<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 September 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 2,189,250 shares
- -------------------------------- ----------------------------------
(Class) (Outstanding at October 31, 1996)
Transitional Small Business Disclosure format (check one)
Yes No X
----- -----
<PAGE>
THE EASTWIND GROUP, INC.
<TABLE>
<CAPTION>
PART I: Page Number
- ------- -----------
<S> <C>
Item 1. - Financial Statements
- ------------------------------
Index to Financial Statements 2
Consolidated Balance Sheets as of
September 30, 1996 and December 31, 1995 4
Consolidated Statements of Operations for the Three Months and
Nine Months ended September 30, 1996 and 1995 5
Consolidated Statements of Cash Flows for the
Nine Months ended September 30, 1996 and 1995 6
Notes to Consolidated Financial Statements 7
Item 2 - Management's Discussion and Analysis of Results of
- -----------------------------------------------------------
Operations and Financial Condition
----------------------------------
Results of Operations for the Three Months and Nine Months
ended September 30, 1996 and 1995 15
Liquidity and Capital Resources 19
PART II:
- --------
Item 1 -- Legal Proceedings 22
Item 2 -- Change in Securities 22
Item 3 -- Defaults upon Senior Securities 22
Item 4 -- Submission of Matters to a Vote of Security Holders 22
Item 5 -- Other Information 22
Item 6 -- Exhibits and Reports on Form 8-K 23
</TABLE>
(2)
<PAGE>
THE EASTWIND GROUP, INC.
Item 1 - Financial Statements
- -----------------------------
The following financial information sets forth the operations of The Eastwind
Group, Inc. (the "Company") for the three and nine months ended September 30,
1996 and 1995. The financial statements include the Company and its wholly-
owned subsidiaries, Princeton Academic Press, Inc. ("Princeton") and Polychem
Corporation ("Polychem"). 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 September 30, 1996 and December 31, 1995, and the results of operations and
cash flows for the three and nine months ended September 30, 1996 and 1995.
(3)
<PAGE>
The Eastwind Group, Inc.
Consolidated Balance Sheets
(Unaudited)
<TABLE>
<CAPTION>
September 30, December 31,
ASSETS 1996 1995
<S> <C> <C>
Current assets: ------------- -------------
Cash and cash equivalents $ 2,977,934 $ 426,377
Subscriptions receivable 300,000 746,000
Accounts receivable, net 4,447,169 4,486,821
Due from related parties 393,117 78,000
Inventories 1,990,601 1,911,969
Prepaid expenses 257,081 63,912
Prepaid income taxes 62,500 -
------------- -------------
Total current assets 10,428,402 7,713,079
------------- -------------
Property, plant and equipment, net 1,842,012 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 429,401 492,878
Goodwill, net 162,800 169,400
------------- -------------
Total other assets 1,420,513 790,590
------------- -------------
$ 13,690,927 $ 10,116,486
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Lines of credit $ 506,913 $ 2,135,096
Current portion of long-term debt 630,354 458,294
Accounts payable 2,139,585 1,571,010
Accrued expenses 555,631 397,188
Accrued income taxes 44,523 27,223
Deferred income taxes 146,494 146,494
------------- -------------
Total current liabilities 4,023,500 4,735,305
------------- -------------
Long-term debt 3,127,049 3,221,585
------------- -------------
Subordinated note payable 300,148 -
------------- -------------
Accrued pension and postretirement benefits 220,760 200,510
------------- -------------
Deferred credit, net 166,387 184,874
------------- -------------
Stockholders' equity:
Preferred stock, $.10 par value, 3,000,000
shares authorized; 1,000 issued and
outstanding at September 30, 1996; none issued
and outstanding at December 31, 1995 100 -
Common stock, $.10 par value, 5,000,000 shares
authorized, 2,139,250 and 1,608,250 issued and
outstanding September 30, 1996 and
December 31, 1995, respectively 213,925 160,825
Warrants outstanding 1,233,390 158,586
Additional paid-in capital 4,354,952 1,818,215
Retained earnings (Accumulated deficit) 50,716 (363,414)
------------- -------------
Total stockholders' equity 5,853,083 1,774,212
------------- -------------
$ 13,690,927 $ 10,116,486
============= =============
</TABLE>
The accompanying notes are an integral part of these financial statements
(4)
<PAGE>
The Eastwind Group, Inc.
