<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-QSB
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1996
--------------------
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transaction period from ____________ to ____________
Commission File Number: 0-27638
-----------
The Eastwind Group, Inc.
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 23-2732753
- --------------------------------------------------------------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) identification No.)
100 Four Falls Corporate Center, Suite 305, West Conshohocken, PA 19428
- --------------------------------------------------------------------------------
(Address of principal executive offices)
(610) 828-6860
- --------------------------------------------------------------------------------
(Registrant's telephone number, including area code)
Not applicable
- --------------------------------------------------------------------------------
(Former name, former address, and former fiscal year, if changed since last
report)
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
------ ------
Yes X No
------ ------
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date.
Common stock, $.10 par value 2,138,250 shares
- -------------------------------- ---------------------------------
(Class) (Outstanding at July 29, 1996)
Transitional Small Business Disclosure format (check one)
Yes No X
------ ------
<PAGE>
THE EASTWIND GROUP, INC.
PART I - FINANCIAL INFORMATION
Item 1 - Financial Statements
-----------------------------
The following financial information sets forth the operations of The Eastwind
Group, Inc. ("The Company") for the three and six months ended June 30, 1996
and 1995. Certain information and footnote disclosures normally included with
financial statements prepared in accordance with generally accepted accounting
principles have been omitted pursuant to SEC rules and regulations.
In the opinion of management, the following unaudited balance sheets and
related statements of operations and cash flows reflect all adjustments
(consisting of normal recurring adjustments) necessary to present fairly the
financial position at June 30, 1996 and December 31, 1995, and the results of
operations and cash flows for the six months ended June 30, 1996 and 1995.
<TABLE>
<CAPTION>
Page Number
-----------
Item 1. - Financial Statements
------------------------------
<S> <C>
Index to Financial Statements 2
Consolidated Balance Sheets as of
June 30, 1996 and December 31, 1995 3
Consolidated Statements of Operations for the Three Months and
Six Months ended June 30, 1996 and 1995 4
Consolidated Statements of Cash Flows for the
Six Months ended June 30, 1996 and 1995 5
Notes to Consolidated Financial Statements 6
Item 2 - Management's Discussion and Analysis of
------------------------------------------------
Results of Operations and Financial Condition
---------------------------------------------
Results of Operations for the Three Months and Six Months
ended June 30, 1996 and 1995 13
Liquidity and Capital Resources 17
</TABLE>
(2)
<PAGE>
The Eastwind Group, Inc.
Consolidated Balance Sheets
(Unaudited)
<TABLE>
<CAPTION>
June 30, December 31
ASSETS 1996 1995
Current assets: ---------- -----------
<S> <C> <C>
Cash and cash equivalents $ 3,064,658 $ 426,377
Subscriptions receivable 900,000 746,000
Accounts receivable, net 4,124,913 4,486,822
Due from related party 123,708 78,000
Inventories 2,003,655 1,911,969
Prepaid expenses 160,156 63,912
---------- -----------
Total current assets 10,377,090 7,713,079
---------- -----------
Property, plant and equipment, net 1,891,605 1,612,817
---------- -----------
Other Assets:
Investment in preferred stock 250,000 -
Subordinated note receivable 450,000 -
Deferred income taxes 128,312 128,312
Other assets 402,215 492,878
Goodwill, net 165,000 169,400
---------- -----------
Total other assets 1,395,527 790,590
---------- -----------
$13,664,222 $ 10,116,486
========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Lines of credit $ 1,019,211 $ 2,135,096
Currrent portion of long-term debt 603,734 458,294
Accounts payable 1,611,344 1,571,010
Accrued expenses 467,439 397,188
Accrued income taxes 68,123 27,223
Deferred income taxes 146,494 146,494
---------- -----------
Total current liabilities 3,916,345 4,735,305
---------- -----------
Long-term debt 3,282,975 3,221,585
---------- -----------
Subordinated note payable 289,600 -
---------- -----------
Accrued pension and postretirement benefits 209,510 200,510
---------- -----------
Deferred credit, net 172,549 184,874
---------- -----------
Stockholders' equity:
Preferred stock, $.10 par value,
3,000,000 shares authorized; 1,000 issued
and outstanding at June 30, 1996; none issued
and outstanding at December 31, 1995 100 -
Common stock, $.10 par value, 5,000,000 shares
authorized, 2,138,250 and 1,608,250 issued
and outstanding June 30, 1996 and
December 31, 1995, respectively 213,825 160,825
Warrants outstanding 1,455,097 158,586
Additional paid-in capital 4,173,906 1,818,215
Accumulated deficit (49,685) (363,414)
---------- -----------
Total stockholders' equity 5,793,243 1,774,212
---------- -----------
$13,664,222 $ 10,116,486
========== ===========
</TABLE>
(3)
<PAGE>
The Eastwind Group, Inc.
