10KSB 1 dec31200510ksb.txt SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-KSB [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 2005 or [ ] TRANSITION REPORT PURSUANT TO SECTION 12 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ____ to ___ Commission File Number: 0-21475 EMERGENT GROUP INC. ---------------------- (Exact name of Registrant as specified in its charter) Nevada 93-1215401 -------------------------------------------------------------------------------- (State of jurisdiction of (I.R.S. Employee incorporation or organization) Identification Number) 932 Grand Central Avenue Glendale, California 91201 -------------------------------------------------------------------------------- (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (818) 240-8250 -------------- Securities registered pursuant to Section 12 (b) of the Act: None Securities registered pursuant to Section 12 (g) of the Act: Common Stock, $.04 Par Value Check whether the Registrant is not required to file reports pursuant to Section 13 or 15(d) of the Exchange Act. [ ] 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 in response to Item 405 of Regulation S-B is not contained in this form, and no disclosure will 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-KSB or any amendment to this Form 10-KSB [ ]. Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes [ ] No [X] State Issuer's revenues for its most recent fiscal year: $12,479,263 As of March 29, 2006, the number of shares held by non-affiliates was approximately 2,000,000 shares. The approximate market value based on the last sale (i.e. $2.60 per share as of March 29, 2006) of the Company's Common Stock was approximately $5,200,000. The number of shares outstanding of the Registrant's Common Stock, as of March 29, 2006, was 5,452,610. 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 "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. 2 PART I Item 1. Description of Business -------------------------------- THE COMPANY ----------- Emergent Group Inc. ("Emergent") is the parent company of PRI Medical Technologies, Inc., ("PRI Medical"), its wholly owned and only operating subsidiary. Emergent acquired PRI Medical in July 2001 and merged its wholly owned subsidiary, Physiologic Reps ("PRI"), into PRI Medical. Emergent, PRI Medical and PRI are referred to collectively hereinafter as the "Company." PRI Medical is a provider of surgical equipment on a fee for service basis to hospitals, surgical care centers and other health care providers. PRI Medical 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 certain 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 Medical 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 Medical value proposition to its customers. PRI Medical makes mobile surgical services available to its customers by providing mobile lasers and other surgical equipment on a per procedure basis to hospitals, outpatient surgery centers, and physician offices along with technical support required to ensure the equipment is working correctly. PRI Medical'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 surgery at hospitals or surgery centers by renting PRI Medical'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 Medical'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 of the equipment. PRI Medical has over 600 active surgical service accounts in California, Utah, Colorado, Nevada, New York and Arizona and experiences a high rate of repeat business from the hospitals, surgery centers and doctors we serve. The market encompasses many disciplines including plastic/cosmetics surgery, dermatology, orthopedic surgery, otolaryngology, urology, obstetrics, gynecology, ophthalmology, general surgery and podiatry. 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 Medical's business. PRI Medical's healthcare distribution network allows physicians, hospitals and healthcare facilities access to new medical equipment without the expense of acquisition. PRI Medical is able to help manufacturers bring advanced medical technologies to market by using its distribution channels and its 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 Medical had revenues of approximately $12.5 million and $11.0 million in 2005 and 2004, respectively, and assisted in over 14,000 surgical and cosmetic procedures. By making new technologies available to physicians PRI Medical hopes to become a provider of innovative medical device and support services to the healthcare community early in a product's life cycle. 3 PRODUCTS AND SERVICES --------------------- PRI Medical's technicians provide surgical equipment and related 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 Medical's scheduling department. Upon arrival at the customer site, PRI Medical's technician set up the equipment, 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. Technician-only services are made available to hospitals and surgery facilities, especially those with fluctuating occupancy levels. Customers sometime find that outsourcing of trained technicians without renting equipment to be a cost-effective alternative to training and staffing their own personnel. PRI Medical's laser equipment encompasses CO2, Greenlight PV, Nd:YAG, Pulse Dye, KTP/YAG, and Holmium YAG laser technology. PRI Medical has established working relationships with leading laser manufacturers and is sometimes an introducer of laser technology in its markets. PRI Medical 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 Medical has, in recent years, added equipment to provide for services in cryosurgery, transmyocardial revascularization, advanced visualization technology, lithotripsy, microwave therapy, and prostrate surgery. 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 Medical 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 prior years PRI Medical offered general medical rental equipment to its customers. However, in late 2001 the Company decided to discontinue this area of business in order to focus on its core mobile surgical equipment rental and services business. Thus, revenues from rentals of general medical equipment decreased to $41,069 in 2005 compared to $102,237 in 2004. "See Management's Discussion and Analysis of Financial Condition and Results of Operations." MARKETING AND SALES ------------------- PRI Medical 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 customers and on obtaining new customer accounts. In conjunction with its sales efforts, PRI Medical sponsors educational seminars on new laser and other surgical equipment technologies, which are attended by its current and prospective customers. These seminars allow PRI Medical's direct sales force to introduce new technologies and procedures to its customer base early in the product's life cycle. 4 PRI Medical's sales representatives attend national and regional physician medical seminars and trade shows to present PRI Medical's services and products. PRI Medical also markets its products and services through direct mail marketing of literature and promotional materials, which describe PRI Medical's complete range of surgical equipment and services to hospitals, surgery centers and physicians. PURCHASE OF CERTAIN OPERATING ASSETS OF ADVANTAGE MEDICAL SERVICES, LLC ----------------------------------------------------------------------- On November11, 2005 PRI Medical entered into an agreement with Advantage Medical Services, LLC ("Seller") to acquire certain operating assets of the Seller including laser equipment and customer lists. In addition, the Seller and certain of its principals entered in a five year non-compete agreement with PRI Medical. The purchase agreement provided for the assumption of certain equipment lease obligations in the amount of approximately $308,000, issuance of 324,000 shares of the Company's common stock, and cash consideration of $475,000. With regard to the cash consideration, PRI Medical paid $100,000 in cash to the Seller on November 14, 2005 with the balance of $375,000 payable in 12 equal quarterly installments from the closing date. The common stock and cash consideration may be reduced if certain net service revenues, as defined, from customers noted on the customer list, are not achieved during the 12-month period following the closing date. The total purchase price was allocated to the assets acquired and to goodwill. In connection with this transaction, Mr. Bruce J. Haber, the Company's Chairman and Chief Executive Officer, received an irrevocable proxy to vote the aforementioned 324,000 shares until the time that the shares are transferred to a non-affiliated party. MARKETS ------- PRI Medical currently serves customers in California, Colorado, Utah, Nevada, New York and Arizona. Each location is staffed with full-time technicians and sales representatives. During the years ended December 31, 2005 and 2004, no customer accounted for more than 10% of PRI Medical's total sales. Hospital Mobile Laser/Surgical Services --------------------------------------- PRI Medical 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 each of the years ended December 31, 2005 and 2004, PRI Medical performed over 14,000 procedures company-wide. Revenues from our surgical mobile medical equipment and services business comprised approximately 90% and 87%, of our total revenues for 2005 and 2004 respectively. We believe that revenue from our surgical related services will continue to comprise the majority of our revenues in the foreseeable future. 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. For the years ended December 31, 2005 and 2004 revenues from our cosmetic laser business comprised approximately 10% and 12% respectively, of our total revenues. 5 INVESTMENTS ----------- Investments In Limited Liability Companies ------------------------------------------ In connection with expanding its business in certain commercial and geographic areas, PRI Medical will at times help to form Limited Liability Companies ("LLCs") in which it will acquire a minority interest and offer the remaining interest to other investors. These LLCs acquire certain equipment for use in their respective business activities which generally focus on surgical procedures. PRI Medical helped to form and acquired minority equity interests in various LLCs in Colorado and California and currently holds minority interest in four LLCs as of December 31, 2005. During 2005, PRI Medical helped to form two new LLCs, which subsequently raised total capital of $200,000 from investors. Such LLCs acquired two surgical lasers in 2005 and in January 2006 financed such equipment through lease financing in the aggregate amount of $600,000. The investors in each LLC provided the financing company with individual proportionate lease guarantees based on their respective ownership percentages in the LLCs. In addition, PRI Medical provided corporate guarantees to the financing company in connection with such lease financing. The investors in each LLC agreed to indemnify PRI Medical against losses, if any, incurred in connection with its guarantees. For the years ended December 31, 2005 and 2004 in accordance with the Financial Accounting Standards Board Interpretation No. 46R, "Consolidation of Variable Interest Entities" the Company accounted for its equity investments in its LLCs under the full consolidation method whereby transactions between the Company and LLCs have been eliminated through consolidation. "See Management's Discussion and Analysis of Financial Condition and Results of Operations." Other Investments ----------------- As discussed herein, prior to Emergent's acquisition of PRI Medical 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 million 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. In 2004, the Company settled a lawsuit against Stonepath and received $37,546, net of related legal fees and other costs of $12,454. The net settlement amount of $37,546 is included in other income in the accompanying statement of operations as of December 31, 2004. 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 6 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 claim or claims arising from such litigation might exceed the Company's insurance coverage. Currently, the Company's current product liability insurance coverage expires in April 2006. In the future, depending on market conditions, there can be no assurances that the Company can maintain such insurance coverage or obtain new coverage from a different insurance carrier should the need arise. COMPETITION ----------- The market for PRI Medical'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 Medical 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 Healthtronics, a publicly held company, and 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 March 20, 2006, the Company employed 81 full-time persons (including three executive officers), 57 of whom were involved in operations activities (most of these were active as field technicians), 13 of whom were involved in sales and marketing, and 11 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. We believe that our relationship with our employees is good. 7 RISK FACTORS ------------ WE HAVE INCURRED LOSSES IN THE PAST AND MAY INCUR LOSSES IN THE FUTURE. For the years ended December 31, 2005 and December 31, 2004, we reported net income of $966,252 and $23,280, respectively. However, we have incurred operating losses in the years preceding 2004. Our ability to generate positive operating results are dependent upon many factors and variables including market conditions for our products and services, changing technologies within the medical equipment industry, and competition. Although we have shown improvement in our net operating results over the last two years, there can be no assurances that we will continue to achieve positive operating results in future periods. 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. Much of our future growth and our ability to meet existing debt, lease and vendor obligations depend upon our ability to expand our customer base and on our ability to acquire new technologies related to medical surgical equipment. Such endeavors may require additional capital resources in addition to cash from operations. 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 in the future 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. 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. 8 THERE IS NO ESTABLISHED TRADING MARKET FOR OUR STOCK. In the past and currently, there has been an irregular and relatively illiquid public market for our common stock. There can be no assurances that an established public market for our Common Stock will develop in the future. 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. 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; 9 o our ability to control expenses; o the timing of regulatory approvals and changes in domestic and regulatory environments; o the level of capital spending of our customers; o costs related to acquisitions or alliances, if any; and o general economic conditions. Due to these and other factors, we believe that our operating results in future quarters and years may differ from expectations, and quarter-to-quarter and year-to-year comparisons of our past operating results may not be meaningful. You should not rely on our results for any quarter or year as an indication of future performance. OUR INDUSTRY IS UNPREDICTABLE AND CHARACTERIZED BY RAPID TECHNOLOGICAL CHANGES AND EVOLVING STANDARDS, AND, IF WE FAIL TO ADDRESS CHANGING MARKET CONDITIONS, OUR BUSINESS AND OPERATING RESULTS WILL BE HARMED. Our industry is characterized by rapid technological change, frequent new product introductions, changes in customer requirements and evolving industry standards. Our equipment could quickly become obsolete due to new technological developments in medical devices. This could lead to a significant financial impact since most of our equipment is generally financed over a period of several years. Because this market is subject to rapid change, it is difficult to predict our potential size or future growth rate. Our success in generating revenues in this market will depend on, among other things: 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. 10 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. IF WE LOSE SENIOR MANAGEMENT AND KEY EMPLOYEES ON WHOM WE DEPEND, OUR BUSINESS COULD SUFFER. We have employment contracts with Bruce J. Haber and Louis Buther who are key employees and officers of the Company. 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: 11 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. Item 2. Description of Property -------------------------------- The Company leases approximately 14,400 square feet of office/warehouse space for its operations and headquarters in Glendale, California. The lease agreement currently provides for monthly rent of approximately $14,500, plus reimbursements for property taxes and insurance, and is subject to annual increases based on increases in the Consumer Price Index. This lease expires in July 2006; however, the Company is currently in discussions with the landlord to renew the lease for another five year period. We believe that we can find suitable alternative office/warehouse space at competitive lease rates in the event the existing lease is not renewed. The Company also leases an aggregate of approximately 4,000 square feet of space for its field and sales offices under operating lease agreements that expire on various dates through May 2007 in Northern California, Colorado and Utah. We believe our present facilities are adequate for our reasonably foreseeable needs. Item 3. Legal Proceedings ------------------------- From time to time, we may become involved in litigation arising out of operations in the normal course of business. As of the filing date of this Form 10-KSB, we are not a party to any pending legal proceedings, except as follows: Byong Y. Kwon, Plaintiff against Daniel J. Yun, Emergent Group, Inc., Emergent Capital Investment Management, LLC, Metedeconk Holdings, LLC, Voyager Advisors, LLC, Millennium Tradition Limited (f/k/a Millennium Heritage, Limited), Emergent Management Company, LLC, Endurance Advisors, Limited, SK Networks Co., Ltd. (f/k/a SK Global Co., Ltd.), Hye Min Kang, John Does 1-2 and Richard Roes 1-2 (collectively the "Defendants"). 12 The civil lawsuit, which was signed by the clerk on February 2, 2005, is brought in the United States District Court, Southern District of New York, is an action by Plaintiff against the Company, a former director, Daniel Yun, and other parties to recover money damages for alleged fraud, negligent misrepresentations and aiding and abetting fraud. The 35-page Amended Complaint alleges that the factual basis involving the action against the Company involves alleged false representations to Plaintiff to induce him to leave his then employment in 2001 and accept the Company's and another named Defendant's alleged offer of employment. Plaintiff seeks compensatory damages and punitive damages each in the amount of not less than $2,100,000 together with interest thereon, reasonable attorneys' fees and other specific relief against Defendants other than the Company. Management has denied the Plaintiff's allegations against the Company and is vigorously defending this lawsuit. 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 2005. PART II Item 5. Market for Common Equity and Related Stockholder Matters. ------------------------------------------------------------------ Our common stock trades on the OTC Electronic Bulletin Board under the symbol "EMGP." 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, 2004.................................... 0.66 0.11 June 30, 2004..................................... 0.66 0.66 September 30, 2004................................ 0.70 0.66 December 31, 2004................................. 2.25 1.30 March 31, 2005.................................... 2.50 0.85 June 30, 2005..................................... 1.00 0.62 September 30, 2005................................ 1.01 0.51 December 31, 2005................................. 2.55 0.69 All quotations reflect inter-dealer prices, without retail mark-up, markdown or commissions, and may not necessarily represent actual transactions. As of March 29, 2006, there were approximately 673 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 --------------- On January 5, 2006, we paid a $0.10 per share cash dividend to our common stockholders of record on December 14, 2005. Previously, we have never paid any cash or other dividends to our stockholders. 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. We can give no assurances that cash or other dividends will be declared and paid in future operating periods. 13 Recent Sales of Unregistered Securities --------------------------------------- During the year ended December 31, 2005, the Company had no sales or issuances of unregistered Common Stock, except as follows: First Quarter Sales: None Second Quarter Sales: An aggregate of 260,000 shares of our Common Stock were sold to executive officers and directors of our Company in connection with certain loan guarantees. There were no commissions paid in connection with the issuance of these shares which were exempt under section 4(2) of the Securities Act of 1933, as amended. Third Quarter Sales: Options to purchase 15,000 shares at an exercise price of $.40 per share were granted to a director of our company and were subsequently exercised. There were no commissions paid in connection with the issuance of these shares which were exempt under section 4(2) of the Securities Act of 1933, as amended. Fourth Quarter Sales: An aggregate of 105,000 shares were issued as restricted stock awards to executive officers and directors of our Company, subject to vesting in five equal annual installments commencing November 2, 2006 and the forfeiture of the non-vested portion in the event that recipient is no longer serving as an officer or director of our Company at the time of vesting, subject to the Board's right to waive the forfeiture provisions. There were no commissions paid in connection with the issuance of these shares which were exempt under section 4(2) of the Securities Act of 1933, as amended. An aggregate of 324,000 shares were issued pursuant to the Company's agreement to acquire certain assets of Advantage Medical Services, LLC and certain individuals entering into a non-compete agreement. There were no commissions paid in connection with the issuance of these shares which were exempt under section 4(2) of the Securities Act of 1933, as amended. Recent Purchases of Securities ------------------------------ During the year ended December 31, 2005, the Company had no repurchases of its Common Stock. Item 6. Management's Discussion and Analysis of Financial Condition and Results of Operations -------------------------------------------------------------------------------- The following discussion should be read in conjunction with our consolidated financial statements and the notes thereto appearing elsewhere in this Form 10-KSB. 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. 14 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 management 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. 104, "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. Overview -------- PRI Medical is a provider of mobile surgical equipment, on a fee for service basis, to hospitals, surgical care centers and other health care providers. PRI Medical 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 Medical provides mobile lasers and other surgical equipment with technical support required to ensure the equipment is working correctly. 15 Results of Operations --------------------- The following table sets forth certain selected condensed consolidated statement of operations data for the periods indicated:
Statement of Operations Data ---------------------------- December 31, --------------------------------- 2005 % 2004 % ------------ -- ------------- -- Revenue $ 12,479,263 100% $ 10,967,369 100% Cost of goods sold 7,937,656 64% 7,703,124 70% ------------ -- ------------- -- Gross profit 4,541,607 36% 3,264,245 30% Selling, general, and administrative expenses 3,399,359 27% 3,152,409 29% ------------ -- ------------- -- Income from operations 1,142,248 9% 111,836 1% Other income, net 9,539 0% 67,953 1% ------------ -- ------------- -- Income before provision for income taxes and minority interest 1,151,787 9% 179,789 2% Provision for income taxes 27,007 0% - 0% ------------ -- ------------- -- Net income before minority interest 1,124,780 9% 179,789 2% -- -- Minority interest in income of consolidated limited liability companies (158,528) -1% (156,509) -1% ------------ -- ------------- -- Net income $ 966,252 8% $ 23,280 0% ============ == ============= ==
The consolidated financial statements of the Company for the periods ended December 31, 2005 and 2004 reflect net income of $966,252 and $23,280, respectively, on net revenues of $12,479,263 and $10,967,369, respectively. Year Ended December 31, 2005 Compared to the Year Ended December 31, 2004 The Company generated revenues of $12,479,263 in 2005 compared to $10,967,369 in 2004. The increase in revenues in 2005 of $1,511,894, or 14% is related to an increase in revenues from our higher-priced surgical procedures, the inclusion of revenues from consolidated limited liability companies, to revenues generated from customers acquired from a competitor in November 2005 and to price increases implemented in late 2004 and early 2005. Revenues for 2005 include revenues of $906,365 from four consolidated limited liability companies while 2004 includes revenues of $833,093 from two such companies. In addition, we acquired certain operating assets and customer lists from a competitor during November 2005, which also contributed to the increase revenues for 2005. Revenues from our surgical and cosmetic procedures represented approximately 90% and 10% of total revenues for 2005 and 87% and 12% for 2004, respectively. Cost of goods sold of was $7,937,656 in 2005 compared to $7,703,124 in 2004. 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 mobile medical equipment and technician services. The increase in cost of goods sold of $234,532 or 3% for 2004 is generally due to increases in disposable costs and payroll and related costs offset by a decrease in depreciation expense and a reduction of $50,000 in our reserve for excess/obsolete inventory in 2005. Disposable costs increased as a result of a change in the mix of surgical procedures rendered to customers whereby a greater number of procedures were performed in 2005 compared to 2004 that required more expensive disposable items while payroll costs increased as a result of the increase in the number of surgical and cosmetic procedures performed in 2005. Depreciation and amortization expense decreased due to the fact that certain assets became fully depreciated in mid-2005 and such decreases in depreciation were not entirely offset by depreciation from newly acquired assets. The net change in other cost categories included in cost of goods sold remained relatively unchanged in 2005 compared to 2004. 16 Gross profit from operations was $4,541,607 in 2005 compared to $3,264,245 in 2004. Gross profit as a percentage of revenues was 36% in 2005 compared to 30% for 2004. The improvement in our gross profit margin in 2005 is primarily due to per procedure price increases implemented in late 2004 and early 2005 for various surgical and cosmetic procedures, the mix of surgical procedures and to a reduction of $50,000 in our reserve for excess/obsolete inventory in 2005. Profit margins, net of disposable costs, will vary depending on the type of surgical procedure performed due to the fact that certain procedures require more expensive disposable items. In addition, gross margin rates will vary from period to period depending upon various factors including product and service mix, pricing considerations, and equipment and technician utilization rates. The gross margin for 2005 is not necessarily indicative of the margins that may be realized in future periods. Selling, general and administrative expenses were $3,399,359 in 2005 compared to $3,152,409 in 2004. The increases of $246,950 or 8% in such expenses primarily relate to increases in payroll costs for sales personnel, including commissions, and to an increase in accrued bonus incentives for management personnel. Selling, general and administrative expenses as a percent of revenue was 27% in 2005 compared to 29% in 2004. Other income was $9,539 in 2005 compared to $67,953 in 2004. Other income includes interest expense, gains and losses on the disposal of property and equipment and other non-recurring income (loss) items. The net decrease in other income of $58,414 in 2005 is due to an increase in interest expense of $18,334 primarily related to minimum borrowing costs incurred in connection with our new revolving line of credit agreement, a decrease in other non-recurring income of $135,000 related to the sale of investment securities and from a legal settlement in 2004 while no such items were recognized in 2005, offset by a net increase of $66,084 in gains from the disposable of property and equipment in 2005. The minority interest in net income of limited liability companies was $158,528 in 2005 compared to $156,509 in 2004. Minority interest in income relates to the consolidation of four entities in 2005 and two entities in 2004 in which we hold an equity investment interest. As of December 31, 2005 and 2004 in accordance with the Financial Accounting Standards Board Interpretation Nos. 46 and 46R, "Consolidation of Variable Interest Entities" the Company accounted for its equity investments in these entities under the full consolidation method. The Company previously utilized the equity method of accounting for such investments. The Company's net income was $966,252 in 2005 compared to $23,280 in 2004. Basis net income per share for 2005 and 2004 was $0.20 and $-0-, respectively, while fully diluted net income per share for 2005 and 2004 was $0.19 and $-0-, respectively. Basic and fully diluted shares outstanding for 2005 were 4,934,430 and 5,189,648, respectively, and 4,744,551 for 2004. The provision for taxes of $27,007 represent Alternative Minimum Tax (AMT) for the year ended December 31, 2005. Due to the availability of net operating loss carryforwards, no other taxes are due. Recently Issued Accounting Pronouncements ----------------------------------------- During 2004 to 2006 the Financial Accounting Standards Board ("FASB") issued SFAS No.154 through SFAS No.155 and an amendment to SFAS 123. These pronouncements and any anticipated effect on us are described in Note 2 in the notes to our consolidated financial statements, which are incorporated herein by reference to Item 7. 17 Liquidity and Capital Resources ------------------------------- On May 25, 2005, the Company entered into a two-year agreement with a new lender to provide a revolving credit line (the "Revolver") and term note (the "Term Note") of up to $1,000,000 collateralized by accounts receivable and certain fixed assets (collectively referred to herein as the "Credit Facility"). Advances under the Revolver are based on 80% of eligible receivables, as defined. Borrowings under the Revolver and Term Note bear interest at the prime rate, plus 2%. The Credit Facility also provides for payment of a monthly collateral management fee equal to 20 basis points (0.2%) on the average daily outstanding balances under the Credit Facility. In addition, the Credit Facility provides for an annual fee equal to 1% of the capital availability amount, as defined, upon closing and on each anniversary of the closing date. The Company incurred loan and closing costs of $26,785 in connection with the negotiation and execution of the Credit Facility which is being amortized over the loan term of 24 months. On May 27, 2005, the Company borrowed a total of $805,218 under the Credit Facility to payoff amounts owed under the Company's bank line of credit (the "Bank Line of Credit") of $654,184 and bank term loan (the "Bank Term Loan") of $151,034, both of which were due on or before May 31, 2005. As of December 31, 2005 total borrowings outstanding under the Credit Facility amounted to $146,220 all of which is due under the Term Note. The Company has $853,780 of borrowing availability under the Credit Facility as of December 31, 2005. The terms and conditions of the Credit Facility included limited guarantees from three executive officers and one director of the Company. In connection with providing such limited guarantees to the lender, the guarantors were issued an aggregate of 260,000 shares of the Company's common stock, of which an aggregate of 200,500 were issued to the executive officers, and 64,000 shares to one director. The guarantors have each entered into an agreement with the Company to return the shares that they received in consideration of their limited guarantee in the event the guarantor on his own volition breaches (other than a breach that is cured within the terms of the limited guarantee agreement) or terminates his own respective limited guarantee, prior to the payment in full of the Company's obligations to the lender or the voluntary release from the limited guarantees by the lender. The Company recorded deferred compensation costs of $104,000 in connection with the issuance of common stock for the limited guarantees, which is being amortized to compensation expense over the guarantee period of 24 months. Deferred compensation amortization expense was $32,329 for the year ended December 31, 2005. On November 11, 2005 PRI Medical entered into an agreement with Advantage Medical Services, LLC ("Seller") to acquire certain operating assets of the Seller including laser and other surgical equipment and customer lists. In addition, the Seller and certain of its principals entered in a five year non-compete agreement with PRI Medical. The purchase agreement provides for the assumption of certain equipment lease obligations in the amount of approximately $320,000, issuance of 324,000 shares of the Company's common stock, and cash consideration of $475,000. With regard to the cash consideration, PRI Medical paid $100,000 in cash to the Seller on November 14, 2005 with the balance of $375,000 payable in eight equal quarterly installments from the closing date. The common stock and cash consideration may be reduced if certain net service revenues, as defined, are not achieved during the 12-month period following the closing date. The total purchase price was allocated to the assets acquired and to goodwill. In connection with this transaction, Mr. Bruce J. Haber, the Company's Chairman and Chief Executive Officer, received an irrevocable proxy to vote the aforementioned 324,000 shares until the time that the shares are transferred to a non-affiliated party. 18 On January 5, 2006, we paid a $0.10 per share cash dividend to our common stockholders of record on December 14, 2005. Previously, we have never paid any cash or other dividends to our stockholders. 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. We can give no assurances that cash or other dividends will be declared and paid in future operating periods. In 2002 we renegotiated substantially all of our outstanding debt and lease obligations with our key creditors. The restructured debt and lease agreements provided for, in some cases, the return of equipment used to collateralize such obligations, and certain periodic and monthly installment payments for the balance of such obligations. As of December 31, 2005 our outstanding restructured debt and lease obligations amounted to $291,227 and $72,497, respectively. In the event of default by the Company all amounts then outstanding are accelerated and become immediately due and payable. In addition, in the event of default, certain restructured debt and lease agreements provide for the payment of additional principal amounts of up to $187,500, excluding collection costs. As of December 31, 2005 and the filing of this Annual Report on Form 10-KSB we were in compliance with the terms and conditions of our renegotiated debt and lease agreements. The Company had cash and cash equivalents of $585,377 at December 31, 2005. Cash provided by operating activities for the year ended December 31, 2005 was $1,821,326. Such amount includes net income of $966,252, depreciation and amortization of $1,072,891, minority interest in net income of $158,528 and an increase in accrued expenses of $333,852 offset by increases in accounts receivable of $456,620, inventory of $244,852 and gain on disposal of property and equipment and other of $82,002. Cash used in investing activities amounted to $356,969 due to the purchase of property and equipment of $346,786, cash paid to members of limited liability companies of $201,035, and a cash down payment of $100,000 in connection with the acquisition of certain operating assets of a competitor, offset by proceeds from the sale of property and equipment of $90,852 and capital contributions of $200,000 from new members in two limited liability companies formed during 2005 for which we serve as manager. Cash used in financing activities of $1,230,575, was primarily the result of the pay down of debt and lease obligations of $561,023 and borrowings and repayments of $7,827,616 and $8,477,616, respectively, under our revolving line of credit. The Company had cash and cash equivalents of $351,595 at December 31, 2004. Cash provided by operating activities for the year ended December 31, 2004 was $1,178,262. Such amount primarily related to the inclusion in net income of certain non-cash items including, depreciation and amortization of $1,195,130 and minority interest in net income of $156,512 offset by increases in accounts receivable and inventory totaling $122,561 and a net decrease in accounts payable and accrued expenses of $66,305. Cash used in investing activities amounted to $850,426 due to the purchase of property and equipment of $717,624 and cash paid to limited liability companies of $189,639 offset by proceeds form the sale of property and equipment of $19,337 and capital contributions of $37,500 from new members in one limited liability company for which we serve as manager. Cash used by financing activities of $666,572, was primarily the result of the pay down of debt and lease obligations of $566,572 and borrowings and repayments of $50,000 and $150,000, respectively, under our bank line of credit. 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 expenditures. The primary sources 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. The Company believes that it can generate sufficient cash flow from these sources to fund its operations for at least the next twelve months. 19 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 that 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. Item 7. Financial Statements ----------------------------- Financial Statements -------------------- The report of the Independent Registered Public Accounting Firm, Financial Statements and Schedules are set forth beginning on page F-1 of this Annual Report on Form 10-KSB following this page. 20 EMERGENT GROUP INC. AND SUBSIDIARIES CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 2005 AND 2004 21 EMERGENT GROUP INC. AND SUBSIDIARIES CONTENTS December 31, 2005 -------------------------------------------------------------------------------- Page REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM F1 - F2 CONSOLIDATED FINANCIAL STATEMENTS Consolidated Balance Sheets F3 Consolidated Statements of Operations F4 Consolidated Statements of Shareholders' Equity F5 Consolidated Statements of Cash Flows F6 Notes to Consolidated Financial Statements F-8 - F-22 22 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM Board of Directors and Shareholders Emergent Group Inc. and subsidiaries We have audited the consolidated balance sheet of Emergent Group Inc. and subsidiaries as of December 31, 2005 and the related consolidated statements of operations, shareholders' equity, and cash flows for the year then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Emergent Group Inc. and subsidiaries as of December 31, 2005 and the results of their operations and their cash flows for the year then ended in conformity with accounting principles generally accepted in the United States of America. /S/ ROSE, SNYDER & JACOBS Encino, California March 17, 2006 F-1 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM Board of Directors and Shareholders Emergent Group Inc. and subsidiaries Glendale, California We have audited the consolidated balance sheet of Emergent Group Inc. and subsidiaries as of December 31, 2004 and the related consolidated statements of operations, shareholders' equity, and cash flows for the year then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Emergent Group Inc. and subsidiaries as of December 31, 2004 and the results of their operations and their cash flows for the year then ended in conformity with accounting principles generally accepted in the United States of America. /S/ SINGER LEWAK GREENBAUM & GOLDSTEIN LLP Los Angeles, California March 8, 2005 F-2 Emergent Group Inc. and Subsidiaries Consolidated Balance Sheets
December 31, -------------------------------- 2005 2004 --------------- ---------------- ASSETS Current assets Cash $ 585,377 $ 351,595 Accounts receivable, net of allowance for doubtful accounts of $20,487 and $26,125 1,891,413 1,429,155 Inventory, net of reserves of $80,148 and $141,916 617,596 372,744 Prepaid expenses 157,526 128,968 --------------- ---------------- Total current assets 3,251,912 2,282,462 Property and equipment, net of accumulated depreciation and amortization of $3,878,680 and $2,931,943 2,467,923 1,896,309 Goodwill 1,195,035 779,127 Other intangible assets, net of accumulated amortization of $56,901 and $29,487 209,384 76,798 Deposits and other assets 106,177 56,892 --------------- ---------------- Total assets $ 7,230,431 $ 5,091,588 =============== ================ LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities Current portion of capital lease obligations $ 490,061 $ 347,558 Current portion of notes payable 434,309 389,247 Dividend payable to shareholders 512,861 - Line of credit - 650,000 Accounts payable 1,238,296 565,136 Accrued expenses 992,578 684,244 --------------- ---------------- Total current liabilities 3,668,105 2,636,185 Capital lease obligations, net of current portion 454,155 269,269 Notes payable, net of current portion 378,139 291,229 --------------- ---------------- Total liabilities 4,500,399 3,196,683 Minority interest 339,421 181,928 Shareholders' equity Preferred stock, $0.001 par value, non-voting 10,000,000 shares authorized, no shares issued and outstanding - - Common stock, $0.04 par value, 100,000,000 shares authorized 5,451,631 and 4,744,551 shares issued and outstanding 218,065 189,782 Additional paid-in capital 14,815,571 14,488,090 Deferred compensation, net of accumulated amortiziation of $32,329 (131,521) - Accumulated deficit (12,511,504) (12,964,895) --------------- ---------------- Total shareholders' equity 2,390,611 1,712,977 --------------- ---------------- Total liabilities and shareholders' equity $ 7,230,431 $ 5,091,588 =============== ================ The accompanying notes are an integral part of these financial statements.