Consolidated Statements of Operations
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
1996 1995 1996 1995
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Net sales $ 5,168,365 $ 4,530,928 $ 14,861,827 $ 10,747,716
Cost of goods sold 3,875,515 3,473,337 11,027,542 8,506,227
------------ ------------ ------------ ------------
Gross profit 1,292,850 1,057,591 3,834,285 2,241,489
Selling, general and administrative expenses 866,727 855,495 2,702,219 2,006,306
------------ ------------ ------------ ------------
Operating income 426,123 202,096 1,132,066 235,183
Interest expense 167,608 174,853 462,566 413,157
------------ ------------ ------------ ------------
Income (loss) before income taxes 258,515 27,243 669,500 (177,974)
Income taxes (benefit) 114,400 - 198,800 (16,912)
------------ ------------ ------------ ------------
Net income (loss) 144,115 27,243 470,700 (161,062)
Preferred stock dividends (43,714) - (56,571) -
------------ ------------ ------------ ------------
Net income available to Common shareholders $ 100,401 $ 27,243 $ 414,129 $ (161,062)
============ ============ ============ ============
Pro forma earnings (loss) per share - $ 0.03 - $ (0.18)
============ ============ ============ ============
Pro forma weighted average number of
common shares outstanding - 985,750 - 910,064
============ ============ ============ ============
Earnings per share $ 0.06 - $ 0.21 -
============ ============ ============ ============
Shares used in computing earnings per share 3,279,780 2,994,546
============ ============ ============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements
(5)
<PAGE>
The Eastwind Group, Inc.
Consolidated Statements of Cash Flows
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
1996 1995
------------ ------------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $ 470,700 $ (161,062)
Adjustments to net income (loss)to net cash
provided by operating activities:
Depreciation 208,891 126,882
Amortization of deferred credit (18,487) (18,487)
Amortization of debt discount 11,348
Amortization, other 37,351 54,961
Deferred income tax provision - (33,163)
Noncash compensation expense - 32,500
(Increase) decrease in assets:
Accounts receivable 39,652 65,393
Inventories (78,632) 566,342
Prepaid expenses (193,169) 53,403
Prepaid income taxes (62,500)
Other assets 32,724 (12,263)
Increase (decrease) in liabilities:
Accounts payable 568,575 748,997
Accrued expenses 158,443 237,258
Accrued income taxes 17,300 16,251
Accrued pension and postretirement benefits 20,250 6,819
------------ ------------
Net cash provided by operating activities 1,212,446 1,683,831
------------ ------------
Cash flows from investing activities:
Purchase of property and equipment (13,913) (2,667)
Net payments from related party - 23,000
Purchase of preferred stock (250,000) -
Purchase of subordinated note receivable (450,000) -
Due from related parties (315,117) -
Purchase of net assets of Polychem, net of cash acquired - (3,779,963)
------------ ------------
Net cash used in investing activities (1,029,030) (3,759,630)
------------ ------------
Cash flows from financing activities:
Net borrowings (repayments) under lines of credit (1,628,183) 870,069
Borrowings on term notes 0 1,952,000
Principal payments on term notes and capital leases (346,649) (680,886)
Proceeds from sales of Common stock and warrants 1,095,742 500,000
Proceeds from exercise of warrants 1,481,000 -
Proceeds from sale of Preferred stock, net of warrants 459,191 -
Issuance of warrants, net of exercises 1,074,811 -
Proceeds from subordinated debenture 288,800 -
Deferred financing costs - (206,195)
Preferred stock dividends (56,571) -
Deferred issuance costs - (77,300)
------------ ------------
Net cash provided by financing activities 2,368,141 2,357,688
------------ ------------
Net increase in cash and cash equivalents 2,551,557 281,889
Cash and cash equivalents , beginning of period 426,377 -
------------ ------------
Cash and cash equivalents , end of period $ 2,977,934 $ 281,889
============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements
(6)
<PAGE>
THE EASTWIND 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 September 30, 1996 and December 31, 1995, and the results
of operations for the three months and nine months ended September 30,
1996 and 1995 and cash flows for the nine months ended September 30,
1996 have been made. The results of operations for the nine month
period ended September 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>
September 30, December 31,
1996 1995
------------- -------------
<S> <C> <C>
Raw Materials $ 841,498 $ 709,728
Work in Process 757,940 619,165
Finished Goods 391,163 583,076
------------- -------------
$ 1,990,601 $ 1,911,969
============= =============
</TABLE>
Note 3: Property, Plant and Equipment
- ------- -----------------------------
<TABLE>
<CAPTION>
September 30, December 31,
1996 1995
------------- -------------
<S> <C> <C>
Land $ 56,221 $ 56,221
Buildings 963,180 963,180
Machinery and equipment 1,248,937 810,851
------------- -------------
2,268,338 1,830,252
Less-Accumulated depreciation (426,326) (217,435)
------------- -------------
$ 1,842,012 $ 1,612,817
============= =============
</TABLE>
Machinery and equipment includes $653,882 and $229,709 of production
equipment under capital leases at September 30, 1996 and December 31,
1995, respectively. Accumulated depreciation on such equipment was
$97,656 and $31,633 at September 30, 1996 and December 31, 1995,
respectively.