Consolidated Statements of Operations
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
1996 1995 1996 1995
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Net sales $ 4,726,480 $ 4,303,268 $ 9,693,462 $ 6,216,788
Cost of goods sold 3,463,274 3,360,063 7,152,027 5,032,890
---------- ---------- ----------- ----------
Gross profit 1,263,206 943,205 2,541,435 1,183,898
Selling, general and administrative expenses 908,796 809,890 1,835,492 1,150,811
---------- ---------- ----------- ----------
Operating income 354,410 133,315 705,943 33,087
Interest expense 144,665 163,690 294,958 238,304
---------- ---------- ----------- ----------
Income (loss) before income taxes 209,745 (30,375) 410,985 (205,217)
Income taxes (benefit) 27,900 16,251 84,400 (16,912)
---------- ---------- ----------- ----------
Net income (loss) $ 181,845 $ (46,626) $ 326,585 $ (188,305)
========== ========== ============ ===========
Pro forma loss per share - $ (0.05) - $ (0.22)
========== ========== ============ ===========
Pro forma weighted average number of
common shares outstanding - 985,750 - 874,638
========== ========== ============ ===========
Earnings (loss) per share $ 0.09 - $ 0.16 -
========== ========== ============ ===========
Shares used in computing earnings per share 2,897,633 2,806,562
========== ========== ============ ===========
</TABLE>
(4)
<PAGE>
The Eastwind Group, Inc.
Consolidated Statements of Cash Flows
(Unaudited)
<TABLE>
<CAPTION>
Six Months Ended
June 30,
1996 1995
---------- -----------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $ 326,585 $ (188,305)
Adjustments to net income (loss)to net cash
provided by operating activities:
Depreciation 151,688 78,498
Amortization of deferred credit (11,825) (12,325)
Amortization, other 24,401 42,120
Deferred income tax provision - (33,163)
Noncash compensation expense - 32,500
(Increase) decrease in assets:
Accounts receivable 398,162 496,709
Inventories (91,686) 524,234
Prepaid expenses (57,436) 80,298
Other assets (11,800) (12,263)
Increase (decrease) in liabilities:
Accounts payable 52,090 269,863
Accrued expenses 19,684 57,739
Accrued income taxes 40,900 -
Accrued pension and postretirement benefits 9,000 -
---------- -----------
Net cash provided by operating activiies 849,763 1,335,905
---------- -----------
Cash flows from investing activities:
Purchase of property and equipment (6,302) (30,025)
Net payments from related party - 25,400
Purchase of preferred stock (250,000) -
Purchase of subordinated note receivable (450,000) -
Purchase of net assets of Polychem, net of
cash acquired - (3,779,963)
---------- -----------
Net cash used in investing activities (706,302) (3,784,588)
---------- -----------
Cash flows from financing activities:
Net borrowings (repayments) under lines
of credit (1,115,885) 798,328
Borrowings on term notes 0 1,952,000
Principal payments on term notes and
capital leases (217,341) (571,970)
Proceeds from sales of common stock and warrants 474,381 500,000
Proceeds from exercise of warrants 1,321,000 -
Proceeds from sale of preferred stock, net
of warrants 459,411 -
Issuance of warrants, net of exercises 1,296,511 -
Proceeds from subordinated debenture 289,600 -
Deferred financing costs - (206,195)
Preferred stock dividends (12,857) -
Registration costs - (7,500)
---------- -----------
Net cash provided by financing activities 2,494,820 2,464,663
---------- -----------
Net increase in cash and cash equivalents 2,638,281 15,980
Cash and cash equivalents , beginning of period 426,377 -
---------- -----------
Cash and cash equivalents , end of period $ 3,064,658 $ 15,980
========== ===========
</TABLE>
(5)
<PAGE>
THE EASTWING GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1: Basis of Presentation
------- ---------------------
The unaudited consolidated financial statements included herein have
been prepared by the Company pursuant to the rules and regulations of
the Securities and Exchange Commission. Certain information and
footnote disclosures normally included in financial statements
prepared in accordance with generally accepted accounting principles
have been omitted pursuant to such rules and regulations. In the
opinion of management, all adjustments, consisting of only normal
recurring adjustments necessary to present fairly the financial
position at June 30, 1996 and December 31, 1995, and the results of
operations for the three months and six months ended June 30, 1996
and 1995 and cash flows for the six months ended June 30, 1996 and
June 30, 1995, have been made. The results of operations for the six
month period ended June 30, 1996 are not necessarily indicative of
the results for the year ending December 31, 1996. These financial
statements should be read in conjunction with the audited financial
statements and the notes thereto included in the Company's Annual
Report on Form 10-KSB which was filed for the year ended December 31,
1995.
Note 2: Inventories
- ------- -----------
Inventories consist of the following:
<TABLE>
<CAPTION>
June 30, December 31,
1996 1995
------------ ------------
<S> <C> <C>
Raw Materials $ 893,243 $ 709,728
Work in Process 696,142 619,165
Finished Goods 414,270 583,076
----------- ------------
$ 2,003,655 $ 1,911,969
=========== ============
</TABLE>
Note 3: Property, Plant and Equipment
- ------- -----------------------------
<TABLE>
<CAPTION>
June 30, December 31,
1996 1995
------------ ------------
<S> <C> <C>
Land $ 56,221 $ 56,221
Buildings 963,180 963,180
Machinery and equipment 1,240,975 810,851
------------ ------------
2,260,376 1,830,252
Less-Accumulated depreciation (368,771) (217,435)
------------ ------------
$1,891,605 $1,612,817
============ ============
</TABLE>
Machinery and equipment includes $512,105 and $212,878 of production
equipment under capital leases at June 30, 1996 and December 31,
1995, respectively. Accumulated depreciation on such equipment was
$34,072 and $31,633 at June 30, 1996 and December 31, 1995,
respectively.
(6)
<PAGE>
Note 4: Investment in Lavelle Company
- ------- -----------------------------
In March 1996, the Company invested $450,000 in Lavelle Company
("Lavelle") in the form of a subordinated debenture. The debenture
matures in March 2001 and pays quarterly interest at a rate of 20%
per year. In connection with its investment, the Company has
guaranteed the indebtedness of Lavelle under a $900,000 equipment
facility. The Company's debenture is subordinate to the equipment
facility indebtedness. In addition, the Company has pledged a
$100,000 security interest in favor of the equipment facility lender.
