-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, UGne1wN0Zql3XVTW5XRt5wo3LKzXQICDo4r27vPtnUG2I6CYYdOm8BFeJcqY7XHQ /9O1b7pdIhChe1Rzw1fdtA== 0001013762-05-000368.txt : 20050331 0001013762-05-000368.hdr.sgml : 20050331 20050331170157 ACCESSION NUMBER: 0001013762-05-000368 CONFORMED SUBMISSION TYPE: 10KSB PUBLIC DOCUMENT COUNT: 10 CONFORMED PERIOD OF REPORT: 20041231 FILED AS OF DATE: 20050331 DATE AS OF CHANGE: 20050331 FILER: COMPANY DATA: COMPANY CONFORMED NAME: EMERGENT GROUP INC/NY CENTRAL INDEX KEY: 0001021097 STANDARD INDUSTRIAL CLASSIFICATION: WHOLESALE-MISC DURABLE GOODS [5090] IRS NUMBER: 931215401 STATE OF INCORPORATION: NV FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10KSB SEC ACT: 1934 Act SEC FILE NUMBER: 000-21475 FILM NUMBER: 05721423 BUSINESS ADDRESS: STREET 1: 932 GRAND CENTRAL AVENUE CITY: GLENDALE STATE: CA ZIP: 91201 BUSINESS PHONE: 818-240-8250 MAIL ADDRESS: STREET 1: 932 GRAND CENTRAL AVENUE CITY: GLENDALE STATE: CA ZIP: 91201 FORMER COMPANY: FORMER CONFORMED NAME: DYNAMIC INTERNATIONAL LTD DATE OF NAME CHANGE: 19960815 10KSB 1 dec31200410ksb.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, 2004 ------------------------------------------- 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 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 [ ]. As of March 15, 2005, the number of shares held by non-affiliates was approximately 1,212,000 shares. Due to the limited and sporadic trading of the Company's Common Stock in the over-the-counter market, no estimate is provided of the value of the Company's Common Stock held by non-affiliates since such information would not be meaningful. The number of shares outstanding of the Registrant's Common Stock, as of March 15, 2005, was 4,745,530. FORWARD-LOOKING STATEMENTS We believe this annual report contains "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. These statements are subject to risks and uncertainties and are based on the beliefs and assumptions of our management, based on information currently available to our management. When we use words such as "believes," "expects," "anticipates," "intends," "plans," "estimates," "should," "likely" or similar expressions, we are making forward-looking statements. Forward-looking statements include information concerning our possible or assumed future results of operations set forth under "Business" and/or "Management's Discussion and Analysis of Financial Condition and Results of Operations." Forward-looking statements are not guarantees of performance. They involve risks, uncertainties and assumptions. Our future results and stockholder values may differ materially from those expressed in the forward-looking statements. Many of the factors that will determine these results and values are beyond our ability to control or predict. Stockholders are cautioned not to put undue reliance on any forward-looking statements. For those statements, we claim the protection of the safe harbor for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995. For a discussion of some of the factors that may cause actual results to differ materially from those suggested by the forward-looking statements, please read carefully the information under "Management's Discussion and Analysis of Financial Condition and Results of Operations--Risk Factors." In addition to the Risk Factors and other important factors discussed elsewhere in this annual report, you should understand that other risks and uncertainties and our public announcements and SEC filings could affect our future results and could cause results to differ materially from those suggested by the forward-looking statements. RECAPITALIZATION On August 29, 2003, the Registrant's reverse stock split became effective. All stockholders of record at the close of business on August 28, 2003 were requested to exchange every 40 shares of Common Stock, $.001 par value, for one new share of Common Stock, $.04 par value. All per share amounts in this Form 10-KSB have been retroactively adjusted to give effect to the one-for-forty reverse stock split, except as otherwise noted. 3 PART I Item 1. Description of Business THE COMPANY Emergent Group Inc. ("Emergent") is the parent company of PRI Medical Technologies, Inc., formerly Medical Resources Management, Inc. ("PRI Medical"), its wholly owned and only operating subsidiary. Emergent acquired PRI Medical in July 2001. PRI Medical primarily conducts its business through its wholly owned subsidiary Physiologic Reps ("PRI"); however, we intend to merge PRI into PRI Medical in early 2005 in an effort to simplify our corporate structure. Emergent, PRI Medical and PRI are referred to collectively hereinafter as the "Company." PRI is a provider of surgical equipment on a fee for service basis to hospitals, surgical care centers and other health care providers. PRI serves both large and small health care providers, including: 1) smaller independent hospitals and physicians who cannot afford to buy surgical equipment because of budget constraints or cannot justify buying due to limited usage; and 2) larger, well-financed hospitals that may be able to purchase equipment for use in their own facility but may choose not to because reimbursement or utilization rates for many procedures do not warrant a capital commitment. Additionally, infrequent utilization may not justify the cost of training and retention of technicians to operate such equipment. PRI is also able to provide its technicians to support hospital-owned surgical equipment on a fee for service basis, thus improving efficiency and reducing costs for the hospital. Reduced operating costs and improved flexibility for hospitals are elements of the PRI value proposition to its customers. PRI makes mobile surgical services available to its customers by providing surgical equipment on a per procedure basis to hospitals, outpatient surgery centers, and physician offices. PRI provides mobile lasers and other surgical equipment to customers along with technical support required to ensure the equipment is working correctly. PRI also provides a limited amount of non-surgical medical equipment on a rental basis to hospitals and surgery centers. This non-surgical equipment is used throughout such facilities to supplement their in-house resources. PRI's mobile surgical services focus on two areas of the health care industry: surgical care and cosmetic surgery. In the surgical care area, physicians can perform minimally invasive surgery at hospitals by renting PRI's laser or other equipment. For cosmetic surgery, physicians benefit from having different laser technologies available to offer to their patients without a significant capital investment. In both instances, physicians and hospitals receive PRI's technical support and expertise that is provided with the equipment, allowing the staff to concentrate on their patient care duties without the distraction of setup and running equipment. 4 PRI has over 600 active surgical service accounts in California, Utah, Colorado and Nevada and experiences a high rate of repeat business from the hospitals, surgery centers and doctors it serves. The market encompasses many disciplines including plastic/cosmetics surgery, dermatology, orthopedic surgery, otolaryngology, urology, obstetrics, gynecology, ophthalmology, general surgery 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's business. PRI's healthcare distribution network allows physicians, hospitals and healthcare facilities access to new medical equipment without the expense of acquisition. PRI is able to help manufacturers bring advanced medical technologies to market by using its distribution channels and 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 had revenues of approximately $11.0 million in 2004, including general medical equipment rental revenues of $102,237, which is being discontinued, and assisted in over 14,000 surgical and cosmetic procedures. By making new technologies available to physicians PRI hopes to become a distributor of innovative medical device and support services to the healthcare community early in a product's life cycle. PRODUCTS AND SERVICES PRI'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's scheduling department. Upon arrival at the customer site, PRI's technician posts required warning notices outside the O.R., issues safety equipment to the O.R. staff, provides any disposable materials needed, and supplies equipment certifications and/or documentation required for hospital record keeping. The technician is responsible for setting the physician's requested power settings on rented equipment and for helping to maintain a safe environment with regard to the rental equipment during the surgical procedure. Technician-only services are made available to hospitals and surgery facilities, especially those with fluctuating occupancy levels. Customers find that outsourcing of trained technicians without renting equipment to be a cost-effective alternative to training and staffing their own personnel. PRI's laser equipment encompasses CO2, Greenlight PV, Nd:YAG, Pulse Dye, KTP/YAG, and Holmium YAG laser technology. PRI has established working relationships with leading laser manufacturers and is sometimes an introducer of laser technology in its markets. PRI reviews developments in the medical field to stay abreast of new and emerging technologies and to obtain new surgical medical equipment. In this regard, PRI has in recent years added equipment to provide for services in cryosurgery, advanced visualization technology 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. 5 PRI also provides its customers with disposable products and/or attachments that are needed for a given medical procedure. These disposable products are primarily related to laser equipment rentals requiring fibers, tubing, laser drapes and masks. Customers may benefit from this added service by lowering their inventory levels of infrequently used products. In prior years PRI 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 $102,237 in 2004 compared to $168,082 in 2003. "See Management's Discussion and Analysis of Financial Condition and Results of Operations." MARKETING AND SALES PRI markets its mobile surgical equipment and services business largely through the efforts of its direct sales force, which focuses on providing high-quality service and products to customers and on obtaining new customer accounts. In conjunction with its sales efforts, PRI sponsors educational seminars on new laser and other surgical equipment technologies, which are attended by its current and prospective customers. These seminars allow PRI's direct sales force to introduce new technologies and procedures to its customer base early in the product's life cycle. PRI's sales representatives attend national and regional physician medical seminars and trade shows to present PRI's services and products. PRI also markets its products and services through direct mail marketing of literature and promotional materials, which describe PRI's complete range of surgical equipment and services to hospitals, surgery centers and physicians. MARKETS PRI currently serves customers in California, Colorado, Utah and Nevada. Each location is staffed with full-time technicians and sales representatives. During the years ended December 31, 2004 and 2003, no customer accounted for more than 10% of PRI's total sales. 6 Hospital Mobile Laser/Surgical Services PRI provides mobile laser/surgical services to customers in each market served. Each location is staffed with full-time trained technicians and sales representatives, and is equipped with a variety of surgical equipment to meet customer needs. During each of the years ended December 31, 2004 and 2003, PRI performed approximately 14,000 procedures company-wide. Revenues from our surgical mobile medical equipment and services business comprised approximately 87% and 85%, of our total revenues for 2004 and 2003, 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. Recent legislation in California and some other states restricting anesthesia in doctor offices has redirected some of this cosmetic surgery to hospitals and surgery centers where PRI has existing customer relationships and the ability to compete more effectively. For the years ended December 31, 2004 and 2003, revenues from our cosmetic laser business comprised approximately 12% and 14%, respectively, of our total revenues. General Medical Equipment, Rentals PRI entered the general equipment rental market in the 1990's. However, due to lower margins and increased competition and its focus on the higher margin mobile surgical services business, PRI Medical started phasing out its general equipment rental business in late 2001 and had sold most of its remaining general medical rental equipment assets by the end of 2003. 7 INVESTMENTS Investments In Limited Liability Companies In connection with expanding its business in certain commercial and geographic areas, PRI 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 acquired certain equipment for use in their respective business activities which generally focus on cosmetic and surgical procedures. In prior years, PRI helped to form and acquired minority equity interests in various LLCs in Colorado and California and holds minority interest in two LLCs as of December 31, 2004. During 2003, PRI withdrew from and dissolved four of its LLCs, and resigned as the manager for one LLC, which was assumed by other third party partners. For the year ended December 31, 2003, in connection with the dissolution of four LLCs, PRI wrote-off a total of $124,336 against its allowance for uncollectible balances. For the years ended December 31, 2004 and 2003 in accordance with the Financial Accounting Standards Board Interpretation No. 46, "Consolidation of Variable Interest Entities" the Company accounted for its equity investments in its two remaining LLCs under the full consolidation method whereby transactions between the Company and LLCs have been eliminated through consolidation. The Company previously utilized the equity method of accounting for its investments in such LLCs. "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 utilized by the Company are subject to extensive regulation by the Food and Drug 8 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 2005. 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's mobile surgical services is highly competitive. Companies, particularly in the laser surgery industry, often compete by price, thereby impacting profit margins. In addition, PRI faces many existing and future competitors of various size and scale. Some of our competitors have significantly greater financial and management resources than the Company. Competitors in our market include two privately held companies by the name of Mobile Med, Incorporated and Southland Surgical. In spite of such competition, the Company believes that it can compete successfully but can give no assurances with regard to its ability to compete. The Company's business could be adversely affected if our customers elect to purchase surgical equipment directly from the manufacturers and hire their own technicians. 9 EMPLOYEES As of March 15, 2005, the Company employed 79 full-time persons (including three executive officers), 54 of whom were involved in operations activities (most of these were active as field technicians), 12 of whom were involved in sales and marketing, and 13 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. 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 $14,300, plus reimbursements for property taxes and insurance, and is subject to annual increases based on increases in the Consumer Price Index. The lease expires in July 2006 and provides for an option to renew for an additional five years. The Company also leases an aggregate of approximately 4,000 square feet of space for its field and sales office under operating lease agreements that expire on various dates through May 2007 in Northern California, Colorado and Utah. We believe our present facilities will be 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"). 10 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 intends to deny the Plaintiff's allegations against the Company and to vigorously defend 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 2004. 11 PART II Item 5. Market for Common Equity and Related Stockholder Matters. Our common stock was traded on the OTC Bulletin Board under the symbol "EMGR" before being removed from listing in May 2002 due to the late filing of our Form 10-K for the year ended December 31, 2001. In 2003, we obtained a new listing of our Common Stock on the OTC Bulletin Board, currently under the symbol "EMGP." Our Common Stock trades on a limited and sporadic basis on the Bulletin Board in the Over-the-Counter Market. The following table sets forth the range of high and low closing prices of our Common Stock for the periods indicated. Quarters Ended High Low - -------------------------------------------------------------------------------- March 31, 2003............................ N/A N/A June 30, 2003............................. N/A N/A September 30, 2003........................ N/A N/A December 31, 2003......................... .11 .11 March 31, 2004............................ .66 .66 June 30, 2004............................. .66 .66 September 30, 2004........................ .70 .70 December 31, 2004........................ 2.50 2.50 ---------- N/A - Not available due to a lack of trading in our Common Stock. - -------------------------------------------------------------------------------- 12 All quotations reflect inter-dealer prices, without retail mark-up, markdown or commissions, and may not necessarily represent actual transactions. As of March 15, 2005, there were approximately 1,500 holders of record of our common stock, although we believe that there are other persons who are beneficial owners of our common stock held in street name. The Company's transfer agent is American Stock Transfer & Trust Company, 59 Maiden Lane, New York, NY 10038. Dividend Policy We have never paid any cash dividends and intend, for the foreseeable future, to retain any future earnings for the development of our business. Our Board of Directors will determine our future dividend policy on the basis of various factors, including our results of operations, financial condition, capital requirements and investment opportunities. Recent Sales of Unregistered Securities During the year ended December 31, 2004, the Company had no sales or issuances of unregistered Common Stock. Recent Purchases of Securities During the year ended December 31, 2004, the Company had no repurchases of its Common Stock. 13 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. Critical Accounting Policies Our discussion and analysis of our financial condition and results of operations are based upon our financial statements, which have been prepared in accordance with generally accepted accounting principles in the United States. The preparation of financial statements require managers to make estimates and disclosures on the date of the financial statements. On an on-going basis, we evaluate our estimates including, but not limited to, those related to revenue recognition. We use authoritative pronouncements, historical experience and other assumptions as the basis for making judgments. Actual results could differ from those estimates. We believe that the following critical accounting policies affect our more significant judgments and estimates in the preparation of our financial statements. Revenue Recognition. We are required to make judgments based on historical experience and future expectations, as to the realizability of goods and services billed to our customers. These judgments are required to assess the propriety of the recognition of revenue based on Staff Accounting Bulletin ("SAB") No. 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. 14 Overview Emergent Group Inc. ("Emergent") is the parent company of PRI Medical, its wholly owned and only operating subsidiary. PRI Medical primarily conducts its business through its wholly owned subsidiary, PRI, which will be merged into PRI Medical in early 2005 to simplify our corporate structure. Emergent, PRI Medical and PRI are referred to collectively hereinafter as the "Company." PRI is a provider of mobile surgical equipment, on a fee for service basis, to hospitals, surgical care centers and other health care providers. PRI serves both large and small health care providers and makes mobile surgical services available to its customers by providing this equipment on a per procedure basis to hospitals, out patient surgery centers, and physician offices. PRI provides mobile lasers and other surgical equipment with technical support required to ensure the equipment is working correctly. PRI also provides a limited amount of general equipment on a rental basis to hospitals and surgery centers, although PRI began winding down this area of business in late 2001 in order to focus on its core surgical equipment rental/services business. Revenues from the rental of general equipment was $102,237 and $168,082 for the years ended December 31, 2004 and 2003, respectively. Revenues from this activity will continue to decrease in future periods. 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