(7)
<PAGE>
THE EASTWIND GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 to the Company from Lavelle Aircraft at
December 31, 1995, $55,000 was repaid by Lavelle Aircraft and the
remainder was assumed by Lavelle. In addition, the Company has
recorded a receivable from Lavelle Company of $334,750 as of September
30, 1996 representing working capital advances and accrued interest
and fees.
The $450,000 debenture is recorded as a non-current asset in the
September 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.
Lavelle reported unaudited net income for the period from the date of
investment through September 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 September 30, 1996, Wickersham experienced minimal
losses, therefore, there was no income recognized in 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. The Company has recorded a
receivable from Wickersham of $58,367 as of September 30, 1996
representing working capital advances.
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 "on demand"
technology.
(8)
<PAGE>
THE EASTWIND GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 6: Long-term Debt
- ------- --------------
Long-term debt consists of the following:
<TABLE>
<CAPTION>
September 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%
(12.0% at September 30, 1996). $ 183,338 $ 258,341
Princeton capital lease obligation,
secured by related equipment,
payable in 60 monthly installments
of $2,397, including interest at 16.1%. 69,232 83,569
Princeton capital lease obligation,
secured by related equipment, payable
in 48 monthly installments of $6,403,
including interest at 8.57% 241,047 -
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 1.75% (9.75% at September
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 2000. 1,396,214 1,586,607
Polychem capital lease obligation,
secured by related equipment, payable
in 60 monthly installments of $2,480,
including interest at 10.65%. 104,506 -
Eastwind loan payable to Cooke Publishing. 25,000 25,000
Other capital lease obligations. 111,772 100,068
---------- ----------
3,757,403 3,679,879
Less-Current portion. (630,354) (458,294)
---------- ----------
$3,127,049 $3,221,585
========== ==========
</TABLE>
(9)
<PAGE>
THE EASTWIND GROUP, INC.
NOTES TO 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% (12.0% at September 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 $336,686 and $411,349 at September 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% (9.75% at September 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 $170,227 and $1,723,747 at September 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 September 30,
1996.
Future maturities of long-term debt at September 30, 1996 are as
follows:
<TABLE>
<CAPTION>
<S> <C>
September 30, 1997 $ 630,354
September 30, 1998 751,169
September 30, 1999 810,005
September 30, 2000 737,182
September 30, 2001 328,731
Thereafter 499,962
--------------
$ 3,757,403
==============
</TABLE>
(10)
<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 $211,200 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 a third
party 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 at $6.00 per
share until they expire on May 10, 2003. The warrants were valued at
$521,400 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 a third party investor 200,000
Common Stock Units (the "Units"), with each Unit consisting of one (1)
share of Common Stock and one-and-one-quarter (1u) 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. All 200,000 Units were issued on the effective date of the
Company's most recent registration statement, which was July 25, 1996.
The warrants were valued at $402,500 for financial reporting purposes
and have been deducted from the gross proceeds received from the
Common Stock sale and recorded as warrants outstanding.
