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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-KSB
(Mark One)
[X] Annual report pursuant to section 13 or 15(d) of the Securities Exchange
Act of 1934 for the fiscal year ended DECEMBER 31, 1996.
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[_] Transition Report pursuant to section 13 or 15(d) of the Securities
Exchange Act of 1934 for the transition period from ____________ to
____________
Commission File Number: 0-27638
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THE EASTWIND GROUP, INC.
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(Exact name of registrant as specified in its charter)
DELAWARE 23-2732753
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(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
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(Address of principal executive offices)
(610) 828-6860
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(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
None
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(Title of Class)
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.10 par value per share
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(Title of Class)
Check 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 ______
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Based on the closing price on the NASDAQ Small Cap Market on March 31, 1997, the
aggregate market value of the voting stock held by nonaffiliates of the
registrant was $10,475,000.
The number of shares outstanding of the registrant's Common stock, $0.10 par
value, was 2,526,482 at March 31, 1997.
Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B contained in this form, and no disclosure will be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB or any
amendment to this Form 10-KSB. [X]
State issuer's revenues for its most recent fiscal year: $ 23,633,000.
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PART I
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ITEM 1 BUSINESS
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GENERAL DEVELOPMENT OF BUSINESS
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The Eastwind Group, Inc. (the "Company") is a holding company formed in August
1993 to acquire and consolidate middle-market manufacturing businesses on an
industry by industry basis. The Company focuses on the acquisition of entities
that management believes are not performing to potential. Through December 31,
1996, the Company completed four acquisitions which comprise the Company's
operating subsidiaries: Polychem Corporation ("Polychem," formerly The Polychem
Division of The Budd Company), acquired March 10, 1995; Princeton Academic
Press, Inc. ("Princeton," formerly part of Princeton University Press "PUP"),
acquired March 10, 1995; Centennial Printing Corporation ("Centennial," formerly
a privately-owned full service commercial printer), acquired October 17, 1996;
and Ivy-Tygart Acquisition Corp. ("Ivy," formerly a privately-owned manufacturer
of finished picture mouldings and frames, finished architectural mouldings,
flooring and panelling), acquired December 31, 1996.
Also, as of January 3, 1997, the Company has acquired, through an exchange of
common stock, two additional manufacturing companies: Lavelle Company
("Lavelle," formerly a privately-owned sheet metal fabricator and manufacturer
of products for the aerospace industry); and Wickersham Printing Company, Inc.
("Wickersham," formerly a privately-owned printer and book manufacturer).
Consistent with its strategy of consolidating industry groups, the Company has
formed a new wholly-owned subsidiary, Team Graphics, Inc. ("Team Graphics"), to
become the principal entity for current and future consolidation in the printing
and graphic arts industry. Accordingly, in March 1997, the Company exchanged a
combination of its investments in Princeton, Centennial and Wickersham and cash
for all the outstanding stock of Team Graphics, which concurrently became the
parent of these printing companies. Gary Stiffler was elected President and
Chief Operating Officer of Team Graphics, in addition to his duties as President
of Centennial and Wickersham. The Company believes that this consolidation of
the printing companies will provide benefits through increased purchasing power,
consolidation of general and administrative functions, and, perhaps most
importantly, a synergy of printing and binding capabilities to better penetrate
the markets of each company.
Each of the Company's subsidiaries are described in detail below. The Company
regularly evaluates possible acquisition opportunities, however, as of the date
of this Report, no additional acquisitions are probable (i.e., more likely than
not to occur).
Financial information by industry segment for the years ended December 31, 1996
and 1995, appears in Note 18 to the consolidated financial statements of the
Company, which are provided pursuant to Item 7 of this Report.
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POLYCHEM CORPORATION
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BACKGROUND
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Polychem is a wholly-owned subsidiary of the Company, which was formed in
February 1995 for the purpose of acquiring substantially all of the assets and
business of The Polychem Division of The Budd Company. See "Acquisition."
Polychem develops and manufactures custom engineered plastic molded products
which are marketed primarily to wastewater treatment plants, as well as to other
industrial users.
ACQUISITION
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The Company acquired substantially all of the assets and business of The
Polychem Division of The Budd Company through its wholly-owned subsidiary,
Polychem, on March 10, 1995, for a purchase price of approximately $6.4 million
including transaction costs, of which approximately $2.4 million has been
financed by the seller through the issuance of two promissory notes, including a
$750,000 retainage note and a $1.63 million term note. The retainage note did
not bear interest and was repaid in September 1995. The term note bears interest
at 8% per year and is payable in 20 equal consecutive quarterly installments.
The quarterly installments commence on March 31, 1998, but if the amount of any
such quarterly payment exceeds an amount equal to the net cash flow of Polychem,
as defined in such note, for its last fiscal quarter ending prior to the date on
which such payment is due, then a portion of the installment may be deferred,
subject to certain limitations. At the time of acquisition the fair market value
of the assets, based on independent appraisals, exceeded the purchase price by
$1,700,000. This excess value was accounted for as a reduction in the net book
value of the assets acquired. See "Debt and Encumbrances" below.
The Company is a party to a surety agreement in favor of The Budd Company
relating to the purchase by the Company of the business and assets of the
Polychem Division, under which the Company has guaranteed all of Polychem's
obligations under or contemplated by the asset purchase agreement between the
Company and The Budd Company, except that the guaranty does not extend to the
term note of Polychem for the Seller financed portion of the purchase price. The
guaranty also applies to any indemnification obligations of Polychem under the
asset purchase agreement in favor of The Budd Company, which could involve
claims for certain environmental matters arising after March 10, 1995, product
warranty claims related to products installed or sold by Polychem after that
date (even if such product was partially manufactured, installed or sold by The
Budd Company prior to that date), and for services performed after that date
(even if such services were partially performed by The Budd Company prior to
that date).
PRODUCTS
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Polychem engineers and produces an extensive line of plastic molded products.
Polychem's typical products include, among others, complete non-metallic
rectangular clarifier component systems for water and wastewater treatment
operations, which are comprised of non-metallic chain, sprockets, stub
shafts, wear shoes and other
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products fabricated to customer specifications; cast nylon elevator buckets for
the handling of foundry sand, aggregate, and glass cullet; phenolic sprockets
and pulleys for agricultural and mining equipment; bearings for steel mills;
extruded thermoset profiles for aircraft applications; and molded conveyor
chains and accessories for food packaging, water and wastewater treatment and
other material handling applications. Most of the nylon buckets, steel mill
bearings and table-top conveyor chain are sold as off-the-shelf items to steel
mills and distributors. The majority of the balance of Polychem's products are
produced for use in a complete system of wastewater treatment clarifier
equipment which Polychem sells to its customers. The latter category is sold
primarily as a complete system built to customer specifications, which is
usually sold under an order selected from competitive bids. The reaction
injection molded ("RIM") nylon products and the injected molded products account
for approximately 85% of Polychem's sales; compression molded products comprise
the balance of the business.
MANUFACTURING PROCESSES
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Polychem's plant is equipped and organized to handle three distinct
manufacturing processes by which its diverse line of products is fabricated:
RIM, which produces cast nylon, is used for buckets, stub shafts, and sprockets;
compression molding, which produces phenolic moldings, is used for steel mill
bearings, timing gears, timing pulleys, and other molded products; and injection
molding, which produces engineered resin parts used for wastewater drive and
collector chain, and table-top conveyor chain.
Polychem's various products are more easily categorized by these three processes
rather than by product type because each of Polychem's many products is created
through only one of the processes. In RIM molding, a compound containing a
catalyst and a compound containing a promoter are mixed in the mold where a
reaction takes place; the combination and percentage of base chemicals and
additives determine the properties of the final product. In the compression
molding process, phenolic macerate or phenolic laminate is placed in heated
molds (approximately 325 degrees) and cured for a specific period of time at
pressures up to 3000 PSI. In injection molding, engineered plastic materials are
melted and injected into the mold at a controlled temperature and rate. Once in
the mold, the plastic is cooled to a shape reflecting the cavity.
Polychem's plant is laid out so that each of its manufacturing processes
occupies a separate location. In the Molding Department, products are molded in
batches and then sent to the Fabricating Department as complete orders for
machining and assembly. Raw materials for all of the manufacturing processes are
stored in tanks inside and outside the facility. Polychem's plant operates on a
three-shift basis. Most of the employees are interchangeable and have been
trained to operate all of the various equipment in their departments, which
gives Polychem additional flexibility in scheduling personnel to meet production
needs as they arise.
MARKETING AND CUSTOMERS
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The Budd Company originally purchased The Polychem Division in 1955. At that
time, Polychem produced a complete line of industrial laminates, automotive
timing gears, vulcanized fibre and teflon and silicon tape. In recent
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years, however, Polychem has shifted its focus to manufacturing products
designed for the wastewater treatment market, and presently the revenues from
wastewater products comprise 83% of Polychem's annual sales volume. The
wastewater treatment market is global in nature, and the Company believes the
potential exists for Polychem to expand into growing markets for such products
in Mexico, Central and South America, Asia, and Eastern Europe.
In addition to non-metallic clarifier component systems for wastewater
treatment, Polychem markets its traditional products (such as plastic chain,
compression molded phenolic and injection molded plastic components, RIM-
processed nylon buckets, phenolic bearings and corrugated fibre products) to the
food processing, electronics, steel, automotive, chemical, printing, aerospace,
and consumer products industries, among others. Polychem markets its plastic
chain, cast nylon buckets, steel mill bearings and compression molded phenolics
primarily through distributors. The balance of its products, including its water
and wastewater treatment component systems, are sold through Polychem's sales
force and agents. In 1996, Polychem's sales force generated 55% of its annual
sales revenue (61% in 1995), international distributors accounted for 39% (31%
in 1995) and domestic distributors accounted for 6% (8% in 1995). Domestic
revenues were approximately 64% and international revenues were approximately
36% in 1996, compared to 56% and 44% in 1995, respectively.
COMPETITION AND STRATEGY
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Competition with Polychem and its products tends to be fragmented. Many other
companies, domestically and internationally, produce one or more products
similar to Polychem's, but Polychem believes that none of its competitors offer
a similar variety of light-weight plastic products for a variety of industries.
Experienced competition exists in each of Polychem's major markets, and many of
Polychem's competitors enjoy excellent working relationships with their
customers, produce a variety of quality products, and have access to significant
resources. These factors, along with product characteristics, reliability,
servicing, and pricing form the major competitive factors in Polychem's markets.
Many of Polychem's customers and potential customers have long associated it
with The Budd Company, a large multinational corporation. Such customers may
feel less comfortable using a smaller supplier, especially with regard to
reliance on product warranties. Maintaining its image as a stand-alone company
forms a key component of Polychem's marketing strategy.
Polychem has four significant competitors in the area of non-metallic
rectangular wastewater clarifier systems, of which it considers Envirex to be
the most significant. Polychem is believed to possess approximately 30% of this
market. However, while Polychem provides product only to clarifier systems in
wastewater plants, Envirex has a much broader line of wastewater treatment
products that encompass all of the major processes in a treatment plant. FMC and
NRG are Polychem's other less substantial (in terms of market share)
competitors. Both Envirex and FMC are significantly larger than Polychem.
Polychem has three competitors in the market for nylon buckets and five
competitors in the market for table-top chains.
Polychem's long-term goals include solidifying its reputation as a leading
provider of quality wastewater treatment equipment products; increasing sales of
its traditional products by improving existing product lines; and seeking new
products to supplement its current line, both from internal research and
development and by acquisition.
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MATERIALS AND SUPPLIES
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Polychem's business of manufacturing a broad line of engineered plastics
products necessitates the ability to obtain various sources of raw materials,
even in periods of short supply. Polychem has developed a strong supply network
over the past thirty years, and does not believe the potential for shortages in
raw materials exists. At present, Polychem does not maintain more than one
month's supply of raw materials beyond the amount required for its scheduled
production work.
ENVIRONMENTAL REGULATIONS
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Polychem does not anticipate any significant expenses for environmental
remediation projects. In the ordinary course of its business, it incurs some
cost for oil reclamation, hauling of waste products and normal energy costs
associated with recycling and waste disposal. Polychem maintains two
environmental permits, one for a dust collection system and the other for its
after burner heater. The collected dust is transported to an approved landfill
and samples of the dust are periodically analyzed. The heater is used to
impregnate phenolic resin into rolls of fabric which are then processed into
specific products. Methanol from the heater is processed through an after burner
and emits little in the way of contaminants. Polychem maintains seven above
ground storage tanks. Two are used to store phenolic resins inside the plant;
two store fuel oil; and three outside tanks are used to store other chemicals.
There are spill containment systems in place throughout the facility.
Occasionally, there are minor and isolated spills of heat transfer oil,
caprolactam and phenolic resins. The latter two quickly solidify in room
temperature and the hardened material is removed to an approved landfill; spills
of heat transfer oil are cleaned and properly disposed of with other waste
products. Polychem has submitted a revised spill prevention and response plan to
the Pennsylvania Department of Environmental Resources in May 1994 to which no
comments have been received as of the date of this filing.
The Company believes that the Polychem property in Phoenixville, Pennsylvania
was first used as a silk mill in the early part of this century and then as a
manufacturing site for felt carpet padding. For this reason, the Company
commissioned several environmental audits prior to its acquisition of the
Polychem Division assets, and no contaminations were found.
EMPLOYEES
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Polychem employs 84 employees, of whom approximately 47 are employed on an
hourly basis. Hourly employees are members of United Textile Workers of America,
AFL-CIO and its affiliate United Food Commercial Workers Local Number 130T (the
"Union"). Most are semi-skilled workers. In October 1996, Polychem renegotiated
its Union contract, which will expire at the end of September 1999. As of the
date of this report, management believes that employee relations are
satisfactory.
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Polychem has also renegotiated its defined benefit retirement plan for hourly
rated employees at its Phoenixville, Pennsylvania plant. As of December 31,
1996, the plan meets ERISA funding requirements; however, there can be no
assurances that market performance of plan investments will be sufficient to
meet all plan liabilities as they arise.
RESEARCH AND DEVELOPMENT
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Polychem is the owner of a number of United States and foreign patents and
patent applications relating to water treatment plastic products, chain conveyor
links, conveyor chain bearings, sprockets with locking mechanisms and a bucket
grit elevator system. The ownership of such patents helps Polychem from a
marketing standpoint by securing its continued reputation as an innovative
competitor in its industry.
Polychem employs eight (8) application engineers who use CAD equipment to design
custom wastewater treatment non-metallic rectangular clarifier systems or to
alter existing clarifiers to meet changing specification requirements. All new
products are evaluated for patent protection. In 1996, Polychem filed two new
Patent Applications and as of this report it is not known if they will be
approved. The amounts spent on research and development by Polychem were
$173,000 and $100,000 for the years ended December 31, 1996 and 1995,
respectively.
DEBT AND ENCUMBRANCES
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To partially finance the acquisition of assets from The Budd Company, Polychem
borrowed $2,748,000 from Congress Financial Corporation (the "Loan") pursuant to
a Loan and Security Agreement dated March 10, 1995 (the "Loan Agreement"), which
provides a maximum credit of $9 million. All of Polychem's assets have been
pledged to secure the loans advanced and to be advanced under the Loan
Agreement. Of the total amount of the Loan, the term loan portion was $1.77
million, repayment of which is secured by real estate and equipment. The balance
of the Loan is a revolving credit accommodation subject to a lending formula
limiting availability of funds to the total of 75% of eligible accounts
receivable plus the lesser of 55% of eligible inventory or $1,000,000 minus 55%
of the undrawn amounts of outstanding letter of credit accommodations for the
purpose of purchasing eligible inventory. The financing agreement requires that
Polychem maintain compliance with certain financial and non-financial covenants.
As of December 31, 1996, Polychem was in compliance with these covenants.
Currently, interest rates on the Loans are at a rate of 1.5% in excess of the
prime rate established by CoreStates Bank, Philadelphia. The loan is subject to
other customary terms and conditions.
The Company has given a limited guarantee to Congress Financial Corporation of
the obligations of Polychem under the Loan Agreement, limited to a principal
amount of $2.5 million of such indebtedness outstanding.
Polychem has acknowledged the terms of an Intercreditor Agreement between
Congress Financial Corporation and The Budd Company pursuant to which The Budd
Company has substantially subordinated its rights with respect to promissory
notes payable to it by Polychem in favor of Congress Financial Corporation and
has agreed to defer its rights of collection for 180 days in the event of a
default under the promissory notes.
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PRINCETON ACADEMIC PRESS, INC.
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BACKGROUND
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Princeton was incorporated under the laws of Delaware in June 1993, to complete
the acquisition of the book manufacturing operations of PUP. Subsequently, DTF
Media, Inc. ("DTF") acquired the shares of Princeton from its founding
stockholders in a share exchange. The Company acquired 100% of Princeton's stock
from DTF on March 10, 1995. See "Acquisition." Princeton helps organizations
manage the process of creating high-quality black and white print work. It
provides pre-press, printing, and binding services to publishers, university
presses, and other information providers. Other Princeton services include
assembly and packaging, order fulfillment and distribution, and overall project
management.
ACQUISITION
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The Company acquired all of the issued and outstanding stock of Princeton on
March 10, 1995 from DTF in exchange for 220,000 shares of its Common Stock and
the assumption of certain liabilities of DTF, including liabilities for certain
professional fees and an intercompany obligation payable to Princeton in a
principal amount outstanding on that date of $283,005. DTF distributed the
Company's Common stock acquired in the exchange to its four stockholders shortly
after the exchange. See Item 11, "Securities Ownership of Certain Beneficial
Owners and Management-Principal Stockholders." At the time of acquisition the
Company assumed the existing book value basis of Princeton's assets upon the
original asset transfer in June 1993. The fair market value of those assets
exceeded their purchase price by $1,481,000. This excess value was accounted for
as a reduction in the book value of the assets.