F-3 Emergent Group Inc. and Subsidiaries Consolidated Statements of Operations
Year Ended December 31, --------------------------------- 2005 2004 ---------------- ---------------- Revenue $ 12,479,263 $ 10,967,369 Cost of goods sold 7,937,656 7,703,124 ---------------- ---------------- Gross profit 4,541,607 3,264,245 Selling, general, and administrative expenses 3,399,359 3,152,409 ---------------- ---------------- Income from operations 1,142,248 111,836 Other income (expense) Interest expense (140,551) (122,217) Gain (loss) on disposal of property and equipment 52,002 (14,082) Other income, net 98,088 204,252 ---------------- ---------------- Total other income (expense) 9,539 67,953 ---------------- ---------------- Income before provision for income taxes and minority interest 1,151,787 179,789 Provision for income taxes 27,007 - ---------------- ---------------- Income before minority interest 1,124,780 179,789 Minority interest in income of consolidated limited liability companies (158,528) (156,509) ---------------- ---------------- Net income $ 966,252 $ 23,280 ================ ================ Basic earnings per share $ 0.20 $ 0.00 ================ ================ Diluted earnings per share $ 0.19 $ 0.00 ================ ================ Basic weighted average shares outstanding 4,934,430 4,744,551 ================ ================ Diluted weighted-average shares outstanding 5,189,648 4,744,551 ================ ================
The accompanying notes are an integral part of these financial statements. F-4 Emergent Group Inc. and Subsidiaries Consolidated Statements of Shareholders' Equity
Common Stock Additional ---------------------- Paid-In Deferred Accumulated Shares Amount Capital Compensation Deficit Total --------- --------- ------------ ------------ ------------ ----------- Balance, January 1, 2004 4,744,551 $ 189,782 $ 14,488,090 $ - $(12,988,175) $ 1,689,697 Net income 23,280 23,280 --------- --------- ------------ ------------ ------------ ----------- Balance, December 31, 2004 4,744,551 189,782 14,488,090 - (12,964,895) 1,712,977 Common stock issued in connection with loan guarantees 260,000 10,400 93,600 (104,000) - - Common stock issued as restricted stock awards 105,000 4,200 55,650 (59,850) - - Amortization of deferred compensation - - - 32,329 - 32,329 Common stock issued to acquire assets 324,000 12,960 171,720 - - 184,680 Exercise of stock options 18,080 723 6,511 - - 7,234 Dividends declared to common shareholders - - - - (512,861) (512,861) Net Income - 966,252 966,252 --------- --------- ------------ ------------ ------------ ----------- Balance, December 31, 2005 5,451,631 $ 218,065 $ 14,815,571 $ (131,521) $(12,511,504) $ 2,390,611 ========= ========= ============ ============ ============ ===========
The accompanying notes are an integral part of these financial statements. F-5 Emergent Group Inc. and Subsidiaries Consolidated Statements of Cash Flows
Year Ended December 31, ------------------------------ 2005 2004 ------------------------------ Cash flows from operating activities Net income $ 966,252 $ 23,280 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 1,072,891 1,195,130 Amortization of finance fees 7,812 20,266 (Gain) loss on disposal of property and equipment and other (82,002) 14,082 Provision for doubtful accounts (5,638) (6,477) Minority interest in income 158,528 156,512 (Increase) decrease in Accounts receivable (456,620) (93,710) Inventory (244,852) (28,851) Prepaid expenses (28,558) (27,807) Deposits and other assets (33,084) (7,858) Increase (decrease) in Accounts payable 158,268 36,773 Accrued expenses 308,329 (103,078) -------------- ------------- Net cash provided by operating activities 1,821,326 1,178,262 -------------- ------------- Cash flows from investing activities Purchase of property and equipment (346,786) (717,624) Cash paid to acquire assets (100,000) - Cash paid to members of limited liability companies (201,035) (189,639) Contributions from new members to limited liability companies 200,000 37,500 Proceeds from the sale of property and equipment 90,852 19,337 -------------- ------------- Net cash used in investing activities (356,969) (850,426) -------------- ------------- Cash flows from financing activities Payments on capital lease obligations (317,994) (189,440) Borrowings under line of credit 7,827,616 50,000 Repayments on line of credit (8,477,616) (150,000) Payments on notes payable, net (243,029) (377,132) Payment of loan fees (26,786) Proceeds from exercise of stock options 7,234 - -------------- ------------- Net cash used in financing activities (1,230,575) (666,572) -------------- ------------- Net increase (decrease) in cash 233,782 (338,736) Cash, beginning of period 351,595 690,331 -------------- ------------- Cash, end of period $ 585,377 $ 351,595 ============== ============= Supplemental disclosures of cash flow information: Interest paid $ 142,617 $ 124,776 ============== =============
The accompanying notes are an integral part of these financial statements. F-6 EMERGENT GROUP INC AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (continued) Years Ended December 31, 2005 and 2004 -------------------------------------------------------------------------------- Supplemental schedule of non-cash investing and financing activities During the year ended December 31, 2005, the Company: o purchased property and equipment of $675,384 through lease and note financing o issued 324,000 shares of common stock valued at $184,680 in connection with the acquisition of certain operating assets of a competitor o formed and consolidated two new limited liability companies with net property and equipment totaling $647,500 During the year ended December 31, 2004, the Company: o purchased property and equipment of $283,369 through lease financing F-7 EMERGENT GROUP INC AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2005 -------------------------------------------------------------------------------- NOTE 1 - ORGANIZATION AND BUSINESS General ------- Emergent Group Inc. ("Emergent") is the parent company of PRI Medical Technologies, Inc., ("PRI Medical"), its wholly owned and only operating subsidiary. PRI Medical previously conducted its business through its wholly owned subsidiary Physiologic Reps ("PRI") until March 2005 at which time PRI was merged into PRI Medical. Emergent and PRI Medical are hereinafter referred to as the "Company." PRI Medical provides mobile laser/surgical services on a per procedure basis to hospitals, out-patient surgery centers, and physicians' offices. Medical lasers and other equipment are provided to customers along with technical support personnel to ensure that such equipment is operating correctly. PRI Medical currently offers its services in California, Nevada, Colorado, Utah, Arizona and New York. Purchase of Certain Operating Assets, Non-Compete and Customer List ---------------------------------------------------------------------- On November 11, 2005 PRI Medical entered into an agreement with a competitor ("Seller") to acquire certain operating assets of the Seller including laser equipment and customer lists. In addition, the Seller and certain of its principals entered in a five year non-compete agreement with PRI Medical. The purchase agreement provided for the assumption of certain equipment lease obligations in the amount of $307,720, issuance of 324,000 shares of the Company's common stock, and cash consideration of $475,000. With regard to the cash consideration, PRI Medical paid $100,000 in cash to the Seller on November 14, 2005 with the balance of $375,000 payable in 12 equal quarterly installments from the closing date. The common stock and cash consideration may be reduced if certain net service revenues, as defined, from customers noted on the customer list, are not achieved during the 12-month period following the closing date. The total purchase price of $995,803, subject to adjustment as described herein, was allocated to equipment and vehicles of $419,895, non-compete agreement of $160,000, customer list of $10,000, with the remainder of $415,908 to goodwill. In connection with this transaction, the Company's Chairman and Chief Executive Officer received an irrevocable proxy to vote the aforementioned 324,000 shares until the time that the shares are transferred to a non-affiliated party. NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Principles of Consolidation --------------------------- The consolidated financial statements include the accounts of Emergent and its wholly owned subsidiaries. In addition, as of December 31, 2004 in accordance with the Financial Accounting Standards Board Interpretation No. 46, "Consolidation of Variable Interest Entities" the Company has accounted for its equity investments in four limited liability companies under the full consolidation method. The Company previously utilized the equity method of accounting for its investments in such entities. All significant inter-company transactions and balances have been eliminated through consolidation. Revenue Recognition ------------------- Revenue is recognized when the services are performed and billable. 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. 104, "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. F-8 EMERGENT GROUP INC AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2005 -------------------------------------------------------------------------------- Cash ---- Cash consists of cash on hand and in banks. The Company maintains cash at several financial institutions. At times, such cash balances may be in excess of the Federal Deposit Insurance Corporation insurance limit of $100,000. As of December 31, 2005 and 2004, uninsured portions of balances at those banks aggregated to $247,422 and $153,230 respectively. The Company has not experienced losses in such accounts and believes it is not exposed to any significant risk on cash. Accounts Receivable and Concentration of Business and Credit Risks ------------------------------------------------------------------ We market our services primarily to hospitals and out-patient centers located in California, Nevada, Utah, Colorado, Arizona and New York. Our equipment rental and technician services are subject to competition from other similar businesses. Our accounts receivable represent financial instruments with potential credit risk. We offer credit terms and credit limits to most of our customers based on the creditworthiness of such customers. However, we retain the right to place such customers on credit hold should their account become delinquent. We maintain an allowance for doubtful accounts for estimated losses should customers fail to make required payments. In addition, we monitor the age of customer account balances, historical bad debt experience, customer creditworthiness, customer specific information, and changes in payment patterns when making estimates of the collectibility of trade receivables. Accounts receivable are written off when all collection attempts have failed. Our allowance for doubtful accounts will be increased if circumstances warrant. Based on the information available, management believes that our net accounts receivable are collectible. Inventory --------- Inventory is stated at the lower of cost or market. Cost is determined by the first-in, first-out method. Property and Equipment ---------------------- Property and equipment are recorded at cost, less accumulated depreciation and amortization. Depreciation and amortization are provided using the straight-line method over estimated useful lives of generally five years. Betterments, renewals, and extraordinary repairs that extend the life of the assets are capitalized; other repairs and maintenance charges are expensed as incurred. The cost and related accumulated depreciation and amortization applicable to retired assets are removed from the Company's accounts, and the gain or loss on dispositions, if any, is recognized in the consolidated statements of operations. Impairment of Long-Lived Assets ------------------------------- The Company reviews its long-lived assets for impairment under SFAS 144 annually whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of the assets to future net cash flows expected to be generated by the assets. If the assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount exceeds the fair value of the assets. In addition to goodwill, other intangible assets include covenant not-to-compete of $150,917, net of accumulated amortization of $9,083 and customer lists of $58,467, net of accumulated amortization of $47,818. Covenants not-to-compete and customer lists are generally amortized over their estimated useful lives of five years. Fair Value of Financial Instruments ----------------------------------- For certain of the Company's financial instruments, including cash, accounts receivable, prepaid expenses, accounts payable, and accrued expenses, the carrying amounts approximate fair value due to their short maturities. Stock-Based Compensation ------------------------ SFAS No. 123, "Accounting for Stock-Based Compensation," defines a fair value based method of accounting for stock-based compensation. However, SFAS No. 123 allows an entity to continue to measure compensation cost related to stock and stock options issued to employees using the intrinsic method of accounting prescribed by Accounting Principles Board ("APB") Opinion No. 25, "Accounting for Stock Issued to Employees." Entities electing to remain with the accounting method of APB No. 25 must make pro forma disclosures of net income and income per share as if the fair value method of accounting defined in SFAS No. 123 had been applied. The Company has elected to account for its stock-based compensation to employees under APB No. 25. F-9 EMERGENT GROUP INC AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2005 -------------------------------------------------------------------------------- Advertising Expense ------------------- The Company expenses advertising in the periods the services are performed. For the years ended December 31, 2005 and 2004, advertising expense was $31,511 and $19,338, respectively. Income Taxes ------------ The Company accounts for income taxes under the liability method, which requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the financial statements or tax returns. Under this method, deferred income taxes are recognized for the tax consequences in future years of differences between the tax bases of assets and liabilities and their financial reporting amounts at each period end based on enacted tax laws and statutory tax rates applicable to the periods in which the differences are expected to affect taxable income. Valuation allowances are established, when necessary, to reduce deferred tax assets to the amount expected to be realized. The provision for income taxes, if any, represents the tax payable for the period and the change during the period in deferred tax assets and liabilities. Earnings Per Share ------------------ The Company utilizes SFAS No. 128, "Earnings per Share." Basic earnings per share is computed by dividing income available to common shareholders by the weighted-average number of common shares outstanding. Diluted earnings per share is computed similar to basic earnings per share except that the denominator is increased to include the number of additional common shares that would have been outstanding if the potential common shares had been issued and if the additional common shares were dilutive. Common equivalent shares are excluded from the computation if their effect is anti-dilutive. As of December 31, 2005, common stock equivalents used in determining fully diluted shares outstanding consist only of options to purchase common stock. Estimates --------- The preparation of financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates. Reclassifications ----------------- Certain amounts included in the prior years' financial statements have been reclassified to conform with the current year presentation. Such reclassifications do not have any effect on reported net income. F-10 EMERGENT GROUP INC AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2005 -------------------------------------------------------------------------------- Recently Issued Accounting Pronouncements ----------------------------------------- In May 2005, the FASB issued Statement of Financial Accounting Standards (SFAS) No. 154, "Accounting Changes and Error Corrections", an amendment to Accounting Principles Bulletin (APB) Opinion No. 20, "Accounting Changes", and SFAS No. 3, "Reporting Accounting Changes in Interim Financial Statements". Though SFAS No. 154 carries forward the guidance in APB No. 20 and SFAS No. 3 with respect to accounting for changes in estimates, changes in reporting entity, and the correction of errors, SFAS No. 154 establishes new standards on accounting for changes in accounting principles, whereby all such changes must be accounted for by retrospective application to the financial