Year Ended December 31, ----------------------------------------- 2004 % 2003 % ----------------- --- ------------------ ---- Revenue $ 10,967,369 100% $ 9,978,440 100% Cost of goods sold 7,703,124 70% 6,415,704 64% ----------------- --- ------------------ ---- Gross profit 3,264,245 30% 3,562,736 36% Selling, general, and administrative expenses 3,152,409 29% 3,389,415 34% ----------------- --- ------------------ ---- Income from operations 111,836 1% 173,321 2% Other income (expense) 67,953 1% (150,825) -2% ----------------- --- ------------------ ---- Income before provision for income taxes, minority interest and extraordinary item 179,789 2% 22,496 0% Provision for income taxes - 0% - 0% ----------------- --- ------------------ ---- Net income before minority interest and extraordinary item 179,789 2% 22,496 0% -- -- Minority interest in net income of consolidated limited liability companies 156,509 1% 108,590 1% ----------------- --- ------------------ ---- Income before extraordinary item 23,280 (86,094) ----------------- ------------------ Extraordinary item Gain on forgiveness of debt, net of tax - 0% 144,399 1% ----------------- --- ------------------ ---- Net income $ 23,280 2% $ 58,305 2% ================= === ================== ====
The consolidated financial statements of the Company for the periods ended December 31, 2004 and 2003 reflect net income of $23,280 and $58,305, respectively, on net revenues of $10,967,369 and $9,978,440, respectively. In addition, in late 2001 the Company decided to discontinue rental of general medical equipment to hospitals and physicians, which accounted for approximately 1% and 2% for the years ended December 31, 2004 and 2003, respectively. Year Ended December 31, 2004 Compared to the Year Ended December 31, 2003 The Company generated revenues of $10,967,369 in 2004 compared to $9,978,440 in 2003. The increase in revenues in 2004 of $988,929, or 10% is primarily due to a net increase in revenues from our surgical procedures of $1,088,914 offset by decreases in revenues from our cosmetic procedures of $55,204 and general equipment rentals of $65,845. The general equipment rental business is being phased out. Total revenues from surgical and cosmetic services represented approximately 87% and 12%, respectively, of total revenues for 2004 and 85% and 14% for 2003, respectively. In addition, the increase in revenues includes net revenues of $227,382 and $209,085 for 2004 and 2003, respectively, from two consolidated limited liability companies. Approximately 87% and 85% of revenues for 2004 and 2003, respectively, were generated from our mobile surgical equipment services with the balance primarily generated from cosmetic services and non-surgical equipment rentals. 16 Cost of goods sold of was $7,703,124 in 2004 compared to $6,415,704 in 2003. The increase in cost of goods sold of $1,287,420 or 20% for 2003 is due to increases in disposable costs, payroll and related costs, and depreciation expense. 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 2004 compared to 2003 that required more expensive disposable items. In addition, depreciation and amortization expense included in cost of goods sold increased by $385,767 in 2004 compared to 2003 primarily as a result of increased capital expenditures in 2004 and the second half of 2003. Such increases were partially offset by decreases in vehicle rent and repair expenses, and worker's compensation insurance, among others, as a result of cost control efforts. Costs of good sold primarily consist of payroll costs and related expenses for technicians, cost of disposables consumed, insurance costs and other operating costs incurred in rendering such services. Gross profit from operations was $3,264,245 in 2004 compared to $3,562,736 in 2003. Gross profit as a percentage of revenues was 30% in 2004 compared to 36% for 2003. The decrease in our gross profit margins primarily relatedto the mix of surgical procedures performed, higher depreciation and amortization expense in 2004 compared to 2003, and due to a decrease of $65,845 in higher margin revenues from general medical equipment rentals, due to the winding down of this area of our business. Profit margins, net of disposable costs, are lower on certain surgical procedures due to higher per unit costs for disposables. 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 2004 is not necessarily indicative of the margins that may be realized in future periods. Selling, general and administrative expenses were $3,152,409 in 2004 compared to $3,389,414 in 2003. The decrease of $237,005 or 6% in such expenses primarily relate to decreases of $43,375 for bonuses for sales personnel and $151,371 for consulting services. The decrease in consulting expenses in 2004 is related to the fact that we did not make use of such services in 2004 to the same extent as in 2003. Selling, general and administrative expenses as a percent of revenue was 29% in 2004 compared to 34% in 2003. Other income was $67,953 in 2004 compared to other expense of $150,825 in 2003. For 2004 other income includes $85,000 from the sale of investment securities written-off in prior years, $50,000 from the settlement of the Stonepath litigation as discussed elsewhere in this Form 10-KSB, and approximately $49,395 from the settlement of old payable balances. Other income was offset by net interest expense of $122,217 and a net loss of $14,082 on the sale of assets. For 2003 other expense of $150,825 primarily included interest expense of $177,123 offset by a gain on the sale of assets of $40,918. The decrease in net interest expense of $54,906 in 2004 compared to 2003 relates to lower overall debt balances in 2004 compared to 2003 and a slight decrease in the interest rate on our line of credit and term loan. 17 The minority interest in net income of limited liability companies was $156,509 in 2004 compared to $108,590 in 2003. Minority interest in income relates to the consolidation of two entities in which we hold an equity investment interest. As of December 31, 2004 and 2003 in accordance with the Financial Accounting Standards Board Interpretation No. 46, "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 recognized a gain on forgiveness of debt, net of tax, of $144,399 in 2003 in connection with debt restructuring efforts commenced in 2002. Such gain is presented as an extraordinary item in the accompanying consolidated statement of operations for the year ended December 31, 2003. No such gains were recorded in 2004. The Company's net income was $23,280 in 2004 compared to $58,305 in 2003. The net income per share was $-0- and $0.02 for 2004 and 2003, respectively. Basic and fully diluted shares outstanding were 4,744,551 and 2,684,339 for 2004 and 2003, respectively. No provision for income taxes is provided for in 2004 and 2003 due to the availability of net operating loss carryforwards. Recently Issued Accounting Pronouncements During November and December 2004 the Financial Accounting Standards Board ("FASB") issued SFAS No.151 through SFAS No.153 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. Liquidity and Capital Resources At December 31, 2004 we have a bank loan (the "Bank Term Loan") outstanding in the amount of $199,775, which is included in the current portion of notes payable in the accompanying balance sheet. The loan agreement provided for monthly principal payments of $16,667, plus interest at the prime rate (5.25% at December 31, 2004) plus 2.00% through January 31, 2005. In March 2005, the Bank Term Loan was amended whereby the principal balance outstanding as of March 3, 2005 is due and payable on May 31, 2005 with interest only payments at the prime rate plus 2.00% due 18 monthly until maturity. In addition, we have an outstanding bank line of credit (the "Bank Line of Credit") with the same lender with an outstanding balance of $650,000 at December 31, 2004. The Bank Line of Credit was due and payable on January 31, 2005; however, in March 2005 the Bank Line of Credit agreement was amended whereby the due date of the loan was extended to May 31, 2005 at which time the outstanding balance, plus accrued interest is due and payable. In addition, the credit line is not available for additional borrowings. The other terms and conditions of the credit agreement remain unchanged. The Bank Line of Credit is collateralized by accounts receivable and a blanket lien on other unencumbered assets of the Company. The Bank Line of Credit agreement, as amended, provides for interest at the prime rate, plus 2.00%. We intend to enter into a new lending relationship on or before May 31, 2005 in order to repay both the Bank Term Loan and Bank Line of Credit and to establish a new revolving credit facility to meet our on-going working capital needs. The Bank Term Loan and Bank Line of Credit agreements prohibit the payment of cash dividends and require us to maintain certain levels of net worth and to generate certain ratios of cash flows to debt service. Notwithstanding the modified terms and conditions of these credit facilities as discussed herein, as of March 3, 2005 we were not in compliance with certain covenants and provisions of the original loan agreements, however, the lender has provided waivers for such non-compliance up to and including the maturity date of May 31, 2005. Both the Bank Term Loan and Bank Line of Credit are classified as current liabilities in the accompanying consolidated balance sheet as of December 31, 2004. 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, 2004 our outstanding restructured debt and lease obligations amounted to $480,701 and $157,773, 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, 2004 and the filing date of this Annual Report on Form 10-KSB, we were in compliance with the terms and conditions of our renegotiated debt and lease agreements. In June 2003, the Company raised proceeds of $951,611, net of offering costs of $48,389, from the private placement of its Subordinated Convertible Promissory Notes (the "Notes"). Such Notes were generally sold in increments of $20,000 (50 units) each. Certain officers and directors of the Company and members of law firms who have acted in a legal capacity to the Company purchased Notes totaling $700,000. Notes totaling $300,000 were purchased by other accredited investors. The Notes provided for interest at 6% per annum payable at the earlier of the maturity date of December 31, 2003, or upon conversion or redemption. Pursuant to the terms and conditions of the Notes, the Notes were automatically converted into 2,500,000 shares of the Company's common stock on August 29, 2003, concurrent with the effective date of a one for forty reverse split of the Company's common stock. An additional 25,000 common shares were issued to note holders in satisfaction of $10,000 of accrued interest on the Notes at $.40 per share. 19 In October 2003, BJH Management, LLC, which is owned by an executive officer of the company, exercised its anti-dilution rights under a Stock Issuance Agreement entered into in December 2002. Pursuant to the agreement, the Company issued 535,606 common shares to BJH as a result of the private placement transaction discussed in the preceding paragraph. BJH concurrently assigned such shares to its sole shareholder and one associate who now serve as executive officers of the Company. In lieu of payment for the exercise, the Company issued such shares to BJH in return for its agreement to terminate any further anti-dilution rights over the remaining term of the Stock Issuance Agreement. The exercise price for such shares of $107,121 is recorded as compensation expense for the year ended December 31, 2003 and is included in selling, general and administrative expense in the accompanying consolidated statement of operations. In May 2003, the Company entered into an agreement with the owner ("Seller") of a small mobile cosmetic laser company to purchase its customer list as well as to enter into a covenant not-to-compete. The purchase price of $50,000 was paid in June 2003 of which $40,000 was allocated to the customer list and $10,000 was allocated to the covenant not-to-compete both of which are being amortized on a straight-line basis over five years. The Company also agreed to make additional payments to the Seller for a period of eighteen months based on future revenues resulting from the acquired customer list. The Company incurred additional costs of $32,324 and $27,005 under this agreement for the years ended December 31, 2004 and 2003. Such amounts are being amortized over the remaining life of the customer list and non-compete agreements. Amortization expense for the covenant not-to-compete and customer list amounted to $20,655 and $8,832 for the years ended December 31, 2004 and 2003, respectively. 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. 20 The Company had cash and cash equivalents of $690,331 at December 31, 2003. Cash provided by operating activities for the year ended December 31, 2003 was $911,725. Such amount primarily related to the inclusion in net income of certain non-cash items including, depreciation and amortization of $820,726 and a net increase in working capital. Cash used in investing activities amounted to $844,897 due to the purchase of property and equipment of $739,021 and cash paid to limited liability companies of $154,328 offset by proceeds form the sale of property and equipment of $48,452. Cash used by financing activities of $333,739, was primarily the result of the pay down of debt and lease obligations of $919,149 and payments of $358,700 on our bank line of credit. Such payments were offset by net proceeds of $951,610 from the private placement of convertible promissory notes during 2003. Such notes were converted into common stock of the Company in August 2003 as discussed herein. 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. RISK FACTORS WE HAVE INCURRED LOSSES IN THE PAST AND MAY INCUR LOSSES IN THE FUTURE. We have incurred operating losses in the years preceding 2003. For the years ended December 31, 2004 and 2003 we incurred net income (loss) of $23,280 and $(86,094), respectively, before extraordinary item. 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 show a modest 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. 21 WE MAY NEED SUBSTANTIAL ADDITIONAL FINANCING TO ACHIEVE OUR STRATEGIC GOALS AND TO RETIRE DEBT. Much of our future growth depends upon our ability to expand our customer base and on our ability to acquire new technologies related to medical surgical equipment. Such endeavors will require additional capital resources. In addition, we will need to generate funds to meet our existing debt, lease and vendor obligations. 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. Although we were successful in generating net proceeds of $951,611 through a private placement of our common stock in 2003, 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. THERE MAY NOT BE AN ACTIVE 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. 22 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: 23 o fluctuations in demand for our products and services; o the introduction of new products, services or technologies by competitors, entry of new competitors, pricing pressures and other competitive factors; o our ability to obtain and introduce new surgical equipment products, services and technologies in a timely manner; o the rate of market acceptance of any new surgical equipment products or services that we offer; o delays or reductions in customer orders of our products and services in anticipation of the introduction of new or enhanced products and services by our competitors or us; o our ability to control expenses; o the timing of regulatory approvals and changes in domestic and regulatory environments; o the level of capital spending of our customers; o costs related to acquisitions or alliances, if any; and o general economic conditions. 24 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. FAILURE TO SUCCESSFULLY COMPLETE AND MANAGE GROWTH STRATEGIES COULD ADVERSELY AFFECT OUR BUSINESS, PROFITABILITY AND GROWTH PROSPECTS. 25 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. 26 IF WE LOSE SENIOR MANAGEMENT AND KEY EMPLOYEES ON WHOM WE DEPEND, OUR BUSINESS COULD SUFFER. Effective December 30, 2002, we entered into 18- month employment contracts with Bruce J. Haber and Louis Buther who are key employees and officers of the Company. Their agreements were extended by resolutions of the Board of Directors through the close of business on June 30, 2005. We currently do not have "key-person" life insurance policies to cover the lives of Messrs. Haber and Buther or any other key employees. The ability to continue to attract and retain highly skilled personnel will be a critical factor in determining our future success. Competition for highly skilled personnel is intense and we may not be successful in attracting, assimilating or retaining qualified personnel to fulfill current or future needs. If we cannot recruit, train, retain and effectively manage key employees, our business, profitability and growth prospects could suffer. SOME OF OUR PRODUCTS ARE COMPLEX IN DESIGN AND MAY CONTAIN DEFECTS THAT ARE NOT DETECTED UNTIL DEPLOYED BY CUSTOMERS, WHICH COULD INCREASE OUR COSTS AND REDUCE OUR REVENUES. Many of our products are inherently complex in design and require ongoing regular maintenance. As a result of the technical complexity of the equipment and certain fibers used in the delivery of our services, changes in our suppliers' manufacturing processes or the inadvertent use of defective or contaminated materials by such suppliers could result in a material adverse effect on our ability to achieve acceptable product reliability. To the extent that such product reliability is not achieved, we could experience, among other things: o damage to our business reputation; o loss of customers; o failure to attract new customers or achieve market acceptance; o diversion of resources; and 27 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. 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. 28 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. 29 EMERGENT GROUP INC. AND SUBSIDIARIES CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 2004 AND 2003 EMERGENT GROUP INC. AND SUBSIDIARIES CONTENTS December 31, 2004 - -------------------------------------------------------------------------------- Page REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM F1 CONSOLIDATED FINANCIAL STATEMENTS Consolidated Balance Sheets F2 Consolidated Statements of Operations F3 Consolidated Statements of Shareholders' Equity F4 Consolidated Statements of Cash Flows F5 Notes to Consolidated Financial Statements F6 - F19 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM Board of Directors and Shareholders Emergent Group Inc. and subsidiaries We have audited the consolidated balance sheets of Emergent Group Inc. and subsidiaries as of December 31, 2004 and 2003, and the related consolidated statements of operations, shareholders' equity, and cash flows for the two years ended December 31, 2004. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audit in accordance with 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 audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Emergent Group Inc. and subsidiaries as of December 31, 2004 and 2003, and the results of their operations and their cash flows for each of the two years in the period ended December 31, 2004 in conformity with accounting principles generally accepted in the United States of America. SINGER LEWAK GREENBAUM & GOLDSTEIN LLP Los Angeles, California March 8, 2005 F-1 EMERGENT GROUP INC. AND SUBSIDIARIES Consolidated Balance Sheets
December 31, December 31, 2004 2003 ---------------- ---------------- ASSETS Current assets Cash $ 351,595 $ 690,331 Accounts receivable, net of allowance for doubtful accounts of $26,125 and $28,780 1,429,155 1,328,968 Inventory, net of reserves of $141,916 372,744 343,893 Prepaid expenses 128,968 102,623 ---------------- ---------------- Total current assets 2,282,462 2,465,815 Property and equipment, net of accumulated depreciation and amortization of $1,186,272 1,896,309 2,115,823 Goodwill 779,127 779,127 Deposits and other assets 133,690 152,683 ---------------- ---------------- Total assets $ 5,091,588 $ 5,513,448 ================ ================ LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities Line of credit $ 650,000 $ 750,000 Current portion of capital lease obligations 347,558 318,827 Current portion of notes payable 389,247 576,906 Accounts payable 565,136 528,363 Accrued expenses 684,244 787,328 ---------------- ---------------- Total current liabilities 2,636,185 2,961,424 Capital lease obligations, net of current portion 269,269 204,071 Notes payable, net of current portion 291,229 480,701 ---------------- ---------------- Total liabilities 3,196,683 3,646,196 Minority Interest 181,928 177,555 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 4,744,551 shares issued and outstanding 189,782 189,782 Additional paid-in capital 14,488,090 14,488,090 Accumulated deficit (12,964,895) (12,988,175) ---------------- ---------------- Total shareholders' equity 1,712,977 1,689,697 ---------------- ---------------- Total liabilities and shareholders' equity $ 5,091,588 $ 5,513,448 ================ ================