PRODUCTS
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Princeton's products include manufactured books and manuals for publishers,
university presses, and other information providers, as well as related services
involved in managing the process of creating books and manuals.
MARKETING AND CUSTOMERS
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Princeton's customer base is primarily comprised of university presses and
traditional book and journal publishers, which are principally concentrated in
the Northeastern United States. The majority of Princeton's products consist of
short to medium run (under 10,000 copies), high-quality black and white hard
cover and paperback books for the university publishing market. PUP accounted
for approximately 53% of Princeton's total revenue in its most recent fiscal
year, which represents a 16% reduction since Princeton began diversifying its
customer base after the acquisition in June 1993. Nonetheless, PUP remains
Princeton's most significant client, and Princeton and the Company would suffer
material, adverse effects if it were to lose PUP's business. Princeton's
management believes that it will continue to enjoy a strong relationship with
PUP due to PUP's dependence upon Princeton's equipment and software systems
which were specially designed to meet PUP's needs, the familiarity of PUP's
personnel with these systems, and the quality of the work produced for PUP.
However, there can be no assurances that Princeton's relationship with PUP will
continue over the long term, or, if it does, that it will continue at the same
level.
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COMPETITION AND STRATEGY
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All phases of Princeton's business are highly competitive. The printing and
publishing industries are highly fragmented. While most establishments are
relatively small, several of Princeton's competitors are considerably larger or
are affiliated with companies which are considerably larger and have greater
financial and other resources than both Princeton and the Company. In recent
years, consolidation of customers and competitors within Princeton's markets has
increased competitive pricing pressures. Currently, approximately 65% of
Princeton's projects are competitively bid in the marketplace. The major
competitive factors in Princeton's business in addition to price are product
quality, customer service, availability of appropriate printing capacity, rapid
turnaround, scheduling flexibility, and technology support. Princeton obtains
its customers through word-of-mouth referrals as well as through its own sales
force, who sell through advertising directories, trade shows, and direct
contact. Princeton derives approximately 48% of its business from reprints of
prior book runs.
OPERATIONS, MATERIALS AND SUPPLIES
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Although some of Princeton's competitors employ a web printing process capable
of handling longer runs of books, Princeton uses sheet fed printing presses,
which provide a higher overall print quality and are better suited for shorter
(under 10,000 copies) runs. Princeton purchases its paper, film, plate
materials, cover stock and ink directly from outside suppliers. As is prevalent
in many other manufacturing facilities, Princeton attempts to maintain a just in
time inventory policy for its standard paper and cover stock, and a consignment
inventory policy for its film and plate materials requirements, whereby such raw
materials are delivered on an "as needed" basis. Additional materials may be
special ordered as the need arises. Princeton buys its raw materials from
multiple sources and is not dependent upon any one supplier for any of its
requirements. Management believes that its long-term relationships with these
suppliers will enable Princeton to continue to maintain an adequate availability
of raw materials for its book manufacturing operations.
The majority of Princeton's typesetting and case binding work is currently
contracted to various specialty providers. While most of Princeton's competitors
outsource typesetting work, some competitors have in-house case binding
capability. Assuming that the demand of its customer base for such service
increases at its current rate, Princeton anticipates obtaining its own case
binding operation at some point in the future when management feels that the
volume of case binding work would support the expense.
The average job's duration is between three and six weeks, which necessitates
that the Company maintain a working capital facility of $1 million, of which the
average outstanding balance has been approximately $600,000, leaving Princeton
with available working capital under the facility of $400,000. Management
believes that Princeton's ability to finance its working capital requirements is
adequate, but expansion of its customer and revenue base will entail additional,
and perhaps significant, working capital requirements.
Princeton's overall business is not significantly seasonal in nature. Princeton
holds no patents, licenses, franchises or concessions which are important to its
operations.
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ENVIRONMENTAL REGULATIONS
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Management believes that Princeton's operations comply in all material respects
with applicable federal, state and local environmental laws and regulations.
Because all of Princeton's film development and ink processes are closed systems
in which potentially hazardous substances are recycled or stored for proper
disposal in accordance with existing law, it does not anticipate incurring any
significant expenditures in order to comply with such laws and regulations that
would have a material impact on capital expenditures, earnings or competitive
position. In addition, Princeton normally utilizes soy-based inks to lessen any
potential adverse environmental conditions. The Company is unaware of
investigations, audits or threatened actions related to environmental matters
within the last five years, nor is it aware of any ongoing investigations,
audits or threatened actions related to environmental matters which occurred
prior to that period.
EMPLOYEES
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Princeton employs 39 persons full-time, who work one of two shifts per day,
depending upon the level of demand. All of Princeton's employees are non-union
workers. Princeton occasionally hires additional part-time help at times of peak
demand. Princeton has never suffered a work stoppage and believes its employee
relations are good.
CENTENNIAL PRINTING CORPORATION
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BACKGROUND
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Centennial is a wholly-owned subsidiary of the Company. See "Acquisition."
Centennial was organized on June 28, 1977 under the laws of Delaware. It
provides high-quality printing services to its clients who are principally
located in the eastern United States.
ACQUISITION
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On October 17, 1996, the Company acquired 100% of the capital stock of
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 Stock and $450,000 in cash. The acquisition has
been accounted for using the purchase method of accounting, whereby the purchase
price was 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 which 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 approximately $6,000,000, which was recorded as goodwill and is
being amortized on a straight-line basis over 20 years.
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The Series B 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 Series B Preferred Stock may require the Company to
redeem for cash, equal to the stated value plus accrued dividends, up to 1,800
shares of Series B Preferred Stock during each three month period beginning
April 1, 1997.
The holder of the Series B Preferred Stock has requested the initial redemption
of 1,800 shares as of April 1, 1997. Due to the significance of the Company's
claims under the indemnification provisions of the Amended and Restated
Agreement and Plan of Merger (the "Merger Agreement") between the Company,
Centennial and Centennial Acquisition Corp. (see Item 3 Legal Proceedings) it
has not redeemed such preferred shares.
In addition, the Company paid the former owner of Centennial $500,000 in
consideration of his agreement not to compete.
The Company agreed to use its best efforts to file a registration statement to
register the shares of common stock received by the former owner and to
guarantee the aggregate consideration received from resale of the stock to be at
least $7.00 per share for one year from the effective date of the registration
statement.
The consolidated financial statements for the year ended December 31, 1996
contain the results of operations of Centennial from the date of acquisition
(October 17, 1996) through the end of the year.
PRODUCTS
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Centennial's products include annual reports, high-quality advertising
brochures, pamphlets, and high-profile marketing pieces.
MARKETING AND CUSTOMERS
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Centennial's customer base is primarily comprised of pharmaceutical, financial
and marketing companies, which are located in the Eastern United States. The
majority of Centennial's work consists of high-quality, multicolor pieces with
typical run lengths of approximately 15,000 copies. In 1996, five customers
represented 36% of Centennial's revenue. Centennial's management believes
Centennial enjoys a strong relationship with these customers: however, there is
no assurance that these customers will continue to purchase from Centennial at
historical levels.
COMPETITION AND STRATEGY
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Centennial's business is highly competitive. The printing industry is very
fragmented. While most of Centennial's competitors are relatively small,
several competitors are considerably larger or are affiliated with companies
which are considerably larger and, therefore, have greater financial and other
resources than either Centennial or the Company. In recent years, consolidation
of customers and competitors within Centennial's markets has increased
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competitive pricing pressures. Currently, nearly all of Centennial's projects
are competitively bid. The major competitive factors in Centennial's business,
in addition to price, are product quality, customer service, rapid turnaround,
scheduling flexibility, and technology support. Centennial obtains its
customers through its in house sales force and customer referrals.
Centennial also intends to grow through the purchase of additional printing
equipment that will increase its capabilities and, therefore, its product
offerings and, also, enhance its competitive position through lower costs.
OPERATIONS, MATERIALS, AND SUPPLIES
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Although some of Centennial's competitors employ a web printing process capable
of handling longer runs, Centennial uses the sheet fed printing process, which
provides a higher overall print quality demanded by its customers and is more
cost-effective for shorter multicolor runs. Centennial purchases its key
supplies (paper, film, plates, and ink) directly from outside suppliers.
Centennial maintains adequate inventory levels of film, plates, and ink through
consignment programs with key suppliers. This ensures "just-in-time" purchasing
together with more efficient cash flow. Since paper is the largest dollar
component of material, specific quantities will be ordered upon receiving a
customer purchase order. Financial efficiencies are achieved by overall volume
purchasing resulting in discounts, improved terms, and rebates. Centennial
purchases its supplies via a network of suppliers and is not dependent upon any
one supplier for any of its requirements.
Centennial outsources certain work for which it does not currently have existing
plant capabilities. Film lamination, perfect binding, foil stamping, and die-
making are examples of such outsourcing. Centennial expects to increasingly
utilize the capability of other Company subsidiaries to conduct these
operations in the future.
The typical duration of Centennial's jobs is two weeks from purchase order to
delivery, which requires the Company to maintain borrowing capacity under a
working capital line. The current working capital line of $2.75 million is, at
present, deemed adequate to effectively operate the business.
Centennial's overall business is not subject to any significant seasonal
fluctuations other than the heavy load of corporate annual reports in the March-
April timeframe.
ENVIRONMENTAL REGULATIONS
- -------------------------
Management believes that Centennial's operations comply in all material
respects with applicable Federal, state, and local environmental laws and
regulations. Because all of Centennial's film development and ink processes
are closed systems in which potentially hazardous substances are recycled or
stored for proper disposal in accord with existing law, it does not anticipate
incurring any significant expenditures in order to comply with such laws and
regulations that would have a material impact on capital expenditures, earnings
or competitive position. In addition, Centennial utilizes soy-based inks
exclusively, to lessen any potential adverse environmental conditions. The
Company is
Page 12
<PAGE>
unaware of investigations, audits or threatened actions related to environmental
matters within the last five years, nor is it aware of any ongoing
investigations, audits, or threatened actions related to environmental matters
which occurred prior to that period.
EMPLOYEES
- ---------
Centennial employs 135 persons full-time, who work one of two shifts per day
depending on the level of demand.
Centennial maintains a part-time staff for use in its fulfillment and linework
areas. Centennial is a nonunion facility and believes its employee relations
are good.
IVY-TYGART ACQUISITION CORPORATION
- ----------------------------------
BACKGROUND
- ----------
Ivy is a majority-owned (92.5%) subsidiary of the Company, which was formed in
October 1996 for the purpose of acquiring substantially all of the assets of
Tygart Moulding Corp. See"ACQUISITION." Ivy serves three market areas:
architectural hardwood trim for the residential building trade, picture moulding
for the picture wholesale trade, and retail picture framing through four retail
stores. The three segments of the business do business under the names Tygart
Moulding, Ivy Industries, and Picture Parts, respectively.
ACQUISITION
- -----------
Ivy acquired substantially all of the assets and business of Tygart Moulding
Corp. on December 31, 1996, for a purchase price of approximately $3,764,000, of
which approximately $3,304,000 was financed as follows: a 20-year term note of
approximately $1,804,000, which bears interest at rates ranging from 7.3% to
10.25%; a 20-year term note of $300,000 which bears interest at 9.4%; a 3-year
term note of $450,000 which bears interest at 4 1/2% over the prime rate; and a
line of credit of $750,000 which bears interest at 3 1/2% over the prime rate.
In addition, pursuant to the terms of this asset purchase agreement, Ivy assumed
liabilities of Tygart Moulding Corp. relating to trade payables, accrued
expenses, and capital leases totalling approximately $450,000. At the time of
acquisition the fair market value of the assets, based upon independent
appraisals, exceeded their purchase price by $1,843,000. This excess was
accounted for as a reduction in the net book value of the assets.
PRODUCTS
- --------
The Tygart part of the business manufactures hardwood flooring and trim products
for the residential homebuilding market. These items are sold through
distributor/dealers, directly to the homeowner or contractor. A sales force
comprised of independent representatives promotes these products to major
contractors in their territory.
Page 13
<PAGE>
The Ivy Industries segment finishes picture moulding obtained from Tygart and
sells it to the picture frame industry. Its sales force consists of
manufacturers' representatives who present Ivy's products to distributors,
picture frame dealers and a OEM accounts.
The Picture Parts segment of the business consists of four (4) retail stores
which sell picture frames manufactured by Ivy Industries and products from other
related framing accessory companies.
MANUFACTURING PROCESSES
- -----------------------
Tygart purchases lumber in plank form, kiln dries it as needed, and mills it
into a desired pattern.
Ivy's finishing process consists of applying various coatings to the picture
moulding to achieve the desired result. Ivy also finishes Tygart's product for
those customers who want their material "pre-finished" as opposed to having to
finish it after installation in their home.
COMPETITION AND STRATEGY
- ------------------------
The picture moulding industry is fragmented. There are a few very large
entities that manufacture and import, and a significant number of very small
manufacturers. Ivy is positioned at the upper end of the quality spectrum and
between these two extremes in terms of size.
Ivy's goals include solidifying its position in the traditional high-end niche
for all of its products and expanding its markets to gain a foothold in other
areas such as more machine intensive finishes that do not compete with the
former.
ENVIRONMENTAL REGULATIONS
- -------------------------
Management believes that Ivy's operations comply in all material respects with
applicable federal, state and local environmental laws and regulations. Ivy's
paints and solvents are formulated to minimize undesirable qualities; wastes are
collected and disposed of through a licensed disposal agent and are then
remitted to a licensed disposal facility. The Company is unaware of
investigations, audits or threatened legal actions related to environmental
matters within the last five years, nor is it aware of any ongoing
investigations, audits or threatened legal actions related to environmental
matters which occurred prior to that period.
EMPLOYEES
- ---------
Ivy employs approximately 95 full-time and 5 part time employees. All Ivy
facilities are non-union. Management believes that relationships with its
employees are very good.
Page 14
<PAGE>
ITEM 2 PROPERTY
- ------ --------
POLYCHEM PROPERTY AND EQUIPMENT
- -------------------------------
Polychem operates from a 220,000 square foot facility in Phoenixville,
Pennsylvania, which it owns, subject to a mortgage with Congress Financial Corp.
See "Polychem Corporation-Debt and Encumbrances," above. Polychem uses
approximately 120,000 square feet for manufacturing and warehousing, and 20,000
square feet for offices. Polychem leases approximately 33,000 square feet of its
facility as warehouse space to a wholesale distributor of imported outdoor
furniture. The lease continues until December 1999 at a rental rate of $92,000
per year, net of utilities. Polychem leases an additional 7,200 square feet of
the facility as equipment storage space to an environmental clean-up firm. That
lease continues until December 1997 at a rental rate of $21,000 per year. An
additional 40,000 square feet of warehouse space is available for lease at the
facility.
Polychem either owns or leases, through capital leases, all of the equipment
required to conduct its business. The equipment is comprised of compression
molding presses, transfer molding presses, injection molding presses, reactors,
dispensers and RIM press lines for nylon-6 operations, a complete fabrication
shop with state of the art computerized numerical control equipment and a
computer aided design center. Polychem capital expenditures were $177,000 and
$41,000 in 1996 and 1995, respectively, nearly all of which were funded by
capital leases. In 1997, capital expenditures are expected to be approximately
$270,000. Polychem considers its equipment to be in good operating condition and
adequate for its present needs, as well as near term expanded business volume.
Management believes that all of Polychem's real and personal property is
adequately covered by insurance.
PRINCETON PROPERTY AND EQUIPMENT
- --------------------------------
Princeton's operations are housed in a facility in Lawrenceville, New Jersey
comprised of approximately 42,700 square feet, which it leases from PUP at a
gross rate (excluding electric) of $6.45 per square foot. The term of the lease
extends until June 30, 1997, Princeton considers its plant to be well maintained
and suitable for the purpose intended.
Princeton's products are manufactured on equipment which in most cases is owned
by Princeton, although it leases computers and electronic printing systems which
are subject to more rapid obsolescence. Capital expenditures including capital
leases amounted to approximately $295,000 in 1996, $14,000 in 1995, and $146,000
in 1994. In 1997, capital expenditures are expected to be less than $50,000.
Princeton considers its equipment to be in good operating condition and adequate
for its present needs, as well as near term expanded business volume.
Management believes that all of Princeton's real and personal property is
adequately covered by insurance.
Page 15
<PAGE>
CENTENNIAL PROPERTY AND EQUIPMENT
- ---------------------------------
Centennial's operations are housed in a facility in King of Prussia,
Pennsylvania comprised of approximately 50,000 square feet, which it leases. The
term of the lease extends until June 30, 2002 at a rate of $5.65 per square foot
(excluding electric) through December 1999 and $6.35 per square foot (excluding
electric) for the remaining term. Centennial considers its plant to be well
maintained and suitable for the purpose intended.
Centennial's products are manufactured on equipment which, in most cases, is
leased by Centennial, because computers and electronic printing systems are
subject to more rapid obsolescence. In 1997, capital expenditures are expected
to approximate $250,000, which are anticipated to be funded by capital leases.
Centennial considers its equipment to be in good operating condition and
adequate for its present needs, as well as near term expanded business volume.
Management believes that all of Centennial's real and personal property is
adequately covered by insurance.
IVY PROPERTY AND EQUIPMENT
- --------------------------
Ivy operates from a 71,000 square foot facility in Charlottesville, Virginia,
which it owns, subject to mortgages. Approximately 5,000 square feet of this is
office space. In addition, Ivy operates a 70,000 square foot complex in
Beverly, West Virginia, which it owns, subject to a mortgage. The retail stores
operate from leased space in its Charlottesville, Richmond, Hampton, and
Virginia Beach locations. Typical lease terms are for five years, but certain
leases have options for longer terms. On average, the stores have approximately
two (2) years remaining on their leases.
Ivy owns all of the equipment required to conduct its business, subject to a
term loan and three capital leases. This consists of wood drying, surfacing,
ripping, and milling equipment for Tygart, and sanding and spraying equipment
for Ivy. Ivy considers its equipment to be in reasonable operating condition.