statements of prior periods unless it is impracticable to do so. SFAS No. 154 is effective for accounting changes and error corrections made in fiscal years beginning after December 15, 2005, with early adoption permitted for changes and corrections made in years beginning after May 2005. The Company will implement SFAS No. 154 in its fiscal year beginning January 1, 2006. We are currently evaluating the impact of this new standard, but believe that it will not have a material impact upon the Company's financial position, results of operations or cash flows. In February 2006, the FASB issued Statement of Financial Accounting Standards No. 155, "Accounting for Certain Hybrid Financial Instruments" ("SFAS 155"), which amends SFAS No. 133, "Accounting for Derivatives Instruments and Hedging Activities" ("SFAS 133") and SFAS No. 140, "Accounting for Transfers and Servicing of Financial Assets and Extinguishment of Liabilities" ("SFAS 140"). SFAS 155 amends SFAS 133 to narrow the scope exception for interest-only and principal-only strips on debt instruments to include only such strips representing rights to receive a specified portion of the contractual interest or principle cash flows. SFAS 155 also amends SFAS 140 to allow qualifying special-purpose entities to hold a passive derivative financial instrument pertaining to beneficial interests that itself is a derivative instruments. The Company is currently evaluating the impact of this new Standard, but believes that it will not have a material impact on the Company's financial position, results of operations or cash flows. In December 2004, the FASB issued SFAS No. 123(R),"Share-Based Payment". SFAS 123(R) amends SFAS No. 123,"Accounting for Stock-Based Compensation", and APB Opinion 25,"Accounting for Stock Issued to Employees." SFAS No.123(R) requires that the cost of share-based payment transactions (including those with employees and non-employees) be recognized in the financial statements. SFAS No. 123(R) applies to all share-based payment transactions in which an entity acquires goods or services by issuing (or offering to issue) its shares, share options, or other equity instruments (except for those held by an ESOP) or by incurring liabilities (1) in amounts based (even in part) on the price of the entity's shares or other equity instruments, or (2) that require (or may require) settlement by the issuance of an entity's shares or other equity instruments. This statement is effective for public companies qualifying as SEC small business issuers for the fiscal year beginning after December 15, 2005. Management is currently assessing the effect of SFAS No. 123(R) on the Company's financial statements. F-11 EMERGENT GROUP INC AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2005 -------------------------------------------------------------------------------- NOTE 3 - INVENTORY Inventory consists of the following:
December 31, ----------------------------------- 2005 2004 --------------- ---------------- Fibers and other disposables $ 697,744 $ 514,660 Less: reserve for excess/obsolescence inventory (80,148) (141,916) --------------- ---------------- Total $ 617,596 $ 372,744 =============== ================
In 2005, based on an analysis of inventory usage, the Company reduced its reserve for excess obsolete inventory from $141,916 to $80,148. The reduction in the reserve is included as a reduction in costs of goods sold in the accompanying statement of operations for the year ended December 31, 2005. NOTE 4 - EQUITY INVESTMENT IN LIMITED LIABILITY COMPANIES In connection with expanding its business in certain commercial and geographic areas, PRI Medical will at times help to form Limited Liability Companies ("LLCs") in which it will acquire a minority interest and offer the remaining interest to other investors. These LLCs acquire certain equipment for use in their respective business activities which generally focus on surgical procedures. As of December 31, 2005 PRI Medical holds minority equity interests in four LLCs which conduct business in California and Colorado. During 2005, PRI Medical helped to form two new LLCs, which subsequently raised total capital of $200,000 from investors. In late 2005, PRI Medical, on behalf of such LLCs, acquired two surgical lasers for $650,000. The LLCs finalized lease financing of $600,000 for such equipment in January 2006. The cost of the equipment is included in property and equipment and the related payable is included in accounts payable in the accompanying balance sheet as of December 31, 2005. The investors in each LLC agreed to provide individual proportionate lease guarantees based on their respective ownership percentages in the LLCs. PRI Medical provided corporate guarantees to the financing company in connection with such lease financing. In addition, the investors in each LLC agreed to indemnify PRI Medical against losses, if any, incurred in connection with its guarantees. For the years ended December 31, 2005 and 2004 in accordance with the Financial Accounting Standards Board Interpretation No. 46R, "Consolidation of Variable Interest Entities" the Company accounted for its equity investments in its LLCs under the full consolidation method whereby transactions between the Company and LLCs have been eliminated through consolidation. F-12 EMERGENT GROUP INC AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2005 -------------------------------------------------------------------------------- NOTE 5 - PROPERTY AND EQUIPMENT Property and equipment consists of the following:
December 31, 2005 2004 --------------- ---------------- Rental equipment $ 5,705,391 $ 4,295,324 Furniture and fixtures, including computers 166,756 143,377 Capitalized software cost 114,214 114,215 Transportation equipment 354,341 269,435 Leasehold improvements 5,901 5,901 --------------- ---------------- 6,346,603 4,828,252 Less accumulated depreciation and amortization 3,878,680 2,931,943 --------------- ---------------- Total $ 2,467,923 $ 1,896,309 =============== ================
The historical cost value and net book value of property and equipment under lease financing at December 31, 2005 is $962,622 and $804,856, respectivly and $431,958 and $393,473 for the year ended December 31, 2004, respectively. Depreciation and amortization expense for property and equipment was $1,008,421 and $1,186,272 for the years ended December 31, 2005 and 2004 respectively. NOTE 6 - LINE OF CREDIT On May 25, 2005, the Company entered into a two-year agreement with a new lender to provide a revolving credit line (the "Revolver") and term note (the "Term Note") of up to $1,000,000 collateralized by accounts receivable and certain fixed assets (collectively referred to herein as the "Credit Facility"). Advances under the Revolver are based on 80% of eligible receivables, as defined. Borrowings under the Revolver and Term Note bear interest at the prime rate, plus 2%. The Credit Facility also provides for payment of a monthly collateral management fee equal to 20 basis points (0.2%) on the average daily outstanding balances under the Credit Facility. In addition, the Credit Facility provides for an annual fee equal to 1% of the capital availability amount, as defined, upon closing and on each anniversary of the closing date. The Company incurred loan and closing costs of $26,785 in connection with the negotiation and execution of the Credit Facility which is being amortized over the loan term of 24 months. On May 27, 2005, the Company borrowed a total of $805,218 under the Credit Facility to payoff amounts owed under the Company's bank line of credit (the "Bank Line of Credit") of $654,184 and bank term loan (the "Bank Term Loan") of $151,034, both of which were due on or before May 31, 2005. The Company has $853,780 of borrowing availability under the Credit Facility as of December 31, 2005. The terms and conditions of the Credit Facility included limited guarantees from three executive officers and one director of the Company. In connection with providing such limited guarantees to the lender, the guarantors were issued an aggregate of 260,000 shares of the Company's common stock, of which an aggregate of 200,500 were issued to the executive officers, and 64,000 shares to one director. The guarantors have each entered into an agreement with the Company to return the shares that they received in consideration of their limited F-13 EMERGENT GROUP INC AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2005 -------------------------------------------------------------------------------- guarantee in the event the guarantor on his own volition breaches (other than a breach that is cured within the terms of the limited guarantee agreement) or terminates his own respective limited guarantee, prior to the payment in full of the Company's obligations to the lender or the voluntary release from the limited guarantees by the lender. The Company recorded deferred compensation costs of $104,000 in connection with the issuance of common stock for the limited guarantees, which is being amortized to compensation expense over the guarantee period of 24 months. Deferred compensation amortization expense was $32,329 for the year ended December 31, 2005. The Company incurred interest expense on borrowings under its line of credit agreements of $43,687 and $43,751 for the years ended December 31, 2005 and 2004, respectively, which is included in interest expense in the accompanying statements of operations. NOTE 7 - NOTES PAYABLE Notes payable consists of the following:
December 31, --------------------------------- 2005 2004 ------------- -------------- Note payable to a finance company, interest at 6.75% with monthly principal and interest payments of $18,013 due monthly through May 2007. The note is collateralized by certain medical equipment. $ 291,228 $ 480,701 Term note payable to a capital company, with interest and principal payable monthly at the prime rate (7.25% at December 31, 2005), plus 2%. The note is collateralized by accounts receivable and equipment, unpaid principal and interest are due on May 27, 2007. 146,220 - Note payable to certain principals of seller in connection with the purchase of certain operating assets, non-compete agreements and customer list. Quarterly principal payments of $31,250 due beginning on February 1, 2006. 375,000 - Note payable to bank, as amended, provides for monthly interest payments at the prime rate (5.25% at December 31, 2004), plus 2% and monthly principal payments of $16,667. The note is collateralized by accounts receivable, inventory and equipment. Principal and unpaid accrued interest due on May 31, 2005. - 199,775 ------------- -------------- 812,448 680,476 Less current portion 434,309 389,247 ------------- -------------- Long-term portion $ 378,139 $ 291,229 ============= ==============
F-14 EMERGENT GROUP INC AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2005 -------------------------------------------------------------------------------- Future maturities of notes payable at December 31, 2005 were as follows: Year Ending December 31, ------------ 2006 $434,309 2007 253,139 2008 125,000 -------- Total $812,448 ======== NOTE 8 - ACCRUED EXPENSES Accrued expenses consists of the following:
December 31, 2005 2004 --------------- ---------------- Accrued payroll and payroll related amounts $ 569,821 $ 269,684 Accrued payable - vendors 107,385 136,208 Accrued professional fees 61,512 75,470 Accrued interest 15,141 16,782 Taxes payable 119,717 85,895 Other 119,002 100,205 --------------- ---------------- Total $ 992,578 $ 684,244 =============== ================
NOTE 9 - COMMITMENTS AND CONTINGENCIES Operating and Capital Leases ---------------------------- The Company leases an office/warehouse facility in Glendale, California, which also serves as the administrative and corporate office. The lease is scheduled to expire in July 2006, however, the Company is negotiating with the landlord to extend the lease. Total rent expense incurred for the years ended December 31, 2005 and 2004 was $174,835 and $168,284, respectively. In addition, the Company leases two other office/warehouse facilities in Northern California and Colorado with a total of 2,620 square feet. Total rent expense incurred for these facilities was $26,500 and $35,857 for the years ended December 31, 2005 and 2004, respectively. The Company leases certain of its vehicles under various operating and financing leases. The operating leases are scheduled to expire between December 2006 and January 2010. Thereafter, such leases will continue under a month-to-month lease term until such time the vehicles are either returned to the lessor or purchased. Total rental expenses for vehicles for the years ended December 31, 2005 and 2004 was $50,431 and $51, 788 respectively. At December 31, 2005 the Company is obligated under several capital equipment leases with various finance companies. The capital leases bear interest at rates between 6.6% and 11.69% per annum. The monthly capital lease payments range between $99 to $3,057 and terminate through December 2010. F-15 EMERGENT GROUP INC AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2005 -------------------------------------------------------------------------------- Future minimum lease payments under operating and capital leases at December 31, 2005 were as follows:
Year Ending Operating Capital December 31, Leases Leases --------------- ---------------- 2006 $ 198,303 $ 529,624 2007 80,033 296,487 2008 49,284 152,713 2009 45,127 80,387 2010 45,923 503 --------------- ---------------- Total minimum lease payments $ 418,670 1,059,714 =============== Less amounts representing interest 115,498 ---------------- 944,216 Less current portion 490,061 ---------------- Long-term portion $ 454,155 ================
Litigation ---------- From time to time, we may become involved in litigation arising out of operations in the normal course of business. Except for the matter discussed below, as of December 31, 2005, we are not a party to any pending legal proceedings the outcome of which could reasonably be expected to have a material adverse effect on our operating results or financial position. Byong Y. Kwon, Plaintiff against Daniel J. Yun, Emergent Group Inc., Emergent Capital Investment Management, LLC, Metedeconk Holdings, LLC, Voyager Advisors, LLC, Millennium Tradition Limited (f/k/a Millennium Heritage, Limited), Emergent Management Company, LLC, Endurance Advisors, Limited, SK Networks Co., Ltd. (f/k/a SK Global Co., Ltd.), Hye Min Kang, John Does 1-2 and Richard Roes 1-2 (collectively the "Defendants"). The civil lawsuit, which was signed by the clerk on February 2, 2005, is brought in the United States District Court, Southern District of New York, is an action by Plaintiff against the Company, a former director, Daniel Yun, and other parties to recover money damages for alleged fraud, negligent misrepresentations and aiding and abetting fraud. The Amended Complaint alleges that the factual basis involving the action against the Company involves alleged false representations to Plaintiff to induce him to leave his then employment in 2001 and accept the Company's and another named Defendant's alleged offer of employment. Plaintiff seeks compensatory damages and punitive damages each in the amount of not less than $2,100,000 together with interest thereon, reasonable attorneys' fees and other specific relief against Defendants other than the Company. Management has denied the Plaintiff's allegations against the Company and intends to vigorously defend this lawsuit. Management does not believe that this matter will have a significant impact on the Company's financial position or results of operations. F-16 EMERGENT GROUP INC AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2005 -------------------------------------------------------------------------------- NOTE 10 - SHAREHOLDERS' EQUITY Common Stock ------------ During the year ended December 31, 2005, the Company completed the following transactions: o In March 2005 the Company issued 73,000 options to purchase common stock to various employees under its 2002 Stock Option Plan. Such options vest in equal annual installments over five years at an exercise price of $0.40 per share. In addition, a new director of the Company received options to purchase 15,000 shares at an exercise price of $0.40 per share which are immediately vested. The value of the 15,000 options determined under the Black Sholes Valuation Method is not significant. o In May 2005 an aggregate of 260,000 shares of our Common Stock were issued to executive officers and a director of our Company in connection with certain limited loan guarantees in connection with the Company's revolving line of credit and term loan agreements. The Company recognized compensation expense of $104,000 in connection with the issuance of shares which is being amortized over the guarantee period of two years. o An aggregate of 105,000 restricted award shares were issued to executive officers and directors of