804 --
Deferred taxes .................. -- 4,000 --
----------- ----------- -----------
Net cash provided by (used in) operating
activities ................................. 973,209 274,116 (1,362,818)
----------- ----------- -----------
The accompanying notes are an integral part of these financial statements.
F-11
EMERGENT GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2002 AND 2001 AND
FOR THE PERIOD FROM MARCH 8, 2000 (INCEPTION) TO DECEMBER 31, 2000
For the
Period from
March 8, 2000
For the Year Ended (Inception) to
December 31, December 31,
------------
2002 2001 2000
---- ---- ----
Cash flows from investing activities
Proceeds from the sale of marketable
securities ............................. 267,427 650,000 --
Purchase of marketable securities .......... -- (620,000) (5,046,703)
Cash paid to limited liability companies ... (292,605) (114,550) --
Purchase of property and equipment ......... (119,442) (120,199) (339,639)
Proceeds from the sale of property and
equipment .............................. 615,603 355,411 --
----------- ----------- -----------
Net cash provided by (used in) investing
activities ................................. 470,983 150,662 (5,386,342)
----------- ----------- -----------
Cash flows from financing activities
Transaction costs in connection with the
acquisition of MRM, Inc. ............... $ -- $ (335,856) $ --
Net change in book overdraft ............... (146,427) (24,580) --
Payments for loan fees ..................... -- (68,550) --
Net changes in line of credit .............. -- 87,626 --
Proceeds from notes payable ................ -- 300,206 --
Payments on notes payable .................. (418,703) (888,130) --
Payments on capital lease obligations ...... (403,985) (364,169) --
Proceeds from sale of common stock ......... -- 600,000 --
Capital contribution by members ............ -- -- 7,500,000
----------- ----------- -----------
Net cash provided by (used in) financing
activities ................................. (969,115) (693,453) 7,500,000
----------- ----------- -----------
Net increase (decrease) in cash ................. 475,077 (268,675) 750,840
Cash, beginning of period ....................... 482,165 750,840 --
----------- ----------- -----------
Cash, end of period ............................. $ 957,242 $ 482,165 $ 750,840
=========== =========== ===========
Supplemental disclosures of cash
flow information
Interest paid .......................... $ 223,178 $ 156,583 $ --
=========== =========== ===========
The accompanying notes are an integral part of these financial statements.
F-12
EMERGENT GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Years Ended December 31, 2002 and 2001
and for the Period from March 8, 2000 (inception) to December 31, 2000
- --------------------------------------------------------------------------------
Supplemental schedule of non-cash investing and financing activities During the
year ended December 31, 2002, the Company:
o acquired property and equipment totaling $150,000 under capital lease
obligations.
o issued 370,000 shares of common stock for the conversion of a note payable
of $100,000.
o capitalized $289,924 of accessories from inventory.
o sold property and equipment with a net book value of $38,229 to a related
party for $156,963. The Company received $106,642 in cash and offset
$52,321 against a balance owed to the related party.
o acquired a 15% interest in a limited liability company for $26,250 in the
form of a note receivable. This note receivable has been offset against
management fees and expenses recharged to the limited liability company
during the year.
o entered in debt re-negotiations with capital lease and note payable
holders, resulting in the forgiveness of $3,208,037 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 $2,104,033. The
Company also entered into debt re-negotiations with several vendors,
resulting in a gain on the forgiveness of debt of $364,721.
During the year ended December 31, 2001, the Company:
o acquired property and equipment totaling $175,774 under capital lease and
notes payable obligations.
o transferred property and equipment costing $418,517 and a capital
lease obligation of $227,013 to related parties.
o billed $565,429 to a related party for management fees. The Company also
incurred expenses on behalf of the related party. At December 31, 2001, the
Company agreed with the related party to offset a note payable against
these accumulated costs and expenses.
o acquired substantially all of the assets and liabilities of Medical
Resources Management, Inc. in exchange for 5,633,667 shares of the
Company's common stock valued at $3,244,992 and options to purchase 564,786
shares of common stock valued at $316,191.
o issued 237,874 shares of common stock for the conversion of a note payable
of $60,000.
During the period from March 8, 2000 (inception) to December 31, 2000:
o a member of the Company contributed $1,173,125 of investment securities.
The accompanying notes are an integral part of these financial statements.
F-13
EMERGENT GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2002
- --------------------------------------------------------------------------------
NOTE 1 - ORGANIZATION AND LINE OF BUSINESS
General
Emergent Ventures, LLC ("Emergent LLC") was formed and commenced
operations in the State of Delaware on March 8, 2000. On August 31,
2002, Emergent LLC contributed substantially all of its assets to
Dynamic International, Ltd. ("Dynamic") in exchange for the issuance of
39,755,178 shares of Dynamic's common stock. Dynamic's name was
subsequently changed to Emergent Group, Inc. ("Emergent Group") The
Company (as defined in Note 3) provides surgical equipment on a
fee-for-service basis to hospitals, surgical care centers, and other
health care providers.
Acquisitions
Transfer of Equity with Dynamic International, Ltd. On August 31, 2000,
Emergent LLC consummated the transactions contemplated by the Equity
Transfer Transaction (the "Transfer"), all pursuant to an Equity
Transfer and Reorganization Agreement dated August 10, 2000 (the
"Agreement"), by and among Dynamic International, Ltd. ("Dynamic"),
certain of its shareholders, Emergent Management, and several holders
of membership interests in Emergent LLC.
Pursuant to the Agreement, Emergent LLC contributed substantially all
of its assets to Dynamic in exchange for the issuance of 39,755,178
shares of Dynamic's common stock to the members of Emergent LLC.
Dynamic's name was subsequently changed to Emergent Group, Inc.
("Emergent Group").
On August 31, 2000, pursuant to and in accordance with the Agreement
and prior to the consummation of the Transfer, Dynamic transferred all
of its assets and liabilities (other than outstanding bank debt in the
amount of $250,000) to a wholly owned corporation of Dynamic named
Dynamic International, Inc. Dynamic International, Inc. acquired the
transferred assets, assumed the remaining liabilities, and indemnified
Dynamic against any liabilities relating to or arising out of the
transferred assets and the assumed liabilities.
For financial accounting purposes, the acquisition was accounted for as
a capitalization by Emergent LLC with Dynamic. After the Transfer, the
former members of Emergent LLC became the beneficial owners of
approximately 39,000,000 shares of Dynamic's common stock, representing
approximately a 90% interest in Dynamic. Each of the directors of
Dynamic immediately resigned prior to or shortly after the consummation
of the Transfer. The principal interest holders of Emergent Management
were elected as directors of Dynamic. They comprise a majority of
Dynamic's directors and serve as Dynamic's executive officers. Emergent
LLC has recorded goodwill as a result of the Transfer amounting to
$250,000, which will be reviewed annually for impairment. The net
balance remaining as of December 31, 2002 and 2001 was $0 and $147,532,
respectively which has been recorded under goodwill on the accompanying
consolidated balance sheets.