Management believes that all of Ivy's real and personal property is adequately
covered by insurance.
ITEM 3 LEGAL PROCEEDINGS
- ------ -----------------
CENTENNIAL
- ----------
Centennial, through its ultimate parent, The Eastwind Group, Inc., instituted a
Demand for Arbitration with the American Arbitration Association on March 31,
1997 against the former owner of Centennial pursuant to the indemnification
provisions of the Merger Agreement between Centennial and the Company. The
Demand for Arbitration asserts various theories of recovery,
Page 16
<PAGE>
including the matters referred to in the paragraph below, and seeks damages of
at least $4.5 million as well as an order terminating obligations of Centennial
to the employee under the purported employment agreement referred to in the
paragraph below. At this time management is unable to state whether an outcome
favorable to the Company is either probable or remote, nor can management assess
the amount or range of expected recovery in the event of a favorable outcome.
An employee of Centennial filed a lawsuit in the Court of Common Pleas of
Montgomery County, Pennsylvania on April 7, 1997, naming Centennial and the
Company as defendants. Although the employee has not been terminated and
although Centennial continues to pay the employee all of his entitlements under
a purported employment agreement allegedly entered into between Centennial and
the employee in November 1994, the theory of the litigation appears to be a
breach of contract based upon an alleged modification of the terms of his
employment, and an alleged demotion. Simultaneously, a companion action was
instituted by the employee against the same defendants with the Pennsylvania
Human Relations Commission based on alleged age discrimination. Centennial does
not believe that the employee's allegations have merit and intends to vigorously
defend both actions. However, at this time, management is unable to state
whether an outcome unfavorable to Centennial in either action is either probable
or remote, nor can management assess the amount or range of exposure in the
event of an unfavorable outcome in either proceeding.
ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
- ------ ---------------------------------------------------
None
Page 17
<PAGE>
PART II
-------
ITEM 5 MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER
- ------ ----------------------------------------------------------------
MATTERS
-------
The Company's Common stock is currently traded on the Nasdaq Small Cap Market,
under the symbol "EWND". Prior to its listing on the Nasdaq Small Cap Market on
May 28, 1996, the Company's Common Stock traded on the Nasdaq Electronic
Bulletin board, under the symbol EWND. The following table sets forth, for the
periods indicated, the range of high and low bid prices of the Common Stock of
the Company as reported by Nasdaq, with respect to the period during which the
Company's Common Stock was traded on the Nasdaq Small Cap Market and, prior to
that, by the National Quotation Bureau. The quotations reported by the National
Quotations Bureau represent prices between dealers and do not include retail
markups, markdowns, or commissions, and do not necessarily represent actual
transactions. The number of holders of record of the Company's Common Stock as
of March 31, 1997 was approximately 1,900.
The market price per share by quarter was:
<TABLE>
<CAPTION>
Three months ended High Low
------------------ ---- ---
<S> <C> <C>
December 31, 1995/(1)/ $ 9 $ 8
March 31, 1996 $ 9 $ 6 1/2
June 30, 1996 $11 1/2 $10
September 30, 1996 $11 1/4 $ 7 29/32
December 31, 1996 $ 8 15/16 $ 4 1/2
March 31, 1997 $ 7 $ 4 3/4
</TABLE>
/(1)/ The Company's initial trading on the Nasdaq Electronic
Bulletin Board occurred on November 13, 1995.
The Company has not paid any cash dividends to date, and does not anticipate or
contemplate paying cash dividends in the foreseeable future. Moreover, payment
of dividends is limited or prohibited under certain restrictions in the loan
agreements of its subsidiaries, which would be necessary to provide the cash for
any such dividends. It is the present intention of management to utilize all
earnings from operations for working capital of the Company.
Page 18
<PAGE>
ITEM 6 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
- ------ ---------------------------------------------------------------
RESULTS OF OPERATIONS
---------------------
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
- ---------------------------------------------------------
This Form 10-KSB contains certain forward-looking statements regarding, among
other things, the anticipated financial and operating results of the Company.
For this purpose, forward looking statements are any statements contained herein
that are not statements of historical fact and include, but are not limited to,
those preceded by or that include the words, "believes," "expects,"
"anticipates," or similar expressions. In connection with the "safe harbor"
provisions in the Private Securities Litigation Reform Act of 1995, the Company
is including this cautionary statement identifying important factors that could
cause the Company's actual results to differ materially from those projected in
forward looking statements made by, or on behalf of, the Company. These
factors, many of which are beyond the control of the Company, include the
Company's ability to (i) identify and capitalize on possible acquisition
opportunities, (ii) obtain suitable financing to support its expansion
objectives, (iii) manage its growth, (iv) achieve operating efficiencies
associated with the acquisitions of separate businesses, and (v) integrate the
operation of separate businesses and the operating subsidiaries' ability to
successfully compete in their respective markets. Although the Company believes
that the forward looking statements contained herein are reasonable, it can give
no assurance that the Company's expectations are correct. All forward looking
statements are expressly qualified in their entirety by this Cautionary
Statement.
BACKGROUND AND BASIS OF PRESENTATION
- ------------------------------------
Although the Company was formed in August 1993, no significant business
operations were conducted until March 10, 1995 when the Company acquired the
shares of Princeton from DTF and the Company's wholly-owned subsidiary acquired
the assets of The Polychem Division of The Budd Company.
The acquisitions of Princeton, Polychem, Centennial and Ivy were accounted for
using the purchase method of accounting. Under the purchase method of
accounting, the assets of the acquired business are generally valued at their
fair market value on the date of acquisition, with the amount by which the
purchase price differs from the aggregate fair market value of the acquired
assets treated as goodwill or negative goodwill. The results of the operations
of the acquired businesses are included with the results of operations of the
Company beginning on the date of acquisition.
Because the acquired businesses were part of larger operations or were privately
held prior to their acquisition, their results of operations prior to the date
of acquisition may not be indicative in evaluating results of operations which
may be expected in the future.
Page 19
<PAGE>
CONSOLIDATED RESULTS OF OPERATIONS
- ----------------------------------
Results of Operations are presented for the years ended December 31, 1996 and
1995. Results of Operations in 1996 include the Company and its three wholly-
owned subsidiaries, Princeton, Polychem and Centennial, the latter from October
17, 1996 (date of acquisition) through December 31, 1996. Ivy was acquired as
of the close of business on December 31, 1996; therefore only the acquisition
balance sheet is included in the Company's consolidated financial statements as
of that date.
The following table sets forth certain statement of operations items as a
percentage of total net sales for the periods indicated:
<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------
1996 1995
---- ----
<S> <C> <C>
Net sales 100.0% 100.0%
Cost of goods sold 75.3 78.0
----- -----
Gross Profit 24.7 22.0
Selling, general
and administrative 20.3 19.6
----- -----
Operating income (loss) 4.4 2.4
Interest expense 3.0 4.2
Interest and dividend income 1.0 -
----- -----
Income (loss) before income taxes (benefit) 2.4 (1.8)
Income taxes (benefit) 1.1 ( .1)
----- -----
Net income loss (%) 1.3% (1.7%)
===== =====
</TABLE>
Net sales for the year ended December 31, 1996 were $23,633,000, compared to
$15,434,000 for the prior year. The principal reasons for the significant
increase in net sales in 1996 versus 1995 was the inclusion of net sales from
Polychem for the entire year versus the period from March 10, 1995 (the date of
acquisition) through December 31, 1995, and an increase in Polychem's 1996
overall sales over the 1995 annualized level of 21%, plus the inclusion of net
sales of Centennial from October 17, 1996 (the date of acquisition) through
December 31, 1996, of $3,284,000.
Polychem's net sales increased by 21% over 1995 annualized sales principally due
to an increase of 24% in net sales to foreign customers together with a
significant increase in domestic sales of replacement parts for existing water
treatment installations.
Page 20
<PAGE>
Net sales for Princeton in 1996 reflected a decrease of 1.6% from 1995.
Increased competition and the related pricing pressures were the major
contributors to the decline in revenues. Princeton's largest customer remains
PUP, which accounted for $2,899,000 and $2,453,000 of net sales, in 1996 and
1995, respectively. Princeton's revenue from reprints (as opposed to the
printing of new titles) represented approximately 45% of Princeton's net sales
for 1996, down approximately 3 percentage points from 1995.
Gross profits for the year ended December 31, 1996 were 24.7%, as compared to
22.0% in 1995. Gross profits were $5,839,000 and $3,390,000, for 1996 and 1995,
respectively. This increase in gross profits is principally due to Polychem
realizing a 1.7 percentage point increase in 1996 (a full year of operations)
over 1995. The products which Polychem provides to its customers have widely
varying gross margins, even within the water treatment product line, dictated by
whether the product is manufactured by the Company (higher margins) or purchased
from outside sources and packaged for customers (lower margins). Polychem's
1997 gross profits are expected to hold at approximately the 1996 level.
International sales traditionally generate higher profits. Other factors
impacting gross profits at Polychem, namely materials cost, labor costs, and
manufacturing overhead, are expected to be consistent with the experience in
1996 with an improvement in gross profits due to anticipated increased volume in
future periods.
Princeton's gross profit percentage was down .2 percentage points due to
overhead being borne by slightly lesser volume. Centennial's gross profits
achieved an expected 23.3% for the two and one-half month period of inclusion in
the consolidated statement of operations.
Selling, general and administrative expenses totalled $4,795,000 and $3,009,000
for 1996 and 1995, respectively. The increase in selling, general and
administrative expenses in 1996 was principally due to the inclusion of Polychem
for an entire year in 1996, versus a shorter period in 1995 (March 10, 1995
through December 31, 1995). This accounted for $591,000 of the increase.
Princeton's selling, general and administrative expenses decreased by
approximately 8.5%, principally due to personnel cutbacks toward the end of
1996. Due to the nature of Princeton's business, the impact on sales of an
expanded sales force is not expected to have a significant impact on revenue
generation until the second quarter of 1997. Centennial's selling, general and
administrative expenses of $667,000 are included from its date of acquisition
(October 17, 1996). Significant streamlining of selling, general and
administrative functions took place in November 1996 and is expected to have a
favorable impact on 1997 expense levels. In addition, corporate overhead
relating to the holding company, principally relating to salaries, facility
costs and professional fees, made up the remaining increase in selling, general
and administrative expenses.
Interest expense for 1996 was $716,000 or 3.0% of net sales, 1.2 percentage
points lower than 1995. This decrease is due to the significant amount of
capital raised by the Company from the last quarter of 1995 through the end of
1996 (see discussion of Consolidated Liquidity below) and the management of
Polychem's balance sheet, which resulted in virtually no increase in interest
expense for Polychem, which experienced a 50% increase in absolute volume in
1996 versus 1995 (noting that 1995 reflects less than a full year of
operations).
Page 21
<PAGE>
Interest and dividend income of $250,000 in 1996 principally reflects the return
on investments in Wickersham and Lavelle. As the Company continues to pursue
its acquisition and consolidation strategies, the continuation of this
investment income will either be reflected as part of operating results or be
dependent upon raising additional capital.
Income tax expense was $262,000 for the year ended December 31, 1996 as compared
to an income tax benefit of $15,000 in 1995. The 1996 effective tax rate was
45.3% as compared to an effective rate of (5.5%) in 1995. The increase in the
effective rate is primarily due to income before income taxes in 1996 of
$578,000 compared to a loss before income taxes of $274,000 in 1995; the fact
that Polychem's income, for state tax purposes, is not offset by the losses of
its parent company and the other operating subsidiaries; and permanent timing
differences. These increases were partially offset by a reduction in the
valuation allowance recorded in 1995. The valuation allowance was reduced to
zero in 1996 since the Company will be able to offset its current taxable
income with prior net operating loss carryforwards and estimated payments.
CONSOLIDATED LIQUIDITY OF THE COMPANY AT DECEMBER 31, 1996
- ----------------------------------------------------------
The Company generated net income of $316,000 during 1996, developing an increase
of cash and cash equivalents of $283,000, resulting in a balance of cash and
cash equivalents of $710,000 at December 31, 1996.
Cash flows from operating activities provided $1,012,000, resulting from:
depreciation and amortization of $505,000; imputed interest of $22,000; deferred
income taxes of $41,000; and changes in working capital net of the effect from
acquisitions including an increase in accrued expenses, accrued income taxes;
and pension and retirement plan benefits of $777,000. These increases in cash
were offset by increases in accounts receivable of $118,000, inventories of
$93,000, prepaid income taxes of $92,000, prepaid expenses and other assets of
$144,000, together with a reduction in accounts payable of $201,000.
Investing activities during 1996 reflected a use of cash of $2,694,000 resulting
from the purchase of capital stock of Centennial of $1,241,000; investments in
and advancements to Wickersham and Lavelle of $1,393,000; purchase of net assets
of Tygart of $10,000 and the purchase of property and equipment of $50,000.
In 1996, net cash provided by financing activities was $1,965,000, including
proceeds from the exercise of warrants of $2,527,000; net proceeds from the sale
of Common Stock units of $1,019,000; net proceeds from the sale of preferred
stock of $929,000 net; proceeds from issuance of a subordinated note payable of
$485,000; and borrowings on term notes of $104,000; all offset by cash used for
repayment of borrowings under lines of credit of $2,208,000; repayment of
principal on term notes of $419,000; repayments of capital lease obligations of
$243,000; purchase of treasury stock of $194,000; and payment of cash dividends
on preferred stock of $35,000. The 1996 net cash provided by financing
activities was principally comprised of proceeds from equity transactions which
enabled the Company to repay $2,765,000 of debt principal. This contrasts 1995,
in which the primary source of cash was the incurrence of debt.
Page 22
<PAGE>
At December 31, 1996, the Company's working capital was approximately
$1,486,000, a decrease of approximately $1,492,000 from December 31, 1995. This
decrease in working capital was due principally to the acquisition of the
capital stock of Centennial. The Company has no significant capital spending or
purchase commitments other than normal commitments under facility and capital
leases. The Company's cash requirements for 1997 include principal payments on
term loans, capital leases and other debt obligations in the amount of
$1,830,000. There are no commitments to purchase significant property, plant
and equipment during 1997, however, Polychem, Princeton, Centennial and Ivy plan
to purchase approximately $600,000 in equipment during 1997, all of which is
expected to be financed through capital leases. Cash flows from operations
for 1997, along with borrowings in the ordinary course under existing credit
facilities of the Company's subsidiaries, are expected to provide sufficient
cash flow to meet the Company's obligations.
Significant investing and financing transactions occurring after December 31,
1996 and prior to filing this Report were: the exchange of 44,537 shares of the
Company's Common Stock for all of the outstanding capital stock of Lavelle on
January 3, 1997; the exchange of 30,000 shares of the Company's Common Stock for
all of the outstanding capital stock of Wickersham on March 19, 1997; the
issuance of 150,000 shares of the Company's Common Stock upon the exercise of
its Class C and Clifton Warrants generating $450,000 in cash proceeds.
The $9,000,000 line of credit facility at Polychem consists of a term loan with
an outstanding balance of $1,307,000 as of December 31, 1996 ($1,219,000 at
March 31, 1997), leaving an aggregate availability of $7,693,000 as of December
31, 1996 ($7,781,000 at March 31, 1997) under the line of credit, dependent upon
eligible collateral assets. As of December 31, 1996, availability
under the line of credit, based upon available eligible collateral assets
was $2,421,000 ($1,019,000 at March 31, 1997). The decrease in the availability
from December 31, 1996 to March 31, 1997 is a result of the decreased receivable
balances, based upon improved collections.
As of December 31, 1996, Princetons line of credit balance outstanding was
$344,000 ($320,000 at March 31, 1997) against the total available credit
facility of $1,000,000, which is available to Princeton based upon eligible
collateral assets.
As of December 31, 1996, Centennial's line of credit balance outstanding was
$2,223,000 ($1,949,000 at March 31, 1997) against a total available credit
facility of $2,750,000, which is available to Centennial at 80% of eligible
accounts receivable.
ITEM 7 FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
- ------ -------------------------------------------
The financial statements required by this Item can be found at pages F-1 to F-
23 of this Report.
ITEM 8 CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
- ------ ---------------------------------------------------------------
FINANCIAL DISCLOSURE
--------------------
None.
Page 23
<PAGE>
PART III
--------
ITEM 9 DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
- ------ --------------------------------------------------
The present members of the Board of Directors (all of whom have been elected for
a one year term and until their successors have been duly elected and
qualified), their ages and positions with the Company are set forth below:
<TABLE>
<CAPTION>
POSITIONS WITH
NAME AGE THE COMPANY
- ---- --- -----------
<S> <C> <C>
Paul A. DeJuliis 41 Chairman of the Board of Directors and Chief Executive Officer
John R. Thach 46 President and a Director
Anthony J. Mendicino 49 Senior Vice President, Chief Operating Officer and a Director
William B. Miller 56 Senior Vice President, Chief Financial Officer and a Director
Bruce P. Murray 51 Director
Andrew Panzo 32 Director
Porter Bibb 59 Director
</TABLE>
Under the securities purchase agreement with Sector Associates, Ltd. ("Sector"),
and a voting agreement, Sector was entitled to name one nominee to the Company's
Board of Directors, and FAC Enterprises, Inc. and American Maple Leaf Financial
Corporation were entitled to jointly name another nominee. Such directors are
Messrs. Panzo and Bibb (see Item 12). The following is a summary of the business
experience of the Company's directors and executive officers during at least the
past five years and their directorships, if any, of companies with a class of
securities registered with the Securities and Exchange Commission:
PAUL A. DEJULIIS - CHAIRMAN OF THE BOARD OF DIRECTORS, CHIEF EXECUTIVE OFFICER
- ------------------------------------------------------------------------------
and a founder of the Company, has experience in strategic planning, mergers and
acquisitions and corporate finance. Prior to assuming his current roles, he
was a partner in Phoenix Management Services, Inc., a turnaround consulting
firm (1989-91). Previously he was Vice-President, Corporate Finance for Colmen
& Co., a national investment banking firm (1987-89), and Manager, Corporate
Turnaround Consulting Group for Coopers & Lybrand (1986-87). Mr. DeJuliis was a
Director and Officer of Lavelle Aircraft Company, an aerospace manufacturing
company which filed for bankruptcy in 1994. Mr. DeJuliis has a B.S. in finance
and accounting from the University of Delaware. He is also a certified public
accountant.