Lavelle was incorporated to purchase the net assets of Lavelle
Aircraft which was liquidated under Chapter 11 of the U.S. Bankruptcy
Law. The stock of Lavelle is owned by non-affiliates of the Company.
Of the $78,000 receivable due from Lavelle Aircraft at December 31,
1995, $55,000 was repaid by Lavelle Aircraft and the remainder was
assumed by Lavelle.
The $450,000 debenture is recorded as a non-current asset in the June
30, 1996 balance sheet. Because of the Company's guarantee and pledge
relating to Lavelle's equipment facility, any loss of Lavelle will be
recognized by the Company in its statement of operations and recorded
as a reduction in the carrying amount of its investment. To the
extent Lavelle's losses exceed the amount of the investment, a
liability will be recorded on the Company's balance sheet.
There were no losses during the period from the date of investment
through June 30, 1996.
Note 5: Investment in Preferred Stock
- ------- -----------------------------
On May 24, 1996, the Company purchased convertible preferred stock in
Wickersham Printing Company, Inc. ("Wickersham") for $250,000. The
preferred stock has a minimum dividend rate of 6% and participates in
the earnings, if any, of Wickersham at the rate of 80% of such
earnings. Through June 30, 1996, Wickersham experienced minimal
losses, therefore there was no impact on the Company's operations.
The preferred stock has a liquidation preference equal, in the
aggregate, to $250,000 plus accrued and unpaid dividends thereon, and
is convertible, in the aggregate, into 80% of the outstanding Common
Stock of Wickersham, dependent upon its achievement of certain
earnings requirements.
Wickersham is a privately-owned printing and book manufacturer
located in Lancaster, Pennsylvania. Its two production facilities
manufacture books via conventional offset printing and through the
latest technology -- "on demand" printing. This dual capacity allows
Wickersham to produce books efficiently in quantities ranging from
one to 20,000.
(7)
<PAGE>
THE EASTWIND GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 6: Long-term Debt
- ------- --------------
Long-term debt consists of the following:
<TABLE>
<CAPTION>
June 30, December 31,
1996 1995
------------ ------------
<S> <C> <C>
Princeton term note payable to
bank, secured by all of its
assets, due in 60 monthly
installments of $8,333, plus
interest at prime plus 4.25%
(12.5% at June 30, 1996). $ 208,338 $ 258,341
Princeton capital lease obligation,
secured by related equipment,
payable in 60 monthly
installments of $2,397, including
interest at 16.1%. 73,735 83,569
Princeton capital lease obligation,
secured by related equipment,
payable in 48 monthly
installments of $6,403, including
interest at 8.57% 250,313 -
Polychem term note payable to the
Budd Company, interest at 8%,
principal payable in 20 quarterly
installments of $81,315,
beginning March 31, 1998. 1,626,294 1,626,294
Polychem note payable to bank,
interest at prime plus 2.25% (10.5%
at June 30, 1996) payable in 18
monthly installments of $21,155
and 41 monthly installments of
$29,617 plus interest, beginning
April 1, 1995 with a final payment
in March 2001. 1,459,679 1,586,607
Polychem capital lease obligation,
secured by related equipment,
payable in 60 monthly
installments of $2,480, including
interest at 10.65%. 142,032 -
Eastwind loan payable to Cooke
Publishing. 25,000 25,000
Other capital lease obligations. 101,318 100,068
------------ ------------
3,886,709 3,679,879
(603,734) (458,294)
------------ ------------
Less-Current portion. $3,282,975 $3,221,585
============ ============
</TABLE>
(8)
<PAGE>
THE EASTWIND GROUP, INC.
NOTES CONSOLIDATED FINANCIAL STATEMENTS
Note 6: Long-term Debt (continued)
- ------- --------------------------
Princeton has a $1,000,000 demand line of credit with a bank through
July 31, 1997, subject to renewal. Borrowings under the line of
credit bear interest at prime plus 4.25% (12.5% at June 30, 1996) and
are limited to 80% of eligible accounts receivable plus the lesser of
50% of paper stock inventory or $350,000. Outstanding borrowings were
$240,850 and $411,349 at June 30, 1996 and December 31, 1995,
respectively. The line is collateralized by substantially all of
Princeton's assets and the personal guarantees of three of the
Company's shareholders. An annual commitment fee of $15,000 is
required under the line and the financing arrangement places
restrictions on payment of dividends, capital expenditures, sale of
assets and change in ownership, among other terms. The arrangement
also includes a material adverse change clause that can be invoked at
the sole discretion of the bank.
Polychem entered into a loan and security agreement with a bank on
March 10, 1995, which provides for a three-year $9,000,000 revolving
line of credit and term note. Borrowings under the revolver bear
interest at prime plus 1.75% (10.0% at June 30, 1996) and are limited
to 75% of eligible accounts receivable plus the lesser of 55% of
eligible inventory or $1,000,000 minus 55% of then-undrawn amounts of
outstanding letters of credit for inventory purchases. Outstanding
borrowings were $774,361 and $1,723,747 at June 30, 1996 and December
31, 1995, respectively. The line is collateralized by substantially
all of Polychem's assets, a mortgage on the land and building and a
$2,500,000 limited guarantee by the Company. In addition, the
financing agreement requires that Polychem maintain adjusted working
capital of at least $2,200,000 and maximum adjusted net deficit of
$500,000, and places restrictions on the payment of dividends to the
Company and investment in, loans or advances directly to any other
subsidiary and other expenditures, among other items. Polychem was in
compliance with these covenants as of June 30, 1996.