the Company, subject to vesting in five equal annual installments commencing November 2, 2006 and the forfeiture of the non-vested portion in the event that recipient is no longer serving as an officer or director of our Company at the time of vesting, subject to the Board's right to waive the forfeiture provisions. o An aggregate of 324,000 shares of common stock valued at $184,680 were issued pursuant to the Company's agreement to acquire certain assets of a competitor and to certain principals of the Seller entering into a non-compete agreements. o On November 28, 2005 the Company's Board of Directors declared a cash dividend of $0.10 per share to our common shareholders of record on December 14, 2005, which is payable on January 5, 2006. Stock Option Plans ------------------ Pursuant to the merger agreement between Emergent and PRI Medical in July 2001, each outstanding PRI Medical stock option automatically converted into an option in shares of Emergent's common stock with the same terms and conditions as were applicable under the PRI Medical stock option plans. At the date of the merger, Emergent assumed all of the outstanding options of PRI Medical, which allowed the purchase of 14,120 (post split) shares of Emergent's common stock at exercise prices ranging from $27.20 (post split) to $162.00 (post split) per share. The Company does not intend to grant any more options under the PRI Medical plans. During the year ended December 31, 2001, the Company adopted the 2001 Stock Option Plan (the "2001 Plan"). The purpose of the 2001 Plan is to provide incentive to key employees, officers, and consultants of the Company who provide significant services to the Company. There were 200,000 shares available for grant under the 2001 Plan, but during the year ended December 31, 2002 the Company reduced the authorized shares issuable under the Plan to 14,625 shares representing the actual number of options outstanding at that time. Options will not be granted for a term of more than 10 years from the date of grant. In the case of incentive stock options granted to a 10% shareholder, the term of the incentive stock option must not exceed five years from the date of grant. Generally, options vest evenly over a period of five years, and the 2001 Plan expires December 31, 2011. F-17 EMERGENT GROUP INC AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2005 -------------------------------------------------------------------------------- Non-statutory stock options may be granted at any price determined by the Board even if the exercise price of the options is at a price below the fair market value of the Company's common stock on the date of grant. The purchase price of an incentive stock option may not be less than the fair market value of the common stock at the time of grant, except in the case of a 10% shareholder who receives an incentive stock option; the purchase price may not be less than 110% of such fair market value. The aggregate fair market value of the stock for which incentive stock options are exercisable by any employee during any calendar year must not exceed $100,000. Since shareholder approval was not obtained on or before November 1, 2002, all incentive stock options granted under the 2001 Plan have automatically become non-statutory stock options, and the Board is limited to granting non-statutory stock options under the 2001 Plan. In April 2002, the Company adopted the 2002 Employee Benefit and Consulting Services Compensation Plan (the "2002 Plan"). The purpose of the 2002 Plan is to provide incentive to key employees, officers, and consultants of the Company who provide significant services to the Company. As of December 31, 2005, there are 650,000 common shares authorized for grant under the 2002 Plan. However, 325,000 shares of the 650,000 shares represent an increase authorized by the Company's Board of Directors subject to shareholder approval. Options will not be granted for a term of more than ten years from the date of grant. Generally, options will vest evenly over a period of five years, and the 2002 Plan expires in March 2012. Since shareholder approval was not obtained on or before April 1, 2003, all incentive stock options granted under the 2002 Plan have automatically become non-statutory stock options, and the Board is limited to granting non-statutory stock options under the 2002 Plan. During the years ended December 31, 2005 and 2004, the Company issued to employees options to purchase 73,000 and 95,000 shares of common stock under the 2002 Plan. Of the options granted to employees during 2005, 25,000 options were granted to the Company's Chief Financial Officer. The options granted in 2005 and 2004 have a 10-year term and are exercisable at $0.40 per share. Generally, one-fifth of each issuance vests over five consecutive years. During the years ended December 2005 and 2004, options to purchase 55,945 and 228,909 shares of common stock were cancelled due to employee terminations. F-18 EMERGENT GROUP INC AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2005 -------------------------------------------------------------------------------- A summary of the Company's outstanding options and activity is as follows:
Weighted- Average Number Exercise of Options Price --------------- ---------------- Outstanding, January 1, 2004 547,953 $ 2.28 Granted 95,000 $ 0.40 Canceled (228,909) $ 2.30 --------------- Outstanding, December 31, 2004 414,044 $ 1.84 Granted 88,000 $ 0.40 Exercised (18,080) $ 0.40 Canceled (52,865) $ 3.14 --------------- Outstanding, December 31, 2005 431,099 $ 1.45 =============== Exercisable, December 31, 2005 268,286 $ 1.90 ===============
The weighted-average remaining contractual life of the options outstanding at December 31, 2005 is 7.80 years. The exercise prices for the options outstanding at December 31, 2005 ranged from $0.40 to $162.16, and information relating to these options is as follows:
Weighted- Weighted- Weighted- Average Average Average Exercise Exercise Range of Stock Stock Remaining Price of Price of Exercise Options Options Contractual Options Options Prices Outstanding Exercisable Life Outstanding Exercisable ------------------ --------------- --------------- ---------------- --------------- ---------------- $ 0.40 417,589 254,776 7.85 years $ 0.40 $ 0.40 $ 2.00 - 8.00 4,000 4,000 7.23 years $ 5.00 $ 5.00 $ 20.00 - 51.00 9,339 9,339 5.98 years $ 38.66 $ 38.66 $ 162.16 171 171 1.51 years $ 162.16 $ 162.16 --------------- --------------- $ 0.40 - 162.16 431,099 268,286 7.80 years $ 1.45 $ 1.90 =============== ===============
The Company has adopted only the disclosure provisions of SFAS No. 123. It applies APB No. 25 and related interpretations in accounting for its plans and does not recognize compensation expense for its stock-based compensation plans other than for restricted stock and options issued to outside third parties and to restricted stock awards issued to employees and directors. If the Company had elected to recognize compensation expense based upon the fair value at the grant date for awards under these option plans consistent with the methodology prescribed by SFAS 123, the Company's net income and basic and diluted earnings per share for the years ended December 31, 2005 and 2004 would be as follows: F-19 EMERGENT GROUP INC AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2005 --------------------------------------------------------------------------------
December 31, 2005 2004 ------------ ----------- Net income As reported $ 966,252 $ 23,280 Pro forma $ 921,129 $ 5,009 Basic earnings per share As reported $ 0.20 $ 0.00 Pro forma $ 0.19 $ 0.00 Diluted earnings per share As reported $ 0.19 $ 0.00 Pro forma $ 0.18 $ 0.00
For purposes of computing the pro forma disclosures required by SFAS No. 123, the fair value of each option granted to employees and directors is estimated using the Black-Scholes option-pricing model with the following weighted-average assumptions for the years ended December 31, 2005 and 2004: dividend yields of 0% and 0%, respectively; expected volatility of 100% and 150%, respectively; risk-free interest rates of 3.9% and 3.3%, respectively; and expected lives of seven and five years, respectively. The weighted-average fair value of all options granted during the year ended December 31, 2005 was $0.38, and the weighted-average exercise price was $0.40. The Black-Scholes option valuation model was developed for use in estimating the fair value of traded options which have no vesting restrictions and are fully transferable. In addition, option valuation models require the input of highly subjective assumptions including the expected stock price volatility. Because the Company's employee stock options have characteristics significantly different from those of traded options, and because changes in the subjective input assumptions can materially affect the fair value estimate, in management's opinion, the existing models do not necessarily provide a reliable single measure of the fair value of its employee stock options. NOTE 11 - INCOME TAXES The components of the income tax provision for the years ended December 31, 2005 and 2004 are as follows: 2005 2004 ----------------- ------- Current $ 27,007 $ -0- Deferred -0- -0- ----------------- ------- Total $ 27,007 $ -0- ================= ======= A reconciliation of the provision for income tax expense with the expected income tax computed by applying the federal statutory income tax rate to income before provision for income taxes was as follows for the years ended December 31, 2005 and 2004: F-20 EMERGENT GROUP INC AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2005 --------------------------------------------------------------------------------
2005 2004 ------------ -------------- Income tax computed at federal statutory tax rate 34.00% 34.00% State taxes, net of federal benefit 5.50 4.00 Other 8.87 (19.23) Increase in valuation allowance (45.98) (16.55) ------------ -------------- Total 2.39% 2.22% ============ ==============
The tax effects of temporary differences that give rise to deferred taxes at December 31, 2005 and 2004 are as follows:
2005 2004 --------------- ---------------- Deferred tax assets Fixed assets $ (126,663) $ (112,049) Capital loss carryover 1,358,059 1,287,853 Net operating loss carryforwards 4,806,032 5,402,435 Other 322,741 328,306 --------------- ---------------- Total gross deferred tax assets 6,360,169 6,906,545 Less valuation allowance 6,360,169 6,906,545 --------------- --------------- Net deferred tax assets $ -0- $ -0- =============== ================
All other deferred tax assets were immaterial. As of December 31, 2005, the Company had approximately $13,763,035 in federal net operating loss carryforwards and $1,432,122 in California net operating loss carryforwards attributable to losses incurred since the Company's inception that may be offset against future taxable income through 2020 and 2010, respectively. Because of statutory ownership changes, the amount of operating loss carryforwards which may be utilized in future years is subject to significant limitations. NOTE 12 - BENEFIT PLAN The Company has a profit sharing plan established in accordance with Section 401(k) of the Employee Retirement Income Security Act of 1974, as amended. Substantially all full-time employees with specific periods of service are eligible to participate. Employee contributions to the plan are elective. For the year ended December 31, 2005, the Company contributed $2,486 through the use of forfeitures and $6,440 in cash. NOTE 13 - RELATED PARTY TRANSACTIONS The Company incurred reimbursable expenses of $33,097 and $30,537 to BJH Management, LLC, which is owned by the Company's Chairman and Chief Executive Officer, for office rent and related expenses for the years ended December 31, 2005 and 2004, respectively. F-21 Item 8. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure. -------------------------------------------------------------------------------- The Audit Committee of the Board of Directors unanimously approved engaging a new independent firm to audit the Company's financial statements for the year ended December 31, 2005. On December 12, 2005, the Company notified its prior independent auditors, Singer Lewak Greenbaum & Goldstein LLP ("SLGG"), that it was no longer the Company's independent auditor. SLGG's report on the Company's financial statements for the last two fiscal years ended December 31, 2004 (collectively, the "Prior Fiscal Years"), 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. There were no disagreements ("Disagreements") between the Company and SLGG during either (i) the Prior Fiscal Years, or (ii) the period January 1, 2005 through December 12, 2005 (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 SLGG, would have caused SLGG to make reference to the subject matter of the Disagreement in connection with its report for the Prior Fiscal Years. There were no reportable events under Item 304(a)(1) of Regulation S-B, during either (i) the Prior Fiscal Years or (ii) the Interim Period. 23 The Company has engaged Rose, Snyder & Jacobs ("RSJ") as its independent auditor for Registrant's fiscal year ended December 31, 2005. Registrant did not consult RSJ 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 the Company's financial statements, or (iii) any matter that was either the subject of a Disagreement or a Reportable Event. Item 8.A. Controls and Procedures. ----------------------------------- The Company maintains disclosure controls and procedures that are designed to ensure that information required to be disclosed in the Company's Exchange Act reports is recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms, and that such information is accumulated and communicated to the Company's management, including its Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure based closely on the definition of "disclosure controls and procedures" in Rule 13a-15(e). In designing and evaluating the disclosure controls and procedures, management recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures. The Company carried out an evaluation, under the supervision and with the participation of the Company's management, including the Company's Chief Executive Officer and the Company's Chief Financial Officer, of the effectiveness of the design and operation of the Company's disclosure controls and procedures. Based on the foregoing, the Company's Chief Executive Officer and Chief Financial Officer concluded that the Company's disclosure controls and procedures were effective at the reasonable assurance level at the end of our most recent fiscal year ended December 31, 2005. There have been no changes in the Company's disclosure controls and procedures or in other factors that could affect the disclosure controls subsequent to the date the Company completed its evaluation. Management has not yet completed, and is not yet required to have completed, its assessment of the effectiveness of internal control over financial reporting as required by Section 404 of the Sarbanes-Oxley Act of 2002, as amended. Item 8.B. Other Information. ----------------------------- Not Applicable. 24 PART III Item 9. Directors, Executive Officers, Promoters and Control Persons; Compliance with Section 16(a) of the Exchange Act. -------------------------------------------------------------------------------- The names, ages and principal occupations of the Company's present officers and directors are listed below. First Became Director Name (1) Age and/or Officer Position -------- --- --------------------- -------- Bruce J. Haber 53 2003 Chairman of the Board and Chief Executive Officer Louis Buther 52 2003 President and Chief Operating Officer William M. McKay 51 2002 Chief Financial Officer, Treasurer and Secretary Mark Waldron 38 2000 Director Howard Waltman 73 2001 Director K. Deane Reade, Jr. 65 2005 Director ------------------ (1) Directors are elected at the annual meeting of stockholders and hold office until the following annual meeting. 