The accompanying notes are an integral part of these financial statements. F-2 EMERGENT GROUP INC. AND SUBSIDIARIES Consolidated Statements of Operations
Year Ended December 31, ---------------------------------- 2004 2003 ---------------- --------------- Revenue $ 10,967,369 $ 9,978,440 Cost of goods sold 7,703,124 6,415,704 ---------------- --------------- Gross profit 3,264,245 3,562,736 Selling, general, and administrative expenses 3,152,409 3,389,415 ---------------- --------------- Income from operations 111,836 173,321 Other income (expense) Interest expense (122,217) (177,123) Equity in net income (loss) of investment in limited liability companies - (24,053) Gain (loss) on disposal of property and equipment (14,082) 40,918 Other income (expense), net 204,252 9,433 ---------------- --------------- Total other income (expense) 67,953 (150,825) ---------------- --------------- Income before provision for income taxes, minority interest and extraordinary item 179,789 22,496 Provision for income taxes - - ---------------- --------------- Income before minority interest and extraordinary item 179,789 22,496 Minority interest in net income of consolidated limited liability companies 156,509 108,590 ---------------- --------------- Income before extraordinary item 23,280 (86,094) ---------------- --------------- Extraordinary item Gain on forgiveness of debt, net of tax - 144,399 ---------------- --------------- Net income $ 23,280 $ 58,305 ================ =============== Basic and diluted earnings per share: Before extraordinary item $ 0.00 $ (0.03) Extraordinary item - 0.05 ---------------- --------------- Basic and diluted earnings per share $ 0.00 $ 0.02 ================ =============== Basic and diluted weighted-average shares outstanding 4,744,551 2,684,339 ================ ===============
The accompanying notes are an integral part of these financial statements. F-3 EMERGENT GROUP INC. AND SUBSIDIARIES Consolidated Statements of Shareholders' Equity
Committed Additional Common Stock Common Paid-In Accumulated Shares Amount Stock Capital Deficit Total --------- -------- -------- ------------- ------------- ---------- Balance, January 1, 2003 1,622,945 $ 64,918 $ 2,440 $ 13,541,784 $(13,046,480) $ 562,662 Common stock issued for services (correction to number of sharees issued in 2002) 61,000 2,440 (2,440) - - - Conversion of promissory notes to common stock 2,500,000 100,000 - 900,000 - 1,000,000 Offering costs incurred in private placement - - - (48,390) - (48,390) Common stock issued for interest expense in connection with conversion of promissory notes to common stock 25,000 1,000 - 9,000 - 10,000 Anti-dilution right issued to stockholder 2,176 2,176 - - (2,176) - (2,176) Common stock issued to officers for services 535,606 21,424 - 85,696 - 107,120 Net income - - - - 58,305 58,305 --------- -------- -------- ------------- ------------- ---------- Balance, December 31, 2003 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 ========= ========= ======== ============= ============= ===========
F-4 The accompanying notes are an integral part of these financial statements. EMERGENT GROUP INC. AND SUBSIDIARIES Consolidated Statements of Cash Flows
Year Ended December 31, -------------------------------------------------- 2004 2003 ---------------------- ----------------------- Cash flows from operating activities Net income $ 23,280 $ 58,305 Adjustments to reconcile net income to net cash provided by (used in) operating activities: Loss (gain) on disposal of property and equipment 14,082 (40,918) Gain on forgiveness of debt - (144,399) Depreciation and amortization 1,195,130 820,726 Equity in net loss of investment in limited liability companies - 24,053 Amortization of finance fees 20,266 47,717 Issuance of stock for services performed - 107,120 Provision for doubtful accounts (6,477) (41,048) Minority interest in net income 156,512 108,590 (Increase) decrease in Accounts receivable (93,710) 18,135 Inventory (28,851) (48,824) Due from related party - 147,760 Prepaid expenses (27,807) 163,901 Deposits and other assets (7,858) (47,955) Increase (decrease) in Accounts payable 36,773 (9,559) Accrued expenses (103,078) (251,879) ---------------------- ----------------------- Net cash provided by operating activities 1,178,262 911,725 ---------------------- ----------------------- Cash flows from investing activities Purchase of property and equipment (717,624) (739,021) Proceeds from the sale of property and equipment 19,337 48,452 Cash paid to limited liability companies (189,639) (154,328) Contributions from new members to limited liability companies 37,500 - ---------------------- ----------------------- Net cash used in investing activities (850,426) (844,897) ---------------------- ----------------------- Cash flows from financing activities Payments on notes payable (377,132) (408,134) Payments on capital lease obligations (189,440) (511,015) Payments on line of credit (150,000) (358,700) Borrowings under line of credit 50,000 - Proceeds from convertible notes payable, net - 951,610 Payments on loan fee - (7,500) ---------------------- ----------------------- Net cash used in financing activities (666,572) (333,739) ---------------------- ----------------------- Net decrease in cash (338,736) (266,911) Cash, beginning of period 690,331 957,242 ---------------------- ----------------------- Cash, end of period $ 351,595 $ 690,331 ====================== ======================= Supplemental disclosures of cash flow information: Interest paid $ 124,776 $ 185,849 ====================== =======================
The accompanying notes are an integral part of these financial statements. F-5 EMERGENT GROUP INC. AND SUBSIDIARIES Consolidated Statements of Cash Flows (continued) Years Ended December 31, 2004 and 2003 Supplemental schedule of non-cash investing and financing activities During the year ended December 31, 2004, the Company: o purchased property and equipment of $283,369 through installment loans During the year ended December 31, 2003, the Company: o issued 25,000 shares of common stock for interest expense of $10,000 in connection with the private placement transaction. o consolidated two limited liability companies with net property and equipment totaling $94,532 The accompanying notes are an integral part of these financial statements. F-6 EMERGENT GROUP INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2004 NOTE 1 - ORGANIZATION AND LINE OF BUSINESS General Emergent Group Inc. ("Emergent") is the parent company of PRI Medical Technologies, Inc., formerly Medical Resources Management, Inc. ("PRI Medical"), its wholly owned and only operating subsidiary. PRI Medical was acquired by Emergent in July 2001. PRI Medical primarily conducts its business through its wholly owned subsidiary Physiologic Reps ("PRI"). Emergent, PRI Medical and PRI are referred to collectively hereinafter as the "Company." PRI Medical provides mobile laser/surgical services on a per procedure basis to hospitals, out-patient surgery centers, and physicians' offices. The lasers are provided with technical support to ensure that they operate correctly. PRI Medical also provides other medical equipment on a limited rental basis to hospitals and surgery centers although this business is being phased out. Purchase of Business and Covenant Not-To-Compete In May 2003, the Company entered into an agreement with the owner ("Seller") of a small mobile cosmetic laser company to purchase its customer list as well as a covenant not-to-compete. The purchase price of $50,000 was paid in June 2003 and the Company allocated $40,000 of the purchase price to the customer list and $10,000 to covenant not-to-compete. Both the customer list and covenant not-to-compete are being amortized on a straight-line basis over five years. The Company also agreed to make additional payments to the Seller for a period of eighteen months based on future revenues resulting from the acquired customer list. During 2004 and 2003 the Company made additional payments to the Seller of $37,751 and $17,754, respectively, pursuant to the purchase agreement. Amortization expense for the covenant not-to-compete and customer list amounted to $20,655 and $8,832 for the year ended December 31, 2004 and 2003, respectively, and are included in the cost of goods sold in the accompanying statement of operations. 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 two 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 reliability 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-7 EMERGENT GROUP INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2004 Comprehensive Income The Company utilizes SFAS No. 130, "Reporting Comprehensive Income." This statement establishes standards for reporting comprehensive income and its components in a financial statement. Comprehensive income as defined includes all changes in equity (net assets) during a period from non-owner sources. Examples of items to be included in comprehensive income, which are excluded from net income, include foreign currency translation adjustments, minimum pension liability adjustments, and unrealized gains and losses on securities. Cash Cash consists of cash on hand and in banks. The Company maintains cash at several financial institutions. At times, such cash balances may be in excess of the Federal Deposit Insurance Corporation insurance limit of $100,000. As of December 31, 2004 and 2003, uninsured portions of balances at those banks aggregated to $153,230 and $537,674, respectively. The Company has not experienced losses in such accounts and believes it is not exposed to any significant risk on cash. 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 and accelerated methods over estimated useful lives of five to seven years. Betterments, renewals, and extraordinary repairs that extend the life of the assets are capitalized; other repairs and maintenance charges are expensed as incurred. The cost and related accumulated depreciation and amortizations 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 142 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. Fair Value of Financial Instruments For certain of the Company's financial instruments, including cash, accounts receivable, prepaid expenses, assets held for sale, accounts payable, and accrued expenses, the carrying amounts approximate fair value due to their short maturities. Stock-Based Compensation F-8 EMERGENT GROUP INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2004 SFAS No. 123(r), "Accounting for Stock-Based Compensation," defines a fair value based method of accounting for stock-based compensation. However, SFAS No. 123 allows an entity to continue to measure compensation cost related to stock and stock options issued to employees using the intrinsic method of accounting prescribed by Accounting Principles Board ("APB") Opinion No. 25, "Accounting for Stock Issued to Employees." Entities electing to remain with the accounting method of APB No. 25 must make pro forma disclosures of net loss and loss per share as if the fair value method of accounting defined in SFAS No. 123 had been applied. The Company has elected to account for its stock-based compensation to employees under APB No. 25. Advertising Expense The Company expenses advertising in the periods the services were incurred. For the years ended December 31, 2004 and 2003, advertising expense was $19,338 and $19,536, 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. Estimates The preparation of financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates. Reclassifications Certain amounts included in the prior years' financial statements have been reclassified to conform with the current year presentation. Such reclassification did not have any effect on reported net income (loss). F-9 EMERGENT GROUP INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2004 Recently Issued Accounting Pronouncements In November 2004, the FASB issued SFAS No. 151,"Inventory Costs". SFAS No. 151 amends the accounting for abnormal amounts of idle facility expense, freight, handling costs, and wasted material (spoilage) under the guidance in ARB No. 43, Chapter 4, "Inventory Pricing". Paragraph 5 of ARB No. 43, Chapter 4, previously stated that ". . . under some circumstances, items such as idle facility expense, excessive spoilage, double freight, and rehandling costs may be so abnormal as to require treatment as current period charges. . . ." This Statement requires that those items be recognized as current-period charges regardless of whether they meet the criterion of "so abnormal." In addition, this Statement requires that allocation of fixed production overheads to the costs of conversion be based on the normal capacity of the production facilities. This statement is effective for inventory costs incurred during fiscal years beginning after June 15, 2005. Management does not expect adoption of SFAS No. 151 to have a material impact on the Company's financial statements. In December 2004, the FASB issued SFAS No. 152,"Accounting for Real Estate Time-Sharing Transactions". The FASB issued this Statement as a result of the guidance provided in AICPA Statement of Position (SOP) 04-2,"Accounting for Real Estate Time-Sharing Transactions". SOP 04-2 applies to all real estate time-sharing transactions. Among other items, the SOP provides guidance on the recording of credit losses and the treatment of selling costs, but does not change the revenue recognition guidance in SFAS No. 66,"Accounting for Sales of Real Estate", for real estate time-sharing transactions. SFAS No. 152 amends Statement No. 66 to reference the guidance provided in SOP 04-2. SFAS No. 152 also amends SFAS No. 67, "Accounting for Costs and Initial Rental Operations of Real Estate Projects", to state that SOP 04-2 provides the relevant guidance on accounting for incidental operations and costs related to the sale of real estate time-sharing transactions. SFAS No. 152 is effective for years beginning after June 15, 2005, with restatements of previously issued financial statements prohibited. This statement is not applicable to the Company. In December 2004, the FASB issued SFAS No. 153,"Exchanges of Nonmonetary Assets," an amendment to Opinion No. 29,"Accounting for Nonmonetary Transactions". Statement No. 153 eliminates certain differences in the guidance in Opinion No. 29 as compared to the guidance contained in standards issued by the International Accounting Standards Board. The amendment to Opinion No. 29 eliminates the fair value exception for nonmonetary exchanges of similar productive assets and replaces it with a general exception for exchanges of nonmonetary assets that do not have commercial substance. Such an exchange has commercial substance if the future cash flows of the entity are expected to change significantly as a result of the exchange. SFAS No. 153 is effective for nonmonetary asset exchanges occurring in periods beginning after June 15, 2005. Earlier application is permitted for nonmonetary asset exchanges occuring in periods beginning after December 16, 2004. Management does not expect adoption of SFAS No. 153 to have a material impact on the Company's financial statements. In December 2004, the FASB issued SFAS No. 123(R),"Share-Based Payment". SFAS 123(R) amends SFAS No. 123,"Accountung 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 (1) for public companies qualifying as SEC small business issuers, as of the first interim period or fiscal year beginning after December 15, 2005, or (2) for all other public companies, as of the first interim period or fiscal year beginning after June 15, 2005, or (3) for all nonpublic entities, as of the first fiscal year beginning after December 15, 2005. Management is currently assessing the effect of SFAS No. 123(R) on the Company's financial statement. F-10 EMERGENT GROUP INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2004 NOTE 3 - INVENTORY Inventory at December 31, 2004 and 2003 consisted of the following: 2004 2003 ------------ ------------ Disposables $ 514,660 $ 499,769 Less reserve for obsolescence 141,916 155,876 ------------ ------------ Total $ 372,744 $ 343,893 ============ ============ NOTE 4 - EQUITY INVESTMENT IN LIMITED LIABILITY COMPANIES As of December 31, 2004 and 2003, the Company held investment interests of 15% and 3% in two limited liabilities companies ("LLCs"). The LLCs were formed by certain investors and PRI Medical to provide mobile laser equipment and services to hospitals, out-patient centers, and doctors. The Company provides operating and administrative services to the LLCs. These entities have been consolidated as of December 31, 2004 and 2003 and are included in the accompanying consolidated statements of operations and balance sheets in accordance with FASB Interpretation No. 46, "Consolidation of Variable Interest Entities." During the third and fourth quarter of 2003 PRI dissolved four LLCs and transferred the management of one LLC to other unaffiliated members. During the year ended December 31, 2003, the Company recognized its equity in net losses of such LLCs of $(24,053). NOTE 5 - PROPERTY AND EQUIPMENT Property and equipment at December 31, 2004 and 2003 consisted of the following:
2004 2003 -------------- -------------- Rental equipment $ 3,735,200 $ 3,208,306 Accessories and eyewear 560,124 373,875 Furniture and fixtures, including computers 143,377 113,571 Capitalized Software Cost 114,215 100,227 Transportation equipment 269,435 93,255 Leasehold improvements 5,901 5,901 -------------- -------------- 4,828,252 3,895,135 Less accumulated depreciation and amortization 2,931,943 1,779,312 -------------- -------------- Total $ 1,896,309 $ 2,115,823 ============== ==============
Depreciation and amortization expense for property and equipment was $1,186,272 and $820,726 for the years ended December 31, 2004 and 2003, respectively. F-11 EMERGENT GROUP INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2004 NOTE 6 - LINE OF CREDIT At December 31, 2004 and 2003 we have a bank line of credit (the "Bank Line of Credit") outstanding of $650,000 and $750,000, respectively. The Bank Line of Credit is due and payable on January 31, 2005. The Bank Line of Credit Agreement, as amended, provided for a principal pay-down of $250,000 on or before October 1, 2004 of which the Company paid $100,000 before October 1, 2004. Since October 1, 2004 the credit line has not been available for additional borrowings. The Bank Line of Credit is collateralized by accounts receivable and a blanket lien on other unencumbered assets of the Company. The Bank Line of Credit agreement, as amended, provides for interest at the prime rate, plus 2.00%. In March 2005 the Bank Line of Credit was extended to May 31, 2005 (see Note 15). The Bank Line of Credit agreement prohibits the payment of cash dividends and requires us to maintain certain levels of net worth and to generate certain ratios of cash flows to debt service. Although the Company is not in compliance with certain loan covants, the lender has waived such non-compliance through and including May 31, 2005. The Company incurred interest expense on borrowings under the line of credit of $43,751 and $71,131 for the years ended December 31, 2004 and 2003, respectively and is included in interest expense in the accompanying statements of operations. NOTE 7 - NOTES PAYABLE Notes payable at December 31, 2004 and 2003 consisted of the following:
2004 2003 ------------- -------------- 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 are due on January 31, 2005. In March 2005, this note was extended for three months and is due and payable on May 31, 2005. $ 199,775 $ 399,775 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 the certain medical equipment. 480,701 657,832 ------------- -------------- 680,476 1,057,607 Less current portion 389,247 576,906 ------------- -------------- Long-term portion $ 291,229 $ 480,701 ============= ==============
Future maturities of notes payable at December 31, 2004 were as follows: Year Ending December 31, 2005 $ 389,248 2006 202,672 2007 88,556 ----------- Total $ 680,476 =========== F-12 EMERGENT GROUP INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2004 NOTE 8 - ACCRUED EXPENSES Accrued expenses at December 31, 2004 and 2003 consisted of the following:
2004 2003 ---------- ---------- Accrued payroll and payroll related amounts $ 269,684 $ 302,426 Accrued interest 16,782 16,141 Other 397,778 468,761 ---------- ---------- Total $ 684,244 $ 787,328 ========== ==========
NOTE 9 - COMMITMENTS AND CONTINGENCIES Operating and Capital Leases The Company leases an office/warehouse facility in Glendale, California, which also serves as an administrative and corporate office. The lease is scheduled to expire in July 2006. Total rent expense incurred for the years ended December 31, 2004 and 2003 was $168,284 and $155,337, 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 $35,857 and $70,236 for the years ended December 31, 2004 and 2003, respectively. The Company leases certain of its vehicles under various operating leases. The leases are scheduled to expire between December 2003 and February 2004. 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, 2004 and 2003 was $51,788 and $155,631, respectively. At December 31, 2004 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 $2,778 and terminate through December 2009. Future minimum lease payments under operating and capital leases at December 31, 2004 were as follows: Year Ending Operating Capital December 31, Lease Lease ------------ ------------ ------------ 2005 $ 272,273 $ 379,386 2006 188,558 159,471 2007 78,905 92,658 2008 72,112 30,467 2009 72,906 18,322 ------------ ------------ Total minimum lease payments $ 684,754 680,304 ============ Less amounts representing interest 63,477 ------------ 616,827 Less current portion 347,558 ------------ Long-term portion $ 269,269 ============ Litigation From time to time, we may become involved in litigation arising out of operations in the normal course of business. As of December 31, 2004, we are not a party to any pending legal proceedings the adverse outcome of which could reasonably be expected to have a material adverse effect on our operating results or financial position. F-13 EMERGENT GROUP INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2004 NOTE 10 - SHAREHOLDERS' EQUITY Common Stock During the year ended December 31, 2003, the Company completed the following transactions: o in June 2003, the Company raised net proceeds of $951,610, net of offering costs of $48,390, in a private placement of its Convertible Subordinated Promissory Notes (the "Notes"). Such Notes were generally sold in increments of $20,000 (50 units) each. Certain officers and directors of the Company and members of law firms who have acted in a legal capacity to the Company purchased Notes totaling $700,000. Notes totaling $300,000 were purchased by other accredited investors. In August 2003, concurrent with the effective date of the reverse stock split described below, the Notes were converted into 2,500,000 shares of common stock. In addition, the Company issued 25,000 common shares to the note holders as payment for accrued interest of $10,000 on such Notes through the date of conversion. o in August 2003, a majority of the Company's stockholders approved an Amendment to the Company's Articles of Incorporation to (i) reduce the number of outstanding shares of Common Stock through a one-for-40 reverse stock split, effective at the opening of business on August 28, 2003 and (ii) a proportionately increase the par value of the Company's Common Stock from $.001 par value to $.04 par value per share. All stockholders of record were requested to exchange every 40 shares of Common Stock, $.001 par value for one new share of Common Stock, $.04 par value. The number of shares outstanding and earnings (loss) per share for all periods presented in the accompanying financial statements have been adjusted to reflect the reverse stock-split. o in October 2003, the Company issued 535,606 shares of common stock to BJH Management, LLC ("BJH") in accordance with the exercise of certain anti-dilution rights as a result of the private placement transaction. Such shares were subsequently transferred to two executive officers of the Company who previously provided services to the Company under BJH Management. The Company recorded consulting expense of $107,120 in connection with the issuance of such shares. o in the first quarter of 2003, the Company issued 61,000 shares of its Common Stock to BJH to correct a computational error for shares issued in December 2002, resulting in total shares issued of 348,574 (post-split) shares of its Common Stock to BJH, which represented 17.5% of the Company's fully diluted shares outstanding as of the issuance date. The Company recorded consulting expense of $13,943 in connection with the issuance of such shares. F-14 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 564,786 (14,120 post split) shares of Emergent's common stock at exercise prices ranging from $0.68 ($27.20 post split) to $4.05 ($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. Options will vest evenly over a period of five years, and the 2001 Plan expires December 31, 2011. The exercise of options granted under the 2001 Plan are determined by the Board of Directors. Non-statutory stock options may be granted at any price determined by the Board even if the exercise price of the options is at a price below the fair market value of the Company's common stock on the date of grant. The purchase price of an incentive stock option may not be less than the fair market value of the common stock at the time of grant, except in the case of a 10% shareholder who receives an incentive stock option; the purchase price may not be less than 110% of such fair market value. The aggregate fair market value of the stock for which incentive stock options are exercisable by any employee during any calendar year must not exceed $100,000. Since shareholder approval was not obtained on or before November 1, 2002, all incentive stock options granted under the 2001 Plan have automatically become non-statutory stock options, and the Board is limited to granting non-statutory stock options under the 2001 Plan. F-15 EMERGENT GROUP INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2004 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, 2004, there are 650,000 common shares authorized for grant under the 2002 Plan. However, 325,000 shares of the 650,000 shares represents 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 10 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, 2004 and 2003, the Company issued to employees options to purchase 95,000 and 213,000 shares of common stock under the 2002 Plan. Of the options granted to employees during 2003, 75,000 options were granted to the Company's Chief Financial Officer. The options granted in 2004 and 2003 have a 10-year term and are exercisable at $0.40 per share. Generally, one-fifth of each issuance vests over five consecutive years. As of December 2004 and 2003, options to purchase 130,197 and 26,566 shares of common stock were cancelled due to employee terminations. A summary of the Company's outstanding options and activity is as follows: Weighted- Average Number Exercise of Options Price Outstanding, January 1, 2003 351,936 $ 0.02 Granted 226,701 $ 0.40 Canceled (30,683) $ 5.66 --------- Outstanding, December 31, 2003 547,954 $ 0.50 Granted 95,000 $ 0.40 Canceled (228,909) $ 1.90 --------- Outstanding, December 31, 2004 414,045 $ 1.80 ========= Exercisable, December 31, 2004 223,902 $ 2.97 ========= The weighted-average remaining contractual life of the options outstanding at December 31, 2004 is 8.4 years. The exercise prices for the options outstanding at December 31, 2004 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 ------------------ --------------- ----------- ------------ ----------- ------------ $ 0.40 394,136 203,993 8.55 years $ 0.40 $ 0.40 $ 2.00 - 8.00 6,500 6,500 5.05 years $ 6.15 $ 6.15 $ 20.00 - 51.00 13,238 13,238 5.92 years $ 39.03 $ 39.03 $ 162.16 171 171 2.43 years $ 162.16 $ 162.16 ============== =========== $ 0.40 - 162.16 414,045 223,902 8.40 years $ 1.80 $ 2.97 ============== ===========
F-16 EMERGENT GROUP INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2004 The Company has adopted only the disclosure provisions of SFAS No. 123. It applies APB No. 25 and related interpretations in accounting for its plans and does not recognize compensation expense for its stock-based compensation plans other than for restricted stock and options issued to outside third parties. If the Company had elected to recognize compensation expense based upon the fair value at the grant date for awards under these plans consistent with the methodology prescribed by SFAS 123, the Company's net income and basic and diluted loss per share for the years ended December 31, 2004 and 2003 would be as follows: 2004 2003 ---------- --------- Net income (loss) As reported $ 23,280 $ 58,305 Pro forma $ 5,009 $ 40,037 Basic and diluted income (loss) per share As reported $ 0.00 $ 0.02 Pro forma $ 0.00 $ 0.01 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, 2004 and 2003: dividend yields of 0% and 0%, respectively; expected volatility of 100% and 100%, respectively; risk-free interest rates of 3.3% and 2.8%, respectively; and expected lives of five and five years, respectively. The weighted-average fair value of all options granted during the year ended December 31, 2004 was $0.03, 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. F-17 EMERGENT GROUP INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2004 NOTE 11 - INCOME TAXES The components of the income tax provision for the years ended December 31, 2004 and 2003 are as follows: 2004 2003 ----------- ---------- Current $ -0- $ -0- Deferred -0- -0- ----------- ---------- Total $ -0- $ -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, 2004 and 2003: 2004 2003 ------- -------- Income tax computed at federal statutory tax rate 34% 34.0% State taxes, net of federal benefit 4 8 Other (19.23) 9 Increase in valuation allowance (16.55) (51) -------- -------- Total 2.22% -0-% ======== ======== The tax effects of temporary differences that give rise to deferred taxes at December 31, 2004 and 2003 are as follows:
2004 2003 ---------------- ----------------- Deferred tax assets Fixed assets $ (112,049) $ (363,116) Capital loss carryover 1,287,853 1,287,853 Net operating loss carryforwards 2,008,337 2,281,300 Other 300,035 307,889 ---------------- ----------------- Total gross deferred tax assets 3,484,176 3,513,926 Less valuation allowance 3,484,176 3,513,926 ---------------- ----------------- Net deferred tax assets $ -0- $ -0- ================ =================
All other deferred tax assets were immaterial. As of December 31, 2004, the Company had approximately $4,959,377 in federal net operating loss carryforwards attributable to losses incurred since the Company's inception that may be offset against future taxable income through 2020. F-18 EMERGENT GROUP INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2004 NOTE 12 - EXTRAORDINARY ITEM In connection with debt re-negotiation efforts with several creditors, the Company recorded a gain on the forgiveness of debt of $144,399 for the year ended December 31, 2003. The debt re-negotiation efforts started during early 2002 and were substantially completed by the end of the first quarter of 2003. NOTE 13 - 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, 2004, the Company contributed $4,249 through the use of forfeitures and $3,995 in cash. NOTE 14 - RELATED PARTY TRANSACTIONS The Company incurred reimbursable expenses of $30,537 and $31,389 to BJH for office rent and related expenses for the years ended December 31, 2004 and 2003, respectively. NOTE 15 - SUBSEQUENT EVENTS On March 7, 2005 the Company's primary lender amended the Company's term loan and line of credit agreements to provide for the extension of the due date of such loans to May 31, 2005 at which time the outstanding balance, plus accrued interest is due and payable. In addition, the credit line is not available for additional borrowings. All other terms and conditions of the credit agreement remain unchanged. Litigation 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 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 intends to deny the Plaintiff's allegations against the Company and to vigorously defend this lawsuit. F-19 Item 8. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure. Not Applicable. 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 as of the end of our 2004 fiscal year. There have been no changes in the Company's internal controls or in other factors that could significantly affect the internal controls subsequent to the date the Company completed its evaluation. Therefore, no corrective actions were taken. Item 8.B. Other Information. Not Applicable. 29 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 52 2003 Chairman of the Board and Chief Executive Officer Louis Buther 51 2003 President and Chief Operating Officer William M. McKay 50 2002 Chief Financial Officer, Treasurer and Secretary Mark Waldron 37 2000 Director Howard Waltman 72 2001 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 are currently two vacancies on the Company's Board of Directors resulting from the resignations of Daniel Yun and Matthew K. Fong, Sr. Bruce J. Haber has served as Chairman of the Board and Chief Executive Officer since January 31, 2003. Mr. Haber is currently President of BJH Management, LLC, a management firm specializing in turnaround consulting and private equity investments, which served as a consultant to the Company between October 2001 and January 2003. From October 2001 until December 2002, Mr. Haber served on the Board of Directors of EB2B Commerce, Inc. a computer software company. From March 2002 to December 2002 Mr. Haber served as Chairman of the Board and as a turnaround consultant to EB2B. Mr. Haber was founder, President and CEO of MedConduit.com, Inc., a healthcare e-commerce B2B from 2000 to 2001. Mr. Haber served as Executive Vice President and a Director of Henry Schein, Inc., an international distributor of healthcare products, as well as President of their Medical Group from 1997 to 1999. From 1981 to 1997, Mr. Haber served as President, CEO and Director of Micro Bio-Medics, Inc., and Caligor Medical Supply Company, a distributor of physician and hospital supplies, which merged with Henry Schein in 1997. Mr. Haber holds a Bachelor of Science degree from the City College of New York and a Master of Business Administration from Baruch College in New York. 30 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. William M. McKay has served as Chief Financial Officer of the Company since August 2002. From August 2000 to August 2002, he served as Chief Financial Officer and as a consultant for EV Global Motors Company, a privately held consumer products company. From December 1998 to July 2000 Mr. McKay served as Chief Financial Officer and Secretary for Internet Dynamics, Inc., a privately held software development company. From February 1998 to November 1998, he served as Chief Financial Officer for Koo Koo Roo, Inc., a publicly held food services company. From May 1995 to February 1998, Mr. McKay served as Chief Financial Officer and Secretary for View Tech, Inc., a publicly held technology company. Mr. McKay also has ten years of public accounting experience with Deloitte & Touche, where he last served as a senior manager in its audit department. Mr. McKay is a member of the American Institute of Certified Public Accountants and the California Society of Certified Public Accountants, and holds a 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, and also served as President and Chief Executive Officer of the Company between August 2000 and January 2003. He has served as a director of PRI Medical since September 2000. Since January 2003 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 in 1993, and was an Associate at Bankers Trust Company before attending business school. He received his undergraduate degree from the Ivey School of Business at the University of Western Ontario in 1989. Mr. Waldron is a member of the Foreign Policy Association and MENSA. Howard Waltman has served as a director of the Company since 2001. Since 2000, Mr. Waltman has acted as a private investor for a family limited liability corporation. Since 1986, Mr. Waltman 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. 31 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. As a result of the resignation of Daniel Yun, there is currently a vacancy on the Compensation Committee. 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 in 2004 consisted of Howard Waltman and Matthew Fong Sr., each of whom were deemed by Management to be independent directors, but neither of whom would be deemed a "Financial Expert" within the meaning of Sarbanes Oxley Act of 2002, as amended. As a result of the resignation of Mr. Fong from the Board of Directors, there is currently a vacancy on the Audit Committee. There can be no assurances given that such vacancy will be filled or, if filled, that an independent director who is a financial expert will be elected to the Board and its Audit Committee. 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. 32 Effective May 20, 2003, the Board has adopted a written charter. The charter includes, among other things: 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 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 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 33 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 has been 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. 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 2004, none of our officers, directors or 10% or greater stockholders filed any forms late to the best of our knowledge, except for a Form 4 for December 31, 2004 which was filed late to report the resignation of Mr. Matthew K. Fong. 34 Item 10. Compensation of Directors and Executive Officers. The following table provides a summary compensation table with respect to the Company's executive officers. No other executive officer of the Company received salary and bonuses amounting to $100,000 or more in 2004. During the past three fiscal years, the Company has not granted stock appreciation rights to its executive officers. In addition, the Company does not have a defined benefit or actuarial plan. SUMMARY COMPENSATION TABLE