(11)
<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
September 30, 1995 are included in the Company's historical
consolidated statement of operations for the nine months ended
September 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>
Nine months ended
September 30, 1995
--------------------
<S> <C>
Total Revenues $ 13,216,000
================
Net loss $ (154,000)
================
Proforma loss per share $ (.16)
================
Shares used in computing proforma
net loss per share 985,750
================
</TABLE>
Note 10: Earnings (Loss) Per Share
- -------- -------------------------
For the three months and nine months ended September 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, with any
excess assumed to be invested with income at a market rate of return.
(12)
<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 nine months ended September 30, 1996 are as follows:
<TABLE>
<CAPTION>
Three months Nine months
ended ended
September 30, September 30
1996 1996
------------- -------------
<S> <C> <C>
Weighted average number of
shares outstanding 2,138,630 1,853,396
Assumed exercise of options
and warrants 1,569,000 1,569,000
Less assumed repurchase of
stock (427,850) (427,850)
------------- -------------
Shares used in computing
earnings per share 3,279,780 2,994,546
============= =============
Net income for the period $ 144,115 $ 470,700
Preferred stock dividends (43,714) (56,571)
Adjustment to net income for
assumed reduction in interest
expense, net of tax 84,404 215,938
------------- -------------
Adjusted net income for computation
of earnings per share $ 184,805 $ 630,067
============= =============
Earnings per share $ .06 $ .21
============= =============
</TABLE>
Earnings (loss) per share for the three months and nine months ended
September 30, 1995 are calculated by dividing the adjusted net income
for the period by the weighted average number of shares outstanding
for the period.
Note 11: Concentration of Credit Risk
- -------- ----------------------------
One customer of Princeton accounted for 15% and 23% of the Company's
consolidated net sales for the nine months ended September 30, 1996
and 1995, respectively. Princeton had receivables from this customer
of approximately $233,000 and $389,000 at September 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 nine months ended September 30, 1996, Polychem and
Princeton entered into capital leases for $146,125 and $278,048 of
equipment, respectively.
(13)
<PAGE>
THE EASTWIND GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 13: Subsequent Events
- -------- -----------------
On October 17, 1996, the Company acquired 100% of the Capital Stock of
Centennial Printing Corporation ("Centennial"). The total
consideration paid by the Company was $2,850,000, comprised of 182,232
shares of the Company's Common Stock, 9,000 shares of the Company's
Series B Preferred Voting Stock and $450,000 in cash. The acquisition
will be accounted for using the purchase method of accounting, whereby
the purchase price is allocated to the assets and liabilities of
Centennial based on the fair market values at the acquisition date.
Such allocation has been based on estimates that may be revised at a
later date. The purchase price, including estimated transaction
costs, exceeded the fair market value of the net assets acquired by
$2,100,000, which will be recorded as goodwill and amortized on a
straightline basis over 20 years.
The Preferred Stock issued has a stated value of $100 per share and
the holder is entitled to receive cash dividends at a rate of 6% per
year. Additionally, the holder of Preferred Stock may require the
Company to redeem for cash, equal to the stated value plus accrued
dividends, up to 1,800 shares of Preferred Stock during each three
month period beginning on April 1, 1997.
In addition, the Company paid the former owner of Centennial $500,000
in consideration of his agreement not to compete and certain other
payments at $100,000 per year for a three year period.
The Company agreed to use its best efforts to file a registration
statement to register the Common shares received by the former owner
and to guarantee the aggregate sales price of the stock to be at $7.00
per share for one year from the effective date of the registration
statement.
Also, on October 28, 1996, the Company entered into a letter of intent
to acquire all the assets of Ivy Industries, Charlottesville, VA, a
privately-owned manufacturer of premium home decorating products
("Ivy"), for approximately $3,700,000 in cash and assumption of
certain liabilities. Consummation of the proposed transaction is
dependent, among other things, upon the Company's satisfactory
completion of its due diligence review. There can be no assurance that
such transaction will be consummated.
(14)
<PAGE>
THE EASTWIND GROUP, INC.
Item 2 - Management's Discussion and Analysis of Financial Condition
- --------------------------------------------------------------------
and Results of Operations
-------------------------
RESULTS OF OPERATIONS
- ---------------------
THREE MONTHS ENDED SEPTEMBER 30, 1996 AND 1995
- ----------------------------------------------
Overview
- --------
The Company generated net income of $144,000 during the three months ended
September 30, 1996, compared to net income of $27,000 for the same period of the
prior year. The income for the quarter ended September 30, 1996 is a result of
Polychem and Princeton profitability more than offsetting the general corporate
overhead during that period.