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. There is currently one vacancy on the Company's Board of Directors. Bruce J. Haber has served as Chairman of the Board and Chief Executive Officer since January 31, 2003. Since 2000, Mr. Haber has served as President of BJH Management, LLC, a management firm specializing in turnaround consulting and private equity investments, which served as a consultant to the Company between October 2001 and January 2003. From October 2001 until December 2002, Mr. Haber served on the Board of Directors of EB2B Commerce, Inc. a computer software company. From March 2002 to December 2002 Mr. Haber served as Chairman of the Board and as a turnaround consultant to EB2B. Mr. Haber served as Executive Vice President and a Director of Henry Schein, Inc., an international distributor of healthcare products, as well as President of their Medical Group from 1997 to 1999. From 1981 to 1997, Mr. Haber served as President, CEO and Director of Micro Bio-Medics, Inc., and Caligor Medical Supply Company, a distributor of physician and hospital supplies, which merged with Henry Schein in 1997. Mr. Haber also serves as a director of several privately held companies. Mr. Haber holds a Bachelor of Science degree from the City College of New York and a Master of Business Administration from Baruch College in New York. Louis Buther has served as President of the Company since January 31, 2003. Mr. Buther has served as an independent consultant since 2000, including providing consulting services to the Company between October 2001 and January 2003. From 1997 through 2000, Mr. Buther was Senior Vice President of the Medical Division of Henry Schein, Inc. From 1983 to 1997, Mr. Buther served as Vice President of Micro Bio-Medics, Inc., and Caligor Medical Supply Company, which merged with Henry Schein in 1997. Mr. Buther holds an Associates Art Science Degree in Chemistry from Bronx Community College and a Bachelor of Science Degree in Pharmacy from Long Island University. 25 William M. McKay has served as Chief Financial Officer of the Company since August 2002. From August 2000 to August 2002, he served as Chief Financial Officer and as a consultant for EV Global Motors Company, a privately held consumer products company. From December 1998 to July 2000 Mr. McKay served as Chief Financial Officer and Secretary for Internet Dynamics, Inc., a privately held software development company. From February 1998 to November 1998, he served as Chief Financial Officer for Koo Koo Roo, Inc., a publicly held food services company. From May 1995 to February 1998, Mr. McKay served as Chief Financial Officer and Secretary for View Tech, Inc., a publicly held technology company. Mr. McKay also has ten years of public accounting experience with Deloitte & Touche, where he last served as a senior manager in its audit department. Mr. McKay is a member of the American Institute of Certified Public Accountants and holds a Bachelor of Science Degree in business administration with an emphasis in accounting from the University of Southern California - Los Angeles. Mark Waldron has served as a director of the Company since August 2000. Mr. Waldron also served as President and Chief Executive Officer of the Company between August 2000 and January 2003, and has served as a director of PRI Medical since September 2000. Since 1998 Mr. Waldron's principal occupation has been as a private investor. Mr. Waldron is a former Vice President of J.P. Morgan in New York and was with the firm from 1993 to 1998. Mr. Waldron received his MBA from Northwestern University's Kellogg School of Management, and prior to attending business school worked at Bankers Trust. He received a BA with honors from the Richard Ivey School of Business at the University of Western Ontario. Howard Waltman has served as a director of the Company and Chairman of the Compensation Committee since 2001. Since 2000, Mr. Waltman has acted as a private investor for a family limited liability corporation. Since 1986, Mr. Waltman serves as a director of Express Scripts, Inc. ("ESI"), and was its Chairman from 1986 to 2000. ESI was formed in 1986 as a subsidiary of Sanus, a company formed in 1983 by Mr. Waltman, who served as its Chairman of the Board from 1983 to 1987. Sanus was acquired by New York Life Insurance Company in 1987. ESI provides mail order pharmacy services and pharmacy claims processing services and was spun out of Sanus and taken public in June 1992. Mr. Waltman also founded Bradford National Corp. in 1968, which was sold to McDonnell Douglas Corporation in 1981. From 1996 to 2000, Mr. Waltman served as a director of Computer Outsourcing Services, Inc. Mr. Waltman is currently a director of a number of privately held companies. K. Deane Reade, Jr. has been a Director of Emergent Group since September, 2005. He currently serves as Chairman of the Audit Committee. Mr. Reade is a founder and, since 1975, has served as President and a director of Bangert, Dawes, Reade, Davis & Thom, Incorporated, a private investment banking firm with offices in New York and San Francisco. Between 1989 and 1996, Mr. Reade served as Managing Director of John Hancock Capital Growth Management, Inc. and was a General Partner of its affiliate Gramercy Hills Partners. Mr. Reade is a graduate of Rutgers University. He is a director of ABC Estonian Shares, a closed end fund (Isle of Man, UK); Abakus Management Co., an investment management company ( Tallinn, Estonia); Myers Industries, Inc. (Lincoln, Illinois). He currently serves as a Trustee of private trusts, charitable foundations and is on the advisory board of Trail Blazers Camps, Inc. (New York, N.Y.) a 100 year old social service organization with a year round educational program for disadvantaged children from the Metropolitan New York - New Jersey area. 26 COMMITTEES ---------- The Company has no standing or nominating committees of the Board of Directors or committees performing similar functions. Compensation Committee The Compensation Committee consists of Bruce Haber,and Howard Waltman. The Compensation Committee has such powers and functions as may be assigned to it by the Board of Directors from time to time; however, such functions shall, at a minimum, include the following: o to review and approve corporate goals and objectives relevant to senior executive compensation, evaluate senior executive performance in light of those goals and objectives, and to set the senior executive compensation levels based on this evaluation; o to approve employment contracts of its officers and employees and consulting contracts of other persons; o to make recommendations to the Board with respect to incentive compensation plans and equity-based plans, including, without limitation, the Company's stock options plans; and o to administer the Company's stock option plans and grant stock options or other awards pursuant to such plans. Audit Committee --------------- The members of the Company's audit committee consist of Howard Waltman and K. Deane Reade, Jr. as its Chairman, each of whom were deemed by Management to be independent directors. K. Deane Reade, Jr. may be deemed a "Financial Expert" within the meaning of Sarbanes Oxley Act of 2002, as amended. The definition of "independent director" is defined in Rule 4200(a)(14) of the NASD's Listing Standards. The NASD's listing standards define an "independent director" generally as a person, other than an officer of the Company, who does not have a relationship with the Company that would interfere with the director's exercise of independent judgment. The term "Financial Expert" is defined as a person who has the following attributes: an understanding of generally accepted accounting principals and financial statements; has the ability to assess the general application of such principals in connection with the accounting for estimates, accruals and reserves; experience preparing, auditing, analyzing or evaluating financial statements that present a breadth and level of complexity of accounting issues that are generally comparable to the breadth and complexity of issues that can reasonably be expected to be raised by the Company's financial statements, or experience actively supervising one or more persons engaged in such activities; an understanding of internal controls and procedures for financial reporting; and an understanding of audit committee functions. 27 Effective May 20, 2003, the Board adopted a written charter for its Audit Committee. The charter includes, among other things: o being directly responsible for the appointment, compensation and oversight of the independent auditor, which shall report directly to the Audit Committee, including resolution of disagreements between management and the auditors regarding financial reporting for the purpose of preparing or issuing an audit report or related work; o annually reviewing and reassessing the adequacy of the committee's formal charter; o reviewing the annual audited financial statements with the Company's management and its independent auditors and the adequacy of its internal accounting controls; o reviewing analyses prepared by the Company's management and independent auditors concerning significant financial reporting issues and judgments made in connection with the preparation of its financial statements; o reviewing the independence of the independent auditors; o reviewing the Company's auditing and accounting principles and practices with the independent auditors and reviewing major changes to its auditing and accounting principles and practices as suggested by the independent auditor or its management; o reviewing all related party transactions on an ongoing basis for potential conflict of interest situations; and o all responsibilities given to the Audit Committee by virtue of the Sarbanes-Oxley Act of 2002 (which was signed into law by President George W. Bush on July 30, 2002) and all amendments thereto. Code of Ethics -------------- Effective March 3, 2003, the Securities & Exchange Commission requires registrants like the Company to either adopt a code of ethics that applies to the Company's Chief Executive Officer and Chief Financial Officer or explain why the Company has not adopted such a code of ethics. For purposes of item 406 of Regulation S-K, the term "code of ethics" means written standards that are reasonably designed to deter wrongdoing and to promote: o Honest and ethical conduct, including the ethical handling of actual or apparent conflicts of interest between personal and professional relationships; o Full, fair, accurate, timely and understandable disclosure in reports and documents that the Company files with, or submits to, the Securities & Exchange Commission and in other public communications made by the Company; o Compliance with applicable governmental law, rules and regulations; o The prompt internal reporting of violations of the code to an appropriate person or persons identified in the code; and o Accountability for adherence to the code. In this respect, the Company has adopted a code of ethics which was filed as Exhibit 14.1 to the Company's 2003 Form 10-KSB. Changes to the Code of Ethics will be filed under a Form 8-K or quarterly or annual report under the Exchange Act. 28 Compliance with Section 16(a) of the Exchange Act ------------------------------------------------- Section 16(a) of the Securities Exchange Act of 1934, as amended, requires our officers and directors, and persons who own more than ten percent of a registered class of our equity securities, to file reports of ownership and changes in ownership with the Securities and Exchange Commission (the "Commission"). Officers, directors and greater than ten percent stockholders are required by the Commission's regulations to furnish us with copies of all Section 16(a) forms they file. During fiscal 2005, none of our officers, directors or 10% or greater stockholders filed any forms late to the best of our knowledge; however, Howard Waltman filed a Form 5 in lieu of a Form 4 for a transaction involving out of the money options granted to him in 2001. Item 10. Compensation of Directors and Executive Officers. ----------------------------------------------------------- The following table provides a summary compensation table with respect to the Company's three executive officers. During the past three fiscal years, the Company has not granted stock appreciation rights to its executive officers. In addition, the Company does not have a defined benefit or actuarial plan other than a 401(k) plan. SUMMARY COMPENSATION TABLE --------------------------
--------------------------------------------------------------------------- ------------------------------------ -------------- Long Term Compensation --------------------------------------------------------------------------- ------------------------------------ -------------- Annual Compensation Awards Payouts ----------------------- -------- ------------------------------------------ -------------------------- --------- -------------- Name and Year Salary ($) Bonus ($) Other Annual Restricted Number of LTIP All Other Principal Position Compensation Stock Options Payout Compensation ($) Award(s) ($) ($) ($) ----------------------- -------- ------------- ------------- -------------- -------------- ----------- --------- -------------- ----------------------- -------- ------------- ------------- -------------- -------------- ----------- --------- -------------- Bruce J. Haber, 2005 $175,000 $95,900 $0 $22,800 (5)(6) 0 0 0 Chairman of the Board 2004 $175,000 0 $0 $0 0 0 0 and Chief Executive 2003 $153,125(1) 0 $61,212 (2) $61,212 (2) 0 0 0 Officer ----------------------- -------- ------------- ------------- -------------- -------------- ----------- --------- -------------- Louis Buther, 2005 $161,000 $95,900 $0 $14,250 (5)(6) 0 0 0 President and Chief 2004 $161,000 $10,000 $0 $0 0 0 0 Operating Officer 2003 $140,875(1) 0 $45,909 (2) $45,909 (2) 0 0 0 ----------------------- -------- ------------- ------------- -------------- -------------- ----------- --------- -------------- William M. Mckay, 2005 $140,000 $65,000 $3,600 $8,550 (5)(6) 25,000 (3) 0 0 Chief Financial 2004 $140,000 $10,000 $3,600 $0 0 0 0 Officer 2003 $140,000 0 $3,600 $0 75,000 (3) 0 0 ----------------------- -------- ------------- ------------- -------------- -------------- ----------- --------- -------------- -----------
(1) On October 15, 2001, the Company retained BJH Management LLC ("BJH"), a company owned by Bruce J. Haber, to provide consulting services before Mr. Haber's and Mr. Buther's employment contracts became effective on January 31, 2003. Monies shown next to Messrs. Haber and Buther include monies paid to BJH for the respective benefit of Messrs. Haber and Buther, it being noted that Mr. Buther provided consulting services to the Company through BJH. However, it does not include payments made by the Company to BJH which represent reimbursed office expenses which totaled $33,097, $30,537 and $31,389 for fiscal 2005, fiscal 2004 and fiscal 2003, respectively. 29 (2) On December 30, 2002, the Company entered into an agreement described herein to issue an aggregate of 348,575 shares to BJH in connection with services rendered. An additional 535,606 shares were issued to BJH in 2003 in connection with certain anti-dilution provisions contained in the agreement and the premature termination of such provisions. The exercise price for such shares of $107,121 ($61,212 for Mr. Haber and $45,909 for Mr. Buther) was charged to compensation expense for the year ended December 31, 2003. Of the 348,575 shares, 199,186 shares were retained by Mr. Haber in a family trust and are reflected in the above table. The remaining 149,389 shares were transferred by agreement to Mr. Buther and are shown in the table above. Of the 535,606 shares issued in 2003 pursuant to the anti-dilution provisions, 306,060 shares were retained by Mr. Haber (before being transferred in November 2005 to a new family trust) and the balance of 229,546 shares were transferred by agreement to Mr. Buther. (3) On March 22, 2005, Mr. McKay was granted 25,000 common stock options at an exercise price of $0.40 per share. Such options will vest in five equal annual installments from the date of issuance commencing March 22, 2006. (4) In 2003 Mr. McKay was granted 75,000 common stock options at an exercise price of $0.40 per share. Two-fifths of such options were immediately vested with the remainder vesting in equal installments over three years from the date of issuance. (5) In November 2005, Messrs Haber, Buther and McKay were granted restricted stock award shares of 40,000, 25,000 and 15,000, respectively, which vest in equal installments over five years. Compensation expense at $.57 per share related to such restricted award shares are being amortized over the five year vesting period. At December 31, 2005, the restricted stock awards of 40,000 shares, 25,000 shares and 15,000 shares were valued at $22,800, $14,250 and $8,550, respectively, based upon a discounted six-month weighted average due to the limited and sporadic market for the Company's Common Stock. (6) The following transaction is not included in the table above as a restricted stock award granted in connection with services rendered: In May 2005, the Company issued restricted shares to Messrs. Haber, Buther and McKay of 89,500, 64,000 and 47,000 in connection with providing limited guarantees to the lender in connection with the Company's new $1 million credit facility as discussed elsewhere in this Form 10-KSB. The guarantors have each entered into an agreement with the Company to return the shares that they received in consideration of their limited guarantee in the event the guarantor on his own volition breaches (other than a breach that is cured within the terms of the limited guarantee agreement) or terminates his own respective limited guarantee, prior to the payment in full of the Company's obligations to the lender or the voluntary release from the limited guarantees by the lender. Compensation expense at $0.40 per share related to the shares issued for the limited guarantee is being amortized over the loan term of 24 months. In the event that the above table were to reflect the value of the restricted shares granted on the date of issuance in connection with the limited guarantees, then Mr. Haber, Mr. Buther and Mr. Mckay would have had an additional $34,200, $25,600 and $18,800 included in the table, for a total of $57,000, $39,850 and $27,350, respectively. Employment Agreements with Bruce J. Haber and Louis Buther ---------------------------------------------------------- Pursuant to employment contracts which currently expire on June 30, 2006, Mr. Bruce J. Haber became the Company's Chief Executive Officer and was elected to the Company's Board of Directors, initially as Chairman and Mr. Louis Buther became its President. Messrs. Haber and Buther are each performing the duties customary for an executive of such rank with a public company. Mr. Haber is not required to devote his full-time to the Company, but is required to devote such time as is necessary for the performances of his duties. Mr. Buther is required to devote his full business time to the Company. On or before June 1 of each year, the Company must offer to extend the Employment Agreement of each of Messrs. Haber and Buther for a period of one additional year on terms no less favorable than the then existing terms of Messrs. Haber's and Buther's respective Employment Agreements, unless such officer(s) has been released by the applicable institutional lender(s) from all personal guarantees of company loans or the Company has retired all outstanding indebtedness owed to such lender(s). 