F-14
EMERGENT GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2002
- --------------------------------------------------------------------------------
NOTE 1 - ORGANIZATION AND LINE OF BUSINESS (Continued)
Acquisitions (Continued)
Merger with Medical Resources Management, Inc. and subsidiaries In July
2001, Emergent Group acquired substantially all of the assets and
liabilities of Medical Resources Management, Inc. ("MRM") and its
subsidiaries in exchange for 5,633,667 shares of the Company's common
stock valued at $3,244,992 and options to purchase 564,786 shares of
common stock valued at $316,191. In addition, transaction costs of
$335,856 were incurred. The transaction has been accounted for in
accordance with Statement of Financial Accounting Standards ("SFAS")
No. 141, "Business Combinations," which is required for all
transactions occurring after June 30, 2001. In accordance with SFAS No.
141, the purchase price was allocated to assets acquired and
liabilities assumed based on the estimated fair market value at the
closing date of the acquisition, with the excess of the purchase price
being allocated to goodwill.
At December 31, 2001, $687,906 of goodwill was impaired and expensed to
the consolidated statement of operations and comprehensive loss. In
addition, based on an independent valuation of goodwill at December 31,
2002, the Company impaired $2,100,955 of goodwill during the fourth
quarter. The remaining balance will be reviewed periodically for
impairment and will be expensed to the consolidated statement of
operations and comprehensive loss accordingly. The assets acquired and
liabilities assumed in connection with the transaction were as follows:
Accounts receivable ................................. $ 1,666,820
Inventory ........................................... 937,469
Property and equipment .............................. 11,372,556
Other assets ........................................ 301,373
Liabilities assumed ................................. (13,802,071)
------------
Net assets ...................................... 476,147
Excess of cost over fair value of net assets acquired 3,420,862
------------
Total purchase price ....................... $ 3,897,009
============
Included in the pro forma numbers for the period from March 8, 2000
(inception) to December 31, 2000 are the results of operations for MRM
for the year ended October 31, 2000 and the results of operations for
Emergent Group for the period from March 8, 2000 (inception) to
December 31, 2000:
2001 2000
--------------- ----------------
(unaudited) (unaudited)
Revenue ........................ $ 10,939,346 $ 11,102,650
Net loss ....................... $(11,905,262) $ (5,208,429)
Basic and diluted loss per share $ (0.22) $ (0.12)
F-15
EMERGENT GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2002
- --------------------------------------------------------------------------------
NOTE 1 - ORGANIZATION AND LINE OF BUSINESS (Continued)
Acquisitions (Continued)
MRM provides mobile laser/surgical services on a per procedure basis to
hospitals, out patient surgery centers, and physicians' offices. The
lasers are provided with technical support to ensure that they operate
correctly. MRM also provides other medical equipment on a rental basis
to hospitals and surgery centers.
NOTE 2 - GOING CONCERN AND BASIS OF PRESENTATION
The accompanying financial statements have been prepared assuming that
the Company will continue as a going concern. The Company has suffered
recurring losses from operations since its inception and has an
accumulated deficit of $13,046,480 at December 31, 2002. In addition,
as detailed in Note 9, the Company has exceeded its borrowing base
under its line of credit and is in default of various covenants.
The consolidated financial statements do not include any adjustments
relating to the recoverability and classification of recorded asset
amounts or amounts and classifications of liabilities that might be
necessary should the Company be unable to continue its existence. The
recovery of the Company's assets is dependent upon continued operations
of the Company.
In addition, the Company's recovery is dependent upon future events,
the outcome of which is indeterminable. The Company's attainment of
profitable operations is dependent upon the Company obtaining
additional debt and equity financing and achieving a level of sales
adequate to support the Company's cost structure.
NOTE 3 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The consolidated financial statements include the accounts of Emergent
Group and its subsidiaries, MRM, Medical Resource Management Financial,
Physiologic Reps, and Pulse Medical Products (collectively, the
"Company"). All significant inter-company transactions and balances
have been eliminated in consolidation.
Revenue Recognition
Revenue is recognized when the services are performed and billable.
F-16
EMERGENT GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2002
- --------------------------------------------------------------------------------
NOTE 3 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Comprehensive Income
The Company utilizes SFAS No. 130, "Reporting Comprehensive Income."
This statement establishes standards for reporting comprehensive income
and its components in a financial statement. Comprehensive income as
defined includes all changes in equity (net assets) during a period
from non-owner sources. Examples of items to be included in
comprehensive income, which are excluded from net income, include
foreign currency translation adjustments, minimum pension liability
adjustments, and unrealized gains and losses on securities.
Cash
Cash consists of cash on hand and in banks. The Company maintains cash
at several financial institutions. At times, such cash may be in excess
of the Federal Deposit Insurance Corporation insurance limit of
$100,000. As of December 31, 2002 and 2001, uninsured portions of
balances at those banks aggregated to $909,261 and $313,737,
respectively. The Company has not experienced losses in such accounts
and believes it is not exposed to any significant risk on cash.
Unrealized Gains and Losses on Investment Securities The Company has
recognized realized losses during the years ended December 31, 2002 and
2001 and the period from March 8, 2000 (inception) to December 31, 2000
on permanently impaired investments that were classified as
available-for-sale in accordance with SFAS No. 115, "Accounting for
Certain Investments in Debt and Equity Securities." The Company has
also recorded an unrealized loss in the period from March 8, 2000
(inception) to December 31, 2000 and an unrealized gain under
comprehensive income during the year ended December 31, 2001, which
reflects the fair market value of the securities that were sold in July
2002.
Inventory
Inventory is stated at the lower of cost or market. Cost is determined
by the first-in, first-out method.
Equity Investment in Limited Liability Companies
Equity investments are recorded in accordance with the equity method of
accounting.
Property and Equipment
Property and equipment are recorded at cost, less accumulated
depreciation and amortization. Depreciation and amortization are
provided using the straight-line and accelerated methods over estimated
useful lives of five to seven years. Betterments, renewals, and
extraordinary repairs that extend the life of the assets are
capitalized; other repairs and maintenance charges are expensed as
incurred. The cost and related accumulated depreciation and
amortization applicable to retired assets are removed from the
Company's accounts, and the gain or loss on dispositions, if any, is
recognized in the consolidated statements of operations and
comprehensive loss.
F-17
EMERGENT GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2002
- --------------------------------------------------------------------------------
NOTE 3 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Impairment of Long-Lived Assets
The Company reviews its long-lived assets for impairment whenever
events or changes in circumstances indicate that the carrying amount of
an asset may not be recoverable. Recoverability of assets to be held
and used is measured by a comparison of the carrying amount of the
assets to future net cash flows expected to be generated by the assets.
If the assets are considered to be impaired, the impairment to be
recognized is measured by the amount by which the carrying amount
exceeds the fair value of the assets. During the years ended December
31, 2002 and 2001 and the period from March 8, 2000 (inception) to
December 31, 2000, 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 losses of $2,100,955, $687,906, and $0,
respectively, in the consolidated statements of operations and
comprehensive loss. In addition, the Company also reviewed property and
equipment for impairment at December 31, 2002 and 2001 and recorded net
losses of $0 and $3,732,223, respectively, in the consolidated
statements of operations and comprehensive loss.