Future maturities of long-term debt at June 30, 1996 are as follows:
<TABLE>
<S> <C>
June 30, 1997 $ 603,734
June 30, 1998 773,141
June 30, 1999 820,197
June 30, 2000 851,003
June 30, 2001 350,751
Thereafter 487,883
-----------
$3,886,709
===========
</TABLE>
(9)
<PAGE>
THE EASTWIND GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 7: Subordinated Debenture Payable
- ------- ------------------------------
In June 1996, the Company sold to an investor a five-year, $500,000
subordinated debenture which bears interest at 12%. The debenture is
payable in three equal installments due June 30, 1999, 2000, and
2001. The Company can repay the debenture in whole or in part at any
time. In addition, the investor received a warrant to purchase 80,000
shares of the Company's Common Stock at $6.00 per share exercisable
for a seven year period. The warrant was valued at $210,400 for
financial purposes and was recorded as a debt discount to be
amortized over the term of the debenture. The effective interest rate
of the subordinated debenture is 14.8%.
Note 8: Equity Transactions
- ------- -------------------
In May 1996, the Company issued 1,000 shares of its newly designated
Series A Preferred Stock (the "Series A Preferred Stock") to an
investor for gross proceeds of $1,000,000. The Series A Preferred
Stock has a stated value of $1,000 per share and pays quarterly
dividends at the rate of 9% per year until May 9, 1999, 15% per year
thereafter until May 9, 2002, and 18% per year thereafter. The
Company may redeem the Series A Preferred Stock at any time on thirty
day's prior notice at the stated value per share plus accrued and
unpaid dividends thereon to the date of redemption. The holders of
the Series A Preferred Stock are entitled to payment of the stated
value plus accrued and unpaid dividends thereon, prior to payment in
respect of any class of capital stock of the Company, in the event of
a liquidation or dissolution of the Company. The Series A Preferred
Stock is not entitled to any voting rights. In connection with the
issuance of the Series A Preferred Stock, the Company issued 220,000
Common Stock Purchase Warrants which are exercisable to purchase one
share of the Company's Common Stock at $6.00 per share until they
expire on May 10, 2003. The warrants were valued at $500,000 for
financial reporting purposes and have been deducted from the gross
proceeds received from the preferred stock sale and recorded as
warrants outstanding.
In June 1996, the Company sold to an investor 200,000 Common Stock
Units (the "Units"), with each Unit consisting of one (1) share of
Common Stock and one-and-one-quarter (1 1/4) Common Stock Purchase
Warrants, for $1,200,000. Each warrant is exercisable at $6.00 per
share for a three year period commencing on December 14, 1996. At
June 30, 1996, 50,000 were issued and the remaining 150,000 Units
will be issued on the effective date of the Company's most recent
registration statement, which was July 25, 1996.
(10)
<PAGE>
THE EASTWIND GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 9: Acquisition of Polychem
- ------- -----------------------
On March 10, 1995, the Company acquired, through a newly established
wholly owned subsidiary, the net assets of the Polychem Division of
the Budd Company for approximately $6,448,000, including the seller
notes of approximately $2,376,000. The acquisition has been accounted
for using the purchase method of accounting. The fair market value of
the net assets acquired was recorded based on the carrying value for
monetary net assets, with the remaining portion of the purchase price
allocated to property, plant, and equipment. Polychem's results from
operations have been included in the Company's consolidated financial
statements from the date of acquisition.
The following unaudited pro forma information is presented for the
acquisition of Polychem as if the acquisition had occurred on January
1, 1995. The operating results for the period March 11, 1995 to June
30, 1995 are included in the Company's historical consolidated
statement of operations for the six months ended June 30, 1995. The
pro forma information does not purport to be indicative of the
results that would have been attained if the operations had actually
been combined during the periods presented and is not necessarily
indicative of operating results to be expected in the future.
<TABLE>
<CAPTION>
Six months ended
June 30, 1995
----------------
<S> <C>
Total Revenues $ 8,685,000
================
Net loss $ (181,000)
================
Proforma loss per share $ (.18)
================
Shares used in computing proforma
net loss per share 985,750
================
</TABLE>
Note 10: Earnings (Loss) Per Share
- -------- -------------------------
For the three months and six months ended June 30, 1996, the
Company's total outstanding Common Stock options and warrants
exceeded 20% of the total outstanding Common Stock. Therefore, the
income per share computations are modified, as required under
Accounting Principles Board Opinion No. 15, to assume all outstanding
common stock options and warrants were exercised and the related
proceeds were used to repurchase up to 20% of the total outstanding
Common Stock. Any remaining proceeds are assumed to be used to reduce
borrowings, thereby reducing interest expense, net of tax.
(11)
<PAGE>
THE EASTWIND GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 10: Earnings (Loss) Per Share (continued)
- -------- --------------------------------------
Details of the calculation of earnings per share for the three months
and six months ended June 30, 1996 are as follows:
<TABLE>
<CAPTION>
Three months Six months
ended ended
June 30, 1996 June 30, 1996
------------- -------------
<S> <C> <C>
Weighted average number of
shares outstanding 1,800,283 1,709,212
Assumed exercise of options
and warrants 1,525,000 1,525,000
Less assumed repurchase of stock (427,650) (427,650)
------------- -------------
Shares used in computing earnings
per share 2,897,633 2,806,562
============= ============
Net income for the period $ 181,845 $ 326,585
Preferred stock dividends (12,857) (12,857)
Adjustment to net income for
assumed reduction in interest
expense, net of tax 80,063 131,534
------------- -------------
Adjusted net income for computation
of earnings per share $ 249,051 $ 445,262
============= ============
Earnings per share $ .09 $ .16
============= ============
</TABLE>
Earnings (loss) per share for the three months and six months ended
June 30, 1995 are calculated by dividing the period loss by the
proforma weighted average number of shares outstanding for the
period.