Net Sales
- ---------
Revenues for the three months ended September 30, 1996 of $5,168,000 represents
an increase of $637,000, and increase of 14% versus the same period of the prior
year. The increase in revenues is attributable to Polychem ($541,000), an
increase of 17% over the same period of the prior year, and Princeton ($96,000),
a 7% increase over the same period of the prior year.
Cost of Sales
- -------------
Cost of sales for the three months ended September 30, 1996 totalled $3,876,000,
or 75% of net sales, compared to the same period of the prior year of
$3,473,000, or 77% of net sales, an improvement of 2 percentage points.
Polychem's cost of sales for the three month period ended September 30, 1996 was
$2,643,000, or 71% of net sales. Polychem's improvement in gross profit
percentage by 2 percentage points during the three months ended September 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 September 30, 1996 was $1,233,000, or 86% of net sales,
approximately the same percentage as 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 three months ended
September 30, 1996 were $867,000, or 17% of net sales, compared to the same
period of the prior year of $855,000, representing a 2 percentage point decrease
as a percentage of sales versus the same period of the prior year, as fixed
costs are spread over higher net sales for both Polychem and Princeton.
Selling, general and administrative expenses for the quarter remained at
approximately the same level as the same period of the prior year with an
increase at Polychem being nearly offset by decreases at Princeton and in
corporate overhead relating to the holding company. Polychem's selling, general
and administrative expenses as a percentage of net sales for the quarter ended
September 30, 1996 were 15%, a 1 percentage point reduction from the same period
of the prior year.
Interest Expense
- ----------------
Interest expense for the three months ended September 30, 1996 was $168,000, or
3.2% of net sales, versus $175,000, 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 September 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 September 30, 1996 was
$104,000, or 2.8% of net sales, while Princeton's interest expense during this
quarter was $33,000 or 2.3% of net sales.
(16)
<PAGE>
THE EASTWIND GROUP, INC.
Item 2 - Management's Discussion and Analysis of Financial Condition
- ---------------------------------------------------------------------
and Results of Operations
-------------------------
RESULTS OF OPERATIONS
- ---------------------
NINE MONTHS ENDED SEPTEMBER 30, 1996 AND 1995
- ---------------------------------------------
Overview
- --------
The Company generated net income of $471,000 during the nine months ended
September 30, 1996, compared to a loss of $161,000 for the same period of the
prior year. The income for the nine month period ended September 30, 1996 is a
result of Polychem's profitability being significantly in excess of general
corporate overhead and Princeton's losses being substantially less than those of
the same period of the prior year.
Net Sales
- ---------
Revenues for the nine months ended September 30, 1996 of $14,862,000 represents
an increase of $4,114,000 versus the same period of the prior year. The
increase is wholly attributable to Polychem, which is included for the entire
nine months in 1996, but only from the time of acquisition (March 10, 1995)
through September 30, 1995. Princeton's revenues for the nine months ended
September 30, 1996 were $69,000 less than the comparable period of the prior
year.
Cost of Sales
- -------------
Cost of sales for the nine months ended September 30, 1996 totalled $11,028,000,
or 74% of net sales, compared to $8,506,000 for the same period of the prior
year, or 79% of net sales, an improvement of 5 percentage points. Polychem's
cost of sales for the nine month period ended September 30, 1996 was $7,503,000,
or 69% of net sales, an improvement of 5 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 favorable mix in manufactured products
versus products for resale purchased from outside vendors. Princeton's cost of
sales for the nine months ended September 30, 1996 was $3,524,000 or 88%, an
identical percentage to that experienced in the comparable period of the prior
year.
(17)
<PAGE>
THE EASTWIND GROUP, INC.
RESULTS OF OPERATIONS (continued)
- ---------------------------------
Selling, General and Administrative Expenses
- --------------------------------------------
Selling, general and administrative expenses for the nine months ended September
30, 1996 were $2,702,000, or 18% of net sales, compared to $2,006,000, or 19% of
net sales for the same period of the prior year. The increase in selling,
general and administrative expenses for the nine months ended September 30, 1996
versus the same period of the prior year is principally attributable to Polychem
being included for the entire nine month period in 1996 versus from the date of
acquisition (March 10, 1995) through September 30, 1995. Princeton's selling,
general and administrative expenses of $449,000 for the nine months ended
September 30, 1996 represent a reduction in such expenses versus the same period
of the prior year of $53,000, a one percentage point improvement.