Fair Value of Financial Instruments
For certain of the Company's financial instruments, including cash,
accounts receivable, due from related parties, prepaid expenses, assets
held for sale, accounts payable, and accrued expenses, the carrying
amounts approximate fair value due to their short maturities.
Stock-Based Compensation
SFAS No. 123, "Accounting for Stock-Based Compensation," defines
a fair value based method of accounting for stock-based compensation.
However, SFAS No. 123 allows an entity to continue to measure
compensation cost related to stock and stock options issued to
employees using the intrinsic method of accounting prescribed by
Accounting Principles Board ("APB") Opinion No. 25, "Accounting for
Stock Issued to Employees." Entities electing to remain with the
accounting method of APB No. 25 must make pro forma disclosures of net
loss and loss per share as if the fair value method of accounting
defined in SFAS No. 123 had been applied. The Company has elected to
account for its stock-based compensation to employees under APB No.
25.
Advertising Expense
The Company expenses advertising in the periods the services were
incurred. For the years ended December 31, 2002 and 2001 and the period
from March 8, 2000 (inception) to December 31, 2000, advertising
expense was $38,824, $35,111, and $0, respectively.
F-18
EMERGENT GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2002
- --------------------------------------------------------------------------------
NOTE 3 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Income Taxes
The Company accounts for income taxes under the liability method, which
requires the recognition of deferred tax assets and liabilities for the
expected future tax consequences of events that have been included in
the financial statements or tax returns. Under this method, deferred
income taxes are recognized for the tax consequences in future years of
differences between the tax bases of assets and liabilities and their
financial reporting amounts at each period end based on enacted tax
laws and statutory tax rates applicable to the periods in which the
differences are expected to affect taxable income. Valuation allowances
are established, when necessary, to reduce deferred tax assets to the
amount expected to be realized. The provision for income taxes
represents the tax payable for the period and the change during the
period in deferred tax assets and liabilities.
Earnings (Loss) Per Share
The Company utilizes SFAS No. 128, "Earnings per Share." Basic earnings
(loss) per share is computed by dividing income (loss) available to
common shareholders by the weighted-average number of common shares
outstanding. Diluted earnings (loss) per share is computed similar to
basic earnings (loss) per share except that the denominator is
increased to include the number of additional common shares that would
have been outstanding if the potential common shares had been issued
and if the additional common shares were dilutive. Common equivalent
shares are excluded from the computation if their effect is
anti-dilutive. The Company does not have any common stock equivalents.
Estimates
The preparation of financial statements requires management to make
estimates and assumptions that affect the reported amounts of assets
and liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of
revenue and expenses during the reporting period. Actual results could
differ from those estimates.
Reclassifications
Certain amounts included in the prior years' financial statements have
been reclassified to conform with the current year presentation. Such
reclassification did not have any effect on reported net income (loss).
F-19
EMERGENT GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2002
- --------------------------------------------------------------------------------
NOTE 3 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Recently Issued Accounting Pronouncements
In June 2001, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 141, "Business Combinations." This statement addresses
financial accounting and reporting for business combinations and
supersedes Accounting Principles Board ("APB") Opinion No. 16,
"Business Combinations," and SFAS No. 38, "Accounting for
Pre-Acquisition Contingencies of Purchased Enterprises." All business
combinations in the scope of this statement are to be accounted for
using one method, the purchase method. The provisions of this statement
apply to all business combinations initiated after June 30, 2001. Use
of the pooling-of-interests method for those business combinations is
prohibited. This statement also applies to all business combinations
accounted for using the purchase method for which the date of
acquisition is July 1, 2001 or later. The Company has adopted SFAS No.
141 for its acquisition of MRM (see Note 1).
In June 2001, the FASB issued SFAS No. 142, "Goodwill and Other
Intangible Assets." This statement addresses financial accounting and
reporting for acquired goodwill and other intangible assets and
supersedes APB Opinion No. 17, "Intangible Assets." It addresses how
intangible assets that are acquired individually or with a group of
other assets (but not those acquired in a business combination) should
be accounted for in financial statements upon their acquisition. This
statement also addresses how goodwill and other intangible assets
should be accounted for after they have been initially recognized in
the financial statements. It is effective for fiscal years beginning
after December 15, 2001. Early application is permitted for entities
with fiscal years beginning after March 15, 2001, provided that the
first interim financial statements have not been issued previously. The
Company does not expect adoption of SFAS No. 142 to have a material
impact, if any, on its financial position or results of operations.
In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset
Retirement Obligations." This statement applies to legal obligations
associated with the retirement of long-lived assets that result from
the acquisition, construction, development, and/or the normal operation
of long-lived assets, except for certain obligations of lessees. The
Company does not expect adoption of SFAS No. 143 to have a material
impact, if any, on its financial position or results of operations.
F-20
EMERGENT GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2002
- --------------------------------------------------------------------------------
NOTE 3 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Recently Issued Accounting Pronouncements (Continued)
In August 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets." This statement addresses
financial accounting and reporting for the impairment or disposal of
long-lived assets. This statement replaces SFAS No. 121, "Accounting
for the Impairment of Long-Lived Assets and for Long-Lived Assets to be
Disposed of," the accounting and reporting provisions of APB No. 30,
"Reporting the Results of Operations - Reporting the Effects of
Disposal of a Segment of a Business, and Extraordinary, Unusual, and
Infrequently Occurring Events and Transactions," for the disposal of a
segment of a business, and amends Accounting Research Bulletin No. 51,
"Consolidated Financial Statements," to eliminate the exception to
consolidation for a subsidiary for which control is likely to be
temporary. During the years ended December 31, 2002 and 2001 and the
period from March 8, 2000 (inception) to December 31, 2000, 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 losses of
$2,100,955, $687,906, and $0, respectively, in the consolidated
statements of operations and comprehensive loss. In addition, the
Company also reviewed property and equipment for impairment at December
31, 2002 and 2001 and recorded net losses of $0 and $3,732,223,
respectively, in the consolidated statements 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. In
connection with the re-negotiation of certain capital lease agreements,
notes payable agreements, and accounts payable liabilities, the Company
recorded an extraordinary gain on forgiveness of debt of $2,468,754 in
the consolidated statements of operations and comprehensive loss for
the year ended December 31, 2002.
F-21
EMERGENT GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2002
- --------------------------------------------------------------------------------
NOTE 3 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Recently Issued Accounting Pronouncements (Continued)
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities." This statement addresses
financial accounting and reporting for costs associated with exit or
disposal activities and nullifies Emerging Issues Task Force ("EITF")
Issue No. 94-3, "Liability Recognition for Certain Employee Termination
Benefits and Other Costs to Exit an Activity (including Certain Costs
Incurred in a Restructuring)." This statement requires that a liability
for a cost associated with an exit or disposal activity be recognized
when the liability is incurred. Under EITF Issue 94-3, a liability for
an exit cost, as defined, was recognized at the date of an entity's
commitment to an exit plan. The provisions of this statement are
effective for exit or disposal activities that are initiated after
December 31, 2002 with earlier application encouraged. This statement
is not applicable to the Company.