Note 11: Concentration of Credit Risk
- -------- ----------------------------
One customer accounted for 15% and 23% of net sales for the six
months ended June 30, 1996 and 1995, respectively. The Company had
receivables from this customer of approximately $133,000 and $389,000
at June 30, 1996 and December 31, 1995, respectively. The loss of
this customer would have a material adverse effect on Princeton and
the Company.
Note 12: Supplemental Cash Flow Disclosure
- -------- ---------------------------------
During the six months ended June 30, 1996, Polychem and Princeton
entered into capital leases for $146,125 and $254,896 of equipment,
respectively.
(12)
<PAGE>
THE EASTWIND GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Item 2 - Management's Discussion and Analysis of Financial Condition
- --------------------------------------------------------------------
and Results of Operations
-------------------------
RESULTS OF OPERATIONS
- ---------------------
THREE MONTHS ENDED JUNE 30, 1996 AND 1995
- -----------------------------------------
Overview
- --------
The Company generated net income of $182,000 during the three months ended June
30, 1996, compared to a loss of $47,000 for the same period of the prior year.
The income for the quarter ended June 30, 1996 is a result of Polychem's
profitability more than offsetting the losses of Princeton during that period.
Revenues
- --------
Revenues for the three months ended June 30, 1996 of $4,726,000 represents an
increase of $423,000 versus the same period of the prior year. The increase is
all attributable to Polychem, as Princeton's revenues were slightly down during
the quarter versus the same period of the prior year.
Cost of Sales
- -------------
Cost of sales for the three months ended June 30, 1996 totalled $3,463,000, or
73% of net sales, compared to the same period of the prior year of $3,360,000,
or 78% of net sales, an improvement of 5 percentage points. Polychem's cost of
sales for the three month period ended June 30, 1996 was $2,280,000 or 67% of
net sales. Polychem's improvement in gross profit percentage by 6 percentage
points during the three months ended June 30, 1996, versus the same period of
the prior year, is attributable to streamlined production methods and a
favorable mix in manufactured products versus products for resale purchased from
outside vendors. Princeton's cost of sales for the three months ended June 30,
1996 was $1,183,000 or 91% of net sales, approximately the same percentage as in
the comparable period of the prior year.
(13)
<PAGE>
THE EASTWIND GROUP, INC.
RESULTS OF OPERATIONS (continued)
- ---------------------------------
Selling, General and Administrative Expenses
- --------------------------------------------
Selling, general and administrative expenses for the three months ended June 30,
1996 were $909,000 or 19% of net sales, compared to the same period of the prior
year of $810,000, representing the same percentage relationship to net sales.
The increase in selling, general and administrative expenses for the quarter was
principally due to increases at Polychem ($77,000) and in corporate overhead
relating to the holding company ($43,000), which were partially off-set by a
reduction in selling, general and administrative expenses at Princeton of
$21,000. Polychem's selling, general and administrative expenses as a percentage
of net sales for the quarter ended June 30, 1996 were 16%, identical to the same
period of the prior year. Management believes that the percentage of selling,
general and administrative expenses to net sales in the future will decrease as
fixed costs are spread over higher net sales for both Polychem and Princeton.
Interest Expense
- ----------------
Interest expense for the three months ended June 30, 1996 was $145,000, or 3.1%
of net sales, versus $164,000, or 3.9% of net sales, for the same period of the
prior year. Interest expense as a percentage of net sales was lower during the
quarter ended June 30, 1996 due to the influx of additional capital and
continuing efforts by management to more effectively manage accounts receivable
and inventories, resulting in lower utilization of available lines of credit.
Polychem's interest expense for the quarter ended June 30, 1996 was $109,000, or
3.2% of net sales, while Princeton's interest expense during this quarter was
$31,000 or 2.3% of net sales.
(14)
<PAGE>
THE EASTWIND GROUP, INC.
Item 2 - Management's Discussion and Analysis of Financial Condition
- --------------------------------------------------------------------
and Results of Operations
-------------------------
RESULTS OF OPERATIONS
- ---------------------
SIX MONTHS ENDED JUNE 30, 1996 AND 1995
- ---------------------------------------
Overview
- --------
The Company generated net income of $327,000 during the six months ended June
30, 1996, compared to a loss of $188,000 for the same period of the prior year.
The income for the six month period ended June 30, 1996 is a result of
Polychem's profitability being significantly in excess of corporate overhead and
Princeton's losses which were slightly less than those of the same period of the
prior year.
Revenues
- --------
Revenues for the six months ended June 30, 1996 of $9,693,000 represents an
increase of $3,476,000 versus the same period of the prior year. The increase is
wholly attributable to Polychem, which is included for the entire six months in
1996, but only from the time of acquisition (March 10, 1995) through June 30,
1995. Princeton's revenues for the six months ended June 30, 1996 were $166,000
less than the comparable period of the prior year.