30 For Mr. Haber's services, he is receiving an annual base compensation of $175,000 (the "Haber Base Salary") payable in semi-monthly installments or otherwise in accordance with Company policies. For Mr. Buther's services, he will receive annual base compensation of $161,000 (the "Buther Base Salary"), payable in semi-monthly installments or otherwise in accordance with Company policies. In addition, in the event that pre-tax profits (subject to certain adjustments approved by the Compensation Committee) before Management's bonuses are at least $1,035,000 for a calendar year, then Messrs. Haber and Buther shall receive a bonus of $50,000 each, increasing to $75,000 each, if pre-tax profits are $1,150,000 plus 6% each of pre-tax profits over $1,150,000. Such bonus, if earned, will be paid within 30 days after the end of each fiscal year end of the Company. Such incentive targets were not achieved for the years ended December 31, 2004 and 2003, however, Mr. Buther received a bonus of $10,000 for the year ended December 31, 2004. For the year ended December 31, 2005, Messrs. Haber and Buther each received a bonus of $95,900, under the incentive plan noted herein. In addition, for the year ended December 31, 2003 Messrs. Haber and Buther were issued additional fully paid common shares under the Stock Issuance Agreement. The value of such shares, based on the exercise price of $0.20 per share, for Messrs. Haber and Buther was $61,212 and $45,909, respectively. Reference is made to our Form 10-KSB for the fiscal year ended December 31, 2004 for a description of other material terms of the employment agreements of Messrs. Haber and Buther. Employment Arrangement - William M. McKay ----------------------------------------- In August 2002, William M. McKay became the Company's Chief Financial Officer ("CFO") pursuant to an engagement letter. As CFO, he is currently receiving a base salary of $140,000 per annum, and participates in an incentive bonus program generally based on Company performance. For the years ended December 31, 2005, 2004 and 2003, Mr. McKay received a bonus of $65,000, $10,000 and $-0- , respectively. In addition, Mr. McKay receives Company-paid health insurance benefits as well as an automobile allowance of $300 per month. Since the commencement of his employment in 2002, Mr. McKay has received ten-year options to purchase an aggregate of 130,000 shares of the Company's Common Stock at an exercise price of $0.40 per share with varying vesting dates. In the event that the Company terminates Mr. McKay without cause, he shall be entitled to receive six months severance pay. Directors' Compensation ----------------------- Directors do not presently receive compensation for serving on the Board or on its committees other than the grant of stock options and/or restricted stock awards. Depending on the number of meetings and the time required for the Company's operations, the Company may decide to compensate its directors in the future. 31 Restricted Stock Awards ----------------------- On November 2, 2005, the Company granted restricted stock awards to its executive officers and directors for services rendered and to be rendered of 40,000 shares to Bruce J. Haber, 25,000 shares to Louis Buther, 15,000 shares to William McKay, 10,000 shares to each of Howard Waltman and Mark Waldron and 5,000 shares to K. Deane Reade, Jr. All of the aforementioned shares shall vest in five equal annual amounts commencing November 2, 2006 and the non-vested portion is subject to forfeiture in the event that the holder is no longer serving as an officer or director of the Company, subject to the Board's right to waive this forfeiture provision. In May 2005, the Company entered into an Accounts Receivable Purchase Agreement and related loan documents with Access Capital, Inc. In accordance with those agreements, Bruce J. Haber, Louis Buther, William M. McKay and Mark Waldron entered into limited personal guarantees in the form of management support validity agreements ("AMSV"). In consideration of their limited guarantees, the Company issued 89,500 shares to Mr. Haber, 64,000 shares to Mr. Buther, 47,000 shares to Mr. McKay and 59,500 shares to Mark Waldron. The Company obtained an agreement with each respective guarantor so that all shares issued to each respective guarantor shall be canceled and returned to the Company in the event that the individual guarantor on his own volition terminates or breaches his own AMSV prior to the earlier of the Company's payment in full of its obligations to Access Capital or the voluntary release of the guarantors from the AMSVs by Access Capital. 2002 Employee and Consulting Compensation Plan ---------------------------------------------- On April 1, 2002, the Company established an Employee Benefit and Consulting Compensation Plan (the "2002 Plan") covering 325,000 shares, which was approved by stockholders on August 5, 2003. Since stockholder approval was not obtained by April 1, 2003, all outstanding Incentive Stock Options granted under the 2002 Plan became Non-Statutory Stock Options and no Incentive Stock Options could be thereafter granted under the 2002 Plan. On March 23, 2004, the Board of Directors approved, subject to stockholder approval, a 325,000 share increase in the number of shares covered by the Plan to 650,000 shares. As of March 17, 2006, there were 417,589 stock options outstanding under the 2002 Plan. Stockholders are expected to be asked to ratify the 325,000 share increase in the 2002 Plan at its next stockholder meeting. Administration -------------- Our Board of Directors, Compensation Committee or both, in the sole discretion of our Board, administer the 2002 Plan. The Board, subject to the provisions of the 2002 Plan, has the authority to determine and designate officers, employees, directors and consultants to whom awards shall be made and the terms, conditions and restrictions applicable to each award (including, but not limited to, the option price, any restriction or limitation, any vesting schedule or acceleration thereof, and any forfeiture restrictions). The Board may, in its sole discretion, accelerate the vesting of awards. The Board of Directors must approve all grants of Options and Stock Awards issued to our officers or directors. Types of Awards --------------- The 2002 Plan is designed to enable us to offer certain officers, employees, directors and consultants of us and our subsidiaries equity interests in us and other incentive awards in order to attract, retain and reward such individuals and to strengthen the mutuality of interests between such individuals and our stockholders. In furtherance of this purpose, the 2002 Plan contains provisions for granting non-statutory stock options (and originally incentive stock options which have now become non-statutory stock options) and Common Stock Awards. 32 Stock Options. A "stock option" is a contractual right to purchase a number of shares of Common Stock at a price determined on the date the option is granted. The option price per share of Common Stock purchasable upon exercise of a stock option and the time or times at which such options shall be exercisable shall be determined by the Board at the time of grant. Such option price shall not be less than 100% of the fair market value of the Common Stock on the date of grant. The option price must be paid in cash, money order, check or Common Stock of the Company. The Options may also contain at the time of grant, at the discretion of the Board, certain other cashless exercise provisions. Options shall be exercisable at the times and subject to the conditions determined by the Board at the date of grant, but no option may be exercisable more than ten years after the date it is granted. If the Optionee ceases to be an employee of our company for any reason other than death, any option (originally granted as an incentive stock option) exercisable on the date of the termination of employment may be exercised for a period of thirty days or until the expiration of the stated term of the option, whichever period is shorter. In the event of the Optionee's death, any option (originally granted as an incentive stock option) exercisable at the date of death may be exercised by the legal heirs of the Optionee from the date of death until the expiration of the stated term of the option or six months from the date of death, whichever event first occurs. In the event of disability of the Optionee, any Options (originally granted as an incentive stock option) shall expire on the stated date that the Option would otherwise have expired or 12 months from the date of disability, whichever event first occurs. The termination and other provisions of a non-statutory stock option shall be fixed by the Board of Directors at the date of grant of each respective option. Common Stock Award. "Common Stock Award" are shares of Common Stock that will be issued to a recipient at the end of a restriction period, if any, specified by the Board if he or she continues to be an employee, director or consultant of us. If the recipient remains an employee, director or consultant at the end of the restriction period, the applicable restrictions will lapse and we will issue a stock certificate representing such shares of Common Stock to the participant. If the recipient ceases to be an employee, director or consultant of us for any reason (including death, disability or retirement) before the end of the restriction period unless otherwise determined by the Board, the restricted stock award will be terminated. Eligibility ----------- Our officers, employees, directors and consultants of Emergent Group and our subsidiaries are eligible to be granted stock options, and Common Stock Awards. Eligibility shall be determined by the Board; however, all Options and Stock Awards granted to officers and directors must be approved by the Board. Termination or Amendment of the 2002 Plan ----------------------------------------- The Board may at any time amend, discontinue, or terminate all or any part of the 2002 Plan, provided, however, that unless otherwise required by law, the rights of a participant may not be impaired without his or her consent, and provided that we will seek the approval of our stockholders for any amendment if such approval is necessary to comply with any applicable federal or state securities laws or rules or regulations. 33 Awards ------ During 2005, 2004, 2003, and 2002, we granted options to employees to purchase 73,000, 95,000, 213,000 and 186,971 shares, respectively, of our Common Stock under the 2002 Plan. The options are exercisable at $0.40 per share (except for 2,000 options exercisable at $2.00 per share and 2,000 options exercisable at $8.00 per share), 236,615 of which have been terminated as a result of employees terminating their employment with the Company. To date, options to purchase 18,880 common shares have been exercised under the Plan. Unless sooner terminated, the 2002 Plan will expire on March 31, 2012 and no awards may be granted after that date. It is not possible to predict the individuals who will receive future awards under the 2002 Plan or the number of shares of Common Stock covered by any future award because such awards are wholly within the discretion of the Board. The table below contains information as of December 31, 2005 on the known benefits provided to certain persons and group of persons under the 2002 Plan. Such table does not include options that have been exercised.
----------------------------------------------------- ---------------- ---------------- ------------------------ Number of Range of Value of unexercised Shares subject exercise price options at Dec. 31 to Options ($) per Share 2005 (1) ----------------------------------------------------- ---------------- ---------------- ------------------------ ----------------------------------------------------- ---------------- ---------------- ------------------------ Bruce J. Haber, Chief Executive Officer -0- $-0- $-0- ----------------------------------------------------- ---------------- ---------------- ------------------------ Louis Buther, President -0- $-0- $-0- ----------------------------------------------------- ---------------- ---------------- ------------------------ William M. McKay, Chief Financial Officer 130,000 $0.40 $63,000 (1) ----------------------------------------------------- ---------------- ---------------- ------------------------ Three Executive Officers as a group 130,000 $0.40 $63,000 (1) ----------------------------------------------------- ---------------- ---------------- ------------------------ Two non-employee Directors and two former Directors as a group 55,000 $0.40 $63,250 (1) ----------------------------------------------------- ---------------- ---------------- ------------------------ Non-Executive Officer Employees and Consultants 225,340 $0.40 - $8.00 $101,509 (1) ----------------------------------------------------- ---------------- ---------------- ------------------------
---------- (1) Value is calculated by multiplying (a) the difference between the market value per share at December 31, 2005 and the option exercise price by (b) the number of shares of Common Stock underlying the number of vested options. Due to the limited and sporadic trading of the Company's Common Stock, the value of unexercised options as of December 31, 2005 was determined using a six month weighted-average price per share. Other 2001 Stock Option Plans ----------------------------- The Company has established two other stock option plans, neither of which have any material amount of shares authorized and/or outstanding under the Plan. 34 OPTION GRANTS TABLE ------------------- The information provided in the table below provides information with respect to individual grants of stock options during 2005 of each of the executive officers named in the summary compensation table above. The Company did not grant any stock appreciation rights during 2005.
Option Grants in Last Fiscal Year --------------------------------- Potential Realizable Value at Assumed Annual Individual Grants Rates of Stock Price ----------------- Appreciation for Option Term (2) ------------------- (c)% of Total Options/Granted Options to Employees in Exercise Price Expiration Name Granted (#) Fiscal Year (1) ($/Sh) Date 5% ($) 10% ($) ---- ---------- --------------- ------ ---- ------ ------- Bruce J. Haber -0- -0- N/A N/A N/A N/A Louis Buther -0- -0- N/A N/A N/A N/A William M. McKay 25,000 34% $0.40 03/22/15 6,290 15,937
------------- N/A - Not Applicable. (1) The percentage of total options granted to employees in the fiscal year is based upon options granted to officers, directors and employees. (2) The potential realizable value of each grant of options assumes that the market price of the Company's Common Stock appreciates in value from the date of grant to the end of the option term at annualized rates of 5% and 10%, respectively, and after subtracting the exercise price from the potential realizable value. AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR END OPTION VALUES The information provided in the table below provides information with respect to each exercise of stock option during 2005 by each of the executive officers named in the summary compensation table and the fiscal year end value of unexercised options.