Page 24
<PAGE>
JOHN R. THACH - PRESIDENT AND A DIRECTOR and a founder of the Company has
- ----------------------------------------
significant experience in corporate finance, financial planning, marketing
and sales. Prior to assuming his current roles, Mr. Thach was an Associate, Vice
President and Senior Vice President for Butcher & Co. (1985 to 1987),
Philadelphia First (1987 to 1989), and Philadelphia Investment Banking (1989 to
1991), respectively, three regional investment banking firms where he was
involved extensively in advisory roles to a number of industrial companies.
Other experience includes Mr. Thach's active participation (as an investor and
in management) in a number of successful start-ups ranging from the creation of
an industrial chemical sales division of a major U.S. corporation to the
creation of a municipal waste ash treatment company. Mr. Thach was a Director
and Officer of Lavelle Aircraft Company, an aerospace manufacturing company
which filed for bankruptcy in 1994. Mr. Thach holds an undergraduate degree from
the University of Virginia, and an MBA from the Darden School at the
University of Virginia.
ANTHONY J. MENDICINO - SENIOR VICE PRESIDENT, CHIEF OPERATING OFFICER AND A
- ---------------------------------------------------------------------------
DIRECTOR, was Senior Vice President, Chief Financial Officer and a director of
- --------
UTI Energy Corp., a diversified oilfield service company listed on the American
Stock Exchange, from 1987 through 1996. Prior thereto, since 1981, Mr.
Mendicino served in various capacities for UGI Corporation, initially as
Director of Corporate Development and, from 1984, as Treasurer. He holds a
degree in engineering from Lehigh University and an MBA from the Wharton School
of the University of Pennsylvania.
WILLIAM B. MILLER - SENIOR VICE PRESIDENT, CHIEF FINANCIAL OFFICER AND A
- ------------------------------------------------------------------------
DIRECTOR, is a certified public accountant and founder, in 1976, of the public
- --------
accounting firm of Kreischer, Miller & Co. in Horsham, PA, which he left in
1987. Prior to the formation of that firm, he was with Price Waterhouse in
Philadelphia (1966-71). Mr. Miller also served as Vice President and
Treasurer of WPHL-TV, Inc. in Philadelphia (1971-75); President of Marian
Financial Services Corp. in Philadelphia, the real estate finance affiliate of a
private bank (1987-92); Chief Financial Officer of Worlco, Inc. in King of
Prussia, PA (1990-91), a holding company for an insurance, equipment leasing
and commercial mortgage brokerage companies which filed for bankruptcy in
1993; and President of Schulmerich Carillons, Inc. in Sellersville, Pennsylvania
(1992-94). Mr. Miller holds an accounting and economics degree from
Muhlenberg College.
BRUCE MURRAY - A DIRECTOR, is founder and President of The Bannock Burn Group,
- -------------------------
Ltd., a management consulting firm with a national practice specializing in
assisting businesses in transition. Prior to the founding of his firm in 1987,
he was part of a senior operating turnaround team recruited by The Sun Company
to manage Sun Ship in Chester, PA and thereafter part of the senior management
group at Sun Carriers, a trucking subsidiary of the Sun Company. Prior to
that, Mr. Murray was employed by the U.S. Maritime Administration as the on site
representative at the Bath Ironworks in Maine, where he was responsible for
managing the Maritime Administration as interests in major ship
construction contracts. He is a graduate of the United States Merchant Marine
Academy and has a masters degree from Rensselaer Polytechnic Institute. He was
formerly Chairman and a Director of the Board of EA Industries, Inc., the stock
of which is traded on the New York Stock Exchange.
Page 25
<PAGE>
ANDREW PANZO - A DIRECTOR, is the managing director of American Maple Leaf
- -------------------------
Financial Corporation ("AMLF") in Bala Cynwyd, Pennsylvania, an investment
banking advisor to the Company which specializes in emerging growth companies.
He was the President and is also a director of Sector Associates, Ltd., a
publicly-held company. Mr. Panzo was a director of Florida West Airlines, Inc.
from July through December 1993. Mr. Panzo was formerly Executive Vice President
of HMA Investments, Inc., an investment banking firm at which he managed certain
diversified securities investments. He is formerly an associate with Venture
Partners, Ltd., of Middletown, Connecticut, a venture capital firm. Mr. Panzo is
a graduate of the University of Connecticut and has a masters degree in
international business and finance from Temple University.
PORTER BIBB - A DIRECTOR, has been with Ladenburg Thalmann & Co., Inc., New York
- ------------------------
NY since 1984, currently serving in the capacity of Principal and Co-Director of
Corporate Finance. He was formerly a Managing Director of Bankers' Trust
Company (1980-1984) and Director of Corporate Development of New York Times
Company (1977-1980) and President and Co-Founder of Financial Management, Inc.
He is also a Director of one other publicly held company, PMC International, an
asset management company. Mr. Bibb is a graduate of Yale University and has
studied in graduate programs at New York University, London School of Economics
and Harvard Business School.
MANAGEMENT OF OPERATING SUBSIDIARIES
- ------------------------------------
The following is a summary of the business experience of the management of the
Company's operating subsidiaries:
PRINCETON ACADEMIC PRESS, INC.
- -----------------------------
B. GRAEME FRAZIER, IV - DIRECTOR OF SALES, has been with Princeton since its
- -----------------------------------------
acquisition by DTF, and previously served as its President. Mr. Frazier has
extensive experience in graphic arts management and sales, having been Managing
Director of Murphy Parker, Inc., a bookbinding company. Mr. Frazier has an
economics degree from Trinity College in Hartford, CT.
POLYCHEM CORP.
- -------------
THEODORE F. RUTKOWSKI - PRESIDENT, prior to assuming that position, Mr.
- ---------------------------------
Rutkowski was the General Manager of The Polychem Division of The Budd Company
since 1975. He previously served as President of The Budd Company Trailer
Division, which was sold in 1985, and was responsible for the restructuring of
Greening Donald in Hamilton, Ontario, a Budd Company subsidiary. He has an
accounting degree from Rutgers University.
WILLIAM J. CRIGHTON - VICE PRESIDENT AND TREASURER, previously served as the
- --------------------------------------------------
divisional controller of The Polychem Division of The Budd Company since
1975. Prior to joining that division he was employed with the automotive
division and technical center of The Budd Company. He holds an accounting
degree from LaSalle University in Philadelphia and an MBA from Widener
University.
Page 26
<PAGE>
J. R. HANNUM - MANAGER OF INTERNATIONAL SALES, PRODUCT DEVELOPMENT AND
- ----------------------------------------------------------------------
ENGINEERING, had previously served as General Manager of The Polychem
- -----------
Division of The Budd Company and as manager of domestic sales, research and
development and manufacturing engineering of that division, prior to which he
was the plant manager. He has an engineering degree from Villanova University
and a masters degree in engineering from Penn State University.
DONALD L. HUTTON - NATIONAL SALES MANAGER, has been with The Budd Company for 36
- -----------------------------------------
years, during which time he has served as advertising manager, manager of
distributor sales and manager of customer service. He is a graduate of the
University of Delaware.
CENTENNIAL PRINTING CORPORATION
- -------------------------------
GARY STIFFLER -- PRESIDENT. Mr. Stiffler has had extensive experience in
- --------------------------
operations management in the printing industry. Mr. Stiffler received his MBA
from Ashland University in 1987 following his BA in Computer Science from Kent
State University in 1981. He held a variety of management positions with R.R.
Donnelley & Sons (1981-89), Plant Manufacturing Manager with Banta Corporation
(1989-90), General Manager of a $40 million revenue plant for Courier
Corporation and Vice President/General Manager of Lehigh Press Lithographics
(1994-96) with $50 million in revenue. Mr. Stiffler has had a broad background
in establishing and implementing strategic management objectives as well as new
technologies in the printing industry.
BILL SIEBERT -- VICE PRESIDENT. Mr. Siebert has had twenty-one years of
- ------------------------------
industry experience. Mr. Siebert completed 4 years at the Eastern Montgomery
Technical School with a major in General Printing and has attended numerous
management seminars and courses that compliment his printing operations
experience. Mr. Siebert joined Centennial Printing in 1992 and advanced from
Working Foreman to Pressroom Supervisor to Plant Management, and was promoted to
V.P. of Operations in November 1996. Prior to joining Centennial, Mr. Siebert
held operations positions with four businesses in the printing industry.
HELENE KOLANKO -- CONTROLLER. Ms. Kolanko graduated from Temple University in
- ----------------------------
1992 with a B.S. in Accounting. During college, Ms. Kolanko held several
accounting positions in the Delaware Valley before joining Arthur
Andersen/Philadelphia PA, where she advanced through the audit department until
June 1996 when she accepted the Controllership of Princeton Academic Press. In
January 1997, Ms. Kolanko was promoted to Controller of Centennial.
IVY-TYGART ACQUISITION CORPORATION
- ----------------------------------
JOHN C. REID - PRESIDENT. Mr. Reid has extensive experience in managing and
- ------------------------
growing small to mid-size companies. Mr. Reid received his MBA from the Darden
School at the University of Virginia in 1980; held a variety of executive
positions with McDermott International (1980); became VP of Operations for
Crutchfield Corporation (1986); and was a principal in start-up of Bingwa
Software (1994). Mr. Reid had approximately 225 employees reporting directly to
him at Crutchfield and 700 employees reporting directly to him at McDermott.
ALAN PINKERTON -- VICE PRESIDENT-FINANCE. Mr. Pinkerton received a BA from
- ----------------------------------------
University of Virginia 1976, joined Ivy Industries as junior accountant (1976),
became Controller, Ivy Industries (1983), became Vice President-Finance of
Tygart Moulding (1993) until his recent assignment over both divisions.
Page 27
<PAGE>
ITEM 10 EXECUTIVE COMPENSATION
- -------------------------------
The following table discloses for the fiscal years ended December 31, 1994,
1995, and 1996, individual compensation information relating to the chief
executive officer of the Company and the executive officers of the Company who
earned in excess of $100,000 during 1996 (the "Named Executive Officers").
<TABLE>
<CAPTION>
Annual Compensation Long Term Compensation
-------------------------------- -------------------------------
Restricted
Other Annual Stock Options/ LTIP All Other
Name and Salary Bonus Compensation Awards SARS Payouts Compensation
Principal Position ($) ($) ($) ($) (#) ($) ($)
- -------------------- ------ ----- ------------ ----------- -------- ------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Paul A. DeJuliis\(1)\
Chief Executive Officer
1996 204,167 0 4,812 0 75,000 0 0
1995 157,917 0 3,661 0 125,000 0 0
1994 64,500 0 0 0 0 0 0
John R. Thach\(1)\
President
1996 190,321 0 3,841 0 75,000 0 0
1995 161,167 0 1,916 0 70,000 0 0
1994 77,500 0 0 0 0 0 0
William B. Miller
Chief Financial Officer
1996 103,500 0 2,765 0 35,000 0 0
1995 70,000 0 1,814 0 70,000 0 0
1994 0 0 0 0 0 0 0
</TABLE>
(1) Mr. DeJuliis and Mr. Thach received no compensation or other benefits from
the Company during fiscal year 1994. The amounts reported above for that
year were paid to them by Princeton Academic Press, which is presently a
wholly owned subsidiary of the Company, but during 1994, was owned by a
corporation not related to the Company.
Page 28
<PAGE>
Aggregated Option/SAR Exercises in Last Fiscal Year and F/Y End
---------------------------------------------------------------
Option/SAR Values
-----------------
The following table sets forth information with respect to option exercises and
fiscal year-end option values for the Named Executive Officers.
<TABLE>
<CAPTION>
Number of
Securities Underlying Value of
Shares Acquired Value Unexercised Options/ Unexercised in-the-money
On Exercise Realized SARS at FY-End (#) Options/SARS at FY-End ($)
Name (#) ($) Exercisable/Unexercisable Exerciseable/Unexercisable
- ----------------- --------------- -------- ------------------------- --------------------------
<S> <C> <C> <C> <C>
Paul A. DeJuliis 0 --- 41,667 / 158,333 0 / $9,375
John R. Thach 0 --- 23,333 / 121,667 0 / $9,375
William B. Miller 0 --- 23,333 / 81,667 0 / $4,375
</TABLE>
(1) Based upon the closing price of the Company's Common stock on December 31,
1996 of $4.625.
OPTION/SAR GRANTS IN LAST FISCAL YEAR
-------------------------------------
The following table sets forth information with respect to option grants during
1996 to the Named Executive Officers.
<TABLE>
<CAPTION>
Number of Percent of
Securities Underlying Total Options/
Options/SARs SARs Granted Exercise
Granted to Employees Price Expiration
Name (#) in Fiscal Year ($/sh.) Date
- ------------------ ---------------------- -------------- -------- ----------
<S> <C> <C> <C> <C>
Paul A. DeJuliis 75,000 26% $4.50 2006
John R. Thach 75,000 26% $4.50 2006
William B. Miller 35,000 12% $4.50 2006
</TABLE>
Page 29
<PAGE>
EMPLOYMENT ARRANGEMENTS
- -----------------------
Effective as of January 1, 1995, the Company entered into employment agreements
with Paul A. DeJuliis and John R. Thach. Each of these agreements provides,
based on recently consummated significant acquisitions, for a base salary of
$250,000 annually with certain automatic adjustments in the event certain
targets relating to the financial performance of the Company are satisfied
(incremental increases of $25,000 for each $1.0 million increase in annual pre-
tax net income over a base of $1.5 million), together with discretionary
bonuses, if any, to be declared by the Board of Directors, but with a provision
that at such time as each of their equity stock ownership in the Company is
reduced to 10% or less of the total issued and outstanding shares of all
classes of equity stock, then such employee shall be entitled to annual minimum
incentive compensation equal to 3% of the Company's annual pre-tax net income.
These agreements also provide for certain benefits, including vacation, health
and medical insurance, reimbursement of certain expenses and stock option plan
participation, but only to the extent such benefits are offered to comparable
employees by the Board of Directors. Such agreements contain covenants
regarding confidentiality of proprietary information of the Company and a
restrictive covenant in favor of the Company under certain circumstances. Each
agreement has an initial term of five years, and thereafter is annually
renewable for successive two-year periods. Such agreements will earlier
terminate as a result of the employees death, permanent disability or
dismissal for just cause. If the termination results from death or permanent
disability, the agreements provide for continuation of base compensation and
fringe benefits for a period of six months, but if the termination results from
any reason other than death, permanent disability, termination for just cause,
or where the employee terminates his employment for good reason, then his
base compensation and all existing fringe benefits shall be continued for the
balance of the unexpired term of his employment agreement, but in no event for
less than one year, after which the employee shall be entitled to all earned and
accrued incentive compensation. Moreover, if his termination follows a
change of control and the employee owns no more than 20% of the total issued
and outstanding securities of the Company, he shall be entitled to a lump sum
severance benefit equal to 500% of his annual base compensation.
In May 1995, the Company entered into an employment agreement with William B.
Miller. Such agreement provides for a base salary in the first year of $84,000
per year, together with discretionary bonuses, if any, to be declared by the
Board of Directors. The base salary will automatically increase to $102,000
per year upon the completion of a significant acquisition by the Company. The
agreement also provides for certain benefits, including vacation, health and
medical insurance, reimbursement of certain expenses and stock option plan
participation, if such are implemented for comparable employees by the
Board of Directors. The agreement contains covenants regarding confidentiality
of proprietary information of the Company and a restrictive covenant in favor
of the Company. The agreement is for a term of one year, and thereafter is
annually renewable for successive one year periods, although either party may
terminate the agreement upon six months written notice to the other and the
Company may discharge the employee at any time with or without cause. If the
employee is terminated without cause, the Company shall pay to the employee a
severance allowance equal to six months base compensation.
Page 30
<PAGE>
COMPENSATION OF DIRECTORS
- -------------------------
Non-employee directors receive no cash compensation, but they participate in a
non-qualified stock option plan, under which Messrs. Panzo and Murray received
options to purchase 40,000 in 1995 and Mr. Bibb received options to purchase
40,000 shares in 1996. Prior to his employment by the Company, Mr Mendicino also
received options to purchase 40,000 shares of Common Stock in 1995. Employee
directors receive no compensation in connection with their services as director.
ITEM 11 SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
- ------- --------------------------------------------------------------
PRINCIPAL STOCKHOLDERS
- ----------------------
The following table sets forth, as of March 31, 1997, information with respect
to the securities holdings of all persons which may be deemed the beneficial
owners of 5% or more of the Company's outstanding Common Stock. Also set forth
in the table is the beneficial ownership of all shares of the Company's
outstanding Common Stock, as of such date, of all officers and directors,
individually and as a group.
<TABLE>
<CAPTION>
Amount & Nature
of Beneficial % of
Ownership Ownership
--------- ---------
<S> <C> <C>
Paul A. DeJuliis 517,667\(1)\ 17.0%
John R. Thach 499,333\(2)\ 16.5%
William B. Miller 48,333\(3)\ 1.9%
Andrew Panzo 23,333 \(4)\ 0.9%
Bruce P. Murray 13,333 \(4)\ 0.5%
Anthony J. Mendicino 13,333 \(4)\ 0.5%
Porter Bibb 13,333 \(4)\ 0.5%
All Officers and Directors
as a group (7 persons) 1,128,667 \(5)\ 30.9%
</TABLE>
/(1)/ Includes 216,667 shares which may be obtained through currently
exercisable warrants and options.