In October 2002, the FASB issued SFAS No. 147, "Acquisitions of Certain
Financial Institutions." SFAS No. 147 removes the requirement in SFAS
No. 72 and Interpretation 9 thereto, to recognize and amortize any
excess of the fair value of liabilities assumed over the fair value of
tangible and identifiable intangible assets acquired as an
unidentifiable intangible asset. This statement requires that those
transactions be accounted for in accordance with SFAS No. 141,
"Business Combinations," and SFAS No. 142, "Goodwill and Other
Intangible Assets." In addition, this statement amends SFAS No. 144,
"Accounting for the Impairment or Disposal of Long-Lived Assets," to
include certain financial institution-related intangible assets. The
Company does not expect adoption of SFAS No. 147 to have a material
impact, if any, on its financial position or results of operations.
In December 2002, the FASB issued SFAS No. 148, "Accounting for
Stock-Based Compensation - Transition and Disclosure," an amendment of
SFAS No. 123. SFAS No. 148 provides alternative methods of transition
for a voluntary change to the fair value based method of accounting for
stock-based employee compensation. In addition, SFAS No. 148 amends the
disclosure requirements of SFAS No. 123 to require more prominent and
more frequent disclosures in financial statements about the effects of
stock-based compensation. This statement is effective for financial
statements for fiscal years ending after December 15, 2002. SFAS No.
148 will not have any impact on the Company's financial statements as
management does not have any intention to change the fair value method.
F-22
EMERGENT GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2002
- --------------------------------------------------------------------------------
NOTE 4 - INVESTMENT SECURITIES
The Company accounts for investment securities in accordance with
the provisions of SFAS No. 115, "Accounting for Certain Investments in
Debt and Equity Securities." Under SFAS No. 115, debt securities and
equity securities that have readily determinable fair values are to be
classified in three categories:
o Held to maturity - the positive intent and ability to hold to
maturity. Amounts are reported at amortized cost and adjusted for
amortization of premiums and accretion of discounts.
o Trading securities - bought principally for the purpose of selling
them in the near term. Amounts are reported at fair value with
unrealized gains and losses included in earnings.
o Available-for-sale - not classified in one of the above
categories. Amounts are reported at fair value with unrealized
gains and losses excluded from earnings and reported separately as
a component of shareholders' equity.
The Company has classified all of its investments as either trading or
available-for-sale securities. As of December 31, 2001, investment
securities are summarized as follows:
2001
Fair Market Unrealized Realized
Value Gain Loss Cost
--------------- ---------------- --------------- ----------------
Common stock
Trading investments $ 267,427 $ 309,822 $ (135,625) $ 93,230
Non-trading investments - - (1,420,803) 1,420,803
Debt securities - - (750,000) 750,000
--------------- ---------------- --------------- ----------------
Total $ 267,427 $ 309,822 $ (2,306,428) $ 2,264,033
=============== ================ =============== ================
F-23
EMERGENT GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2002
- --------------------------------------------------------------------------------
NOTE 4 - INVESTMENT SECURITIES (Continued)
The Company did not have any investment securities at December 31,
2002.
NOTE 5 - INVENTORY
Inventory at December 31, 2002 and 2001 consisted of the following:
2002 2001
--------------- ----------------
Disposables $ 459,174 $ 428,944
Eyewear and accessories - 269,930
Medical rental - 10,126
--------------- ----------------
459,174 709,000
Less reserve for obsolescence 164,105 164,105
--------------- ----------------
Total $ 295,069 $ 544,895
=============== ================
During the years ended December 31, 2002 and 2001 and the period from
March 8, 2000 (inception) to December 31, 2000, the Company capitalized
$289,924, $0, and $0, respectively, of accessories from inventory.
NOTE 6 - EQUITY INVESTMENT IN LIMITED LIABILITY COMPANIES
During the years ended December 31, 2001 and 2000, PRI acquired between
a 3% and 21% equity interest in several limited liability companies
(the "LLCs"). The LLCs were formed by certain physicians and MRM, who
made investments between $5,000 and $17,500. During the year ended
December 31, 2002, the Company acquired a 15% interest in another LLC
for $26,250. The interest was acquired in the form of a note
receivable, which has been offset against management fees and expenses
recharged to the LLC by the Company during the year. The Company
provides operating and administrative services to the LLCs and accounts
for its interest in the LLCs using the equity method of accounting.
F-24
EMERGENT GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2002
- --------------------------------------------------------------------------------
NOTE 6 - EQUITY INVESTMENT IN LIMITED LIABILITY COMPANIES (Continued)
During the years ended December 31, 2002 and 2001 and the period from
March 8, 2000 (inception) to December 31, 2000, the Company recognized
an equity loss of $5,508 and an equity gain of $26,773 and $0,
respectively. The Company's total equity investments in these LLCs
during the years ended December 31, 2002 and 2001 and the period from
March 8, 2000 (inception) to December 31, 2000 were $31,134, $55,521,
and $0, respectively.
During the years ended December 31, 2002 and 2001, the Company
earned management fees and recharged expenses of $1,399,625 and
$901,769, respectively, to the LLCs for the performance of
operational, management, and other services. The balances due from the
LLCS at December 31, 2002 and 2001 were $121,543 and $38,268,
respectively, net of provisions for doubtful receivable balances of
$73,568 and $0, respectively, which are recorded under due from
related parties on the accompanying consolidated balance sheets.
NOTE 7 - PROPERTY AND EQUIPMENT
Property and equipment at December 31, 2002 and 2001 consisted of the
following:
2002 2001
--------------- ----------------
Accessories and eyewear $ 289,924 $ -
Furniture and fixtures, including computers 58,087 22,659
Transportation equipment 14,963 56,329
Rental equipment 2,373,627 2,619,020
Leasehold improvements 2,101 2,100
--------------- ----------------
2,738,702 2,700,108
Less accumulated depreciation and amortization 850,014 291,486
--------------- ----------------
Total $ 1,888,688 $ 2,408,622
=============== ================
Included in the above are $1,403,329 and $1,191,455 of assets acquired
through capital lease obligations, which are net of accumulated
amortization of $485,890 and $146,741, respectively, at December 31,
2002 and 2001, respectively.
Depreciation and amortization expense was $594,538, $1,117,661, and
$33,844 for the years ended December 31, 2002 and 2001 and the period
from March 8, 2000 (inception) to December 31, 2000, respectively.
Depreciation charges on assets that were subsequently impaired is
included in the amount expensed at December 31, 2001.
F-25
EMERGENT GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2002
- --------------------------------------------------------------------------------
NOTE 8 - LINE OF CREDIT
In March 2001, MRM entered into a line of credit agreement with a
financial institution that allows it to borrow a maximum of $2,000,000.
The line of credit bears interest at prime (4.25% at December 31,
2002), plus 2.75%, is payable on a monthly basis, is secured by
accounts receivable, inventory, equipment, and a personal guarantee by
a shareholder, and originally matured in July 2002. As of December 31,
2002, the Company had exceeded the eligible borrowing base and was in
default of various covenants. Therefore, the facility was not available
for use. In March 2002, the Company agreed to pay down the line of
credit using 50% of the proceeds from the sale of medical rental
equipment, and the agreement was extended to March 31, 2003. The
Company has commenced discussions to extend the loan for a further
period of six months under the same terms and conditions. As of
December 31, 2002 and 2001, the outstanding balance under the line of
credit was $1,108,700 and $1,108,700, respectively.