Cost of Sales
- -------------
Cost of sales for the six months ended June 30, 1996 totalled $7,152,000, or 74%
of net sales, compared to $5,033,000 for the same period of the prior year, or
81% of net sales, an improvement of 7 percentage points. Polychem's cost of
sales for the six month period ended June 30, 1996 was $4,860,000 or 68% of net
sales, an improvement of 6 percentage points over the same period of the prior
year. Polychem's improvement in gross profit is attributable to both streamlined
production methods and a very favorable mix in manufactured products versus
products for resale purchased from outside vendors. Princeton's cost of sales
for the six months ended June 30, 1996 was $2,292,000 or 90%, an identical
percentage to that experienced in the comparable period of the prior year.
(15)
<PAGE>
THE EASTWIND GROUP, INC.
RESULTS OF OPERATIONS (continued)
- ---------------------------------
Selling, General and Administrative Expenses
- --------------------------------------------
Selling, general and administrative expenses for the six months ended June 30,
1996 were $1,835,000 or 19% of net sales, compared to $1,151,000 for the same
period of the prior year, or 19% of net sales. The increase in selling, general
and administrative expenses for the six months ended June 30, 1996 versus the
same period of the prior year is principally attributable to Polychem being
included for the entire six month period in 1996 versus from the date of
acquisition (March 10, 1995) through June 30, 1995. Princeton's selling, general
and administrative expenses of $290,000 for the six months ended June 30, 1996
represents a reduction in such expenses versus the same period of the prior year
of $47,000, a one percentage point improvement. Management continues to believe
that the percentage of selling, general and administrative expenses to net sales
will decrease as fixed costs are spread over higher net sales for both Polychem
and Princeton.
Interest Expense
- ----------------
Interest expense for the six months ended June 30, 1996 was $295,000, or 3.0% of
net sales, versus $238,000, or 3.8% of net sales, for the same period of the
prior year. Interest expense as a percentage of net sales improved as a result
of continuing efforts by management to more efficiently manage accounts
receivable and inventories, resulting in lower utilization of available lines of
credit. Polychem's interest expense for the six months ended June 30, 1996 was
$227,000, or 3.2% of net sales, down by .9 percentage point versus the
comparable period of the prior year. Princeton's interest expense for the six
months ended June 30, 1996 was $61,000 or 2.4% of net sales, a .6 percentage
point improvement versus the comparable prior year period.
Income Taxes
- ------------
Income tax expense for the six months ended June 30, 1996 was $84,000,
representing state taxes relating to Polychem. There was no Federal income tax
expense for the six months ended June 30, 1996 due to the entire current
provision being offset by the utilization of the Company's net operating loss
carryover. The net operating loss carryovers were fully utilized as of June 30,
1996.
(16)
<PAGE>
THE EASTWIND GROUP, INC.
Liquidity and Capital Resources
- -------------------------------
The Company has financed its working capital requirements and capital
expenditures through cash flows generated from operations, bank debt, sale of
common stock and warrants, sale of preferred stock, sale of a subordinated
debenture, and equipment leases. Net cash provided by operating activities
during the six months ended June 30, 1996 was $850,000, as compared to cash
provided by operating activities of $1,336,000 for the same period of the prior
year. The principal components of cash flows provided by operating activities
during the six months ended June 30, 1996 were net income ($327,000),
depreciation and amortization ($164,000), a reduction in accounts receivable
($398,000); increases in accounts payable ($52,000), accrued expenses ($20,000)
and pension retirement benefits ($9,000); offset by an increase in inventories
($92,000), prepaid expenses ($57,000) and other assets ($12,000).
During the six months ended June 30, 1995, the net loss for the period of
$188,000 was offset by depreciation and amortization of $108,000, non-cash
compensation expense ($33,000), decreases in accounts receivable ($497,000),
inventory ($524,000), prepaid expenses ($80,000), increases in accounts payable
($270,000) and accrued expenses ($58,000); all of which was offset by an
increase in other assets ($12,000) and a deferred tax benefit ($33,000).
The cash flow from operating activities during the six months ended June 30,
1995 was principally attributable to a decrease in inventories and increases in
accounts payable and accrued expenses at Polychem from the date of acquisition.
However, the Company has continued to focus on the management of accounts
receivable and inventories, resulting in lower levels of line of credit
utilization and a resultant lower interest cost. In addition, the Company
continues to utilize increases in accounts payable in order to take advantage of
trade credit available as opposed to increasing borrowings under its revolving
credit facilities.
Net cash used in investing activities for the six months ended June 30, 1996 was
$706,000 as compared to cash used in the six months ended June 30, 1995 of
$3,785,000. During the six months ended June 30, 1996, the Company made an
investment in the form of a subordinated debenture in Lavelle Company of
$450,000 and an investment of $250,000 in Wickersham Printing Co., Inc. in the
form of convertible preferred stock. Also, the Company purchased property and
equipment of $6,000. During the six months ended June 30, 1995, cash used in
investing activities related to the purchase of net assets of Polychem
($3,780,000) and purchases of property and equipment ($30,000), which were
offset by net payments from a related party ($25,000).
Net cash provided from financing activities for the six months ended June 30,
1996 was $2,495,000, compared to cash provided during the same period of the
prior year of $2,465,000. The principal components of cash provided from
(17)
<PAGE>
THE EASTWIND GROUP, INC.
Liquidity and Capital Resources (continued)
- -------------------------------------------
financing activities during the six months ended June 30, 1996 were proceeds
received from the sale of preferred stock ($459,000), the sale of common stock
($474,000), sale of common stock warrants ($1,297,000), exercise of common stock
warrants ($1,321,000) and the issuance of a subordinated debenture ($290,000).