- --------------------------------------------------------------------------- ------------------------------------ -------------- Long Term Compensation - --------------------------------------------------------------------------- ------------------------------------ -------------- Annual Compensation Awards Payouts - ----------------------- -------- ------------------------------------------ -------------------------- --------- -------------- Name and Year Salary ($) Bonus ($) Other Annual Restricted Number of LTIP All Other - ---------------------- Compensation Stock Options Payout Compensation a) Principal Position ($) Award(s) ($) ($) ($) - ----------------------- -------- ------------- ------------- -------------- ------------ ------------- --------- -------------- - ----------------------- -------- ------------- ------------- -------------- ------------ ------------- --------- -------------- Bruce J. Haber, 2004 $175,000 0 $0 0 0 0 0 Chairman of the Board 2003 $153,125(1) 0 $61,212 (2) 306,060 (2) 0 0 0 and Chief Executive 2002 (1) 0 $0 199,186 (2) 0 0 0 Officer - ----------------------- -------- ------------- ------------- -------------- ------------ ------------- --------- -------------- Louis Buther, 2004 $161,000 $10,000 $0 0 0 0 0 President and Chief 2003 $140,875(1) 0 $45,909 (2) 229,546 (2) 0 0 0 Operating Officer 2002 (1) 0 $0 149,389 (2) 0 0 0 - ----------------------- -------- ------------- ------------- -------------- ------------ ------------- --------- -------------- William M. Mckay, 2004 $140,000 $10,000 $3,600 0 0 0 0 Chief Financial 2003 $140,000 0 $3,600 0 75,000 (3) 0 0 Officer 2002 $46,667 $7,500 $1,200 0 30,000 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 as described herein, before Mr. Haber's employment contract became effective on January 31, 2003. The Company paid BJH $28,000; $439,975 and $69,355 for services rendered to the Company in 2003, 2002 and 2001, respectively. Such payments received by BJH included $53,965, $82,000 and $18,288 for 2003, 2002 and 2001, respectively, which were paid to Louis Buther for consulting services he provided to the Company through BJH, it being noted that a portion of Mr. Buther's 2003 payment included monies paid to BJH in 2002. (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 and the balance of 229,546 shares were transferred by agreement to Mr. Buther. (3) 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. 35 Employment Agreements with Bruce J. Haber and Louis Buther Effective December 30, 2002, the Company entered into Employment Agreements (the "Employment Agreements") with Bruce J. Haber and Louis Buther for an initial term of 18 months subject to an automatic annual renewal unless terminated 90 days prior to the end of the term of these Agreements. On March 30, 2004, the Company's Board of Directors approved a resolution for an extension of the Employment Agreements of Messrs. Haber and Buther until the close of business on June 30, 2005, with the proviso that the automatic renewal provisions shall be deemed deleted from their Agreements. Pursuant to the Agreements, effective January 31, 2003, Mr. Haber became the Company's Chief Executive Officer and was elected to the Company's Board of Directors, initially as Chairman and Mr. Buther became its President. Messrs. Haber and Buther are each performing the duties customary for an executive of such rank with a public company. Messrs. Haber and Buther are each based in New York and are not required to relocate without each person's respective consent. Mr. Haber is not required to devote his full-time to the Company, but is required to devote such time as is necessary for the performances of his duties. Mr. Buther is required to devote his full business time to the Company. For Mr. Haber's services, he is receiving an annual base compensation of $175,000 (the "Haber Base Salary") payable in semi-monthly installments or otherwise in accordance with Company policies. For Mr. Buther's services, he will receive annual base compensation of $161,000 (the "Buther Base Salary"), payable in semi-monthly installments or otherwise in accordance with Company policies. In addition, in the event that pre-tax profits before Management's bonuses are at least $1,035,000 for a calendar year, then Messrs. Haber and Buther shall receive a bonus of $50,000 each, increasing to $75,000 each, if pre-tax profits are $1,150,000 plus 6% each of pre-tax profits over $1,150,000. Such bonus, if earned, will be paid within 30 days after the end of each fiscal year end of the Company. 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. 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 shares, for Messrs. Haber and Buther was $61,212 and $45,909, respectively. The Company reimburses Messrs. Haber and Buther for all ordinary and necessary business expenses incurred in connection with the performance of their duties and responsibilities. Messrs. Haber and Buther shall be entitled to indemnification for any claim or lawsuit, which may be asserted against them when acting in a capacity for the Company or any subsidiary or affiliated business. Messrs. Haber and Buther shall also be entitled to participate in officers and directors liability insurance maintained by the Company and any subsidiary or affiliated business. The Employment Agreements provide that all proprietary information inventions and trade secret information of the Company shall belong exclusively to the Company, including all patents, copyrights and other rights in connection therewith. At all times, both during the term of the Employment Agreements and after termination thereof for any reason whatsoever, Messrs. Haber and Buther agree to keep in strict confidence and trust all proprietary information and that they will not use or disclose any proprietary information except as may be necessary in the ordinary course of performing their duties under the Services Agreements. All inventions and invention ideas developed by Messrs. Haber and Buther in connection with their Employment Agreements shall belong to the Company as its sole property and each person grants to the Company an assignment of all right, title and interest pertaining thereto. During the term of the Employment Agreements and for a period of six months thereafter, Messrs. Haber and Buther and BJH agree that they will not (i) directly or indirectly engage in 36 or become interested in any business enterprise which is engaged in the current business of the Company, other than a maximum ownership interest of 5% of any publicly traded company that is in the current business of the rental of surgical equipment to healthcare providers; (ii) directly or indirectly participate for their own benefit in the solicitation of any business of any type conducted by the Company from any person or entity which was a client or customer of the Company during the term of the Services Agreements; or (iii) directly or indirectly recruit for employment, or induce or seek to cause such person to terminate his or her employment with the Company, any person who is then an employee of the Company or was an employee of the Company during the preceding six months, provided that the foregoing shall not apply to the recruiting for employment of Messrs. Haber and Buther and Fran Barr. The Employment Agreements provide for termination of the Agreements for cause after giving notice to Messrs. Haber and/or Buther or if they violate the restrictive covenants, they are found to have committed an act of fraud, embezzlement, or theft against the property or personnel of the Company or convicted of a felony or other criminal conduct that would be expected to materially adversely affect the Company's business, prospects, results of operations or financial condition. The Employment Agreements may be terminated by the Company upon the death or 12-month disability of Messrs. Haber or Buther or without cause by giving written notice. Messrs. Haber and/or Buther may also terminate their respective Employment Agreements at any time by giving 30 days prior written notice to the Company. In all such cases, Messrs Haber and Buther shall be entitled to receive their earned and unpaid base salary and Bonuses earned and unpaid through the effective date of termination. In the case of termination without cause, Mr. Haber shall be entitled to receive an amount equal to 50% of the then current annual Haber Base Salary and reasonably incurred expenses through the termination date. Mr. Buther shall be entitled to receive an amount equal to the unpaid Buther Base Salary through the termination date of his Employment Agreement. Upon termination of the Employment Agreement for cause, Haber shall immediately resign as a director of the Company unless otherwise agreed to by the Company and Haber. There are no change in control provisions in Messrs. Haber's and Buther's employment contracts. 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, 2004, 2003, and 2002, Mr. McKay received a bonus of $10,000; $-0- and $7,500, respectively. In addition, Mr. McKay receives Company-paid health insurance benefits as well as an automobile allowance of $300 per month. During the year ended December 31, 2003, Mr. McKay was granted 75,000 common stock options at an exercise price of $0.40 per share with two-fifths of such options immediately vested and the remainder vesting in annual installments over three years from the date of grant. 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. Depending on the number of meetings and the time required for the Company's operations, the Company may decide to compensate its directors in the future. 2002 Employee and Consulting Compensation Plan On April 1, 2002, the Company established an Employee Benefit and Consulting Compensation Plan (the "2002 Plan") covering 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 29, 2005 there were 471,134 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 expected to take place in 2005. 37 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. 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. 38 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. Awards During 2004, 2003 and 2002, we granted options to employees to purchase 95,000, 218,000 and 148,196 shares, respectively, of our Common Stock under the 2002 Plan. The options are exercisable at $.40 per share (except for 2,000 options exercisable at $2.00 per share and 2,000 options exercisable at $8.00 per share), 129,942 of which have been terminated as a result of employees terminating their employment with the Company. To date, no options to purchase common shares have been exercised under the Plan. Unless sooner terminated, the 2002 Plan will expire on March 31, 2012 and no awards may be granted after that date. It is not possible to predict the individuals who will receive future awards under the 2002 Plan or the number of shares of Common Stock covered by any future award because such awards are wholly within the discretion of the Board. The table below contains information as of December 31, 2004 on the known benefits provided to certain persons and group of persons under the 2002 Plan.
----------------------------------------------------- ---------------- ---------------- ------------------------ (1) Number of Range of Value of unexercised Shares subject exercise price options at Dec. 31 to Options ($) per Share 2004 (1) ----------------------------------------------------- ---------------- ---------------- ------------------------ ----------------------------------------------------- ---------------- ---------------- ------------------------ Bruce J. Haber, Chief Executive Officer -0- -0- -0- ----------------------------------------------------- ---------------- ---------------- ------------------------ Louis Buther, President -0- -0- -0- ----------------------------------------------------- ---------------- ---------------- ------------------------ William M. McKay, Chief Financial Officer 105,000 .40 (1) ----------------------------------------------------- ---------------- ---------------- ------------------------ Three Executive Officers As a group 105,000 .40 (1) ----------------------------------------------------- ---------------- ---------------- ------------------------ Two non-employee Directors and one former Director 55,000 .40 (1) as a group ----------------------------------------------------- ---------------- ---------------- ------------------------ Non-Executive Officer Employees and Consultants 238,1324 $.40 - $8.00 (1) ----------------------------------------------------- ---------------- ---------------- ------------------------ - ----------
39 (1) Value is normally calculated by multiplying (a) the difference between the market value per share at December 31, 2004 and the option exercise price by (b) the number of shares of Common Stock underlying the option. Due to the limited and sporadic trading of the Company's Common Stock at year-end, no value is given to the options as of December 31, 2004. 2001 Stock Option Plan On November 1, 2001, we adopted a 2001 Stock Option Plan, subject to stockholder approval, similar to our 2002 Plan except that the 2001 Plan, which covers 200,000 shares, does not provide for the direct issuance of stock and it has no cashless exercise provisions. The Company granted options to purchase 24,250 shares under the 2001 Plan exercisable at $40.00 per share, 13,750 of which have been terminated as a result of employees terminating their employment with the Company. Since stockholder approval was not obtained on or before November 1, 2002, all incentive stock options granted under the Plan have automatically become non-statutory stock options and the Board is limited to granting non-statutory stock options under the Plan. The Board of Directors has no plans to issue any additional options under the 2001 Plan and on December 19, 2002, it approved a resolution reducing the number of authorized options under the Plan to 14,625 shares of Common Stock, representing the number of outstanding options under the Plan as of that date. As of December 31, 2004 there were 10,500 employee options outstanding under the 2001 Plan. PRI Medical Stock Option Plans Pursuant to the Merger Agreement between the Company and PRI Medical in July 2001, each outstanding PRI Medical stock option automatically became an option in shares of the Company's common stock, on the same terms and conditions as were applicable under such PRI Medical option, to purchase the same number of shares of the Company's common stock as the holder of PRI Medical would have been entitled to receive pursuant to the merger had such holder exercised such option in full immediately prior to the effective time of the merger at a price per share (rounded up to the nearest whole cent) equal to (y) the aggregate exercise price for the shares of PRI Medical otherwise purchasable pursuant to the PRI Medical option divided by (z) the number of full shares of the Company's common stock deemed purchasable pursuant to such PRI Medical option in accordance with the foregoing. At July 6, 2001, the effective time of the merger, Emergent assumed PRI Medical outstanding options to purchase 14,120 shares of Emergent's Common Stock at exercise prices ranging from $27.20 per share to $162.00 per share. Of the 14,120 options, 1,162 are currently outstanding as of December 31, 2004 and none have been exercised. The Company does not intend to grant any more options under the PRI Medical plans. OPTION GRANTS TABLE The information provided in the table below provides information with respect to individual grants of stock options during 2004 of each of the executive officers named in the summary compensation table above. The Company did not grant any stock appreciation rights during 2004. 40
Option Grants in Last Fiscal Year Potential Realizable Value at Assumed Annual Individual Grants Rates of Stock Price ----------------- Appreciation for Option Term (2) -------------------- (c)% of Total Options Options/Granted Exercise Granted to Employees in Price Expiration Name (#) Fiscal Year (1) ($/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 -0- -0- N/A N/A N/A N/A
- ------------- 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 2004 by each of the executive officers named in the summary compensation table and the fiscal year end value of unexercised options. 41
(a) (b) (c) (d) (e) Value of Number of Unexercised Unexercised In-the-Money Shares Options at Options Acquired 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 Mckay 0 0 63,000/42,000 0 / 0
(1) The aggregate dollar values in column (c) and (e) are calculated by determining the difference between the fair market value of the Common Stock underlying the options and the exercise price of the options at exercise or fiscal year end, respectively. In calculating the dollar value realized upon exercise, the value of any payment of the exercise price is not included. Due to the limited and sporadic trading of the Company's Common Stock at year-end, no value is given to the options as of December 31, 2004. PRI 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, 2004 and 2003, the Company contributed matching contributions to the Plan of $8,244 and $11,701, respectively. Item 11. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters. As of March 15, 2005, the Company had outstanding 4,745,530 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. 42
- ------------------------------------------------------------- ------------------------------- ------------------------ 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 407,082 (2) 8.6 - ------------------------------------------------------------- ------------------------------- ------------------------ Howard Waltman 140 Deerfield Tenafly, NJ 07670 338,832 (3) 7.0 - ------------------------------------------------------------- ------------------------------- ------------------------ William M. McKay 932 Grand Central Avenue Glendale, CA 91201 88,250 (4) 1.8 - ------------------------------------------------------------- ------------------------------- ------------------------ Bruce J. Haber c/o BJH Management, LLC 145 Huguenot Street, Suite 405 New Rochelle, NY 10801 1,010,246 (5) 21.3 - ------------------------------------------------------------- ------------------------------- ------------------------ Louis Buther 932 Grand Central Avenue South Salem, NY 10590 530,436 (5) 11.2 - ------------------------------------------------------------- ------------------------------- ------------------------ All current and proposed executive officers and directors as a group (five) persons 2,374,846 (6) 48.4 - ------------------------------------------------------------- ------------------------------- ------------------------ - ------------------------------------------------------------- ------------------------------- ------------------------ 5% Stockholders - ------------------------------------------------------------- ------------------------------- ------------------------ Arie Kanofsky 385 West John Street Hicksville, NY 11801 505,000 10.6 - ------------------------------------------------------------- ------------------------------- ------------------------ Daniel Yun 375 Park Avenue, Suite 3607 New York, NY 10152 791,509 (7) 16.7 - ------------------------------------------------------------- ------------------------------- ------------------------
- --------------- (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 63,000 shares. (5) BJH Management LLC is a company owned by Mr. Bruce J. Haber. BJH acquired 348,575 shares of Common Stock of the Company pursuant to a services agreement and Mr. Haber purchased 505,000 shares. Of the 348,575 shares, 199,186 shares were gifted by Mr. Haber to an irrevocable trust for the benefit of his daughter, Jessica L. Haber with his wife, Michela I. Haber, as Trustee. The remaining 149,389 shares were transferred to Louis Buther. BJH Management had certain anti-dilution rights to maintain on behalf of itself, and at its option, its transferees, a minimum combined 17.5% of the Company's outstanding shares on a fully diluted basis. Pursuant to these rights and in exchange for its premature cancellation of rights, BJH received 535,606 shares of Common Stock. Of these shares, 229,545 shares were transferred to Mr. Buther and the remaining 306,060 shares were transferred to Mr. Haber. The amount of stock shown in the table as owned by Mr, Haber includes the shares held in his daughter's trust, although he disclaims beneficial ownership of such shares. (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. 43 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. Securities Authorized for Issuance under Equity Compensation Plans. The following summary information is as of March 29, 2005 and relates to our 2002 Stock Option Plan described in Item 10 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) 471,134 $0.44 178,866 - ------------------------------- ------------------------------ ---------------------- -------------------------------- - --------------------
(1) Based upon 467,134 options exercisable at $.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 2005. The following summary information is as of March 29, 2005 and relates to our 2001 Stock Option Plan described in Item 10 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 10,500 $40.00 -0- Plans - ------------------------------- ------------------------------ ---------------------- --------------------------------
- -------------------- 44 (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. The following summary information is as of March 29, 2005 and relates to our Stock Option Plans of PRI Medical described in Item 10 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) 1,162 $47.04 -0- - ------------------------------- ------------------------------ ---------------------- -------------------------------- - --------------------