/(2)/ Includes 198,333 shares which may be obtained through currently
exercisable warrants and options.
/(3)/ Includes 38,333 shares which may be obtained through currently
exercisable warrants and options.
/(4)/ Includes 13,333 shares which may be obtained through currently
exercisable options.
/(5)/ Includes 506,665 shares which may be obtained through currently
exercisable warrants and options.
Page 31
<PAGE>
Approximately 63% of the outstanding shares of Common Stock on the date of this
Report are subject to a Voting Agreement between the Company, Messrs. DeJuliis
and Thach, AMLF and FAC Enterprises Inc. ("FAC"). The Agreement provided that
all parties will vote their shares of Company Common Stock so that one director
shall be nominated by Sector, one director shall be nominated by FAC and AMLF
and five shall be nominated by Messrs. DeJuliis and Thach. Sector, FAC and AMLF
have nominated Messrs. Panzo and Bibb, pursuant to the Securities Purchase
Agreement referenced in Item 12. Messrs. DeJuliis and Thach have nominated, in
addition to themselves, Messrs. Miller, Murray and Mendicino.
The Agreement will terminate as to all parties upon the earlier of (i) March 10,
1998 or (ii) the completion of an underwritten public offering which results in
cash proceeds of at $7,500,000 and a per share offering price of at least $5.00
per share.
The addresses of Messrs. DeJuliis, Thach, Mendicino, and Miller is 100 Four
Falls Corporate Center, Suite 305, West Conshohocken, PA 19428. The address of
Mr. Panzo and Sector Associates, Ltd. is 401 City Avenue, Suite 725, Bala
Cynwyd, PA 19004. The address of Mr. Bibb is c/o Ladenburg Thalmann & Co.,
Inc., 540 Madison Avenue, New York, NY 10022. The address of Mr. Murray is c/o
Bannock Burn Group, 712 Pheasant Run, Suite Two, Kennett Square, PA 19348. The
address of Mr. Frazier is 3175 Princeton Pike, Lawrenceville, NJ 08648.
ITEM 12 CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
- ------- ----------------------------------------------
EQUITY INFUSION FROM SECTOR ASSOCIATES, LTD.
- -------------------------------------------
Effective on March 10, 1995, pursuant to a Securities Purchase Agreement (the
"Securities Purchase Agreement") dated January 25, 1995, Sector purchased
securities from the Company consisting of 200,000 shares of its Common Stock,
250,000 Class A Common Stock Purchase Warrants, 187,500 Class B Common Stock
Purchase Warrants and 250,000 Class C Common Stock Purchase Warrants for an
aggregate purchase price in cash of $500,000. The prompt registration of such
securities was a requirement of the Securities Purchase Agreement, and following
the effectiveness of this registration statement, Sector distributed such
securities to its stockholders on a pro rata basis. Pursuant to the Securities
Purchase Agreement, Sector was given the unilateral right to determine how to
equitably apportion fractional shares and warrants in such distribution. In
November 1995, the exercise prices of the Class A, B and C warrants were reduced
to $3.00, $4.00, and $6.00 per share from their original exercise prices of
$4.00, $5.50, and $8.00 per share, respectively.
The Securities Purchase Agreement contains customary representations, warranties
and covenants of the Company for the benefit of Sector and its shareholder
distributees of the Company's securities, including customary indemnification
provisions. In addition, provision has been made for amendment of the Company's
Bylaws to ensure that there shall be a minimum of seven directors and the
parties to the Securities Purchase Agreement have entered into a separate voting
agreement concerning the election of such directors. Pursuant to that voting
agreement, Sector was guaranteed
Page 32
<PAGE>
the ability to elect at least one of the seven directors. The Company's Bylaws
were further amended pursuant to the Securities Purchase Agreement to provide
that any amendment of Bylaw provisions relating to the number of directors or
the approval of certain fundamental transactions, as described in the Securities
Purchase Agreement, shall require the affirmative vote of 75% of the outstanding
shares entitled to elect directors, or, following a Qualified Public Offering
as defined in the Securities Purchase Agreement, such number of affirmative
votes as otherwise is required under the Delaware General Corporation Law. Some
of the supermajority voting requirements expired automatically on September 10,
1996.
DESCRIPTION OF INVESTMENT BANKING ADVISOR AGREEMENTS
- ----------------------------------------------------
The Company entered into an Investment Banking Advisor Agreement on January 25,
1995 with FAC and AMLF (collectively, the "Investment Advisors"). Pursuant to
such Agreement, the Investment Advisors are required to provide certain
consulting services of an investment banking and financial relations nature to
the Company, in exchange for which the Company issued 40,000 shares of its
Common Stock to FAC and 10,000 shares to Andrew Panzo on March 10, 1995.
Pursuant to the Agreement, the Company was also obligated to issue an aggregate
of 100,000 additional shares of its Common Stock and an aggregate of 100,000
Class A-1 Warrants to the Investment Advisors, but only upon the satisfaction
of certain conditions tied to their performance. The agreement was amended on
December 15, 1995 to accelerate delivery of all of these conditional shares and
warrants provided that all of the Class A Warrants were exercised before
December 31, 1995. As of December 31, 1995, all Class A Warrants had been
exercised. Accordingly, the conditional Class A-1 Warrants and Common Stock
were issued as of that date.
The Investment Advisors are granted similar registration rights with respect to
the Common Stock issued and the conditional shares and warrants issuable to
them under the Investment Banking Advisor Agreement as have been granted to
Sector. The Investment Advisors are also given similar rights of first refusal,
similar indemnification and similar tag-along rights as those given to Sector.
The Investment Advisors, acting jointly, retain the right to nominate one
director of the Company.
In addition, the Investment Banking Advisor Agreement further provided that the
Company will pay the Investment Advisors a monthly fee of $6,000 (the allocation
of such aggregate fee between the two investment advisors to be determined by
them). Payment of such fee has been discontinued as of December 31, 1996.
The Investment Banking Advisor Agreement was the product of arm's length
negotiation, and the Company believes that the terms of such Agreement are no
less favorable than could otherwise have been obtained as of the date of the
Agreement.
Page 33
<PAGE>
TRANSACTIONS WITH DTF MEDIA, INC.
- --------------------------------
The Company acquired the shares of Princeton in a share exchange with DTF, a
company formed by Messrs. DeJuliis and Thach, officers and principal
stockholders of the Company, and the other founding stockholders, Graeme Frazier
IV and Robert Spahr, who owned the shares of Princeton. Messrs. DeJuliis, Thach
and Frazier each received 66,000 shares of Common Stock and Mr. Spahr received
22,000 shares of Common Stock in exchange for all of the outstanding shares of
Princeton. In addition, the Company assumed certain specific
liabilities of DTF, including certain liabilities for professional fees
($26,000), and an intercompany obligation payable to Princeton in a principal
amount of $283,005. The aggregate cost of the shares of Princeton in June 1993
was approximately $596,000. Inasmuch as the share exchange reflected the
initial organization of the Company, there was no issue of valuation of the
Princeton shares and for accounting purposes the Princeton shares were accounted
for on the basis of the initial acquisition of the Princeton assets from PUP.
INVESTMENT IN LAVELLE COMPANY
- -----------------------------
In March 1996, The Company invested $450,000 in 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. Lavelle Aircraft is
owned by DTM Aerospace, Inc. of which Messrs. DeJuliis and Thach are directors,
officers and principal stockholders.
The $450,000 debenture has been recorded as a non-current asset on the balance
sheet of the Company. 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. In 1996, the Company provided working capital advances to Lavelle of
$366,000 and earned interest of $121,000 on its debenture investment and such
advances.
ITEM 13 LIST OF EXHIBITS AND REPORTS ON FORM 8-K
- ------- ----------------------------------------
(a) LIST OF EXHIBITS
----------------
See Exhibit Index appearing immediately under the Consolidated Financial
Statements.
(b) REPORTS ON FORM 8-K
-------------------
On November 1, 1996, the Company filed a report on Form 8-K reporting the
acquisition of Centennial. Financial statements of Centennial were filed on an
amendment to such Form 8-K filed on December 31, 1996.
Page 34
<PAGE>
SIGNATURES
----------
In accordance with Section 13 or 15(d) of the Securities Exchange Act of 1934,
the Registrant caused this Form 10-KSB to be signed on its behalf by the
undersigned, thereunto duly authorized on the 15th day of April, 1997.
THE EASTWIND GROUP, INC.
By: /s/ Paul A. DeJuliis
----------------------------------
Paul A. DeJuliis
Chairman and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this Form
10-KSB has been signed by the following persons in their capacities and on the
dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- --------- ----- ----
<S> <C> <C>
/s/ Paul A. DeJuliis
- ----------------------------
Paul A. DeJuliis Chairman of the Board, and April 15 , 1997
Chief Executive Officer --------------
/s/ John R. Thach
- ---------------------------
John R. Thach President and Director April 15 , 1997
--------------
/s/ Anthony J. Mendicino
- ---------------------------
Anthony J. Mendicino Senior Vice President
and Chief Operating Officer
and Director April 15 , 1997
/s/ William B. Miller --------------
- ---------------------------
William B. Miller Senior Vice President
and Chief Financial Officer
and Director April 15 , 1997
/s/ Porter Bibb --------------
- ---------------------------
Porter Bibb Director April 15 , 1997
--------------
/s/ Bruce P. Murray
- ---------------------------
Bruce P. Murray Director April 15 , 1997
--------------
/s/ Andrew Panzo
- ---------------------------
Andrew Panzo Director April 15 , 1997
--------------
</TABLE>
Page 35
<PAGE>
THE EASTWIND GROUP, INC.
------------------------
INDEX TO FINANCIAL STATEMENTS
-----------------------------
<TABLE>
<CAPTION>
Page
----
<S> <C>
Report of Independent Public Accountants F-2
Consolidated Balance Sheets F-3
Consolidated Statements of Operations F-4
Consolidated Statements of Stockholders' Equity F-5
Consolidated Statement of Cash Flows F-7
Notes to Consolidated Financial Statements F-8
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To The Eastwind Group, Inc.:
We have audited the accompanying consolidated balance sheets of The Eastwind
Group, Inc. (a Delaware corporation) and Subsidiaries as of December 31, 1996
and 1995, and the related consolidated statements of operations, stockholders'
equity and cash flows for the years then ended. These financial statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of The Eastwind Group, Inc. and
Subsidiaries as of December 31, 1996 and 1995, and the results of their
operations and their cash flows for the years then ended in conformity with
generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Philadelphia, Pa.,
March 26, 1997
F-2
<PAGE>
THE EASTWIND GROUP, INC.
------------------------
CONSOLIDATED BALANCE SHEETS
---------------------------
<TABLE>
<CAPTION>
December 31,
------------------------------------
1996 1995
------------------ ----------------
<S> <C> <C>
ASSETS
------
Current Assets:
Cash and cash equivalents $ 709,697 $ 426,377
Accounts receivable, net 7,655,763 4,486,821
Stock subscription receivable -- 746,000
Due from related parties 1,047,354 78,000
Inventories 4,001,007 1,911,969
Prepaid expenses 203,820 63,912
Prepaid income taxes 91,500 --
----------- -----------
Total current assets 13,709,141 7,713,079
Property, plant and equipment, net 7,024,393 1,612,817
Investments in investee companies 700,000 --
Deferred income taxes -- 128,312
Goodwill and other assets 7,024,489 662,278
----------- -----------
$28,458,023 $10,116,486
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Current Liabilities:
Lines of credit $ 3,626,365 $ 2,135,096
Current portion of long-term debt 880,012 408,586
Current portion of capitalized lease obligations 848,701 49,708
Accounts payable 3,775,002 1,571,010
Accrued expenses 2,718,391 397,188
Accrued income taxes -- 27,223
Due to related party 276,260 --
Deferred income taxes 98,186 146,494
----------- -----------
Total current liabilities 12,222,917 4,735,305
----------- -----------
Long-term debt 5,537,523 3,087,455
----------- -----------
Capitalized lease obligations 1,695,229 134,130
----------- -----------
Accrued pension and postretirement benefits 218,510 200,510
----------- -----------
Deferred credit, net 160,224 184,874
----------- -----------
Deferred income taxes 382,814 --
----------- -----------
Minority interest in consolidated subsidiary 14,927 --
----------- -----------
Redeemable Series B Preferred Stock 900,000 --
----------- -----------
Commitments and contingencies (Note 16)
Stockholders' Equity:
Series A Preferred stock, $.10 par value, 3,000,000 shares authorized 1,000
shares issued and outstanding 100 --
Common stock, $.10 par value, 5,000,000 shares authorized, 2,411,482 and
1,608,250 shares issued and 2,376,482 and 1,608,250 outstanding 241,148 160,825
Warrants outstanding 1,271,597 158,586
Additional paid-in capital 6,408,621 1,818,215
Accumulated deficit (147,051) (363,414)
----------- -----------
7,774,415 1,774,212
Less- Common stock in treasury, 35,000 shares at cost (193,609) --
Notes receivable from sale of stock (240,000) --
Deferred compensation (14,927) --
----------- -----------
Total stockholders' equity 7,325,879 1,774,212
----------- -----------
$28,458,023 $10,116,486
=========== ===========
</TABLE>
The accompanying notes are an integral part of these statements.
F-3
<PAGE>
THE EASTWIND GROUP, INC.
------------------------
CONSOLIDATED STATEMENTS OF OPERATIONS
-------------------------------------
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------------------
1996 1995
------------ ------------
<S> <C> <C>
Net sales $23,632,872 $15,433,897
Cost of goods sold 17,793,635 12,044,099
----------- ------------
Gross profit 5,839,237 3,389,798
Selling, general and administrative expenses 4,795,227 3,008,833
----------- ------------
Operating income 1,044,010 380,965
Interest expense 716,381 654,513
Interest and dividend income 249,982 --
----------- ------------
Income (loss) before income taxes (benefit) 577,611 (273,548)
Income taxes (benefit) 261,927 (14,963)
----------- ------------
Net income (loss) 315,684 (258,585)
Preferred stock dividends 99,321 --
----------- ------------
Net income (loss) available to Common stockholders $ 216,363 $ (258,585)
=========== ============
Earnings (loss) per share $ .11 $ (.28)
=========== ============
Shares used in computing earnings (loss) per share 1,971,137 939,826
=========== ============
</TABLE>
The accompanying notes are an integral part of these statements.
F-4
<PAGE>
THE EASTWIND GROUP, INC.
------------------------
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
-----------------------------------------------
<TABLE>
<CAPTION>
Series A Additional
Preferred Common Warrants Paid-in Accumulated Treasury
Stock Stock Outstanding Capital Deficit Stock
--------- ---------- ------------ ------------- ------------ --------
<S> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1994 $ -- $ 47,000 $ -- $ 13,000 $(104,829) $ --
Sale of 200,000 shares of Common stock
and warrants, net of expenses of $368,361 -- 20,000 26,328 85,311 -- --
Issuance of 59,500 shares of Common stock
to investment bankers -- 5,950 -- (5,950) -- --
Issuance of warrants to
officers/stockholders -- -- 137,500 -- -- --
Issuance of 220,000 shares of Common
stock for certain assets and liabilities of
DTF Media, Inc. -- 22,000 -- (178,510) -- --
Issuance of 10,000 shares of Common stock
to officer -- 1,000 -- 19,000 -- --
Issuance of 26,250 shares of Common stock
and warrants to noteholders -- 2,625 7,000 49,875 -- --
Issuance of warrants to investment bankers -- -- 25,000 (25,000) -- --
Issuance of 100,000 shares of Common
stock to investment bankers -- 10,000 -- (10,000) -- --
Exercise of 487,500 warrants -- 48,750 (37,242) 1,688,492 -- --
Issuance of 35,000 shares of Common stock
to satisfy bridge note -- 3,500 -- 181,997 -- --
Net loss -- -- -- -- (258,585) --
------- -------- -------- ---------- ----------- --------
Balance, December 31, 1995 $ -- $160,825 $158,586 $1,818,215 $(363,414) $ --
------- -------- -------- ---------- ----------- --------
<CAPTION>
Note
Receivable Total
from Sale Deferred Stockholders
of Stock Compensation Equity
------------ ------------ -------------
<S> <C> <C> <C>
Balance, December 31, 1994 $ -- $ -- $ (44,829)
Sale of 200,000 shares of Common stock
and warrants, net of expenses of $368,361 -- -- 131,639
Issuance of 59,500 shares of Common stock
to investment bankers -- -- --
Issuance of warrants to
officers/stockholders -- -- 137,500
Issuance of 220,000 shares of Common
stock for certain assets and liabilities of
DTF Media, Inc. -- -- (156,510)
Issuance of 10,000 shares of Common stock
to officer -- -- 20,000
Issuance of 26,250 shares of Common stock
and warrants to noteholders -- -- 59,500
Issuance of warrants to investment bankers -- -- --
Issuance of 100,000 shares of Common
stock to investment bankers -- --
Exercise of 487,500 warrants -- -- 1,700,000
Issuance of 35,000 shares of Common stock
to satisfy bridge note -- 185,497
Net loss -- -- (258,585)
------------ ----------- ------------
Balance, December 31, 1995 $ -- $ -- $1,774,212
------------ ----------- ------------
</TABLE>
The accompanying notes are an integral part of these statements.
(Continued)
F-5
<PAGE>
THE EASTWIND GROUP, INC.