NOTE 9 - NOTES PAYABLE
Notes payable at December 31, 2002 and 2001 consisted of the following:
2002 2001
--------------- ----------------
Note payable to bank, issued in March 1999 to MRM and bearing
interest at prime, plus 4%, payable monthly. The note is
secured by various accounts receivable, inventory,
equipment, and a personal guarantee by a shareholder. In
March 2002, the Company re-negotiated the debt, and the
principal is now payable in four consecutive, monthly
installments of $16,667 each, beginning March 2, 2002,
plus 20 installments of $33,333 each, beginning March
2003, with a final payment equal to all unpaid
principal on March 2, 2004. $ 599,774 $ 866,667
Equipment note payable to a finance company, secured by
various accounts receivable and inventory. The note bore
interest at 12% per annum, was payable monthly, and was
payable on demand. During the year ended December 31,
2002, the Company renegotiated the debt,
and the amount was forgiven in full. - 300,206
F-26
EMERGENT GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2002
- --------------------------------------------------------------------------------
NOTE 9 - NOTES PAYABLE (Continued)
2002 2001
--------------- ----------------
Unsecured promissory note, bearing interest at 12.5% per
annum. The note was originally due on December 31, 2002,
but the Company renegotiated the amount due in November
2002. A total of $60,000 of the debt was forgiven, and the
outstanding balance at December 31, 2002 is due on or
before
March 31, 2003. $ 20,000 $ 100,000
Unsecured promissory note, bearing interest at 10% per annum.
The note was due in full on April 18, 2001. During the
year ended December 31, 2002, the Company renegotiated the
amount due, and $62,000 of the debt was forgiven. The
outstanding balance at December 31, 2002 is due on or
before
March 31, 2003. 19,000 100,000
Thirty-nine notes payable to a finance company, which are
secured by the Company's medical equipment. The notes
payable bear interest at varying rates between 9% and 11%
per annum and require monthly payments of approximately
$81,000. During the year ended December 31, 2002, the
Company renegotiated the amount due, and $1,167,861 of the
debt was forgiven. The balance of the
notes payable mature through December 2005. 823,428 1,379,632
Note payable to a finance company, secured by
an automobile, bearing interest at 8.9% per
annum. The note was payable in full in April
2002 and requires monthly payments of $506. - 6,586
Note payable to bank, secured by medical
equipment, bearing interest at 10.4% per
annum. The note is payable in full in July
2003 and requires monthly payments of $521. 3,539 9,090
--------------- ----------------
1,465,741 2,762,181
Less current portion 807,908 1,060,776
--------------- ----------------
Long-term portion $ 657,833 $ 1,701,405
=============== ================
F-27
EMERGENT GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2002
- --------------------------------------------------------------------------------
NOTE 9 - NOTES PAYABLE (Continued)
Future maturities of notes payable at December 31, 2002 were as
follows:
Year Ending
December 31,
2003 $ 807,908
2004 177,120
2005 189,472
2006 202,672
2007 88,569
----------
Total $1,465,741
==========
NOTE 10 - CONVERTIBLE NOTE PAYABLE
At December 31, 2001, the Company maintained a short-term, convertible
promissory note, which bore interest at 8% per annum and matured in
April 2002. It was convertible at a rate of $0.27 per share into
370,000 shares of common stock. During the year ended December 31,
2002, the note was converted in full.
NOTE 11 - ACCRUED EXPENSES
Accrued expenses at December 31, 2002 and 2001 consisted of the
following:
2002 2001
---------- ----------
Accrued payroll and payroll related amounts $ 240,943 $ 261,240
Accrued interest .......................... 16,128 248,913
Accrued penalties and late fees ........... 45,464 74,661
Other ..................................... 750,708 393,370
---------- ----------
Total ................................. $1,053,243 $ 978,184
========== ==========
F-28
EMERGENT GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2002
- --------------------------------------------------------------------------------
NOTE 12 - COMMITMENTS AND CONTINGENCIES
Operating and Capital Leases
The Company leases a facility in Glendale, California, which serves as
an administrative and corporate office. The lease is scheduled to
expire in July 2006. Total rent expense incurred for the years ended
December 31, 2002 and 2001 and the period from March 8, 2000
(inception) to December 31, 2000 was $157,378, $71,280 , and $0,
respectively.
The Company leases a facility in Dublin, California, which serves as an
administrative office. The lease is scheduled to expire in March 2004.
Total rent expense incurred for the years ended December 31, 2002 and
2001 and the period from March 8, 2000 (inception) to December 31, 2000
was $52,092, $33,921, and $0, respectively.
The Company leases its automobiles under various operating leases. The
leases are scheduled to expire between December 2003 and February 2004.
Total automobile rental expense for the years ended December 31, 2002
and 2001 and the period from March 8, 2000 (inception) to December 31,
2000 was $169,051, $66,636, $0, respectively.
The Company also has 42 capital lease obligations with several finance
companies for various rental equipment. The capital leases bear
interest at rates between 6% and 34% per annum. The monthly lease
payments range between $92 to $17,851 and terminate through April 2006.
During the years ended December 31, 2002 and 2001, the Company
renegotiated various capital lease obligations, resulting in the
forgiveness of $1,609,114 and $0, respectively, of the debt.
As of December 31, 2002, the Company continued to be in default under
certain note and lease obligations with aggregate principal balances
outstanding of $162,347. The Company's management intends to continue
negotiations with these creditors until these disputes are resolved and
satisfactory resolutions are reached. Assurances cannot be given that
these negotiations will be completed on terms satisfactory to the
Company, if at all.
F-29
EMERGENT GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2002
- --------------------------------------------------------------------------------
NOTE 12 - COMMITMENTS AND CONTINGENCIES (Continued)
Operating and Capital Leases (Continued)
Future minimum lease payments under operating and capital leases at
December 31, 2002 were as follows:
Year Ending Operating Capital
December 31, Lease Lease
------------ --------------- ----------------
2003 $ 366,813 $ 730,527
2004 202,741 216,688
2005 174,182 114,625
2006 98,698 74,854
--------------- ----------------
Total minimum lease payments $ 842,434 1,136,694
===============
Less amounts representing interest 90,103
----------------
1,046,591
Less current portion 677,973
----------------
Long-term portion $ 368,618
================
Litigation
In October 2000, Emergent Capital Investment Management LLC ("ECIM"), a
related party, commenced an action on behalf of the Company against
Stonepath, a third party, and two of its officers in the United States
District Court for the Southern District of New York. The action was
for negligence and fraud under the federal securities laws and common
law to recover ECIM's investment in Stonepath. On April 15, 2002, the
amended Complaint was dismissed without leave to amend. ECIM has filed
an appeal of this decision. The Company does not intend to conduct any
additional merchant banking activities to make investments in other
companies in the foreseeable future.