(1) Based upon 991 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. 2003 Private Placement On June 27, 2003, the Company completed a private placement for gross proceeds of $1,000,000 of subordinated convertible promissory notes. Of the $1,000,000 raised, $700,000 was invested by eleven persons who are officers, and directors of the Company or members of law firms who have acted in a legal capacity to the Company. The remaining $300,000 was purchased by six accredited investors. Of the $700,000, officers, directors and employees of the Company invested the following sums of money: $200,000 was invested by each of Daniel Yun and Bruce J. Haber, $60,000 was invested by each of Mark Waldron and Louis Buther, $100,000 was invested by Howard Waltman, $10,000 was invested by William M. McKay and $40,000 was invested by Rick Frey (a former officer). The notes were converted into an aggregate of 2,525,000 shares of Common Stock on August 29, 2003, the effective date of a one-for-forty reverse stock split. In addition, the Company issued 25,000 common shares as payment for interest of $10,000 accrued on the notes as of the conversion date. Consulting Agreement with BJH Management, LLC On October 15, 2001, the Company entered into a consulting agreement (the "Consulting Agreement") with BJH Management, LLC ("BJH"), a New York based company, to act as a consultant to the Company for an initial three-month period, which the parties verbally agreed to extend to December 31, 2002. Pursuant to the Consulting Agreement, BJH assigned Bruce J. Haber and Louis Buther to assist the Company with strategic decisions, and day-to-day operations. As compensation for its services, the Company paid BJH a monthly fee of $25,000, plus reimbursement of reasonable and necessary business expenses, subject to prior approval by the Company's Board of Directors. The Consulting Agreement provided for a bonus in the form of a 12.5% equity interest in the 45 Company, on a post-funding basis, if the Company raised a minimum of $1 million in equity capital by the conclusion of the consulting period, or if the Company concluded that it no longer required any or all such additional equity as a result of a debt restructuring on terms acceptable to the Company. Further, BJH was entitled to receive such bonus if either of Messrs. Haber or Buther chose to accept an executive position with the Company after the completion of a funding transaction or debt restructuring. If no such positions were accepted, then the equity participation would have been reduced to 7.5%. In the event the Company was sold within a six-month period commencing on October 22, 2001, BJH would have been entitled to a 10% equity interest. Stock Issuance Agreement with BJH Management, LLC In December 2002, the Company determined that BJH, through its efforts in renegotiating and restructuring of certain of the Company's outstanding debt obligations with key creditors, had satisfied a significant portion of the Company's funding and liquidity needs. In addition, Messrs. Haber and Buther agreed to join the Company as executive officers as set forth in the "Employment Agreements" between the Company and Bruce J. Haber and Louis Buther as described below. Therefore, pursuant to the terms of a Stock Issuance Agreement and as additional consideration for agreeing to enter into the Employment Agreements on December 30, 2002, the Company agreed to issue to BJH 287,775 (post-split basis) (subsequently increased by 61,000 shares to 348,575 for correction of computational error) shares of common stock equal to 17.5% of the fully diluted common shares outstanding (the "Initial Shares"). The fully diluted common shares outstanding is defined as the outstanding shares of the Company plus the number of shares issuable upon exercise of options/warrants that are exercisable at $10.00 (post-split basis) or less. The Stock Issuance Agreement also provided for the following: On or before January 31, 2004, provided that (i) that the Employment Agreements are then still in full force and effect on December 31, 2003 (the "Anniversary Date"), and (ii) during the period commencing on January 1, 2003 and ending on the Anniversary Date (the "One-Year Period"), the Company has sold additional shares of Common Stock or Common Stock equivalents (exclusive of any shares of Common Stock issued pursuant to the exercise or conversion, as the case may be, of options, warrants, convertible debt or other derivative securities outstanding on the date hereof), BJH shall have the right (the "Anti-Dilution Right") to purchase from the Company, at a purchase price of $0.20 per share, additional shares of Common Stock (the "Additional Shares"), such that, upon the purchase of such Additional Shares, BJH's ownership interest in the Company, on a fully diluted basis, after the purchase of any such Additional Shares, when aggregated with the Initial Shares, equals 17 1/2 % of the Company on a fully diluted basis as of the Anniversary Date, provided, however, that such Anti-Dilution Right shall only apply to up to $2,000,000 of actual Equity Issuances (meaning stock or common stock equivalents sold for cash consideration in a private placement or public offering) closed by the Company during the One Year Period. For the avoidance of doubt, it is expressly understood and agreed by the parties that the foregoing Anti-Dilution Right only applies to the first $2,000,000 (or such lesser amount) of Equity Issuances actually closed by the Company during the One Year Period. Consequently, in the event and to the extent that the Company affects Equity Issuances during the One Year Period in excess of $2,000,000, BJH's ownership interest in the Company will be diluted accordingly. Should the Employment Agreements be terminated prior to the Anniversary Date, any Additional Shares acquired by BJH prior to the Anniversary Date shall be forfeited and BJH, simultaneously with the termination of such Employment Agreements, shall be required to sell such Additional Shares back to the Company at the same price paid for the Additional Shares by BJH. In October 2003, the Company and BJH agreed to prematurely terminate the anti-dilution provisions in exchange for the issuance to BJH of 535,606 fully paid for shares of Common Stock. The Company recorded compensation expense of $107,121 in connection with this agreement, which is included in selling, general and administrative expense in the accompanying consolidated statement of operations for the year ended December 31, 2003. 46 The Stock Issuance Agreement also provided that the shares acquired by BJH from the Company may not be sold, transferred, assigned, pledged, encumbered or otherwise disposed of for a period of 12 months from December 30, 2002, except in the case of a change in control of the Company or to Messrs. Haber or Buther and/or their immediate family members as defined in the Agreement. The Stock Issuance Agreement also provided for certain piggy-back registration rights to register the shares for resale with the Securities and Exchange Commission and notice provisions of at least 30 days before the initial filing of the Registration Statement with the Commission. The Company incurred reimbursable expenses of $30,537 and $31,389 to BJH for office rent and related expenses for the years ended December 31, 2004 and 2003, respectively. Consulting Agreement with Mark Waldron, former Chief Executive Officer On December 30, 2002, the Company entered into a non-exclusive Consulting Agreement (the "Waldron Consulting Agreement" or "Agreement") with JIMA Management LLC and Mark Waldron for the period from January 15, 2003 to September 15, 2003. JIMA Management LLC agreed to provide the Company with the non-exclusive services of Mr. Waldron as may be required by the Company from time-to-time during the term of the agreement. Mr. Waldron's consulting services included advising the Company on commercial strategies, management and operations, and assisting the Company with identifying and pursuing suitable business opportunities. Pursuant to the Agreement, JIMA Management LLC was paid $10,000 per month. Such fees also compensated JIMA Management LLC for services provided by Mr. Waldron during the term of this agreement as well as services provided to the Company and expensed on the Company's books and records for the period from July 1, 2001 to March 31, 2002 during which time Mr. Waldron served as the Company's Chief Executive Officer and did not receive a salary. The Waldron Consulting Agreement also provided for certain piggy-back registration rights to have his Common Stock registered for sale with the Securities and Exchange Commission and notice provisions of at least 30 days before the initial filing of the registration statement with the Commission. In the first three months of 2002, Mr. Waldron did not receive a salary, but received payment of his rent, automobile and automobile insurance as benefits from the Company. Between April 2002 and January 2003, PRI Medical was paying him a salary at the monthly rate of $12,500 and discontinued all other benefits described above, except a monthly auto allowance. The Company expensed fees of $70,000 and $10,000 as of December 31, 2001 and March 31, 2002, respectively, in connection with services provided under the Waldron Consulting Agreement. The remaining fees of $10,000 under the Agreement were expensed during 2003. 47 Exhibit Number 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) 10.14 Consulting Agreement dated February3, 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. (10) 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. (10) 23.1 Consent of Accountants in connection with Form S-8 Registration Statement (10) 23.2 Consent of Accountants in connection with Form S-8 Registration Statement (10) 31(a) Rule 13a-14(a) Certification - Chief Executive Officer (10) 31(b) Rule 13a-14(a) Certification - Chief Financial Officer (10) 32(a) Section 1350 Certification - Chief Executive Officer (10) 32(b) Section 1350 Certification - Chief Financial Officer (10) 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) 48 - --------- (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) Filed herewith. 49 The following exhibits were filed or incorporated by reference in PRI Medical's, formerly Medical Resources Management, Inc.'s, Form 10-KSB or Form 10-KSB/A for its fiscal year ended October 31, 2000. The exhibits referenced therein are incorporated by reference into the Registrant's Form 10-KSB. Exhibit Exhibit Description Number - -------------------------------------------------------------------------------- 3.1 Articles of Incorporation and Amendments thereto. (1) 3.2 By-Laws of the Registrant. (1) 10.1 Copy of a Warrant Agreement and Warrant issued between November 1996 and March 1997 to investors in the Registrant's Private Placement. (1) 10.2 Registrant's 1996 Stock Incentive Plan. (1) 10.3 Equipment Note Loan and Security Agreement dated April 24, 1997 between the Registrant and LINC Capital Management, a division of LINC Capital, Inc. (1) 10.4 Collateral Note No. 1 dated April 28, 1997 between the Registrant and LINC Capital, Inc. (1) 10.5 Lease Modification Agreement dated April 24, 1997 between Pulse Medical Products, Inc. and LINC Capital Management, a division of LINC Capital, Inc. (1) 10.6 Warrant Purchase Agreement dated April 24, 1997 between the Registrant and LINC Capital Management, a division of LINC Capital, Inc. (1) 10.7 Warrant to Purchase Shares of Common Stock dated April 24, 1997 between the Registrant and LINC Capital Management, a division of LINC Capital, Inc. (1) 10.8 Amendment to Warrant Agreement -- Class A Redeemable Warrant, dated September 26, 1999. (5) 10.9 Amendment to Warrant Agreement -- Class B Redeemable Warrant, dated September 26, 1999. (5) 10.10 Loan Agreement dated March 30, 1999 between Physiologic Reps and Santa Monica Bank. (5) 10.11 Promissory Note dated March 30, 1999 between Physiologic Reps and Santa Monica Bank (Line of Credit). (5) 10.12 Promissory Note dated March 30,1999 between Physiologic Reps and Santa Monica Bank (Term Loan). (5) 10.13 Registrant's 2000 Stock Incentive Plan. (7) 10.14 Agreement and Plan of Reorganization and Merger among Medical Resources Management, Inc., Emergent Group, Inc. and MRM Acquisition, Inc. dated as of January 23, 2001. (6) 10.15 Employment Contract between the Registrant and Richard Whitman, Chairman, President and CEO dated January 10, 2000. (7) 21.0 Subsidiaries of the Registrant. (7) - --------------- (1) Exhibit filed with Registrant's Form 10-SB on May 16, 1997 and incorporated by reference herein. (2) Exhibit filed with Registrant's Form 10-QSB for the quarter ended July 31, 1997 and incorporated by reference herein. (3) Exhibit filed with Registrant's Form 10-KSB for the fiscal year ended October 31, 1997 and incorporated by reference herein. (4) Exhibit filed with Registrant's Form 10-QSB for the quarter ended January 31, 1998 and incorporated by reference herein. (5) Exhibit filed with Registrant's Form 10-KSB for the fiscal year ended October 31, 1999 and incorporated by reference herein. (6) Exhibit filed with Registrant's Form 8-K filed on January 31, 2001. (7) Exhibit filed with Registrant's Form 10-KSB or 10-KSB/A for the fiscal year ended October 31, 2000 and incorporated by reference herein. 50 Item 14. Principal Accountant Fees and Services. Audit Fees For the fiscal year ended December 31, 2004, the aggregate fees billed for professional services rendered by Singer Lewak Greenbaum & Goldstein LLP ("independent auditors") for the audit of the Company's annual financial statements and the reviews of its financial statements included in the Company's quarterly reports totaled approximately $96,851. Financial Information Systems Design and Implementation Fees For the fiscal year ended December 31, 2004, there were $-0- in fees billed for professional services by the Company's 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, 2004, there was $12,606 in fees billed for preparation of corporate tax returns, tax research and other professional services rendered by the Company's independent auditors. The foregoing fees exclude expense reimbursements of $12,178. 51 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 29, 2005 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 - ----------------------- Chief Executive Officer March 29, 2005 Bruce J. Haber /s/ William M. McKay Chief Financial Officer - ----------------------- Secretary and Treasurer March 29, 2005 William M. McKay /s/ Mark Waldron Director March 29, 2005 - ----------------------- Mark Waldron /s/ Howard Waltman Director March 29, 2005 - ----------------------- Howard Waltman Bruce J. Haber, Mark Waldron and Howard Waltman represent all the current members of the Board of Directors. EX-10 2 dec312004ex1015.txt EXTENSION AND MODIFICATION AGREEMENT ------------------------------------ This Extension and Modification Agreement ("Agreement") is made as of March 7, 2005, by and among U.S. Bank National Association, successor in interest to Santa Monica Bank ("Bank"); Physiologic Reps, a California corporation ("Borrower"); PRI Medical Technologies, Inc. formerly known as Medical Resources Management, Inc., a Nevada corporation ("PRIMT"); Medical Resources Management Financial, Inc., a California corporation ("MRM Financial"); and Emergent Group, Inc., a Nevada corporation ("Emergent"). RECITALS -------- This Agreement is made and entered into in reliance on the accuracy of the following recitals, which are acknowledged by Bank, Borrower, PRIMT, MRM Financial and Emergent to be true and accurate: 1. Borrower's Obligations to Bank. A. Line of Credit Note and Loan Agreement. Borrower is liable to Bank pursuant to that certain Promissory Note dated March 30, 1999, in the original principal amount of $2,000,000.00, with an original maturity date of May 2, 2000, and an initial interest rate of 8.750%, which Promissory Note was modified by Change in Terms Agreements dated April 26, 2000; August 4, 2000; September 28, 2000; October 19, 2000; December 12, 2000; April 2, 2001; June 5, 2001; August 2, 2001; and October 22, 2001. The Promissory Note evidences a revolving line of credit, and is governed by that Loan Agreement dated as of March 30, 1999, in an original maximum amount outstanding at any time of no more than the lesser of $2,000,000.00 or 80.000% of Eligible Accounts (as defined in said Loan Agreement), which Loan Agreement was modified by that Modification of Loan Agreement dated July 22, 1999, and by that Second Amendment to Loan Agreement dated as of August 2, 2001. Both the above-referenced Promissory Note and the above-referenced Loan Agreement were modified by Amendments to Loan Agreement and Note (and any addenda to such Amendments to Loan Agreement and Note) dated March 15, 2002; April 2, 2002; July 23, 2002; October 10, 2002; April 22, 2003; and March 26, 2004; and by Extension and Modification Agreements entered into by and between Bank, Borrower, PRIMT, MRM Financial and Emergent and dated as of October 31, 2003 (the "October 2003 Extension Agreement") and November 15, 2004 (the "November 2004 Extension Agreement"). Page 1 The above-referenced Promissory Note, as modified, is referred to herein as the "Line of Credit Note". The above-referenced Loan Agreement, as modified, is referred to herein as the "Loan Agreement". Borrower was required to reduce the outstanding principal balance under the Line of Credit Note to no more than $500,000.00 by October 1, 2004, and to pay all obligations under the Line of Credit Note, in full, no later than January 31, 2005. Borrower is required to provide Bank with a Borrower's Certificate within twenty (20) days after the end of each month. Each Borrower's Certificate is required to be in a form acceptable to Bank, duly executed by Borrower and detailing the status of the line of credit governed by the Loan Agreement as of the date on said Certificate. As of March 2, 2005, the outstanding principal balance under the Line of Credit Note was $650,000.00, together with accrued and unpaid interest (the "Line of Credit Note Accrued Interest") in the amount of $4,053.47, together with all accruing interest, fees, costs, and expenses provided in the Loan Documents (as defined below), including, without limitation, attorneys' fees, costs and title fees. B. Term Note. Borrower is further liable to Bank pursuant to that certain Promissory Note dated March 30, 1999, in the original principal amount of $2,000,000.00, with an original maturity date of April 2, 2004, a current maturity date of January 31, 2005, and an initial interest rate of 9.000%, which Promissory Note was modified by that Change in Terms Agreement dated August 2, 2001; and by Amendments to Loan Agreement and Note dated March 15, 2002; July 23, 2002; October 10, 2002; and April 22, 2003; and by: the October 2003 Extension Agreement, an Amendment to Note dated March 25, 2004, and the November 2004 Extension Agreement. The above-referenced Promissory Note, as modified, is referred to herein as the "Term Note". As of March 2, 2005, the outstanding principal balance under the Term Note was $150,774.93, together with all accruing interest, fees, costs, and expenses provided in the Loan Documents (as defined below), including, without limitation, attorneys' fees, costs and title fees. 2. Security for Borrower's Obligations. A. Borrower's Collateral. To secure Borrower's obligations to Bank under the Term Note, Borrower has granted to Bank a security interest in certain of its assets, pursuant to that certain Commercial Security Agreement dated March 30, 1999, which assets include, but are not Page 2 limited to, all inventory, chattel paper, accounts, equipment and general intangibles of Borrower. To secure Borrower's obligations to Bank under the Line of Credit Note, Borrower has granted to Bank a security interest in certain of its assets, pursuant to that certain Commercial Security Agreement dated March 30, 1999, which assets include, but are not limited to, all inventory, chattel paper, accounts, equipment and general intangibles of Borrower. The above-referenced Commercial Security Agreements are referred to, collectively, as the "Borrower Security Agreements"; and the assets of Borrower in which Borrower granted the above-referenced security interests are referred to, collectively, as the "Borrower Collateral". B. Medical Resources Management, Inc.'s Collateral. To secure Borrower's obligations to Bank under the Term Note, PRIMT has granted to Bank a security interest in certain of its assets, pursuant to that certain Commercial Security Agreement dated March 30, 1999, which assets include, but are not limited to, all inventory, chattel paper, accounts, equipment and general intangibles of PRIMT. To secure Borrower's obligations to Bank under the Line of Credit Note, PRIMT has granted to Bank a security interest in certain of its assets, pursuant to that certain Commercial Security Agreement dated March 30, 1999, which assets include, but are not limited to, all inventory, chattel paper, accounts, equipment and general intangibles of PRIMT. The above-referenced Commercial Security Agreements are referred to, collectively, as the "PRIMT Security Agreements"; and the assets of PRIMT in which PRIMT granted the above-referenced security interests are referred to, collectively, as the "PRIMT Collateral". C. Med Surg Specialties, Inc.'s Collateral. To secure Borrower's obligations to Bank under the Term Note, Med Surg Specialties, Inc., a California corporation, now known as Medical Resources Management Financial, Inc. ("MRM Financial"), has granted to Bank a security interest in certain of its assets, pursuant to that certain Commercial Security Agreement dated March 30, 1999, which assets include, but are not limited to, all inventory, chattel paper, accounts, equipment and general intangibles of MRM Financial. To secure Borrower's obligations to Bank under the Line of Credit Note, MRM Financial has granted to Bank a security interest in certain of its assets, pursuant to that certain Commercial Security Agreement dated March 30, 1999, which assets include, but Page 3 are not limited to, all inventory, chattel paper, accounts, equipment and general intangibles of Borrower. The above-referenced Commercial Security Agreements are referred to, collectively, as the "MRM Financial Security Agreements"; and the assets of MRM Financial in which MRM Financial granted the above-referenced security interests are referred to, collectively, as the "MRM Financial Collateral". D. Texas Oxygen Medical Equipment Company's Collateral. To secure Borrower's obligations to Bank under the Term Note, Texas Oxygen Medical Equipment Company, a Texas corporation ("Texas Oxygen") has granted to Bank a security interest in certain of its assets, pursuant to that certain Commercial Security Agreement dated March 30, 1999, which assets include, but are not limited to, all inventory, chattel paper, accounts, equipment and general