This cash provided was reduced by repayments of lines of credit ($1,116,000),
principal repayments on term notes and capital leases ($217,000) and preferred
stock dividends ($13,000).
During the six months ended June 30, 1995, cash flows from financing activities
included net borrowings under lines of credit ($798,000), borrowings on term
notes ($1,952,000), sale of common stock and warrants ($500,000); reduced by
principal repayments on term notes and capital leases ($572,000), deferred
financing costs ($206,000) and registration costs ($7,000).
As of June 30, 1996 and December 31, 1995, working capital was $6,461,000 and
$2,978,000, respectively. As working capital increased by $3,483,000, the
working capital ratio increased from 1.6 to 2.6. The Company's focus on raising
capital and managing its principal assets of accounts receivable and inventories
has resulted in significantly stronger liquidity at June 30, 1996 versus
December 31, 1995.
The Company has no significant capital spending or purchase commitments, other
than normal commitments under facility and capital leases. There are no
commitments to purchase significant property, plant and equipment during the
remainder of 1996.
The $9,000,000 credit facility at Polychem includes a term loan with an
outstanding balance of $1,460,000 at June 30, 1996, leaving an aggregate
availability of $7,540,000 as of that date under the credit facility, dependent
upon eligible collateral assets. As of June 30, 1996, availability under the
line of credit, based upon available eligible collateral assets, was $2,437,000,
and outstanding borrowings were $774,000.
As of June 30, 1996, Princeton's line of credit balance outstanding was $245,000
against the total available credit facility of $1,000,000.
As of June 30, 1996, the Company had outstanding Class C, D, and A-1 Common
Stock purchase warrants, which were offered in March 1995 to create a reserve to
be used by the Company in raising funds for additional potential business
opportunities and acquisitions. During the six months ended June 30, 1996,
exercises of Class C, Class D and Class A-1 warrants were 85,000, 30,000 and
215,000 shares, respectively, generated gross capital proceeds to the Company of
$1,475,000.
(18)
<PAGE>
THE EASTWIND GROUP, INC.
Liquidity and Capital Resources (continued)
- -------------------------------------------
In addition, in May and June 1996, the Company sold warrants through private
equity and debt placements for 550,000 shares of Common Stock with exercise
prices at $6.00. These additional warrants plus the remaining Class C, Class D
and Class A-1 warrants, if fully exercised, would generate additional net
capital to the Company of $5,848,000.
The Company believes that its current cash and available resources, cash
generated from operations, and the availability under its lines of credit will
be sufficient to fund the Company's operations and expected capital expenditures
for the twelve months from June 30, 1996.
The Company intends to aggressively pursue potential acquisitions. The Company
will require additional capital to fund its expansion plans, which may be in the
form of private placements or public offerings of debt, equity or convertible
securities.
(19)
<PAGE>
THE EASTWIND GROUP, INC.
PART II - OTHER INFORMATION
Item 1: Legal Proceedings
- ------- -----------------
none
Item 2: Change in Securities
- ------- --------------------
(a) In May 1996, the Company issued 1,000 shares of its Series A Preferred
Stock. The terms of such Series A Preferred Stock as established by the
Company's Board of Directors, has a stated value of $1,000 per share and
requires the payment of quarterly dividends at the rate of 9% per annum
through May 9, 1999; 15% per annum thereafter until May 9, 2002, and 18%
per annum thereafter. The Series A Preferred Stock is redeem able at any
time upon thirty (30) day's prior notice at the stated value per share plus
accrued and unpaid dividends through the date of redemption. The holders of
the Series A Preferred Stock have a liquidation preference with respect to
such shares equal to their stated value plus accrued and unpaid dividends.
The Series A Preferred Stock has no voting rights.
(b) The effect of the issuance of the 1,000 shares of Series A Preferred Stock
upon the Common Stock are to subordinate the rights of the holders of the
Common Stock to dividends and to proceeds upon liquidation of the Company
to the preferences as to dividends and liquidation rights accorded to the
Series A Preferred Stock.
(c) On June 20, 1996 the company sold to Mentor Special Situation Fund, L.P. a
five year, $500,000 Subordinated Debenture which bears interest at 12%. The
Debenture is payable in three equal installments due June 30, 1999, 2000,
and 2001. The Company can repay the Debenture in whole or in part at any
time. In addition, MSSF received a warrant to purchase 80,000 shares of the
Company's Common Stock at $6.00 per share exercisable for a seven year
period. The terms of the Subordinated Debenture prohibit the payment of
dividends for so long as any portion of the Subordinated Debenture are
outstanding.
Item 3: Defaults on Senior Securities
- ------- -----------------------------
none
Item 4: Submission of Matters to a Vote of Security Holders
- ------- ---------------------------------------------------
none
(20)
<PAGE>
THE EASTWIND GROUP, INC.