------------------------
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (CONTINUED)
-----------------------------------------------------------
<TABLE>
<CAPTION>
Note
Series A Additional Receivable
Preferred Common Warrants Paid-in Accumulated Treasury From Sale
Stock Stock Outstanding Capital Deficit Stock of Stock
--------- --------- ----------- ----------- ----------- --------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1995 $ - $ 160,825 $ 158,586 $ 1,818,215 $ (363,414) $ - $ -
Sale of 1,000 shares of Series A Preferred
stock, net of expenses of $71,086 100 - 484,344 444,690 - - -
Sale of 200,000 shares of Common Stock
Units, net of expenses of $181,284 - 20,000 341,694 657,022 - - -
Insurance of warrants to subordinated
noteholders, net of expenses of $15,010 - - 196,190 - - - -
Insurance of 182,232 shares of Common
stock in connection with Centennial
acquisition - 18,223 - 1,481,777 - - -
Issuance of warrants to investment
bankers in connection with Centennial
acquisition - - 118,800 - - - -
Issuance of warrants to investment
bankers - - 32,850 (32,850) - - -
Exercise of 421,000 warrants - 42,100 (60,867) 2,039,767 - - (240,000)
Purchase of 35,000 shares of Common
stock for treasury - - - - - (193,609) -
Deferred compensation related to Ivy
acquisition - - - - - - -
Dividends - - - - (99,321) -
Net Income - - - - 315,684 - -
--------- --------- ---------- ----------- ----------- --------- -----------
Balance, December 31, 1996 $ 100 $ 241,148 $1,271,597 $ 6,408,621 $ (147,051) $(193,609) $ (240,000)
========= ========= ========== =========== =========== ========== ===========
<CAPTION>
Total
Deferred Stockholders'
Compensation Equity
------------ -------------
<S> <C> <C>
Balance, December 31, 1995 $ - $ 1,774,212
Sale of 1,000 shares of Series A Preferred
stock, net of expenses of $71,086 - 929,134
Sale of 200,000 shares of Common Stock
Units, net of expenses of $181,284 - 1,018,716
Insurance of warrants to subordinated
noteholders, net of expenses of $15,010 - 196,190
Insurance of 182,232 shares of Common
stock in connection with Centennial
acquisition - 1,500,000
Issuance of warrants to investment
bankers in connection with Centennial
acquisition - 118,800
Issuance of warrants to investment
bankers - -
Exercise of 421,000 warrants - 1,781,000
Purchase of 35,000 shares of Common
stock for treasury - (193,609)
Deferred compensation related to Ivy
acquisition (14,927) (14,927)
Dividends (99,321)
Net Income - 315,684
------------ -------------
Balance, December 31, 1996 $ (14,927) $ 7,325,879
============ =============
</TABLE>
The accompanying notes are an integral part of these statements.
F-6
<PAGE>
THE EASTWIND GROUP, INC.
------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
-------------------------------------
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------
1996 1995
------------ ------------
<S> <C> <C>
Cash Flows From Operating Activities:
Net income (loss) $ 315,684 $ (258,585)
Adjustments to reconcile net income (loss) to net cash
provided by operating activities-
Depreciation and amortization 529,387 243,485
Amortization of deferred credit (24,650) (24,650)
Imputed interest 21,952 69,997
Deferred income tax provision (benefit) 40,794 (42,186)
Noncash compensation expense -- 32,500
Changes in assets and liabilities, net of effect from acquisitions
(Increase) decrease in-
Accounts receivable (117,925) (267,371)
Inventories (93,156) 771,640
Prepaid expenses (94,900) 64,558
Prepaid income taxes (91,500) --
Other assets (48,756) 4,516
Increase (decrease) in-
Accounts payable (201,311) 213,680
Accrued expenses 786,000 270,760
Accrued income taxes (27,223) 27,223
Accrued pension and postretirement benefits 18,000 20,001
----------- -----------
Net cash provided by operating activities 1,012,396 1,125,568
----------- -----------
Cash Flows For Investing Activities:
Net payments from (transfers to) related parties -- 13,000
Purchase of property and equipment (49,777) (29,111)
Purchase of net assets of Polychem, net of cash acquired -- (3,897,463)
Purchase of capital stock of Centennial (1,241,226) --
Purchase of net assets of Ivy, net of cash acquired (10,355) --
Investments in and advances to investee companies (1,393,094) --
----------- -----------
Net cash used in investing activities (2,694,452) (3,913,574)
----------- -----------
Cash Flows From Financing Activities:
Net borrowings (repayments) under lines of credit (2,207,940) 1,450,266
Borrowings on term notes 104,000 1,952,000
Repayments of term notes (418,881) (290,392)
Repayments of capitalized lease obligations (242,677) (26,935)
Repayment of seller note -- (750,000)
Deferred financing costs -- (206,195)
Proceeds from sale of Preferred stock, net of expenses 929,134 --
Proceeds from exercise of warrants 1,781,000 --
Collection of stock subscription receivable 746,000 --
Proceeds from sale of Common Stock Units, net of expenses 1,018,716 1,085,639
Proceeds from issuance of subordinated note payable and warrants, net
of expenses 484,990 --
Payment of dividends (35,357) --
Purchase of Common stock for treasury (193,609) --
----------- -----------
Net cash provided by financing activities 1,965,376 3,214,383
----------- -----------
Net Increase in Cash and Cash Equivalents 283,320 426,377
Cash and Cash Equivalents, Beginning of Year 426,377 --
----------- -----------
Cash and Cash Equivalents, End of Year $ 709,697 $ 426,377
=========== ===========
</TABLE>
The accompanying notes are an integral part of these statements.
F-7
<PAGE>
THE EASTWIND GROUP, INC.
------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
1. COMPANY BACKGROUND:
-------------------
The Eastwind Group, Inc. (the "Company") is a management holding company which
has four operating subsidiaries, Princeton Academic Press, Inc. ("Princeton"),
Polychem Corporation ("Polychem"), Centennial Printing Corporation
("Centennial") and Ivy-Tygart Acquisition Corp. ("Ivy"). Princeton is engaged in
the printing and binding of books and related activities. Polychem manufactures
and sells clarifier components for waste water treatment applications and other
plastic molded products, including buckets, sprockets and bearings. Centennial
provides high quality printing services. Ivy manufactures and sells premium home
decorative products to retailers and the home construction industry.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
-------------------------------------------
Principles of Consolidation
- ---------------------------
The consolidated financial statements include the accounts of the Company and
its subsidiaries. All of the subsidiaries are wholly owned except for a 7.5%
interest in Ivy. All intercompany accounts and transactions have been eliminated
in consolidation.
Use of Estimates
- ----------------
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Cash and Cash Equivalents
- -------------------------
The Company's cash management system provides for the short-term investment of
cash and the transfer or deposit of sufficient funds to cover checks as they are
submitted for payment. The Company considers all highly liquid debt instruments
purchased with an original maturity of three months or less to be cash
equivalents. There were no cash equivalents at December 31, 1996.
Inventories
- -----------
Inventories consist of raw materials, work-in-process, and finished goods. Work-
in-process and finished goods include raw materials, direct labor and a portion
of manufacturing overhead. The inventories of Polychem and Princeton are stated
at the lower of cost or market, with cost determined by the last-in, first-out
("LIFO") method, while the cost of inventories of Centennial and Ivy is
determined on the first-in, first-out ("FIFO") method.
F-8
<PAGE>
Property, Plant and Equipment
- -----------------------------
Property, plant, and equipment are stated at cost. Depreciation and amortization
are provided on a straight-line basis for financial reporting purposes and
accelerated methods for income tax purposes. Maintenance and repair expenditures
are charged to operations, while renewals and betterments are capitalized. For
financial reporting purposes, estimated useful lives are fifteen years for
buildings and three to seven years for machinery and equipment.
Goodwill
- --------
Goodwill is being amortized on a straight-line basis over 20 years and
accumulated amortization as of December 31, 1996 and 1995, was $72,876 and
$6,600, respectively. The Company continually evaluates whether events and
circumstances have occurred that indicate the remaining estimated useful life
may warrant revision or that the remaining goodwill balance may not be
recoverable. If factors indicate that goodwill should be evaluated for possible
impairment, the Company uses an estimate of the related undiscounted operating
income over the remaining life in determining whether goodwill is recoverable.
Deferred Financing Costs
- ------------------------
Costs related to obtaining debt financing (see Note 9) have been capitalized and
are being amortized on a straight-line basis over the term of the debt.
Accumulated amortization was $102,786 and $61,782 at December 31, 1996 and 1995,
respectively. Net deferred financing costs are included in other assets in the
accompanying consolidated balance sheets (see Note 8).
Long-Lived Assets
- -----------------
The Company follows Statement of Financial Accounting Standards ("SFAS") No.
121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed Of," which requires impairment losses to be recorded on
long-lived assets used in operations when indications of impairment are present
and undiscounted cash flows estimated to be generated by those assets are less
than the assets carrying amount. The Company adopted SFAS No. 121 in 1996. The
adoption did not have an impact on the Company's financial condition or results
of operations.
Pension Plan
- ------------
Polychem accounts for pensions in accordance with SFAS No. 87, "Employer's
Accounting for Pensions," which requires the use of explicit assumptions to
calculate net periodic pension costs and the use of the plan's benefit formula
as a basis for attributing benefits earned and their costs to the periods of
employee service.
F-9
<PAGE>
Postretirement Benefits Other Than Pensions
- -------------------------------------------
Polychem provides life insurance benefits to retired hourly employees. Polychem
accounts for these benefits in accordance with SFAS No. 106, "Employer's
Accounting for Postretirement Benefits Other Than Pensions," which requires that
an estimated cost of postretirement benefits be accrued over the period earned.
Revenue Recognition
- -------------------
Revenues for Princeton, Centennial and Ivy are recorded when the goods are
shipped. Revenues at Polychem are recorded when goods are
shipped or, in certain circumstances, when the title to goods and risk of
ownership are transferred to the customer. This "bill and
hold" practice is common in the construction supply business, in which
contractors often request a hold on delivery of goods to a construction site for
security or logistical reasons.
Income Taxes
- ------------
The Company files a consolidated federal tax return and separate state tax
returns. Certain income and expense items are recorded for financial reporting
purposes in different time periods than for income tax purposes. Provision for
current and deferred taxes are made in recognition of the temporary differences
and are computed in accordance with SFAS No. 109, "Accounting for Income Taxes."
Concentration of Credit Risk
- ----------------------------
One of Princeton's customers accounted for 12% and 16% of consolidated net sales
in 1996 and 1995, respectively. The Company had receivables from this customer
of approximately $180,000 at December 31, 1996. The loss of this customer would
have a material adverse effect on Princeton and the Company. Concentration of
credit risk is limited to trade receivables and is subject to the financial
conditions of customers. The Company generally does not require collateral from
its customers except for Polychem, which requires certain of its domestic
customers to obtain performance bonds and requires most of its international
customers to provide letters of credit.
Reclassifications
- -----------------
Certain reclassifications have been made to the 1995 financial statements to
conform to the current presentation.
Accounting for Stock-Based Compensation
- ---------------------------------------
The Financial Accounting Standards Board issued SFAS No. 123, "Accounting for
Stock-Based Compensation" and the Company adopted the disclosure requirements of
this standard in 1996 (see Note 15).
F-10
<PAGE>
3. ACQUISITIONS:
-------------
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 seller notes of approximately $2,376,000
(see Note 9). The acquisition has been accounted for using the purchase method
of accounting. The fair 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.
Centennial
- ----------
On October 17, 1996, the Company acquired all of the capital stock of
Centennial. The total consideration paid was $2,850,000, comprised of 182,232
shares of the Company's Common Stock, 9,000 shares of the Company's Series B
Redeemable Preferred Stock and $450,000 in cash. The acquisition has been
accounted for using the purchase method of accounting. The purchase price was
allocated to the assets and liabilities acquired based on the fair 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 value of the net assets acquired by approximately
$6,000,000, which has been recorded as goodwill. Centennial's results from
operations have been included in the Company's consolidated financial statements
from the date of acquisition. In addition to the purchase price, the Company
paid the owner of Centennial $500,000 in consideration of his agreement not to
compete for a 10 year period. The covenant not to compete is being amortized on
a straight line basis over this period and accumulated amortization was $10,417
at December 31, 1996.
The Series B Preferred stock issued has a stated value of $100 per share and the
holder is entitled to receive cash dividends at 6% per year. Additionally, the
holder of Series B Preferred stock may require the Company to redeem for cash up
to 1,800 shares during each three-month period beginning on April 1, 1997, at a
price equal to the stated value plus accrued dividends. Accrued dividends at
December 31, 1996 were $6,750.
The Company agreed to use its best efforts to file a registration statement to
register the Common stock issued in connection with the acquisition and agreed
to guarantee the aggregate sales price of the stock to be $7 per share for one
year from the effective date of the registration statement.
In March 1997, the Company instituted a demand for arbitration against the
former owner of Centennial pursuant to the idemnification provisions of the
stock purchase agreement. At this point, management is unable to state whether
an outcome favorable to the Company is either probable or remote, nor can
management assess the amount or range of recovery, if any, in the event of a
favorable outcome.
F-11
<PAGE>
Ivy
- ---
On December 31, 1996, a majority-owned subsidiary of the Company acquired
substantially all of the assets and assumed certain liabilities of Ivy. The
total purchase price was $3,764,000, of which $3,304,000 was financed through
debt. The acquisition has been accounted for using the purchase method of
accounting. The purchase price was allocated to the assets and liabilities
acquired based on the fair values at the acquisition date. Such allocation has
been based on estimates that may be revised at a later date. The fair value of
the net assets 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.
Pro Forma Information
- ---------------------
The following unaudited pro forma information is presented for the acquisition
of Polychem, Centennial, and Ivy as if the acquisition had occurred on January
1, 1995. The unaudited 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>
For the Year Ended
December 31,
---------------------------
1996 1995
------------- -------------
<S> <C> <C>
Net sales $44,608,000 $42,926,000
Net loss available to common
stockholders $ (290,000) $ (645,000)
Pro forma loss per share available to
common stockholders $ (.15) $ (.55)
Shares used in computing pro forma loss
per share 1,971,137 1,167,982
</TABLE>
4. EARNINGS (LOSS) PER SHARE:
--------------------------
For the year ended December 31, 1996, the Company's total outstanding Common
stock options and warrants exceeded 20% of the total outstanding Common stock.
Therefore, the net earnings per share computations are required to be modified
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. Earnings per share for the year ended December 31,
1996, is computed by dividing net income available to common stockholders by the
weighted average number of Common stock outstanding during the year since the
net effect of the modified treasury stock method is antidilutive.
F-12
<PAGE>
Net loss per share in 1995 was calculated by dividing the loss by the weighted
average number of shares outstanding for the year. The weighted average shares
outstanding includes 220,000 shares issued to DTF Media, Inc., an affiliated
entity of the Company due to common majority ownership, in 1995 in exchange for
DTF's stock interest in Princeton. The warrants and options outstanding during
1995 have been excluded from the calculation since they are antidilutive.
5. ACCOUNTS RECEIVABLE:
--------------------
<TABLE>
<CAPTION>
December 31,
------------------------
1996 1995
---------- ----------
<S> <C> <C>
Trade receivables $7,699,041 $4,350,131
Retainage receivables 316,822 559,091
Bad debt reserve (207,079) (109,576)
---------- ----------
7,808,784 4,799,646
Less- Retainage receivables due in over one year 153,021 312,825
---------- ----------
$7,655,763 $4,486,821
========== ==========
</TABLE>
Polychem sells clarifier components to general contractors for use in building
and maintaining waste water treatment facilities operated by government
municipalities. Sale of these components under contracts generally require
retainage provisions which become due upon completion of the entire contract.
Retainage receivables expected to be collected after one year are included in
other assets in the accompanying consolidated balance sheets.
6. INVENTORIES:
<TABLE>
<CAPTION>
December 31,
-----------------------
1996 1995
---------- ----------
<S> <C> <C>
Raw materials $1,246,482 $ 709,728
Work-in-process 1,189,328 619,165
Finished goods 1,565,197 583,076
---------- ----------
$4,001,007 $1,911,969
========== ==========
</TABLE>
Had the first-in, first-out (FIFO) method of valuing inventories of Princeton
and Polychem been used, the value of inventories would not have been
significantly different at December 31, 1996 and 1995.
F-13
<PAGE>
7. PROPERTY, PLANT AND EQUIPMENT:
------------------------------
<TABLE>
<CAPTION>
December 31,
-----------------------
1996 1995
<S> ---------- ----------
Land <C> <C>
Buildings $ 368,916 $ 56,221
Machinery and equipment 2,142,863 963,180
5,141,739 810,851
---------- ----------
7,653,518 1,830,252
Less- Accumulated depreciation (629,125) (217,435)
---------- ----------
$7,024,393 $1,612,817
</TABLE> ========== ==========
Machinery and equipment at December 31, 1996 and 1995, includes $3,484,800 and
$212,878, respectively, of equipment under capital leases, with accumulated
depreciation of $205,509 and $31,633, respectively.