Interest Expense
- ----------------
Interest expense for the nine months ended September 30, 1996 was $463,000, or
3.1% of net sales, versus $413,000, 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 nine months ended September 30,
1996 was $331,000, or 3.0% of net sales, down by 1 percentage point versus the
comparable period of the prior year. Princeton's interest expense for the nine
months ended September 30, 1996 was $94,000 or 2.4% of net sales, a .6
percentage point improvement versus the comparable prior year period.
Income Taxes
- ------------
Income tax expense for the nine months ended September 30, 1996 was $199,000.
Federal income tax expense for the nine months ended September 30, 1996 has been
partially offset by the utilization of the Company's net operating loss
carryover. The net operating loss carryovers were fully utilized as of
September 30, 1996.
(18)
<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 nine months ended September 30, 1996 was $1,212,000, as compared to
cash provided by operating activities of $1,684,000 for the same period of the
prior year. The components of cash flows provided by operating activities
during the nine months ended September 30, 1996 were net income ($471,000),
depreciation and amortization ($239,000), a decrease in accounts receivable
($40,000), other assets ($33,000), increases in accounts payable ($569,000),
accrued expenses ($158,000), accrued income taxes ($17,000), and pension
retirement benefits ($20,000); offset by an increase in inventories ($79,000),
prepaid expenses ($193,000) and an increase in prepaid income taxes ($63,000).
During the nine months ended September 30, 1995, the net loss for the period of
$161,000 was offset by depreciation and amortization ($163,000), non-cash
compensation expense ($33,000), decreases in accounts receivable ($65,000),
inventory ($566,000), prepaid expenses ($54,000), increases in accounts payable
($749,000), accrued expenses ($237,000), accrued income taxes ($16,000) and
accrued pension and post retirement benefits ($7,000); 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 nine months ended September
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 as a percentage of net sales.
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 nine months ended September 30,
1996 was $1,029,000 as compared to cash used in the nine months ended September
30, 1995 of $3,760,000. During the nine months ended September 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 $14,000 and made advances of $316,000 to related
parties. During the nine months ended September 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 ($3,000), which were offset
by net payments from a related party ($23,000).
(19)
<PAGE>
THE EASTWIND GROUP, INC.
Liquidity and Capital Resources (continued)
- -------------------------------------------
Net cash provided by financing activities for the nine months ended September
30, 1996 was $2,368,000, compared to cash provided during the same period of the
prior year of $2,358,000. The principal components of cash provided from
financing activities during the nine months ended September 30, 1996 were
proceeds received from the sale of preferred stock ($459,000), common stock and
warrants ($1,096,000), common stock issued on exercise of warrants ($1,481,000),
warrants ($1,075,000) and a subordinated debenture ($289,000); partially offset
by repayments of lines of credit ($1,628,000), term notes and capital leases
($347,000) and preferred stock dividends ($57,000).
During the nine months ended September 30, 1995, cash flows from financing
activities included net borrowings under lines of credit ($870,000), 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 ($681,000),
deferred financing costs ($206,000) and deferred issuance costs ($77,000).
As of September 30, 1996 and December 31, 1995, working capital was $6,405,000
and $2,978,000, respectively. As working capital increased by $3,427,000, 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 a stronger liquidity position at September 30, 1996 versus
December 31, 1995.
In October, 1996, the Company purchased the stock of Centennial Printing
Corporation for $2,850,000, of which $450,000 was cash. In addition, the former
owner received $500,000 for his agreement not to compete, and the right to
receive $100,000 per year for three years. In addition, the Company has agreed
to redeem for cash up to $180,000 of Preferred Stock held by the former owner
per quarter commencing April 1, 1997.
The Company has entered into a letter of intent to acquire all of the assets of
Ivy Industries, Charlottesville, VA, a privately-owned manufacturer of premium
home decorating products, for approximately $3,700,000 in cash and assumption of
certain liabilities.
In addition, the Company has announced that its Board of Directors has
authorized the repurchase, from time to time, of up to 100,000 shares of its
common stock in the open market or in negotiated transactions, depending upon
market conditions and other factors.