PART II - OTHER INFORMATION
Item 5: Other Information
- ------- -----------------
Cautionary Statement for Purposes of the "Safe Harbor" Provisions of the Private
Securities Litigation Reform Act of 1995:
When used in this Quarterly Report on Form 10-QSB and in other public
statements by the Company and Company officers, the words "estimate",
"project", "intend" and similar expressions are intended to identify
forward-looking statements regarding events and financial trends which may
affect the Company's future operating results and financial position. Such
statements are subject to risks and uncertainties that could cause the
Company's actual results and financial position to differ materially. Such
factors include, among others: (i) the Company's ability to identify
appropriate acquisition candidates, complete acquisitions on satisfactory
terms, or successfully integrate acquired businesses; (ii) the intense
competition and low barriers to entry in the industries in which the
Company competes; (iii) the Company's ability to obtain financing on
satisfactory terms and the degree to which the Company is leveraged,
including the extent to which currently outstanding options and warrants
are exercised; (iv) the sensitivity of the Company's businesses to general
economic conditions; (v) the timing of orders from, and shipments to, major
customers; (vi) the timing of new product sales; (vii) the introduction and
market acceptance of new products; (viii) factors associated with
international sales such as the relative strength of the dollar when
compared to the currencies of the countries into which the Company exports
product; (ix) the Company's ability to remain in compliance with the
numerous environmental, health and safety requirements to which it is
subject; (x) changes in accounting principles, policies or guidelines; and
(xi) other economic, competitive, governmental and technological factors
affecting the Company's operations, markets, products, services and prices.
Additional factors are described in the Company's other public reports
filed with the Securities and Exchange Commission. Readers are cautioned
not to place undue reliance on these forward-looking statements, which
speak only as of the date made. The Company undertakes no obligation to
publicly release the result of any revision of these forward-looking
statements to reflect events or circumstances after the date they are made
or to reflect to occurrence of unanticipated events.
(21)
<PAGE>
THE EASTWIND GROUP, INC.
PART II - OTHER INFORMATION
Item 6: Exhibits and Reports on Form 8K
- ------- -------------------------------
(a) Exhibits
4.1 Specimen Form of Common Stock Purchase Warrant issued to Clifton
capital, Ltd. (incorporated by reference to Exhibit 4.5 to the
Registrant's Registration Statement on Form SB-2 filed under the
Securities Act of 1933, as amended, Registration Number 333-08227).
4.2 Certificate of Designation for Series A Preferred Stock (incorporated
by reference to Exhibit 4.1 to the Registrant's Form 8-K filed on May
10, 1996 under the Securities Exchange Act of 1934).
4.3 $500,000 subordinated 12% debenture issued to Mentor Special
Situation Fund, LP (incorporated by reference to Exhibit 4.7 to the
Registrant's Registration Statement on Form SB-2 filed under the
Securities Act of 1933, as amended, Registration Number 333-08227).
10.1 Securities Purchase Agreement between the Company and Odyssey Capital
Group, LP dated May 10, 1996 (incorporated by reference to Exhibit
10.1 to the Registrant's Form 8-K filed on May 10, 1996 under the
Securities Exchange Act of 1934).
10.2 Amendment Number 1 to Securities Purchase Agreement between the
Company and Odyssey Capital Group, LP dated June 20, 1996
(incorporated by reference to Exhibit 10.27 to the Registrant's
Registration Statement on Form SB-2 filed under the Securities Act of
1933, as amended, Registration Number 333-08227).
10.3 Securities Purchase Agreement between the Company and Mentor Special
Situation, LP dated June 20, 1996 (incorporated by reference to
Exhibit 10.28 to the Registrant's Registration Statement on Form SB-2
filed under the Securities Act of 1933, as amended, Registration
Number 333-08227).
(b) Reports on Form 8-K
A Form 8-K was filed by the Company on May 10, 1996 for the purpose of
reporting the transaction with Odyssey Capital Group, LP pursuant to which
the Company issued 1,000 shares of Series A Preferred Stock, and attaching
as exhibits the Certificate of Designation for the Series A Preferred Stock
and the Securities Purchase Agreement between the Company and Odyssey
Capital Group, LP.
(22)
<PAGE>
Signatures
- ----------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Dated: August 12, 1996
THE EASTWIND GROUP, INC.
(Registrant)
/s/ Paul A. DeJuliis
--------------------------------
Paul A. DeJuliis
Chairman and CEO
/s/ William B. Miller
---------------------------------
William B. Miller
Senior Vice President and CFO
(Principal financial and accounting officer)
(23)
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C> <C>
<PERIOD-TYPE> 6-MOS 6-MOS
<FISCAL-YEAR-END> DEC-31-1996 DEC-31-1995
<PERIOD-START> JAN-01-1996 JAN-01-1995
<PERIOD-END> JUN-30-1996 JUN-30-1995
<CASH> 3,064,658 426,377
<SECURITIES> 0 0
<RECEIVABLES> 4,124,913 4,486,821
<ALLOWANCES> 0 0
<INVENTORY> 2,003,655 1,911,969
<CURRENT-ASSETS> 10,377,090 7,713,079
<PP&E> 2,260,376 1,830,252
<DEPRECIATION> (368,771) (217,435)
<TOTAL-ASSETS> 13,664,222 10,116,486
<CURRENT-LIABILITIES> 3,916,345 4,735,305
<BONDS> 0 0
0 0
100 0
<COMMON> 213,825 160,825
<OTHER-SE> 5,579,318 1,613,387
<TOTAL-LIABILITY-AND-EQUITY> 13,664,222 10,116,486
<SALES> 9,693,462 6,216,788
<TOTAL-REVENUES> 9,693,462 6,216,788
<CGS> 7,152,027 5,032,890
<TOTAL-COSTS> 7,152,027 5,032,890
<OTHER-EXPENSES> 1,835,492 1,150,881
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 294,958 238,304
<INCOME-PRETAX> 410,985 (205,217)
<INCOME-TAX> 84,400 (16,912)
<INCOME-CONTINUING> 326,585 (188,305)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 326,585 (188,305)
<EPS-PRIMARY> .16 (.22)
<EPS-DILUTED> 0 0
</TABLE>