8. GOODWILL AND OTHER ASSETS:
--------------------------
<TABLE>
<CAPTION>
December 31,
---------------------
1996 1995
---------- --------
<S> <C> <C>
Goodwill, net $6,042,889 $169,400
Covenant not to compete, net 489,583 --
Retainage receivables due in over one
year 153,021 312,825
Deferred financing, net 138,253 164,257
Cash surrender value of officers' life
insurance 92,496 --
Other 108,247 15,796
---------- --------
$7,024,489 $662,278
========== ========
</TABLE>
F-14
<PAGE>
9. DEBT FINANCING:
---------------
<TABLE>
<CAPTION>
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 the bank's prime rate
plus 3.75% (12% at December 31, 1996) $ 158,341 $ 258,341
Polychem term note payable to the Budd
Company, interest at 8%, principal
payable in 20 quarterly installments
of $81,305, beginning March 31, 1998 1,626,093 1,626,093
Polychem note payable to bank, interest
at the bank's prime rate plus 1.5%
(9.75% at December 31, 1996), payable
in 18 monthly installments of $21,155
and 41 monthly installments of $29,617
plus interest, with a final payment in
March 2000 1,307,364 1,586,607
Eastwind loan payable -- 25,000
Centennial notes payable to
individuals, interest at 12.5%, due on
February 1, 1997 105,000 --
Centennial term note payable to seller,
interest at 8%, due in 36 monthly
installments of principal and interest
of $8,333, beginning November 17, 1996 251,235 --
Centennial term note payable to a
vendor, interest at 8%, due in 24
semi-monthly payments of principal and
interest of $4,523, beginning January
10, 1997 104,000 --
Ivy note payable to a bank, secured by
certain property, interest at 7.3%,
due in 240 monthly installments of
principal and interest of $5,909 750,000 --
Ivy note payable to a bank, secured by
certain property, interest at the
bank's prime rate plus 2.0% (10.25% at
December 31, 1996), due in 240 monthly
installments of principal and interest
of $10,487, beginning in March 1997 1,054,750 --
Ivy term note payable to a bank,
secured by certain property, interest
at 9.4%, due in 240 monthly
installments of principal and interest
of $2,777, beginning in March 1997 300,000 --
Ivy term note payable to a finance
company, secured by substantially all
of its assets, due in 35 monthly
installments of $7,500 with a final
installment of $187,500, plus interest
at the bank's prime rate plus 4.5%
(12.75% at December 31, 1996) 450,000 --
Eastwind subordinated note payable to
an investor 310,752 --
---------- ----------
6,417,535 3,496,041
Less- Current portion (880,012) (408,586)
---------- ----------
$5,537,523 $3,087,455
========== ==========
</TABLE>
Interest expense of $312,624 and $293,862 on the term notes was charged to
operations for the years ended December 31, 1996 and 1995, respectively.
F-15
<PAGE>
Interest expense of $41,004 and $53,282 was charged to expense for the years
ended December 31, 1996 and 1995, respectively, related to amortization of
deferred financing costs (see Note 2).
Princeton
- ---------
Princeton has a $1,000,000 demand line of credit with a bank through June 30,
1997, subject to renewal. Borrowings under the line of credit bear interest at
the bank's prime plus 3.75% (12% at December 31, 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 $343,812 and $411,349 at December 31,
1996 and 1995, respectively. Interest expense of $64,888 and $93,946 was
charged to operations for the years ended December 31, 1996 and 1995,
respectively. The line is collateralized by substantially all of Princeton's
assets and the personal guarantees of two of the Company's stockholders. 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 items. The arrangement also
includes a material adverse change clause that can be exercised at the sole
discretion of the bank.
Polychem
- --------
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 the bank's prime rate
plus 1.5% (9.75% at December 31, 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 $310,139 and $1,723,747 at December 31,
1996 and 1995, respectively. As of December 31, 1996, there was $2,421,143
available under the line. Interest expense of $91,155 and $119,715 was charged
to operations for the year ended December 31, 1996 and for the period from
acquisition (March 10, 1995) through December 31, 1995, respectively. The line
is collateralized by substantially all of Polychem's assets, except for 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 other than
expenditures, among other items. The adjusted working capital and adjusted net
worth of Polychem, as defined in the loan and security agreement, at December
31, 1996, was approximately $3,395,895 and $1,781,568 respectively.
In September 1995, Polychem repaid a retainage seller note payable to the Budd
Company of $750,000. This note did not bear interest.
F-16
<PAGE>
Centennial
- ----------
Centennial has a $2,750,000 line of credit with a bank. Borrowings under the
line bear interest at the bank's prime rate plus 1.25% (9.5% at December 31,
1996) and are limited to 80% of eligible accounts receivable, as defined.
Outstanding borrowings were $2,223,205 at December 31, 1996. Interest expense of
$43,793 was charged to operations for the period from acquisition (October 17,
1996) through December 31, 1996. The line of credit is collateralized by
substantially all of Centennial's assets and the unlimited guaranty of the
Company. In addition, the arrangement requires that Centennial maintain total
net worth of at least $3,350,000. It also places restrictions on transactions
with Eastwind, including management fees.
Ivy
- ---
Ivy has a $1,500,000 line of credit with a finance company through January 1,
2000. Borrowings under the line of credit bear interest at the bank's prime
rate plus 3.5% (11.75% at December 31, 1996) and are limited to 85% of eligible
accounts receivable plus the lesser of 50% of raw materials and finished goods
inventory or $750,000. Outstanding borrowings were $749,209 at December 31,
1996. The line is collateralized by substantially all of Ivy's assets and the
guarantee of Eastwind. An annual commitment fee of $15,000, a monthly
collateral monitoring fee of $1,500 and a monthly minimum income fee of $6,000
are required under the line. The arrangement requires that the Company maintain
a minimum tangible net worth of $200,000, minimum working capital of $500,000, a
debt service coverage ratio of at least 1.25 to 1.00 and net income of at least
$100,000 for each fiscal year. It also places restrictions on the amount of
capital expenditures, transactions with Eastwind, and officer compensation.
In connection with the acquisition of Ivy (see Note 3), Ivy obtained a
$1,804,750 bridge note which was originally due on March 31, 1997. Subsequent
to year-end, Ivy replaced the bridge note with $750,000 and $1,054,750 of term
notes. At December 31, 1996, $1,671,360 of the bridge note is classified as
long-term debt based on the Company's refinancing after year-end.
Eastwind Subordinated Note Payable
- ----------------------------------
In June 1996, the Company sold to an investor a five-year, $500,000 subordinated
note which bears interest at 12%. The note is payable in three equal
installments due June 30, 1999, 2000, and 2001. The Company can repay the note
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 per share
exercisable for a seven-year period. The warrant was valued at $211,200 for
financial reporting purposes and was recorded as a debt discount, which is being
amortized over the term of the debenture. Interest expense of $54,452 was
recorded for the year ended December 31, 1996. The effective interest rate on
the subordinated debenture is 14.8%.
F-17
<PAGE>
Bridge Financing
- ----------------
In connection with a $175,000 bridge loan entered into in March 1995, the
Company issued the noteholders 26,250 shares of Common stock and Class D
Warrants to purchase 35,000 shares of Common stock at $5 per share. One of the
noteholders is also a shareholder. The warrants are exercisable through March
1998. The estimated fair value of the stock and warrants of $59,500 was
recorded as a debt discount and a credit to stockholders' equity. As discussed
in Note 14, this note and related accrued interest thereon were settled in
exchange for the issuance of 35,000 shares of the Company's Common stock in
December 1995. Interest expense of $69,997 was charged to operations for the
year ended December 31, 1995, related to this note.
Future maturities of long-term debt are as follows at December 31, 1996:
<TABLE>
<S> <C>
1997 $ 880,012
1998 962,245
1999 1,251,619
2000 785,107
2001 548,757
Thereafter 2,179,043
----------
6,606,783
Less- Unamortized interest (189,248)
----------
$6,417,535
==========
</TABLE>
10. CAPITALIZED LEASE OBLIGATIONS:
------------------------------
The Company leases certain equipment under capital leases. The weighted average
interest rate was 11.2% and 15.6% for the years ended December 31, 1996 and
1995, respectively. Interest expense of $108,465 and $23,711 on the capitalized
lease obligations was charged to operations for the years ended December 31,
1996 and 1995, respectively. Future minimum lease payments as of December 31,
1996 are as follows:
<TABLE>
<S> <C>
1997 $1,096,440
1998 940,357
1999 881,853
2000 72,598
2001 8,433
----------
Total minimum lease payments 2,999,681
Less- Amounts representing interest (455,751)
----------
Present value of future minimum lease
payments 2,543,930
Less- Current portion (848,701)
----------
$1,695,229
==========
</TABLE>
F-18
<PAGE>
11. INVESTMENTS IN OPERATING COMPANIES:
-----------------------------------
Lavelle
- -------
In April 1995, the Company advanced funds, on a secured basis, to Lavelle
Aircraft Company ("Lavelle Aircraft"). Two of the principal stockholders of the
Company are also principal stockholders of DTM Aerospace, Inc., which owned 100%
of Lavelle Aircraft. The Company had a receivable of $78,000 from Lavelle
Aircraft at December 31, 1995.
Lavelle Company ("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. Lavelle
is a manufacturer of sheet metal products for the aerospace industry.
In March 1996, the Company invested $450,000 in Lavelle in the form of a
subordinated debenture. The debenture matures in March 2001 and pays interest
at 20% per year. In addition, the Company made advances to Lavelle for working
capital purposes. Interest income of $120,989 was recorded on the subordinated
debenture and advances for the year ended December 31, 1996. In connection with
its investment, the Company guaranteed the indebtedness of Lavelle under a
$900,000 equipment facility for which the Company charged a $37,500 fee in 1996.
The Company's debenture is subordinate to the equipment facility indebtedness.
In addition, the Company pledged a $100,000 security interest in favor of the
equipment facility lender. At December 31, 1996, the Company had a receivable
of $524,356 from Lavelle for advances and accrued interest.
Because of the Company's guarantee and pledge relating to Lavelle's equipment
facility, any loss of Lavelle would be recognized by the Company in its
statement of operations and recorded as a reduction in the carrying amount of
its investment. Lavelle reported net income of approximately $125,000 for the
period from the date of the Company's investment through December 31, 1996.
In January 1997, the Company entered into an agreement to acquire all of the
outstanding common stock of Lavelle in exchange for 44,537 shares of the
Company's Common stock and forgiveness of certain receivables due from Lavelle.
The acquisition will be accounted for using the purchase method of accounting.
Wickersham
- ----------
On May 24, 1996, the Company purchased convertible preferred stock of Wickersham
Printing Company, Inc. ("Wickersham") for $250,000. The preferred stock has a
minimum dividend rate of 6%. The preferred stock has a liquidation preference
equal to, in the aggregate, $250,000 plus accrued and unpaid dividends thereon,
and is convertible into 80% of the outstanding common stock of Wickersham
depending upon its achievement of certain earnings levels. In 1996, Wickersham
experienced net losses of approximately $131,000. The Company has a receivable
from Wickersham of $91,493 as of December 31, 1996, representing working capital
advances and dividends receivable.
In June 1996, Princeton entered into $257,817 of capitalized lease obligations
for printing equipment. This equipment is operated by Wickersham on behalf of
Princeton. The costs of the printing operation are funded by Princeton and the
related revenues and costs are
F-19
<PAGE>
recognized by Princeton. For the year ended December 31, 1996, revenues and
costs of the printing operation were $410,913 and $295,530, respectively. At
December 31, 1996, the Company had a receivable from Wickersham of $431,505 and
a payable to Wickersham of $276,260 related to the printing operation.
In January 1997, the Company entered into an agreement to acquire all of the
outstanding common stock of Wickersham in exchange for 30,000 shares of the
Company's Common stock. The acquisition will be accounted for using the
purchase method of accounting.
Wickersham is a privately-owned printing and book manufacturer located in
Lancaster, Pennsylvania.
12. EMPLOYEE BENEFIT PLANS:
-----------------------
Defined Contribution Plans
- --------------------------
Management and nonunion employees of Polychem participate in a qualified 401(k)
savings plan. Participants can contribute a portion of their pretax
compensation, and Polychem matches 50% of the first 4% of compensation
contributed by the employee. Contributions to the plan in 1996 and 1995 were
$30,708 and $21,742, respectively. Participants vest in Polychem's
contributions pro rata over two to five years. At the direction of the board of
directors, Polychem may elect to contribute a maximum of 9% of each employee's
compensation in addition to the regular match, if sufficient profits are
generated. Discretionary contributions were $97,920 for the year ended December
31, 1996. No discretionary contributions were made to the plan in 1995.
All employees of Princeton that meet minimum eligibility requirements, as
defined, may participate in a qualified 401(k) savings plan. Participants can
contribute a portion of their pretax compensation to the plan. Princeton may
make contributions to the plan at its discretion. Participants vest in employer
contributions 20% per year beginning in year three, while they are always vested
in their contributions. Princeton has not made any discretionary contributions
to the plan since the date of acquisition.
All employees of Centennial that meet eligibility requirements, as defined, may
participate in a qualified 401(k) savings plan. Participants can contribute a
portion of their pretax compensation to the plan and Centennial matches 25% of
the first 6% of compensation contributed by the employee. Contributions to the
plan for the period from acquisition (October 17, 1996) to December 31, 1996
were $10,571. Participants vest in the Centennial's contributions over six
years.
Defined Benefit Plans
- ---------------------
In accordance with the terms of the Polychem acquisition agreement (see Note 3),
the pension plan for hourly union employees was amended to name Polychem as the
plan sponsor. Polychem assumed all assets, liabilities, and future obligations
of the plan. The pension benefits are based on years of service and the benefit
rate in effect at the date of retirement. The plan was fully funded by the Budd
Company as of the acquisition date, based on actuarial assumptions defined in
the acquisition agreement. As of the acquisition date, the plan's assets and
liabilities were remeasured in accordance with provisions of
F-20
<PAGE>
SFAS No. 87, "Employer's Accounting for Pensions," which resulted in the
recognition of an assumed pension liability of $157,370.
The plan's funded status was as follows:
<TABLE>
<CAPTION>
December 31
-------------------------
1996 1995
------------ ------------
<S> <C> <C>
Actuarial present value of:
Vested benefit obligation $2,223,820 $2,287,329
Nonvested benefit obligation 895 921
---------- ----------
Accumulated benefit obligation 2,224,715 2,288,250
Effect of projected future salary
increases -- --
---------- ----------
Projected benefit obligation 2,224,715 2,288,250
Fair market value of plan assets 1,907,801 1,904,007
---------- ----------
Projected benefit obligation in excess
of plan assets 316,914 384,243
Unrecognized net (loss) (128,332) (220,387)
---------- ----------
Accrued pension cost $ 188,582 $ 163,856
========== ==========
</TABLE>
A discount rate of 7.0% and 7.5% and an expected long-term rate of return on
plan assets of 8.5% was used in determining the actuarial present value of the
obligations at December 31, 1996 and 1995, respectively. The pension plan
assets held at December 31, 1996 consist of amounts invested in fixed income
money market funds.
The net periodic pension cost includes the following components:
<TABLE>
<CAPTION>
For the
Period From
Year Ended March 10, 1995 to
December 31, December 31,
1996 1995
------------- ------------------
<S> <C> <C>
Service cost benefits earned during the
period $ 25,639 $ 5,128
Interest cost on projected benefit
obligation 152,192 132,387
Return on assets (208,168) (71,559)
Net amortization and deferrals 55,949 (58,141)
--------- --------
$ 25,612 $ 7,815
========= ========
</TABLE>
Postretirement Life Insurance Benefits
- --------------------------------------
Polychem provides postretirement life insurance benefits to all union employees.
The life insurance plan provides coverage ranging from $3,000 to $6,000 for
qualifying retired employees. A discount rate of 7.0% was used in determining
the actuarial present value of the obligations at December 31, 1996 and 1995.
The unfunded accumulated postretirement benefit obligation as of December 31,
1996 and 1995, was $29,928 and $36,654, respectively, and the net periodic
postretirement benefit cost for the years ended December 31, 1996 and 1995, was
immaterial.
F-21
<PAGE>
13. INCOME TAXES:
-------------
The components of income taxes are as follows:
<TABLE>
<CAPTION>
Year Ended December 31,
------------------------
1996 1995
------------ -----------
<S> <C> <C>
Current-
Federal $ 38,834 $ --
State 182,299 27,223
-------- ---------
221,133 27,223
-------- ---------
Deferred-
Federal 146,108 (112,702)
State (25,486) (9,312)
-------- ---------
120,622 (122,014)
-------- ---------
Increase (decrease) in valuation
allowance (79,828) 79,828
-------- ---------
$261,927 $(14,963)
======== =========
</TABLE>
The reconciliation of the statutory federal rate to the Company's effective
income tax rate is as follows:
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------------
1996 1995
------------- --------------------
<S> <C> <C>
Statutory tax provision
(benefit) 34.0% (34.0)%
State income tax provision, net
of federal tax benefit 17.9 4.3
Net operating losses for which no
tax benefit is currently
available -- 24.2
Decrease in valuation allowance (13.8) --
Other 7.2 --
------ ------
45.3% (5.5)%
====== ======
</TABLE>
Under SFAS No. 109, "Accounting for Income Taxes," deferred tax assets and
liabilities are recognized for the future tax consequences attributable to
differences between the financial statement carrying amounts of existing assets
and liabilities and their respective tax bases. Deferred tax assets and
liabilities are measured using enacted tax rates.
F-22
<PAGE>
The tax effect of temporary differences that give rise to deferred income taxes
are as follows:
<TABLE>
<CAPTION>
December 31,
--------------------
1996 1995
--------- ----------
<S> <C> <C>
Gross deferred tax asset:
Property, plant and equipment $ -- $ 5,572
Accruals and reserves 79,579 1,211
Pension and postretirement benefits 90,169 82,716
Net operating loss carryforwards -- 119,852
Valuation allowance on deferred tax
asset -- (79,828)
Other 50,726 --
-------- --------
$220,474 $129,523
======== ========
Gross deferred tax liabilities:
Property, plant and equipment $523,709 $ --
Inventory 177,765 147,705
-------- --------
$701,474 $147,705
======== ========
</TABLE>
In connection with the acquisition of Centennial (Note 3), a net deferred tax
liability of $422,024 was recorded primarily due to the differences in the
financial reporting and tax bases of property and equipment.
14. EQUITY TRANSACTIONS:
--------------------
In January 1995, the Company entered into a Securities Purchase Agreement (the
Agreement) with a third party to sell 200,000 shares of Common stock, 250,000
Class A Warrants, 187,500 Class B Warrants and 250,000 Class C Warrants for an
aggregate price of $500,000. The value assigned to these securities was $2 per
Common share, $.25 per Class A Warrant, $.167 per Class B Warrant and $.025 per
Class C Warrant. The Agreement provides the holder of the equity securities the
right of first refusal for a defined period of time to purchase additional
shares of Company stock offered for sale and immediate registration rights for
the securities issued thereunder. The securities have been recorded in the
accompanying balance sheet net of the costs of filing the related registration
statement of $368,361.