On April 25, 2002, Citicorp Vendor Finance, Inc. ("Citicorp") filed a
suit in the Superior Court of Los Angeles against PRI and MRM. The
complainant seeks damages of approximately $656,000, plus interest and
late charges and asserts breach of contract. The Company reached a
settlement with Citicorp in November 2002, whereby the Company agreed
to pay Citicorp a total of $400,000 in full settlement of the claim in
various installments, with the balance being paid in full by March
2004. As part of the settlement, Citicorp has agreed that PRI may sell
the equipment under the equipment lease agreement, but must transmit to
Citicorp all proceeds from the sale in excess of $225,000. The
settlement further stipulates in event of non-payment, Citicorp may
petition the court for an entry of judgment against PRI. All payments
have currently been made on a timely basis. At December 31, 2002, the
Company has accrued for the liability in full.
F-30
EMERGENT GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2002
- --------------------------------------------------------------------------------
NOTE 12 - COMMITMENTS AND CONTINGENCIES (Continued)
Litigation (Continued)
In October 2002, a former employee commenced legal proceedings in the
Superior Court of California against the Company. The compliant alleges
discrimination, breach of contract, and breach of the implied covenant
of good faith and fair dealing. The Company intends to vigorously
defend this claim.
In December 2001, a former patient of Anaheim General Hospital
commenced a legal proceeding in the Superior Court of the State of
California, County of Orange, against MRM, the hospital and one of the
hospitals' surgeons. The plaintiff alleges that while she was under
anesthesia, the 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.
NOTE 13 - SHAREHOLDERS' EQUITY
Preferred Stock
The Company has 10,000,000 authorized shares of non-voting preferred
stock with a $0.001 par value. The preferred stock may be issued in
series, from time to time, with such designations, rights, preferences,
and limitations as the Board of Directors may determine by resolution.
The Company did not have any preferred stock issued and outstanding at
December 31, 2002 and 2001.
Common Stock
During the year ended December 31, 2002, the Company completed the
following transactions:
o issued 370,000 shares of common stock for the conversion of a
note payable of $100,000.
o issued 11,502,970 shares of common stock valued at $11,503 to a
principal of a consulting firm in connection with his appointment
as the Company's Chief Executive Officer. In connection with this
transaction, an additional 2,440,024 shares of common stock were
issued subsequent to December 31, 2002 valued at $2,440. This
transaction has been recorded as committed common stock in the
accompanying consolidated balance sheet.
During the year ended December 31, 2001, the Company completed the
following transactions:
o issued 3,000,000 shares of common stock for cash totaling
$600,000. Offering costs were not recorded in connection with this
transaction.
During the period from March 8, 2000 (inception) to December 31,
2000, a member of Emergent LLC contributed $1,173,125 of investment
securities. This investment was recorded as a capital contribution
under additional paid-in capital. In addition, Emergent LLC recorded a
capital contribution of $7,500,000 in cash by other members. These
contributions were received in connection with the recapitalization of
capital accounts as a result of the Dynamic transfer, whereby a total
of 44,173,280 shares were issued.
F-31
EMERGENT GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2002
- --------------------------------------------------------------------------------
NOTE 13 - SHAREHOLDERS' EQUITY (Continued)
Common Stock (Continued)
o converted a note payable for $60,000 into 237,874 shares of common
stock. Expense was not recorded in connection with a beneficial
conversion feature since the note was convertible at a rate that
was approximately market value.
o acquired substantially all of the assets and liabilities of MRM,
Inc. in exchange for 5,633,667 shares of the Company's common
stock valued at $3,244,992 and options to purchase 564,786 shares
of common stock valued at $316,191.
o issued options to purchase 2,013,436 shares of common stock with
exercise prices ranging from $0.01 to $1 to consultants for
services valued at $155,891, which has been recorded as consulting
expense. Included in these issuances were options to purchase
250,000 shares of common stock issued to consultants who are
former employees of Either Emergent or MRM. In addition, options
to purchase 200,000 shares of common stock were issued to the
Company's general counsel.
o issued warrants to purchase 500,000 shares of common stock with an
exercise price of $0.01 to consultants for services valued at
$370,000, which has been recorded as consulting expense.
o issued warrants to purchase 50,000 shares of common stock with an
exercise price of $0.01 to a capital lease holder in connection
with the re-negotiation of debt. Management determined that there
was not a material charge in connection with this transaction, so
an expense was not recorded.
o issued options to employees to purchase 2,110,000 shares of common
stock when the exercise price was less than the fair value of the
Company's common stock at the date of grant. Compensation expense
in the amount of $75,000 was recorded in connection with the
issuance of the stock options.
During the period from March 8, 2000 (inception) to December 31, 2000,
a member of the Company contributed $1,173,125 of investment
securities. This investment was recorded as a capital contribution
under additional paid-in capital by the Company. In addition, the
Company recorded a capital contribution of $7,500,000. These
contributions were received in connection with the recapitalization of
capital accounts as a result of the Dynamic transfer, whereby a total
of 44,173,280 shares were issued.
F-32
EMERGENT GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2002
- --------------------------------------------------------------------------------
NOTE 13 - SHAREHOLDERS' EQUITY (Continued)
Stock Option Plans
In September 1996, MRM adopted the 1996 Stock Incentive Plan (the "1996
Plan") to allow officers, employees, and certain non-employees to
receive certain options to purchase common stock. Under the 1996 Plan,
regular salaried employees and directors may be granted options
exercisable at not less than 100% of the fair market value of the
shares at the date of grant. The exercise price of any option granted
to a person who owns stock possessing more than 10% of the voting power
of all classes of common stock of MRM must be 110% of the fair market
value of the common stock on the date of grant, and the duration may
not exceed five years. Options generally become exercisable at a rate
of one-third of the shares subject to option on each of the first,
second, and third anniversary dates of the grant. The duration of the
options may not exceed 10 years. A maximum number of 1,500,000 shares
of MRM's common stock may be issued under the 1996 Plan.
In February 2000, MRM adopted the 2000 Stock Incentive Plan (the "2000
Plan") to allow officers, employees, and certain non-employees to
receive certain options to purchase common stock. Under the 2000 Plan,
regular salaried employees and directors may be granted options
exercisable at not less than 100% of the fair market value of the
shares at the date of grant. The exercise price of any option granted
to a person who owns stock possessing more than 10% of the voting power
of all classes of common stock of MRM must be 110% of the fair market
value of the common stock on the date of grant, and the duration may
not exceed five years. Options generally become exercisable at a rate
of one-third of the shares subject to option on each of the first,
second, and third anniversary dates of the grant. The duration of the
options may not exceed 10 years. A maximum number of 2,500,000 shares
of MRM's common stock may be issued under the 2000 Plan.
Pursuant to the merger agreement between Emergent and MRM in July 2001,
each outstanding MRM stock option automatically converted into an
option in shares of Emergent's common stock with the same terms and
conditions as were applicable under the MRM stock option plans. At the
date of the merger, Emergent assumed all of the outstanding options of
MRM, which allowed the purchase of 564,786 shares of Emergent's common
stock at exercise prices ranging from $0.68 to $4.05 per share. The
Company does not intend to grant any more options under the MRM plans.