The Company has no other 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
(20)
<PAGE>
THE EASTWIND GROUP, INC.
Liquidity and Capital Resources (continued)
- -------------------------------------------
outstanding balance of $1,396,000 at September 30, 1996, leaving an aggregate
availability of $7,604,000 as of that date under the credit facility, dependent
upon eligible collateral assets. As of September 30, 1996, availability under
the line of credit, based upon available eligible collateral assets, was
$2,676,000, and outstanding borrowings were $170,000.
As of September 30, 1996, Princeton's line of credit balance outstanding was
$337,000 against the total available credit facility of $1,000,000.
As of September 30, 1996, the Company had outstanding Class C, D, and A-1 Common
Stock purchase warrants. During the nine months ended September 30, 1996,
exercises of Class C, Class D and Class A-1 warrants to purchase 86,000, 30,000
and 215,000 shares of common stock, respectively, which generated gross capital
proceeds to the Company of $1,481,000. 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 $5,842,000 on the
issuance of 1,054,000 shares of common stock. The Company currently anticipates
using any such funds, if received, for working capital, including potential
acquisitions.
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 September 30, 1996, and to fund the purchase
commitments described above, including the purchase of stock pursuant to the
open-market purchase program and, if completed, the acquisition of Ivy
Industries.
The Company intends to aggressively pursue potential acquisitions. The Company
may 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.
(21)
<PAGE>
THE EASTWIND GROUP, INC.
PART II - OTHER INFORMATION
Item 1: Legal Proceedings
- ------- -----------------
none
Item 2: Change in Securities
- ------- --------------------
none
Item 3: Defaults on Senior Securities
- ------- -----------------------------
none
Item 4: Submission of Matters to a Vote of Security Holders
- ------- ---------------------------------------------------
none
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", "believe", "anticipate" 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
(22)
<PAGE>
THE EASTWIND GROUP, INC.
PART II - OTHER INFORMATION
Item 5: Other Information (continued)
- ------- -----------------------------
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 the
occurrence of unanticipated events.
Item 6: Exhibits and Reports on Form 8K
- ------- -------------------------------
(a) Exhibits
none
(b) Reports on Form 8-K
The Company filed no reports on Form 8-K during the quarter ended
September 30, 1996.
(23)
<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: November 12, 1996
THE EASTWIND GROUP, INC.
(Registrant)
__________________________________
Paul A. DeJuliis
Chairman and CEO
__________________________________
William B. Miller
Senior Vice President and CFO
(Principal financial and accounting officer)
(24)
<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: November 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)
(25)
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C> <C>
<PERIOD-TYPE> 9-MOS 9-MOS
<FISCAL-YEAR-END> DEC-31-1996 DEC-31-1995
<PERIOD-START> JAN-01-1996 JAN-01-1995
<PERIOD-END> SEP-30-1996 SEP-30-1995
<CASH> 2,977,934 426,377
<SECURITIES> 0 0
<RECEIVABLES> 4,447,169 4,486,821
<ALLOWANCES> 0 0
<INVENTORY> 1,990,601 1,911,969
<CURRENT-ASSETS> 10,428,402 7,713,079
<PP&E> 2,268,338 1,830,252
<DEPRECIATION> (426,326) (217,435)
<TOTAL-ASSETS> 13,690,927 10,116,486
<CURRENT-LIABILITIES> 4,023,500 4,735,305
<BONDS> 0 0
0 0
100 0
<COMMON> 213,925 160,825
<OTHER-SE> 5,639,058 1,613,387
<TOTAL-LIABILITY-AND-EQUITY> 13,690,927 10,116,486
<SALES> 14,861,827 10,747,716
<TOTAL-REVENUES> 14,861,827 10,747,716
<CGS> 11,027,542 8,506,227
<TOTAL-COSTS> 11,027,542 8,506,227
<OTHER-EXPENSES> 2,702,219 2,006,306
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 462,566 413,157
<INCOME-PRETAX> 669,500 (177,974)
<INCOME-TAX> 198,800 (16,912)
<INCOME-CONTINUING> 470,700 (161,062)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 470,700 (161,062)
<EPS-PRIMARY> .21 (.18)
<EPS-DILUTED> 0 0
</TABLE>
