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.
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(Exact name of Registrant as specified in its charter)
Nevada 93-1215401
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(State of jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
932 Grand Central Avenue
Glendale, California 91201
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (818) 240-8250
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Former address: 375 Park Avenue, New York, NY 10152
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Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: Common Stock,
$.001 Par Value
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days. Yes X . No ___.
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K (ss.229.405 of this chapter) is not contained herein,
and will not be contained, to the best of Registrant's knowledge, in definitive
proxy or information statements incorporated by reference in part III of this
Form 10-K or any amendment to this Form 10-K [ ].
As of 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
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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
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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
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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.
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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.
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Cosmetic Mobile Laser/Surgical Services
The cosmetic laser business is primarily physician office based. This
market is characterized by rapid changes in specific techniques as new
technology emerges. Recently, cosmetic laser skin resurfacing surgery has shown
significant growth, however, price competition is a constant challenge from
smaller start-up companies. Recent legislation in California and some other
states restricting anesthesia in doctor offices has redirected some of this
cosmetic surgery to hospitals and surgery centers where PRI has existing
customer relationships and the ability to compete more effectively. 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.
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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.
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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)
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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.
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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.