During the year ended December 31, 2001, the Company adopted the 2001
Stock Option Plan (the "2001 Plan"). The purpose of the 2001 Plan is to
provide incentive to key employees, officers, and consultants of the
Company who provide significant services to the Company. There were
8,000,000 shares available for grant under the 2001 Plan, but during
the year ended December 31, 2002, the Company reduced the authorized
share capital to 585,000 shares. 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
F-33
EMERGENT GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2002
- --------------------------------------------------------------------------------
NOTE 13 - SHAREHOLDERS' EQUITY (Continued)
Stock Option Plans (Continued)
from the date of grant. Options will vest evenly over a period of five
years, and the 2001 Plan expires December 31, 2011.
The exercise of options granted under the 2001 Plan will be determined
by the Board of Directors. Non-statutory stock options may be granted
at any price determined by the Board even if the exercise price of the
options is at a price below the fair market value of the Company's
common stock on the date of grant. The purchase price of an incentive
stock option may not be less than the fair market value of the common
stock at the time of grant, except in the case of a 10% shareholder who
receives an incentive stock option, the purchase price may not be less
than 110% of such fair market value. The aggregate fair market value of
the stock for which incentive stock options are exercisable by any
employee during any calendar year must not exceed $100,000.
Since shareholder approval was not obtained on or before November 1,
2002, all incentive stock options granted under the 2001 Plan have
automatically become non-statutory stock options, and the Board is
limited to granting non-statutory stock options under the 2001 Plan.
The exercisability of options outstanding under the 2001 Plan is
subject to shareholder approval.
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.
During the year ended December 31, 2002, the Company issued to
employees options to purchase 5,927,854 shares of common stock under
the 2002 Plan. The options have a 10-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. In
addition, in the event shareholder approval of the 2002 Plan is not
obtained by April 1, 2003, then all incentive stock options granted
under the 2002 Plan will automatically convert to non-statutory
options, and additional incentive stock options will not be granted
under the plan.
The Company issued options to purchase 1,551,000 shares of common stock
to various employees under the 2002 Plan at an exercise price of $0.01
per share, of which 1,200,000 were issued to the new Chief Financial
Officer in connection with his appointment. The shares vest between
December 2002 and December 2012.
F-34
EMERGENT GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2002
- --------------------------------------------------------------------------------
NOTE 13 - SHAREHOLDERS' EQUITY (Continued)
Stock Option Plans (Continued)
The Company issued options to purchase 2,578,026 shares of common
stock under the 2002 Plan to various consultants and independent
directors. 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 has not recorded any charge to expense because the
impact on the statement of operations is not material.
The Company issued options to purchase 150,000 shares of common stock
to a former officer of MRM as part of a settlement agreement for the
termination of a consulting contract entered in January 2000 and
subsequently amended in August 2001. In addition to the options, the
former officer 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 also issued options to purchase 500,000 shares of
common stock to a consultant for services performed. The options are
immediately vested with a term of 10 years at an exercise price of
$0.01 per share. The Company has not recorded any charge to expense
because the impact on the statement of operations is not material.
A summary of the Company's outstanding options and activity is as
follows:
Weighted-
Average
Number Exercise
of Options Price
Outstanding, March 8, 2000 (inception) to
December 31, 2000 - $ -
Stock options converted upon merger 564,786 $ 0.73
Granted 5,093,436 $ 0.04
Canceled (177,068) $ 0.80
---------------
Outstanding, December 31, 2001 5,481,154 $ 0.14
Granted 10,706,880 $ 0.01
Canceled (2,110,614) $ 0.29
---------------
Outstanding, December 31, 2002 14,077,420 $ 0.02
===============
Exercisable, December 31, 2002 7,172,058 $ 0.13
===============
F-35
EMERGENT GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2002
- --------------------------------------------------------------------------------
NOTE 13 - SHAREHOLDERS' EQUITY (Continued)
Stock Option Plans (Continued)
The weighted-average remaining contractual life of the options
outstanding at December 31, 2002 is 7.4 years. The exercise prices for
the options outstanding at December 31, 2002 ranged from $0.01 to
$4.05, and information relating to these options is as follows:
Weighted- Weighted-
Weighted- Average Average
Average Exercise Exercise
Range of Stock Stock Remaining Price of Price of
Exercise Options Options Contractual Options Options
Prices Outstanding Exercisable Life Outstanding Exercisable
------------------ --------------- --------------- ---------------- --------------- ----------------
$ 0.00 - 0.20 13,366,045 6,827,477 7.36 years $ 0.04 $ 0.06
$ 0.21 - 1.00 704,530 337,736 8.04 years $ 0.98 $ 0.95
$ 1.01 - 4.05 6,845 6,845 4.28 years $ 4.05 $ 4.05
--------------- ---------------
14,077,420 7,172,058
=============== ===============
The Company has adopted only the disclosure provisions of SFAS No. 123.
It applies APB No. 25 and related interpretations in accounting for its
plans and does not recognize compensation expense for its stock-based
compensation plans other than for restricted stock and options issued
to outside third parties. If the Company had elected to recognize
compensation expense based upon the fair value at the grant date for
awards under these plans consistent with the methodology prescribed by
SFAS 123, the Company's net loss and basic and diluted loss per share
for the years ended December 31, 2002 and 2001 would be as follows:
2002 2001
--------------- ----------------
Net loss
As reported $ (1,758,439) $ (9,720,221)
Pro forma $ (1,835,135) $ (9,766,403)
Basic and diluted loss per share
As reported $ (0.08) $ (0.19)
Pro forma $ (0.08) $ (0.20)
For purposes of computing the pro forma disclosures required by SFAS
No. 123, the fair value of each option granted to employees and
directors is estimated using the Black-Scholes option-pricing model
with the following weighted-average assumptions for the years ended
December 31, 2002 and 2001: dividend yields of 0% and 0%, respectively;
expected volatility of 175% and 175%, respectively; risk-free interest
rates of 3.3% and 3.8%, respectively; and expected lives of five and
2.28 years, respectively. The weighted-average fair value of options
granted during the year ended December 31, 2002 for which the exercise
price was greater than the market price on the grant date was $0.0001,
and the weighted-average exercise price was $0.01. The weighted-average
fair value of options granted during the year ended December 31, 2002
for
F-36
EMERGENT GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2002
- --------------------------------------------------------------------------------
NOTE 13 - SHAREHOLDERS' EQUITY (Continued)
Stock Option Plans (Continued)
which the exercise price was equal to the market price on the grant
date was $0.01 and the weighted-average exercise price was $0.01.
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options which have no vesting
restrictions and are fully transferable. In addition, option valuation
models require the input of highly subjective assumptions including the
expected stock price volatility. Because the Company's employee stock
options have characteristics significantly different from those of
traded options, and because changes in the subjective input assumptions
can materially affect the fair value estimate, in management's opinion,
the existing models do not necessarily provide a reliable single
measure of the fair value of its employee stock options.
Warrants
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.