(a) (b) (c) (d) (e) Value of Number of Unexercised Shares Unexercised In-the-Money Acquired Options at Options on Value FY-End (#) at FY-End($) Exercise Realized Exercisable/ Exercisable/ Name ( # ) ($)(1) Unexercisable Unexercisable(1) ---- ------------ ------ - ------------- ---------------- Bruce Haber -0- -0- -0- $-0- / $-0- Louis Buther -0- -0- -0- $-0- / $-0- William M. Mckay -0- -0- 84,000/46,000 $63,000/$34,500
(1) The aggregate dollar values in column (c) and (e) are calculated by determining the difference between the fair market value of the Common Stock underlying the options and the exercise price of the options at exercise or fiscal year end, respectively. In calculating the dollar value realized upon exercise, the value of any payment of the exercise price is not included. Due to the limited and sporadic trading of the Company's Common Stock, the value of unexercised options as of December 31, 2005 was determined using a six month weighted-average price per share. 35 PRI Medical Deferred Contribution Plan -------------------------------------- PRI Medical has adopted a defined contribution retirement plan, which qualifies under Section 401(k) of the Internal Revenue Code. This Plan covers substantially all employees with over one year of service. PRI Medical currently provides matching contributions of 6% of each participant's deferral up to a maximum of 15% of eligible contributions. Except for PRI Medical's 401(k) Plan, the Company has no other annuity, pension, or retirement benefits for its employees. For the years ended December 31, 2005, 2004 and 2003, the Company contributed matching contributions to the Plan of $8,926, $8,244 and $11,701, respectively. Item 11. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters. -------------------------------------------------------------------------------- As of March 17, 2006, the Company had outstanding 5,452,610 shares of Common Stock. The only persons of record who presently hold or are known to own (or believed by the Company to own) beneficially more than 5% of the outstanding shares of such class of stock is listed below. The following table also sets forth certain information as to holdings of the Company's Common Stock of all officers and directors individually, and all officers and directors as a group.
------------------------------------------------------------- ------------------------------- ------------------------ Name and Address of Beneficial Owner (1) Number of Common Approximate Shares Percentage ------------------------------------------------------------- ------------------------------- ------------------------ Officers and Directors ------------------------------------------------------------- ------------------------------- ------------------------ ------------------------------------------------------------- ------------------------------- ------------------------ Mark Waldron 932 Grand Central Avenue Glendale, CA 91201 476,675 (2) 8.8 ------------------------------------------------------------- ------------------------------- ------------------------ Howard Waltman 140 Deerfield Tenafly, NJ 07670 348,832 (3) 6.3 ------------------------------------------------------------- ------------------------------- ------------------------ William M. McKay 932 Grand Central Avenue Glendale, CA 91201 176,250 (4) 3.2 ------------------------------------------------------------- ------------------------------- ------------------------ Bruce J. Haber c/o BJH Management, LLC 145 Huguenot Street, Suite 405 New Rochelle, NY 10801 1,168,174 (5) 21.5 ------------------------------------------------------------- ------------------------------- ------------------------ Louis Buther 932 Grand Central Ave. Glendale, CA 91201 619,435 (5) 11.4 ------------------------------------------------------------- ------------------------------- ------------------------ K. Deane Reade, Jr. 605 Third Avenue New York, NY 10158 20,000 .4 ------------------------------------------------------------- ------------------------------- ------------------------ 36 ------------------------------------------------------------- ------------------------------- ------------------------ All current and proposed executive officers and directors as a group (six) persons 2,809,366 (6) 51.7 ------------------------------------------------------------- ------------------------------- ------------------------ 5% Stockholders ------------------------------------------------------------- ------------------------------- ------------------------ Arie Kanofsky 385 West John Street Hicksville, NY 11801 505,000 9.3 ------------------------------------------------------------- ------------------------------- ------------------------ Daniel Yun 791,509 (7) 375 Park Avenue, Suite 3607 14.6 New York, NY 10152 ---------------
(1) All shares are directly owned, and the sole investment and voting power is held, by the persons named unless otherwise noted. (2) Includes options to purchase 93 shares. (3) Includes 263,832 shares owned by his family in the name of The THW Group LLC, over which shares Mr. Waltman exercises voting and investment control and options to purchase 75,000 shares. (4) Includes options to purchase 89,000 shares. (5) Mr. Bruce J. Haber directly owns 68,428 shares of the Company's Common Stock. His wife, Michela I. Haber, is the trustee over two family trusts which beneficially own an aggregate of 1,099,746 shares which are included in the table above even though he disclaims beneficial ownership of such 1,099,746 shares. Mr. Haber also holds irrevocable proxies to vote an aggregate of 324,000 shares of Common Stock until such shares are sold to an unaffiliated third party, which shares are not reflected in the table above. (6) See footnotes (2) through (5) above. (7) Includes 30,834 shares owned by Emergent Capital L.P., which Mr. Yun has sole voting and disposition power, 17,500 shares gifted to 17 persons and options to purchase 93 shares. Voting Agreement ---------------- During December 2002, the Company's former Chairman of the Board, Mr. Daniel Yun and former Chief Executive Officer, Mr. Mark Waldron entered into a Voting Agreement (the "Voting Agreement"), whereby they agreed to vote all of their common stock in unison. However, to the extent that Messrs. Yun and Waldron do not agree on any particular matter, then each of them shall vote their shares of common stock in a manner consistent with the recommendation of the majority of the Company's Board of Directors. The Voting Agreement terminates on the earlier of five years from the effective date, or upon the sale of such shares by Messrs. Yun or Waldron to a non-related or unaffiliated party. The Company does not know of any arrangement or pledge of its securities by persons now considered in control of the Company that might result in a change of control of the Company. 37 Securities Authorized for Issuance under Equity Compensation Plans. ------------------------------------------------------------------- The following summary information is as of March 17, 2006 and relates to our 2002 Stock Option Plan pursuant to which we have granted options to purchase our common stock:
------------------------------- ------------------------------ ---------------------- -------------------------------- (a) (b) (c) ------------------------------- ------------------------------ ---------------------- -------------------------------- Number of securities remaining available for Number of shares of common Weighted average future issuance under stock to be issued upon exercise price of equity compensation plans Plan category exercise outstanding (excluding shares of outstanding options options (1) reflected in column (a) ------------------------------- ------------------------------ ---------------------- -------------------------------- Equity compensation Plans (2) 421,589 $0.44 228,411 ------------------------------- ------------------------------ ---------------------- -------------------------------- --------------------
(1) Based upon 417,589 options exercisable at $0.40 per share, 2,000 options exercisable at $2.00 per share and 2,000 options exercisable at $8.00 per share. (2) In March 2004, our Board of Directors approved an increase in the number of shares covered by the 2002 Plan from 325,000 to 650,000, subject to stockholder approval at our next annual meeting, which is expected to take place in 2006. The following summary information is as of March 17, 2006 and relates to our 2001 Stock Option Plan 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 be issued upon exercise price of remaining available for exercise outstanding future issuance under of outstanding options options (1) equity compensation plans (excluding shares reflected in column (a)(2) ------------------------------- ------------------------------ ---------------------- -------------------------------- Equity compensation Plans 8,375 $40.00 -0- ------------------------------- ------------------------------ ---------------------- -------------------------------- --------------------
(1) All options are exercisable at $40.00 per share. (2) The Board of Directors does not intend to grant additional options under the 2001 Plan. 38 The following summary information is as of March 17, 2006 and relates to our Stock Option Plans of PRI Medical 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 be issued upon exercise price of remaining available for exercise outstanding future issuance under of outstanding options options (1) equity compensation plans (excluding shares reflected in column (a) ------------------------------- ------------------------------ ---------------------- -------------------------------- Equity compensation Plans (2) 1,135 $47.51 -0- ------------------------------- ------------------------------ ---------------------- -------------------------------- --------------------
(1) Based upon 964 options exercisable at $27.20 per share and 171 options exercisable at $162.00 per share. (2) The Board of Directors of Emergent does not intend to grant additional options under the old PRI Medical Plans. Item 12. Certain Relationships and Related Transactions. --------------------------------------------------------- Except as otherwise described in Items 1, 6, 7, 10 and 11 of this Form 10-KSB, there have been no reportable transactions with the Company's officers, directors and/or affiliated persons required to be disclosed pursuant to Item 404 of Regulation S-B. Item 13. Exhibits ----------------- Number Exhibit Description ------- ------------- 2.1 Agreement and Plan of Reorganization and Merger, dated as of January 23, 2001, among MRM Registrant and MRM Acquisition Inc. (1) 2.2 Agreement to transfer equity dated August 10, 2000. (3) 3.1 Articles of Incorporation of Registrant. (5) 3.2 Amendment to Articles of Incorporation. (5) 3.3 2003 Amendment to Articles of Incorporation. (9) 3.43 By-laws of Registrant. (5) 9.1 Voting Trust Agreement between Daniel Yun and Mark Waldron. (4) 10.1 Consulting Agreement dated October 15, 2001 with BJH Management LLC. (4) 10.2 Stock Issuance Agreement dated December 30, 2002 with BJH Management LLC. (4) 10.3 Employment Agreement dated December 30, 2002 with Bruce J. Haber. (4) 10.4 Employment Agreement dated December 30, 2002 with Louis Buther. (4) 10.5 Consulting Agreement dated December 30, 2002 with JIMA Management LLC and Mark Waldron. (4) 10.6 Consulting Agreement dated September 1, 2001 with Howard Waltman, which was terminated by the Company on December 19, 2002. (4) 10.7 Consulting Agreement dated September 1, 2001 with Paula Fong, which was terminated by the Company on December 19, 2002. (4) 10.8 Facility Lease - Glendale, California. (4) 10.9 Settlement Agreement with Al Guadagno. (4) 10.10 Settlement Agreement with Richard Whitman. (4) 10.11 Consulting Agreements and Settlement Agreement with Tahoe Carson Management Consulting.(4) 10.12 Employment Agreement - Calvin Yee, approved by the board on November 1, 2001 (4) 10.13 Engagement Letter - William M. McKay (4) 39 10.14 Consulting Agreement dated February 3, 2003 - Richard Whitman (6) 10.15 Extension and Modification Agreement, dated March 7, 2005, by and among U.S. Bank National Association, successor in interest to Santa Monica Bank, PRI Medical Technologies, Inc., Physiologic Reps, Medical Resources Financial, Inc. and Emergent Group Inc. (13) 10.16 Asset Purchase Agreement - Advantage Medical Services, LLC and Non-Competitive, Non-disclosure and Non-Solicitation Agreement (10) 10.17 Accounts Receivable Purchase Agreement executed May 25, 2005 by and among Access Capital, EGI and EGI's wholly-owned subsidiary, PRI Medical Technologies, Inc. (11) 10.18 May 2005 Letter Agreement by and among EGI and the limited guarantors, Bruce J. Haber, Mark Waldron, William M. McKay and Louis Buther (11) 10.19 May 2005 Amendment to Employment Contract of Bruce Haber (11) 10.20 May 2005 Amendment of Employment Contract of Louis Buther (11) 11.1 Statement re: computation of per share earnings (see consolidated financial statements and notes thereto). 14.1 Code of Ethics (7) 21.1 Subsidiaries of Registrant listing the state or other jurisdiction of each subsidiary other than subsidiaries which would not constitute a significant subsidiary in Rule 1-02(w) of Regulation S-X. (12) 23.1 Consent of Singer, Lewak, Greenbaum & Goldstein LLP in connection with Form S-8 Registration Statement (12) 23.2 Consent of Rose, Snyder & Jacobs in connection with Form S-8 Registration Statement (12) 31(a) Rule 13a-14(a) Certification - Chief Executive Officer (12) 31(b) Rule 13a-14(a) Certification - Chief Financial Officer (12) 32(a) Section 1350 Certification - Chief Executive Officer (12) 32(b) Section 1350 Certification - Chief Financial Officer (12) 99.1 2002 Stock Option Plan. (4) 99.2 2001 Stock Option Plan. (4) 99.3 Form of Subordinated Promissory Note (9) 99.4 March 23, 2004 amendment to 2002 Stock Option Plan, subject to stockholder approval (10) 99.5 Press Release - Results of Operations for 2005 (12) --------- (1) Filed as an exhibit to the Registrant's Current Report on Form 8-K, dated January 29, 2001, and incorporated herein by reference. (1) Filed as an exhibit to the Registrant's Form 10-K for its fiscal year ended December 31, 2000. (2) Incorporated by reference to the Registrant's Form 8-K - August 31, 2000 (date of earliest event). (3) Incorporated by reference to the Registrant's Form 10-K for its fiscal year ended December 31, 2001. (4) Incorporated by reference to the Registrant's Form S-4 Registration Statement filed May 8, 2001. (6) Incorporated by reference to the Registrant's Form 10-K for its fiscal year ended December 31, 2002. (7) Incorporated by reference to Registrant's Form 10-KSB for its fiscal year ended December 31, 2003. (8) Incorporated by reference to the Registrant's Form 8-K - June 27, 2003 (date of earliest event). (9) Incorporated by reference to the Registrant's Form 10-QSB for its quarter ended September 30, 2003. (10) Incorporated by reference to the Registrant's Form 10-QSB for its quarter ended September 30, 2005. (11) Incorporated by regerence to the Registrant's Form 10-QSB for its quarter ended June 30, 2005. 37 (12) Filed herewith. (13) Incorporated by reference to the Registrant's Form 10-KSB for the fiscal year ended December 31, 2004. Item 14. Principal Accountant Fees and Services. ------------------------------------------------- Audit Fees During fiscal 2005, the aggregate fees billed for professional services rendered by Singer Lewak Greenbaum & Goldstein LLP (the "Prior Independent Auditors") for the 2004 audit of the Company's annual financial statements and the 2005 quarterly reviews of its financial statements included in the Company's quarterly reports totaled approximately $98,000. The aggregate fees billed for professional services rendered by Rose, Synder & Jacobs for the 2005 audit of the Company's financial statements totaled approximately $50,000. Financial Information Systems Design and Implementation Fees During 2005, there were $-0- in fees billed for professional services by the Company's Prior Independent Auditors rendered in connection with, directly or indirectly, operating or supervising the operation of its information system or managing its local area network. All Other Fees For the fiscal year ended December 31, 2005, there was $13,000 in fees billed for preparation of corporate tax returns, tax research and other professional services rendered by the Company's Prior Independent Auditors. The foregoing fees exclude expense reimbursements of approximately $5,400. 38 SIGNATURES Pursuant to the requirements Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized. EMERGENT GROUP INC. By: /s/ Bruce J. Haber ---------------------- Bruce J. Haber, Chairman of the Board and Chief Executive Officer Dated: New Rochelle, New York March 30, 2006 Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated: Signatures Title Date /s/ Bruce J. Haber Chairman of the Board March 30, 2006 ------------------------------- Bruce J. Haber Chief Executive Officer /s/ William M. McKay Chief Financial Officer March 30, 2006 ----------------------------- Secretary and Treasurer William M. McKay /s/ Mark Waldron Director March 30, 2006 ------------------------------- Mark Waldron /s/ Howard Waltman Director March 30, 2006 ---------------------------- Howard Waltman /s/ K. Deane Reade, Jr. Director March 30, 2006 -------------------------------- K. Deane Reade, Jr. Bruce J. Haber, Mark Waldron, Howard Waltman and K. Deane Reade, Jr. represent all the current members of the Board of Directors. 39