intangibles of Texas Oxygen. To secure Borrower's obligations to Bank under the Line of Credit Note, Texas Oxygen has granted to Bank a security interest in certain of its assets, pursuant to that certain Commercial Security Agreement dated March 30, 1999, which assets include, but are not limited to, all inventory, chattel paper, accounts, equipment and general intangibles of Texas Oxygen. The above-referenced Commercial Security Agreements are referred to, collectively, as the "Texas Oxygen Security Agreements"; and the assets of Texas Oxygen in which Texas Oxygen granted the above-referenced security interests are referred to, collectively, as the "Texas Oxygen Collateral". E. Laser Medical, Inc.'s Collateral. To secure Borrower's obligations to Bank under the Term Note, Laser Medical, Inc., a Utah corporation ("Laser Medical") has granted to Bank a security interest in certain of its assets, pursuant to that certain Commercial Security Agreement dated March 30, 1999, which assets include, but are not limited to, all inventory, chattel paper, accounts, equipment and general intangibles of Laser Medical. To secure Borrower's obligations to Bank under the Line of Credit Note, Laser Medical has granted to Bank a security interest in certain of its assets, pursuant to that certain Commercial Security Agreement dated March 30, 1999, which assets include, but are not limited to, all inventory, chattel paper, accounts, equipment and general intangibles of Laser Medical. The above-referenced Commercial Security Agreements are referred to, collectively, as the "Laser Medical Security Agreements"; and the assets of Laser Page 4 Medical in which Laser Medical granted the above-referenced security interests are referred to, collectively, as the "Laser Medical Collateral". F. Pulse Medical Products, Inc.'s Collateral. To secure Borrower's obligations to Bank under the Term Note, Pulse Medical Products, Inc., an Idaho corporation ("Pulse Medical"), has granted to Bank a security interest in certain of its assets, pursuant to that certain Commercial Security Agreement dated March 30, 1999, which assets include, but are not limited to, all inventory, chattel paper, accounts, equipment and general intangibles of Pulse Medical. To secure Borrower's obligations to Bank under the Line of Credit Note, Pulse Medical has granted to Bank a security interest in certain of its assets, pursuant to that certain Commercial Security Agreement dated March 30, 1999, which assets include, but are not limited to, all inventory, chattel paper, accounts, equipment and general intangibles of Pulse Medical. The above-referenced Commercial Security Agreements are referred to, collectively, as the "Pulse Medical Security Agreements"; and the assets of Pulse Medical in which Pulse Medical granted the above-referenced security interests are referred to, collectively, as the "Pulse Medical Collateral". G. Inter-Creditor Agreements. On or about July 7, 1999, Bank and General Electric Company, a New York corporation ("G.E."), entered into Inter-Creditor Agreements with respect to the priority of Bank's and G.E.'s respective security interests in certain assets of Borrower, PRIMT, MRM Financial, Texas Oxygen, Laser Medical and Pulse Medical. Said Inter-Creditor Agreements are referred to, collectively, as the "Inter-Creditor Agreements"; and, when reference is made to a specific Inter-Creditor Agreement, are referred to by the name of the debtor referred to (e.g., "Borrower Inter-Creditor Agreement" or "PRIMT Inter-Creditor Agreement"). H. Collective Reference. The above-referenced Security Agreements, as modified by the Inter-Creditor Agreements, are referred to collectively as the "Security Agreements"; and the above-referenced Collateral, in which security interests have been granted pursuant to the Security Agreements, is referred to collectively as the "Collateral". 3. Guaranties of Borrower's Indebtedness. A. PRIMT Guaranty. Page 5 On or about March 30, 1999, PRIMT executed, in favor of Bank, a Commercial Guaranty (the "PRIMT Guaranty"), whereby PRIMT guaranteed and promised to pay all of Borrower's "Indebtedness" (as defined therein) to Bank. B. MRM Financial Guaranty. On or about March 30, 1999, MRM Financial executed, in favor of Bank, a Commercial Guaranty (the "MRM Financial Guaranty"), whereby MRM Financial guaranteed and promised to pay all of Borrower's "Indebtedness" (as defined therein) to Bank. C. Texas Oxygen Guaranty. On or about March 30, 1999, Texas Oxygen executed, in favor of Bank, a Commercial Guaranty (the "Texas Oxygen Guaranty"), whereby Texas Oxygen guaranteed and promised to pay all of Borrower's "Indebtedness" (as defined therein) to Bank. D. Laser Medical Guaranty. On or about March 30, 1999, Laser Medical executed, in favor of Bank, a Commercial Guaranty (the "Laser Medical Guaranty"), whereby Laser Medical guaranteed and promised to pay all of Borrower's "Indebtedness" (as defined therein) to Bank. E. Pulse Medical Guaranty. On or about March 30, 1999, Pulse Medical executed, in favor of Bank, a Commercial Guaranty (the "Pulse Medical Guaranty"), whereby Pulse Medical guaranteed and promised to pay all of Borrower's "Indebtedness" (as defined therein) to Bank. F. Bonnifield Guaranty. On or about March 30, 1999, Allen Bonnifield, an individual ("Bonnifield"), executed, in favor of Bank, a Commercial Guaranty (the "Bonnifield Guaranty"), whereby Bonnifield guaranteed and promised to pay all of Borrower's "Indebtedness" (as defined therein) to Bank. G. Emergent Guaranty. Emergent executed in favor of Bank, a Commercial Guaranty (the "Emergent Guaranty"), whereby Emergent guaranteed and promised to pay all of Borrower's "Indebtedness" (as defined therein) to Bank. Page 6 H. Collective Reference. The above-referenced guaranties are referred to, collectively, as the "Guaranties"; and the above-referenced guarantors are referred to, collectively, as the "Guarantors". 4. Loan Documents. The following documents evidence Borrower's and Guarantors' obligations to and relationship with Bank: this Agreement, the October 2003 Extension Agreement, the Loan Agreement, the Line of Credit Note, the Term Note, the Security Agreements and the Guaranties. The documents referenced in the preceding sentence, together with any other documents executed by or among the parties in connection with the Loan Agreement, the Line of Credit Note or the Term Note, and any and all amendments and modifications thereto, are referred to collectively in this Agreement as "Loan Documents." There are no written or oral agreements between Bank, Borrower, and Guarantors, or any of them, evidencing or arising out of the transactions evidenced by the Loan Documents, other than the agreements stated in the Loan Documents. 5. Relationships Between Borrower, PRIMT, MRM Financial and Emergent. Borrower is a wholly-owned subsidiary of PRIMT. PRIMT is a wholly-owned subsidiary of Emergent. Recital "E" of the October 2003 Extension Agreement provided, in part, as follows: On or before December 31, 2003, Borrower and PRIMT will merge. PRIMT will be the surviving entity, and Borrower will cease to exist as a legal entity. When the merger takes effect, then, automatically and without the necessity of execution by any party of any further document or instrument except as expressly provided herein, PRIMT will become the "Borrower" under the other Loan Documents and will be obligated under and bound by them in the same manner and to the same extent that Borrower itself is bound by such other Loan Documents. The merger described in the preceding paragraph has not occurred as of the date of this Agreement. Instead, as of the date of this Agreement, and as stated in the first paragraph of this Recital E, Borrower is a wholly-owned subsidiary of PRIMT, and PRIMT is a wholly-owned subsidiary of Emergent. On or before May 31, 2005, Borrower and PRIMT will merge. PRIMT will be the surviving entity, and Borrower will cease to exist as a legal entity. When the merger takes effect, then, automatically and without the necessity of execution by any party of any further document or instrument except as expressly provided herein, PRIMT will Page 7 become the "Borrower" under the other Loan Documents and will be obligated under and bound by them in the same manner and to the same extent that Borrower itself is bound by such other Loan Documents. 6. Default. Borrower is in default under the November 2004 Extension Agreement, in that Borrower failed to merge with PRIMT on or before December 31, 2004; failed to pay off the outstanding balance of the Line of Credit Note as and when required, and is in default of certain of the covenants contained in the Loan Agreement; and is in default under certain of the terms of the Term Note as a result of the defaults under the Line of Credit Note (the failure to repay and the defaults with respect to financial covenants are collectively referred to herein as the "Designated Defaults"). Borrower acknowledges it has received adequate and reasonable notice of the Designated Defaults from Bank. 7. Bank's Default Rights. Because of the existence of the Designated Defaults, Bank has the current right to exercise any and all of its rights and remedies against Borrower or otherwise under applicable law and the Loan Documents. Such remedies include, without limitation, the right to foreclose upon the Collateral and the right to exercise all remedies pursuant to the Guaranties. 8. Extension and Modification. At Borrower's request, Bank is willing to forbear from exercising default remedies as set forth herein, and to extend and modify the terms of the Line of Credit Note and the Term Note and the other Loan Documents as provided for herein, provided that the conditions set forth herein are satisfied within the time periods required under this Agreement. AGREEMENT NOW, THEREFORE, in consideration of the foregoing, and for other valuable consideration, the receipt and sufficiency of which are hereby acknowledged, Bank, Borrower, PRIMT, MRM Financial and Emergent hereby agree as follows: 1. Incorporation of Recitals; Loan Documents Remain Unchanged. Each of the above recitals is incorporated herein and deemed to be the agreement of Bank, Borrower, PRIMT, MRM Financial and Emergent, and is relied upon by each Page 8 party to this Agreement in agreeing to the terms of this Agreement. Except as modified herein, all of the terms of the other Loan Documents remain unchanged and in full force and effect. 2. Confirmation of Collateral. A. Borrower hereby grants to Bank, and confirms that the Term Note and the Line of Credit Note are secured by, a perfected security interest in the Borrower Collateral. B. PRIMT hereby grants to Bank, and confirms that the Term Note and the Line of Credit Note are secured by, a perfected security interest in the PRIMT Collateral. C. MRM Financial hereby grants to Bank, and confirms that the Term Note and the Line of Credit Note are secured by, a perfected security interest in the MRM Financial Collateral. 3. Conditions Precedent. Borrower, PRIMT, MRM Financial and Emergent understand and agree that this Agreement shall not be effective, and Bank shall have no obligation to forbear or to amend the terms of the Loan Documents as provided herein, unless and until each of the following conditions precedent has been satisfied not later than the respective date set forth below, or waived by Bank (in Bank's sole discretion), for whose sole benefit such conditions exist, with Bank's determination as to whether they have been timely satisfied being conclusive absent manifest error: A. On or before March 7, 2005, Borrower, PRIMT, MRM Financial and Emergent shall have executed and delivered to Bank this Agreement originally signed by them. B. On or before such time as Bank may require, Borrower, PRIMT, MRM Financial and Emergent shall have taken any and all actions, and executed and delivered to Bank any and all documents, required by this Agreement to be taken or executed and delivered, as the case may be, or necessary or appropriate in Bank's sole discretion to effectuate this Agreement. C. On or before March 7, 2005, Borrower shall have paid to Bank the following: (1) an extension fee in the amount of $1,000.00; (2) an amount equal to the Bank's attorneys' fees incurred in the negotiation and preparation of this Agreement in the sum of $4,462.80; Page 9 (3) the sum of $4,053.47, representing the Line of Credit Note Accrued Interest; and (4) reimbursement to the Bank of any other fees or expenses incurred by the Bank in connection with the negotiation and preparation of this Agreement. 4. Representations and Warranties. To induce Bank to enter into this Agreement, Borrower, PRIMT, MRM Financial and Emergent hereby represent and warrant to Bank as follows: A. Representations and Warranties True and Correct; Survival. All representations and warranties contained in this Agreement and in any and all of the other Loan Documents are true and correct as of the date of this Agreement, except that, to the extent that a representation or warranty in this Agreement conflicts with a representation or warranty in another Loan Document, the representation or warranty in this Agreement is true and correct; and all such representations and warranties shall survive the execution of this Agreement. B. No Breach. With the exception of the Designated Defaults, no event has occurred or failed to occur that is or, with notice or lapse of time or both would constitute, a default, an event of default, or a breach or failure of any condition under any Loan Document. C. Unconditional Obligation; No Defenses. Each of the Term Note and the Line of Credit Note represents an unconditional, absolute, valid and enforceable obligation against Borrower. Neither Borrower, PRIMT, MRM Financial, Emergent, nor any of them, has any claims or defenses against Bank or any other person or entity which would or might affect (a) the enforceability of any provisions of the Loan Documents or (b) the collectibility of sums advanced by Bank in connection with the Term Note or the Line of Credit Note. Borrower acknowledges that the statements of balances as reflected in Recital "A" are true and correct. Borrower understands and acknowledges that the Bank is entering into this Agreement in reliance upon and in partial consideration for this acknowledgment and representation, and agrees that such reliance is reasonable and appropriate. 5. Cooperation of Borrower and Guarantors. Borrower, PRIMT, MRM Financial and Emergent shall take any and all actions of any kind or nature whatsoever, either directly or indirectly, that are necessary to prevent Bank from suffering a loss with respect to the Term Note or the Line of Credit Note, or being deprived of any of the Collateral or of any rights or remedies of Bank with respect Page 10 to any Loan Document in the event of a default by Borrower under this Agreement or any other Loan Document. 6. Modification of Loan Documents. To induce Bank to enter into this Agreement, Borrower agrees that the Loan Documents are hereby restated, supplemented and modified as follows, which modifications shall supersede and prevail over any conflicting provisions of the Loan Documents: A. The Term Note is modified as follows: (1) Upon the effective date of the merger between PRIMT and Borrower, described in Recital "5" of this Agreement, PRIMT shall become the "Borrower" under the Loan Documents, including the Term Note. (2) From and after February 1, 2005, the interest rate shall be the Bank's Prime Rate plus 2.50 percentage points (P + 2.50%). (3) The repayment provisions of the Term Note shall be changed from those provided in the November 2004 Extension Agreement which provided, among other things, that the final maturity date of the Term Note was July 1, 2006; the Term shall now be repayable in monthly installments equal to the amount of accrued interest, with all outstanding principal, interest and other sums due under the Term Note due and payable no later than May 31, 2005 ("the Final Maturity Date"). B. The Revolving Credit Note and the Loan Agreement are modified as follows: (1) Upon the effective date of the merger between PRIMT and Borrower, PRIMT shall become the "Borrower" under the Loan Documents, including the Revolving Credit Note and the Loan Agreement. (2) The entire outstanding balance of the Revolving Credit Note will be due and payable in full at the earliest of (x) the time that Borrower's new lender ("New Lender") demands the termination of the Bank's security interest in Borrower's accounts and inventory or (y) May 31, 2005. Notwithstanding the foregoing, Borrower will make its best effort to partially pay off the outstanding balance of the Revolving Credit Note from collection of accounts receivables once Borrower has closed its transaction with the New Lender to provide financing secured by the Borrower's accounts receivables and inventory. (3) Borrower will continue to make monthly payments of all accrued interest until the Final Maturity Date. Page 11 (4) Notwithstanding any provisions contained in the Revolving Credit Note and the Loan Agreement to the contrary, the revolving feature of the Revolving Credit Note is eliminated. Borrower will no longer be permitted to request advances and Bank will not be required to honor any such request for an advance under the Revolving Credit Note. Borrower will not be permitted to re-borrow funds once any portion of the Revolving Credit Note has been repaid. 7. Covenants and Agreements of Borrower and Guarantors. Unless Bank otherwise consents in writing during the extended term as provided herein, each of Borrower, PRIMT, MRM Financial and Emergent covenants and agrees as follows: A. Each will comply with all requirements of this Agreement and with all requirements of all other Loan Documents to the extent not inconsistent with this Agreement; B. Except for Permitted Liens, as defined in the Loan Agreement, neither Borrower, PRIMT, MRM Financial, Emergent, nor any of them, shall further encumber any of its assets; C. Neither Borrower, PRIMT, MRM Financial, Emergent, nor any of them, shall increase the salary of any of its officers, nor pay any bonus to any officer or shareholder, without the written approval of Bank. Notwithstanding the foregoing, the Bank shall be deemed to have given its approval so long as the aggregate amount of any such increase or bonus to be given or paid to an officer and/or shareholder does not exceed 15% of the previous compensation payable to such officer and/or shareholder; D. Neither Borrower, PRIMT, MRM Financial, Emergent, nor any of them, shall make any distributions, payments or other transfers (other than budgeted salaries), whether in cash or in kind, whether from capital, income or otherwise to the shareholders, officers and directors of Borrower, PRIMT, MRM Financial, Emergent, or any of them; E. Neither Borrower, PRIMT, MRM Financial, Emergent, nor any of them, shall draw or present checks or other items which will, if paid, overdraw any of their deposit accounts with Bank, and each of them acknowledges and agrees that if checks or other items are presented to Bank which, if paid, would have the effect of overdrawing any of their deposit accounts, then Bank shall be under no obligation to contact the entity so affected, and Bank shall have the right to return such checks or other items; F. Except for the contemplated merger between Borrower and PRIMT, with PRIMT as the surviving entity, Borrower, PRIMT, MRM Financial, Emergent, and each of them, will at all times maintain their separate legal existence and further will maintain Page 12 separate books and accounting records all of which will be maintained in accordance with generally accepted accounting principles consistently applied; G. Unless Bank has already been paid off in full on both the Term Note and the Revolving Credit Note, on or before the date that the merger of Borrower and PRIMT, described in Recital "5" of this Agreement takes effect PRIMT will sign and deliver to Bank a Commercial Security Agreement, in form satisfactory to Bank, granting to Bank a security interest in the PRIMT Collateral and in all of PRIMT's right, title and interest in and to all property which, prior to such date, is Borrower's Collateral, in order to secure PRIMT's "Indebtedness" (as defined in the Borrower Security Agreements) in PRIMT's capacity, upon the effect of such merger, as the "Borrower" under the Loan Documents. 8. Covenants of Bank. A. In consideration of all of the herein agreements, and so long as there is no additional event of default, Bank agrees to the modification of the Loan Documents as provided herein. B. Bank agrees to waive the Designated Defaults through the Final Maturity Date, May 31, 2005. C. Upon final satisfaction of the entire outstanding balance of the Revolving Credit Note, the Bank will release from its collateral all of Borrower's accounts receivable and inventory and will cause amendments to its various UCC-1 financing statements to reflect only the such release of Borrower's accounts receivable and inventory. 