NOTE 14 - INCOME TAXES
The components of the income tax provision for the years ended December
31, 2002 and 2001 and the period from March 8, 2000 (inception) to
December 31, 2000 were as follows:
2002 2001 2001
---------------- --------------- ----------------
Current $ - $ 1,600 $ -
Deferred - - -
---------------- --------------- ----------------
Total $ - $ 1,600 $ -
================ =============== ================
A reconciliation of the provision for income tax expense with the
expected income tax computed by applying the federal statutory income
tax rate to income before provision for income taxes was as follows for
the years ended December 31, 2002 and 2001 and the period from March 8,
2000 (inception) to December 31, 2000:
2002 2001 2001
---------------- --------------- ----------------
Income tax computed at federal
statutory tax rate 34.0% 34.0% 34.0%
State taxes, net of federal benefit 8.0 8.0 8.0
------------- ------------- -------------
Total 42.0% 42.0% 42.0%
============= ============= =============
F-37
EMERGENT GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2002
- --------------------------------------------------------------------------------
NOTE 14 - INCOME TAXES (Continued)
The tax effects of temporary differences that give rise to deferred
taxes at December 31, 2002 and 2001 are as follows:
2002 2001
--------------- ----------------
Deferred tax assets
Impairment of assets $ 2,826,310 $ 2,609,490
Capital loss carryover 1,358,059 919,862
Unrealized loss on investment securities - 1,287,492
Net operating loss carryforwards 1,869,351 2,524,816
Other 419,011 271,010
--------------- ----------------
Total gross deferred tax assets 6,472,731 7,612,670
Less valuation allowance 6,472,731 7,612,670
--------------- ----------------
Net deferred tax assets $ - $ -
=============== ================
The valuation allowance decreased by $1,139,939 during the year ended
December 31, 2002. All other deferred tax assets were immaterial. As of
December 31, 2002, the Company had approximately $4,398,000 in federal
net operating loss carryforwards attributable to losses incurred since
the Company's inception that may be offset against future taxable
income through 2019.
NOTE 15 - EXTRAORDINARY ITEM
During the year ended December 31, 2002, the Company entered in debt
re-negotiations with capital lease and note payable holders, resulting
in the forgiveness of $3,208,037 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 $2,104,033,
which is included in the gain on forgiveness of debt on the
accompanying consolidated statement of operations for the year ended
December 31, 2002.
In addition, the Company also entered into debt re-negotiations with
several vendors, resulting in the forgiveness of $364,721 of debt. This
gain is also included in the gain on forgiveness of debt on the
accompanying consolidated statement of operations for the year ended
December 31, 2002.
NOTE 16 - BENEFIT PLAN
MRM has adopted a defined contribution retirement plan (the "Plan"),
which qualifies under Section 401(k) of the Internal Revenue Code. The
Plan covers all employees. MRM makes an annual election to provide
matching contributions of up to 6% of each participant's deferral. MRM
did not make any matching contributions during the years ended December
31, 2002 and 2001 and the period from March 8, 2000 (inception) to
December 31, 2000.
F-38
EMERGENT GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2002
- --------------------------------------------------------------------------------
NOTE 17 - RELATED PARTY TRANSACTIONS
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.
In December 2002, 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,
13,942,994 shares of the Company's common stock valued at $13,943 were
issued to the principal officer 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.
During the year ended December 31 2001, the Company transferred
$227,013 of property and equipment to a related party. This amount is
included in due from related parties on the accompanying consolidated
balance sheet.
During the period from March 8, 2000 (inception) to December 31, 2000,
the Company was funded by an operating entity that was owned by the
Company's principal shareholders. During the year ended December 31,
2001, the Company transferred $191,504 of property and equipment and
incurred several operating costs on behalf of this entity. The full
amount due, including the balance of $467,519 due from the related
party at December 31, 2000, was repaid in full during the year ended
December 31, 2001 by the offset of a loan of $1,045,123 due by the
Company to the related entity.
In November 2001, the Company entered into an employment contract with
the former Vice President/Chief Operating Officer of MRM. The agreement
called for a base salary of $125,000 per year and options to purchase
500,000 shares of the Company's common stock at $0.01 per share. The
options expire in December 2004. Subsequent to December 31, 2002, this
agreement was terminated, but the officer retained his options.
F-39
EMERGENT GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2002
- --------------------------------------------------------------------------------
NOTE 17 - RELATED PARTY TRANSACTIONS (Continued)
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 on
or before 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 May 2002, the Company sold property and equipment with a net book
value of $38,229 to a related party for $156,963. The Company received
$106,642 in cash and offset $52,321 against a balance owed to the
related party.
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, 2002, 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 December 2002, the Company entered into a consulting agreement with
the current Chief Executive Officer and his company, JIMA Management.
The agreement related to the provision of consulting services during
the period from July 2001 to March 2002 in exchange for a monthly fee
of $10,000, payable in 2003. As of December 31, 2002, the Company has
accrued $70,000 with regard to these services rendered.
NOTE 18 - FOURTH QUARTER ADJUSTMENTS
During the year ended December 31, 2002, the Company recorded an
expense of $2,100,955 in the fourth quarter in connection with the
impairment of goodwill.
During the year ended December 31, 2001, in connection with the
acquisition of substantially all of the assets and liabilities of MRM
in July 2001, the Company recorded an excess of cost over fair value of
assets acquired of $3,420,862. The Company recorded an expense of
$687,906 in the fourth quarter in connection with the impairment of
this asset. In connection with a review of property and equipment for
impairment, the Company recorded a net expense of $3,732,223 in the
fourth quarter of 2001.
The Company did not have any fourth quarter adjustments during the
period from March 8, 2000 (inception) to December 31, 2000.
F-40
SIGNATURES
Pursuant to the requirements Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has caused this Report to be signed on its
behalf by the undersigned, thereunto duly authorized.
EMERGENT GROUP INC.
By: /s/ Bruce J. Haber
Bruce J. Haber, Chairman
of the Board and Chief
Executive Officer
Dated: Glendale, California
March 27, 2003
Pursuant to the requirements of the Securities Exchange Act of 1934,
this Report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated:
Signatures Title Date
/s/ Bruce J. Haber Chairman of the Board March 27, 2003
Bruce J. Haber Chief Executive Officer
/s/ William M. McKay Chief Financial Officer March 27, 2003
William M. McKay Secretary and Treasurer
/s/ Daniel Yun Director March 27, 2003
Daniel Yun
/s/ Mark Waldron Director March 27, 2003
Mark Waldron
/s/ Howard Waltman Director March 27, 2003
Howard Waltman
/s/ Matthew K. Fong Director March 27, 2003
Matthew K. Fong
Bruce J. Haber, Daniel Yun, Mark Waldron, Howard Waltman and Matthew K.
Fong represent all the current members of the Board of Directors.
67
CERTIFICATION
I, Bruce J. Haber, Chief Executive Officer of the Registrant, certify that:
1. I have reviewed this annual report on Form 10-K of Emergent Group Inc.;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this annual
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report.
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 annual 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
annual report (the "Evaluation Date"); and
c) presented in this annual 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
annual 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: March 27, 2003 /s/ Bruce J. Haber
Bruce J. Haber,
Chief Executive Officer
68
CERTIFICATION
I, William M. McKay, Chief Financial Officer of the Registrant, certify
that:
1. I have reviewed this annual report on Form 10-K of Emergent Group Inc.
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this annual
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report;
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 annual 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
annual report (the "Evaluation Date"); and
c) presented in this annual 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
annual 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: March 27, 2003 /s/William M. McKay
William M. McKay, Chief
Financial Officer
69