9. Additional Events of Default. In addition to the events of default set forth in the Loan Documents, the occurrence of any of the following events of default other than a Designated Default shall be an event of default and, at Bank's option may make all obligations of Borrower, PRIMT, MRM Financial and Emergent (collectively, individually, or in any combination) immediately due and payable, all without demand, presentment or notice, all of which requirements Borrower, PRIMT, MRM Financial and Emergent hereby waive: A. Failure to Perform. Failure to perform any of the obligations set forth in this Agreement or in any other Loan Documents (as the same may be affected by this Agreement); B. Representations and Warranties. Page 13 Any representation or warranty of Borrower or PRIMT or MRM Financial or Emergent herein or in any other Loan Document shall be false, misleading, or incorrect; C. Material Adverse Changes. If there is any further impairment of the Borrower's or PRIMT's or MRM Financial's or Emergent's ability to satisfy its obligations to Bank. 10. Remedies. Upon the occurrence of an event of default and at all times thereafter, Bank, without the necessity of obtaining court approval, shall be entitled to exercise, in respect of all of the Collateral it may hold, all rights and remedies of a secured creditor available to it under applicable laws. Bank shall also be entitled to exercise all rights and remedies available to Bank as a creditor generally, including, without limitation, all remedies available to Bank under the Loan Documents, as well as rights and remedies available to Bank at law or in equity. All such rights and remedies shall be cumulative. No failure or delay on the part of Bank in exercising any power, right, or remedy under any of the Loan Documents shall operate as a waiver thereof, and no single or partial exercise of any such power, right, or remedy shall preclude any further exercise thereof or the exercise of any other power, right, or remedy. 11. Confirmation of Guaranty; Unconditional Obligations; Waiver. Each of PRIMT and MRM Financial reaffirms its obligations under, respectively, the PRIMT Guaranty and the MRM Financial Guaranty, and reaffirms and restates each and every term, condition, and provision thereof. In addition, each of PRIMT and MRM Financial and Emergent hereby agrees that its obligations under its guaranty are and shall be unconditional, irrespective of (i) the absence of any attempt to collect the Loan from Borrower or any other guarantor or other action to enforce the same, (ii) the waiver or consent by Bank with respect to any provision of any instrument evidencing the Loan, or any part thereof, or any other agreement now or hereafter executed by Borrower and delivered to Bank, (iii) Bank's election, in any proceeding instituted under Chapter 11 of title 11 of the United States Code (11 U.S.C. ss.101 et seq.) (the "Bankruptcy Code"), of the application of Section 111 l(b)(2) of the Bankruptcy Code, (iv) any borrowing or grant of a security interest by Borrower, as debtor-in-possession, under Section 364 of the Bankruptcy Code, or (v) the disallowance under Section 502 of the Bankruptcy Code of all or any portion of Bank's claim(s) for repayment of the Loan. Each of PRIMT and MRM Financial and Emergent further reaffirms that its obligations under its guaranty are and shall be primary and are and shall be separate and distinct from Borrower's obligations, and each further represents and warrants that it has no defenses or claims against Bank that would or might affect the enforceability of its guaranty and that its guaranty remains in full force and effect, and each irrevocably and permanently (even if it pays said obligations in full) waives any and all rights of subrogation, reimbursement, Page 14 indemnity, contribution or any other claim arising from the existence or performance of the guaranty which it may now or hereafter have against Borrower or any other entity (or their respective properties) directly or contingently liable for said obligations. Page 15 12. Release. Borrower, PRIMT, MRM Financial and Emergent, and each of them, hereby, for themselves, their successors, heirs, executors, administrators and assigns, release, acquit and forever discharge Bank, its directors, officers, employees, agents, affiliates, successors, administrators and assigns ("Released Parties") of and from any and all claims, actions, causes of action, demands, rights, damages, costs, loss of service, expenses, and compensation whatsoever which Borrower, PRIMT, MRM Financial and Emergent, or any of them, might have because of anything done, omitted to be done, or allowed to be done by any of Released Parties and in any way connected with the Loan, this Agreement or the other Loan Documents, as of the date of execution of this Agreement, WHETHER KNOWN OR UNKNOWN, FORESEEN OR UNFORESEEN, including, without limitation, any settlement negotiations and also including, without limitation, any damages and the consequences thereof resulting or to result from the events described, referred to, or implied hereinabove ("Released Matters"). Borrower, PRIMT, MRM Financial and Emergent, and each of them, further agree never to commence, aid, or participate in (except to the extent required by order or legal process issued by a court or governmental agency of competent jurisdiction) any legal action or other proceeding based in whole or in part upon the foregoing. In furtherance of this general release, Borrower, PRIMT, MRM Financial and Emergent, and each of them, acknowledge and waive the benefits of California Civil Code section 1542, which provides: "A general release does not extend to claims which the creditor does not know or suspect to exist in his favor at the time of executing the release, which if known by him must have materially affected his settlement with the debtor." Borrower, PRIMT, MRM Financial and Emergent, and each of them, agree that this waiver and release is an essential and material term of this Agreement and that the agreements in this paragraph are intended to be in full satisfaction of any alleged injuries or damages in connection with the Released Matters. Borrower, PRIMT, MRM Financial and Emergent, and each of them, also understand that this release shall apply to all unknown or unanticipated results of the transactions and occurrences described above, as well as those known and anticipated. Borrower, PRIMT, MRM Financial and Emergent, and each of them, have consulted with legal counsel prior to signing this release, or had an opportunity to obtain such counsel and knowingly chose not to do so, and execute such release voluntarily with the intention of fully and finally extinguishing all Released Matters. 13. Miscellaneous. A. Agreement to Cooperate. Page 16 All the parties hereto agree to and will cooperate fully with each other in the performance of this Agreement and the Loan Documents, including, without limitation, executing any additional documents reasonably necessary to the full performance of this Agreement. B. Benefit of Agreement. This Agreement shall be binding upon, inure to the benefit of, and be enforceable by the parties hereto, their respective successors and assigns. No other person or entity shall be entitled to claim any right or benefit hereunder, including, without limitation, the status of a third party beneficiary hereunder. C. Effect of Agreement. Bank, Borrower, PRIMT, MRM Financial and Emergent agree that, except as expressly provided herein, the Loan Documents shall remain in full force and effect in accordance with their respective terms, and this Agreement shall not be construed to: (1) Impair the validity, perfection, or priority of any lien or security interest securing Borrower's, PRIMT's, MRM Financial's or Emergent's obligations to Bank; (2) Waive or impair any rights, powers, or remedies of Bank under the Loan Documents; (3) Constitute an agreement by Bank or require Bank to grant forbearance periods or extend the term of the Term Note or the Line of Credit Note or the time for payment of any of Borrower's, PRIMT's, MRM Financial's or Emergent's obligations to Bank except as expressly provided herein, none of which Bank agrees or has agreed to do, and all of which matters are in Bank's sole and absolute discretion. In the event of any inconsistency between the terms of this Agreement and any other Loan Document, this Agreement shall govern. This Agreement shall be construed without regard to any presumption or rule requiring that it be construed against the party causing this Agreement or any part hereof to be drafted. The headings used in this Agreement are for convenience only and shall be disregarded in interpreting the substantive provisions of this Agreement. D. Integration. This Agreement and the other Loan Documents are intended by the parties as the final expression of their agreement and therefore incorporate all negotiations of the parties hereto and are the entire agreement of the parties hereto. Borrower, PRIMT, MRM Financial and Emergent, and each of them, acknowledge that they are not relying on any written or oral agreement, representation, warranty, or understanding of any kind Page 17 made by Bank or by any employee or agent of Bank except for the agreements of Bank set forth herein or in the other Loan Documents. Except as expressly set forth in this Agreement, the other Loan Documents remain unchanged and in full force and effect. E. Severability. In case any provision in this Agreement shall be invalid, illegal, or unenforceable, such provision shall be severable from the remainder of this Agreement and the validity, legality, and enforceability of the remaining provisions shall not in any way be affected or impaired thereby. F. Reversal of Payments. If Bank receives any payments or proceeds of any Collateral which are subsequently invalidated, declared to be fraudulent or preferential, set aside, or required to be paid to a trustee, debtor-in-possession, receiver, or any other party under any bankruptcy law, common law, equitable cause, or otherwise, then, to such extent, the obligations or part thereof intended to be satisfied by such payments or proceeds shall be reserved and continue as if such payments or proceeds had not been received by Bank. G. Modification. This Agreement may not be amended, waived, or modified in any manner without the prior written consent of the party against whom the amendment, waiver or modification is sought to be enforced. H. Attorneys' Fees. Borrower shall reimburse Bank promptly upon demand for all costs and expenses, including, without limitation, reasonable attorneys' fees and expenses, expended or incurred by Bank in any arbitration, judicial reference, legal action, or otherwise in connection with (i) the amendment and enforcement of this Agreement and the other Loan Documents, including, without limitation, during any workout, attempted workout, and/or in connection with the rendering of legal advice as to Bank's rights, remedies, and obligations under this Agreement and the other Loan Documents, whether or not any form of legal proceeding is recommended, (ii) collecting any sum which becomes due Bank under this Agreement or any of the other Loan Documents, (iii) any proceeding for declaratory relief, any counterclaim to any proceeding, or any appeal, (iv) the protection, preservation, or enforcement of any rights or remedies of Bank or any of the Collateral, whether or not any form of legal proceedings is commenced, or (v) any action necessary to defend, protect, assert, or preserve any of Bank's rights or remedies as a result of or related to any case or proceeding under title 11 of the United States Code, as amended, or any similar law of any jurisdiction. All of such costs and expenses shall bear interest from the time of demand at the rate then in effect under the Note. Page 18 I. Applicable Law. Except as otherwise provided herein, this Agreement and all other Loan Documents and the rights and obligations of the parties hereto shall be governed by the laws of the State of California, exclusive of the choice of law provisions thereof. J. Counterparts. This Agreement may be executed in any number of counterparts which, when taken together, shall constitute but one agreement. K. Survival. All representations, warranties, covenants, agreements, waivers, and releases of Borrower, PRIMT, MRM Financial and Emergent, and each of them, contained herein shall survive the payment in full of Borrower's, PRIMT's, MRM Financial's or Emergent's obligations to Bank. L. Notices. Any notices required or contemplated under this Agreement or any other Loan Document shall be in writing and shall be personally delivered; or sent by United States mail, postage prepaid; or sent by facsimile transmission, and shall be addressed as follows: "Borrower" Physiologic Reps 932 Grand Central Avenue Glendale, California, 91201 Attn: William McKay, CFO Fax No.: (818)240-8535 "PRIMT" PRI Medical Technologies, Inc. 932 Grand Central Avenue Glendale, California, 91201 Attn: William McKay, CFO Fax No.: (818)240-8535 Page 19 "MRM Financial" Medical Resources Management Financial, Inc. 932 Grand Central Avenue Glendale, California, 91201 Attn: William McKay, CFO Fax No.: (818)240-8535 "Emergent" Emergent Group, Inc. 145 Huguenot St. #405B New Rochelle, New York 10801 Attn: Bruce J. Haber, CEO Fax No.: (914) 235-4258 "Bank" U.S. Bank National Association Attn: Peggy Carmichael, Vice President Special Assets Group, P-5 555 S.W. Oak Street, Suite 505 Portland, OR 97204 Fax No.: (503)275-5919 Notice shall be deemed complete three days after the mailing of notice by U.S. Mail, or upon the date of personal delivery, or upon the date of successful completion of facsimile transmission. Any party may change the address to which notices, requests and other communications are to be sent by giving written notice of such change to each other party, which shall be effective upon receipt of such written notice. Page 20 IN WITNESS WHEREOF, Bank, Borrower, PRIMT, MRM Financial and Emergent have executed this Agreement as of the date and year first set forth above. Physiologic Reps, a California corporation By: __________________________ Bruce J. Haber Its: Chief Executive Officer PRI Medical Technologies, Inc., formerly known as Medical Resources Management, Inc., a Nevada corporation By: __________________________ Bruce J. Haber Its: Chief Executive Officer Medical Resources Management Financial, Inc., a California corporation By: __________________________ Bruce J. Haber Its: Chief Executive Officer Emergent Group, Inc., a Nevada corporation By: __________________________ Bruce J. Haber Its: Chief Executive Officer U.S. Bank National Association By: ___________________________________________________ Peggy Carmichael Its: Vice President Page 21 EX-21 3 dec31200410ksbex211.txt Exhibit 21.1 Subsidiaries of Registrant listing state of incorporation Name State of Incorporation - ---- ---------------------- PRI Medical Technologies, Inc. Nevada Physiologic Reps California Medical Resources Management Financial, Inc. California EX-23 4 dec31200410ksbex231.txt CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM We consent to the incorporation by reference in Registration Statement No. 333-104315 of Emergent Group, Inc. on Form S-8 of our report, dated March 8, 2005, appearing in the Annual Report on Form 10-KSB of Emergent Group, Inc. for the year ended December 31, 2004. /s/ SINGER LEWAK GREENBAUM & GOLDSTEIN LLP Los Angeles, California March 31, 2005 EX-23 5 dec312004ex232.txt CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM We consent to the incorporation by reference in Registration Statement No. 333-104315 of Emergent Group, Inc. on Form S-8 of our report, dated March 2, 2004, except for Note 15 as to which the date is March 31, 2004, appearing in the Annual Report on Form 10-KSB of Emergent Group, Inc. for the year ended December 31, 2003. /s/ SINGER LEWAK GREENBAUM & GOLDSTEIN LLP Los Angeles, California March 31, 2005 EX-31 6 dec31200410ksbex311.txt Exhibit 31 (a) CERTIFICATION I, Bruce J. Haber, Chairman and Chief Executive Officer, certify that: 1. I have reviewed this annual report on Form 10-KSB of Emergent Group Inc.; 2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary in order to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report; 3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining "disclosure controls and procedures" for the registrant and have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of the end of the period covered by this annual report (the "Evaluation Date"); and c) presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date. 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of the registrant's board of directors: a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's othe certifying officer and I have indicated in this annual report whether there were significant changes i internal controls or in other factors that could significantly affect internal controls subsequent t the date of our most recent evaluation, including any corrective actions with regard to significant eficiencies and material weaknesses. Dated: March 29, 2005 /s/ BRUCE J. HABER -------------- Bruce J. Haber Chairman and Chief Executive Officer EX-31 7 dec31200410ksbex312.txt Exhibit 31 (b) CERTIFICATION I, William M. McKay, Chief Financial Officer, certify that: 1. I have reviewed this annual report on Form 10-KSB of Emergent Group, Inc.; 2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary in order to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report; 3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining "disclosure controls and procedures" for the registrant and have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of the end of the period covered by this annual report (the "Evaluation Date"); and c) presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date. 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of the registrant's board of directors: a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officer and I have indicated in this annual report whether there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: March 29, 2005 /s/ WILLIAM M. MCKAY ---------------- William M. McKay Chief Financial Officer EX-32 8 dec31200410ksbex321.txt Exhibit 32(a) Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (Subsections (a) and (b) of Section 1350, Chapter 63 of Title 18, United States Code) Pursuant to section 906 of the Sarbanes-Oxley Act of 2002 (subsections (a) and (b) of section 1350, chapter 63 of title 18, United States Code), the undersigned officer of Emergent Group Inc., a Nevada corporation (the "Company"), hereby certifies, to such officer's knowledge, that: The Annual Report on Form 10-KSB for the year ended December 31, 2004 (the "Report") of the Company fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934 and information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. Dated: March 29, 2005 /s/ BRUCE J. HABER ------------------ Bruce J. Haber Chairman and Chief Executive Officer EX-32 9 dec31200410ksbex322.txt Exhibit 32(b) Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (Subsections (a) and (b) of Section 1350, Chapter 63 of Title 18, United States Code) Pursuant to section 906 of the Sarbanes-Oxley Act of 2002 (subsections (a) and (b) of section 1350, chapter 63 of title 18, United States Code), the undersigned officer of Emergent Group Inc., a Nevada corporation (the "Company"), hereby certifies, to such officer's knowledge, that: The Annual Report on Form 10-KSB for the year ended December 31, 2004 (the "Report") of the Company fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934 and information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. Dated: March 29, 2005 /s/ WILLIAM M. MCKAY -------------------- William M. McKay Chief Financial Officer EX-99.4 10 dec31200410ksbex994.txt Exhibit 99.4 Resolution of the Board of Directors of March 23, 2004 amending 2002 Stock Option Plan, subject to stockholder approval RESOLVED, that subject to stockholder approval, the Board of Directors does hereby adopt and approve an increase in the number of shares covered by the Plan from 325,000 to 650,000 and that Section 6) of the 2002 Stock Option Plan is amended to read as follows: "The total number of shares of Common Stock reserved for issuance by the Company either directly or underlying Options granted under this Plan from inception to date is 650,000. The total number of shares of Common Stock reserved for such issuance may be increased only by a resolution adopted by the Board of Directors and amendment of the Plan. Stockholder approval of such increase or other Modification of the Plan within one year of Effective Date shall be required in the event Incentive Stock Options are granted or to be granted under the Plan. Common Stock issued under the Plan may be authorized and unissued or reacquired Common Stock of the Company." -----END PRIVACY-ENHANCED MESSAGE-----