The Class A, B and C Warrants are exercisable at any time through March 2005 at
$3 per share, $4 per share and $6 per share, respectively, which prices reflect
a subsequent negotiated reduction between the Company and warrant holders. The
Company has the right to call the warrants for redemption at $.001 per warrant
if consolidated net income in any year is $400,000 and net income per share is
at least $.40, or if the Company acquires an entity, exclusive of the Polychem
acquisition in March 1995, that has revenues of at least $10,000,000.
In connection with the sale of securities, the Company issued warrants to two
officers/stockholders to purchase an aggregate of 500,000 shares of Common
stock at $4 per share (A-1 Warrants) for identifying and closing the acquisition
of Polychem. The estimated value of these warrants of $125,000 was included in
the aggregate purchase price of
F-23
<PAGE>
Polychem. These warrants are exercisable at any time through March 2005 and are
not subject to redemption by the Company.
In January 1995, the Company entered into an agreement with two investment
banking firms to provide advisory services. As compensation for services
rendered in connection with arranging for the sale of securities, the Company
issued 50,000 shares of Common stock at $2 per share. In addition, the Company
agreed to issue 100,000 shares of Common stock and 100,000 warrants to purchase
Common stock at $4 per share upon the occurrence of certain funding events.
These shares and warrants were issued in December 1995 in accordance with these
agreements. Another investment banker was issued 9,500 shares of Common stock at
$2 per share in connection with the sale of securities. The value of these
shares and warrants was recorded as a reduction in additional paid-in capital.
Two officers/stockholders of the Company, the holders of securities issued under
the Agreement and two of the investment banking firms have entered into a voting
agreement whereby the parties thereto agreed to vote for certain Board of
Director representatives designated by such stockholder groups. The two
officers/stockholders have the right to designate representatives for five of
the seven seats on the Board of Directors, while the remaining two seats are
designated by the holders of the Securities issued under the Agreement. The
voting agreement will continue in effect until the earlier of January 25, 1998,
or the completion of an underwritten public offering which results in aggregate
cash proceeds of not less than $7.5 million at a per share price of not less
than $5 per share.
In March 1995, the Company issued 10,000 shares of Common stock and 25,000 A-1
Warrants to an executive officer upon commencement of his employment. The
$26,250 estimated fair value of the Common stock and warrants was charged to
operations for the year ended December 31, 1995.
In March 1995, the Company issued 25,000 A-1 warrants to an employee of
Princeton as a bonus. The $6,250 estimated fair value of the warrants was
charged to operations for the period ended December 31, 1995.
In December 1995, 250,000 Class A warrants, 187,500 Class B warrants, and 50,000
Class A-1 warrants were exercised. The Class A warrants were exercised for $3
per share and the Class B and A-1 warrants were exercised for $4 per share. The
total proceeds from the exercise of these warrants were $1,700,000, of which
$746,000 has been recorded as a stock subscription receivable at December 31,
1995. The subscriptions receivable were collected in early January 1996.
In December 1995, the Company satisfied the bridge note (see Note 9) through the
issuance of 35,000 shares of Common stock. The face value of the note of
$175,000 plus accrued interest of $10,497 has been recorded as Common stock and
additional paid-in capital.
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 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
F-24
<PAGE>
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 per share until they
expire on May 10, 2003. The warrants were valued at $521,400 for financial
reporting purposes and were 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 share of Common Stock and
one-and-one-quarter Common Stock Purchase Warrants, for $1,200,000. Each
warrant is exercisable at $3 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 were
recorded as warrants outstanding. In November 1996, in connection with the sale
of Common Stock Units, the Company issued warrants to investment bankers to
purchase 22,500 shares of Common stock at an exercise price of $6.00. These
warrants expire in November 1999.
In October 1996, in connection with the acquisition of Centennial (see Note 3),
the Company issued warrants to investment bankers to purchase an aggregate of
130,000 shares of Common stock at exercise prices ranging from $6.00 to $9.00.
These warrants expire between three and seven years from the date of issuance.
In December 1996, the Company purchased 35,000 shares of its Common stock for
treasury at a price of approximately $5.50 per share.
During 1996, Class A-1, C and D warrants were exercised at price ranging from
$3.50 to $6.00. The net proceeds from the exercise of these warrants was
$1,781,000.
The Company has reserved 1,166,500 shares of Common stock for issuance upon
exercise of the outstanding warrants.
F-25
<PAGE>
15. STOCK PLANS:
------------
The Company has two stock plans which provide for the granting of both incentive
and nonqualified stock options and stock appreciation rights ("SARs") to
officers, employees, consultants and nonemployee directors. Under the plans,
2,000,000 shares of Common Stock have been reserved for issuance and are
available for future grants. The number of options/SARs and exercise price/base
price, respectively, are determined by the Board of Directors in accordance with
the terms of the plans. Information with respect to the options under the plans
is as follows:
<TABLE>
<CAPTION>
Stock Option Incentive Plan Non-Employee Director Plan
--------------------------- --------------------------
Weighted Weighted
Number of Average Number of Average
Shares Exercise Price Shares Exercise Price
---------- --------------- ---------- --------------
<S> <C> <C> <C> <C>
Balance, December 31, 1994 -- $ -- -- $ --
Grants 300,000 6.00 120,000 7.50
------- ----- ------- -----
Balance, December 31, 1995 300,000 6.00 120,000 7.50
Grants 280,000 4.57 40,000 9.06
------- ----- ------- -----
Balance, December 31, 1996 580,000 $5.31 160,000 $7.89
======= ===== ======= =====
</TABLE>
These options vest ratably over three years. At December 31, 1996, 140,000
options were exercisable and 1,260,000 were available for future grant. As of
December 31, 1996, no SARs had been granted.
The Company accounts for its stock option plans under Accounting Principles
Board ("APB") Opinion No. 25, "Accounting for Stock Issued to Employees."
Accordingly, no compensation expense has been recognized for stock options
issued to employees. In 1995 the Company recorded compensation expense of
$32,500 for warrants issued to employees and recorded the $125,000 estimated
value of warrants issued to officers/stockholders as part of the purchase price
of Polychem (see Note 14). The disclosure requirements of SFAS No. 123 were
adopted by the Company in 1996. Had compensation cost for the Company's common
stock option plans been determined based upon the fair value of the options at
the date of grant, as prescribed under SFAS No. 123, the Company's pro forma net
loss available to common stockholders and loss per share available to common
stockholders would have been as follows:
<TABLE>
<CAPTION>
Year Ended December 31,
---------------------------
1996 1995
----------- ------------
<S> <C> <C>
Net income (loss) available to Common
stockholders:
As reported $ 216,363 $(258,585)
Pro forma (407,023) (306,248)
Earnings (loss) per share available to
Common stockholders:
As reported $ .11 $ (.28)
Pro forma (.21) (.33)
</TABLE>
F-26
<PAGE>
The weighted average fair value of each stock option granted during 1996 and
1995 was $3.19 and $3.96, respectively. The fair value of each option grant is
estimated on the date of grant using the Black-Scholes option pricing model with
the following weighted average assumptions:
<TABLE>
<CAPTION>
1996 1995
-------- --------
<S> <C> <C>
Risk-free interest rate 6.3% 5.8%
Expected dividend yield -- --
Expected life 6 years 6 years
Expected volatility 60% 60%
</TABLE>
The weighted average remaining contractual life of stock options outstanding as
of December 31, 1996 is 9.3 years.
The Company has issued a stock option to purchase a 10% interest in Ivy to the
president of that subsidiary. The option vests only upon an initial public
offering or change in control, as defined, of Ivy.
16. COMMITMENTS AND CONTINGENCIES:
------------------------------
Operating Leases
- ----------------
The Company leases certain facilities and equipment under noncancelable
operating leases that expire through June 2002. Rent expense of $491,844 and
$257,000 has been charged to operations for the years ended December 31, 1996
and 1995, respectively. Minimum future rental payments under leases are as
follows at December 31, 1996:
<TABLE>
<S> <C>
1997 $1,142,984
1998 886,675
1999 798,876
2000 633,246
2001 317,500
Thereafter 158,750
----------
$3,938,031
==========
</TABLE>
Employment Agreements
- ---------------------
Effective January 1, 1995, the Company entered into five-year employment
agreements with two executive officers/stockholders. These agreements provide
for aggregate base compensation of $500,000 per year plus scheduled increases in
base compensation of $50,000 for every $1,000,000 increase in pretax income
above $1,500,000. The base compensation is also subject to increases upon the
Company acquiring a third operating company. The officers/stockholders are each
entitled to incentive compensation equal to 3% of pretax income if their
respective stock ownership is reduced to 10% or less. No additional
compensation was earned in 1996 and 1995. The employment agreements also
F-27
<PAGE>
provide for certain payments upon termination of employment and change in
control of the Company.
The Company also entered into a one-year employment agreement with another
executive officer effective March 1, 1995, which was renewed in March 1996.
This agreement provides for a base compensation of $84,000 per year plus
benefits, which was subsequently increased to $102,000.
Litigation
- ----------
The Company is involved in certain legal actions and claims arising out of the
ordinary course of business. Management believes that the outcome of such
litigation and claims will not have a material adverse effect on the Company's
financial position or results of operations.
17. SUPPLEMENTAL CASH FLOW DISCLOSURES:
-----------------------------------
Cash paid for interest was $706,901 and $498,714 for the years ended December
31, 1996 and 1995, respectively.
The Company paid income taxes of $337,564, and none for the years ended December
31, 1996, and 1995, respectively.
In 1996, the Company entered into $453,189 of capital lease obligations for
computer equipment and various furniture and fixtures. In 1995, the Company
entered into $111,878 of capital lease obligations for production equipment.
Polychem and Ivy purchased the net assets of certain entities in March 1995 and
December 1996, respectively (see Note 3). The Company acquired the capital
stock of Centennial in October 1996 (see Note 3). In connection with the
acquisitions, liabilities were assumed as follows:
<TABLE>
<CAPTION>
Polychem Centennial Ivy
------------ ------------- ------------
<S> <C> <C> <C>
Assigned value of assets acquired $ 7,037,071 $13,079,617 $3,763,743
Cash paid for the assets, including
cash acquired (3,945,789) (1,241,226) (10,355)
Issuance of Preferred and Common stock
and warrants -- (2,518,800) --
Deferred credit -- -- --
Notes payable to seller (2,376,293) (265,873) --
----------- ----------- ----------
Liabilities assumed $ 714,989 $ 9,053,718 $3,753,388
=========== =========== ==========
</TABLE>
In connection with the Company's acquisition of certain assets of DTF in March
1995 (see Note 4), the Company assumed a loan payable of $25,000, accounts
payable of $24,505 and a payable to Princeton of $283,005.
In December 1995, the Company issued 35,000 shares of Common stock in settlement
of the $175,000 bridge note obligation and accrued interest thereon (see
Note 9).
F-28
<PAGE>
18. INDUSTRY SEGMENT AND FOREIGN SALES INFORMATION:
------------------------------------------------
The Company operates in three business segments through its subsidiaries -
Polychem, Centennial and Princeton ("Printing"), and Ivy (see Note 1). Net
sales, operating income, identifiable assets, capital expenditures and
depreciation and amortization are presented below:
For the year ended December 31, 1996:
<TABLE>
<CAPTION>
Corporate and
Polychem Printing Ivy Eliminations Total
------------ ------------ ---------- -------------- ------------
<S> <C> <C> <C> <C> <C>
Net Sales $14,860,000 $ 8,773,000 $ -- $ -- $23,633,000
Operating income (loss) 1,734,000 (20,000) -- (670,000) 1,044,000
Identifiable assets 7,377,000 15,156,000 3,952,000 1,973,000 28,458,000
Capital expenditures 3,000 26,000 -- 21,000 50,000
Depreciation and
amortization 204,000 273,000 -- 28,000 505,000
For the year ended December 31, 1995:
Corporate and
Polychem Printing Ivy Eliminations Total
------------ ----------- ---------- -------------- -------------
<S> <C> <C> <C> <C> <C>
Net Sales $ 9,858,000 $ 5,576,000 $ -- $ -- $15,434,000
Operating income (loss) 1,189,000 (52,000) -- (756,000) 381,000
Identifiable assets 7,651,000 1,565,000 -- 900,000 10,116,000
Capital expenditures -- 29,000 -- -- 29,000
Depreciation and
amortization 146,000 34,000 -- 39,000 219,000
</TABLE>
For the year ended December 31, 1996, Polychem's sales to foreign customers were
approximately $5,325,000, or 23% of consolidated net sales and consist of sales
to customers in Asia (13%), Europe (7%) and North America (3%). Receivables
from these customers were approximately $1,353,000 at December 31, 1996.
For the year ended December 31, 1995, Polychem's sales to foreign customers were
approximately $4,304,000, or 28% of consolidated net sales and consist of sales
to customers in Asia (12%), Europe (9%), North America (5%) and Other (2%).
There were no foreign sales prior to the acquisition of Polychem in March 1995.
F-29
<PAGE>
<TABLE>
<CAPTION>
Exhibit No. Description Method of Filing
- ----------- ----------- ----------------
<S> <C> <C>
2.1 Asset purchase agreement Incorporated by reference to Exhibit
between Polychem 2.1 to the Registrant's Registration
Corporation and The Budd Statement on Form SB-2 filed under
Company dated March 10, the Securities Act of 1933, as
1995. amended, Registration no. 33-94252.
</TABLE>
1
<PAGE>
<TABLE>
<CAPTION>
Exhibit No. Description Method of Filing
- ----------- ----------- ----------------
<S> <C> <C>
2.2 Securities Purchase Incorporated by reference to Exhibit
Agreement between the 2.3 to the Registrant's Registration
company and Sector Statement on Form SB-2 filed under
Associates, Ltd. dated the Securities Act of 1933, as
January 25, 1995. amended, Registration no. 33-94252.
2.3 Amended and Restated Incorporated by reference to Exhibit
Agreement and Plan of 2.1 of the Registrant's Form 8-K
Merger by and between (No. 0-27638) filed on Novenber 1,
Centennial Printing 1996.
Corporation, The
Eastwind Group, Inc.
and Centennial
Acquisition Corp.
2.4 Asset Purchase Agreement Incorporation by reference to Exhibit
by and between Tygart 2.1 of the Registrant's Form 8-K
Moulding Corporation and (No. 0-27638) filed on January 14,
Ivy-Tygart Acquisition 1997.
Corp.
3.1 Amended and Restated Incorporated by reference to Exhibit
Certificate of 3.1 to the Registrant's Registration
Incorporation of the Statement on Form SB-2 filed under
Company. the Securities Act of 1933, as
amended, Registration no. 33-94252.
3.2 Restated and Amended Incorporated by reference to Exhibit
Bylaws of The Company. 3.2 to the Registrant's Registration
Statement on Form SB-2 filed under
the Securities Act of 1933, as
amended, Registration no. 33-94252.
4.1 Specimen common stock Incorporated by reference to Exhibit
certificate of the Company. 4.1 of Amendment No. 2 to the
Registrants Registration Statement on
Form SB-2 filed under The Securities
Act of 1933, as amended, File No.
33-94252.
4.2 Specimen form of series Incorporated by reference to Exhibit
A-1 common stock purchase 4.2 to the Registrant's Registration
warrant of the Company. Statement on Form SB-2 filed under
the Securities Act of 1933, as
amended, Registration no. 33-94252.
4.3 Specimen form of series C Incorporated by reference to Exhibit
common stock purchase 4.5 to the Registrant's Registration
warrant of the Company. Statement on Form SB-2 filed under
the Securities Act of 1933, as
amended, Registration no. 33-94252.
</TABLE>
2
<PAGE>
<TABLE>
<CAPTION>
Exhibit No. Description Method of Filing
- ----------- ----------- ----------------
<S> <C> <C>
4.4 Specimen form of series D Incorporated by reference to Exhibit
common stock purchase 4.6 to the Registrant's Registration
warrant of the Company. Statement on Form SB-2 filed under
the Securities Act of 1933, as
amended, Registration no. 33-94252.
4.5 Specimen form of Common Incorporated by reference to Exhibit
Stock Purchase Warrant 4.5 to the Registrant's Registration
issued to Clifton Capital, Statement on Form SB-2 filed under the
Ltd. Securities Act of 1933, as amended,
Registration No. 333-08227.
4.6 Specimen form of Common Incorporated by reference to Exhibit
Stock Purchase Warrant 4.2 of the Registrant's Form 8-K (No.
issued to Odyssey Capital 0-27638) filed on May 23, 1996.
Group, LP.
4.7 Specimen form of Common Filed herewith.
Stock Purchase Warrant
issued to Mentor Special
Situation, LP.
4.8 Certificate of Designation Filed herewith.
Series B Preferred Stock.
4.9 Certificate of Designation Incorporated by reference to Exhibit
for Series A Preferred 4.1 of the Registrant's Form 8-K (No.
Stock. 0.27638) filed on May 23, 1996.
4.10 $500,000 Subordinated 12% Incorporated by reference to Exhibit
Debenture issued to Mentor 4.7 to the Registrant's Registration
Special Situation Fund, Statement on Form SB-2 filed under the
L.P. Securities Act of 1933, as amended,
Registration No. 333-08227.
9.1 Voting agreement of Incorporated by reference to Exhibit
certain stockholders of 9.1 to the Registrant's Registration
the Company. Statement on Form SB-2 filed under
the Securities Act of 1933, as
amended, Registration no. 33-94252.
10.1 Investment banking advisor Incorporated by reference to Exhibit
agreement among the 10.1 to the Registrant's Registration
Company, FAC Enterprise, Statement on Form SB-2 filed under
Inc. and American Maple the Securities Act of 1933, as
Leaf Financial Corporation amended, Registration no. 33-94252.
dated January 25, 1995.
10.2* Employment agreement Incorporated by reference to Exhibit
between the Company and 10.2 to the Registrant's Registration
Paul A. DeJullis. Statement on Form SB-2 filed under
the Securities Act of 1933, as
amended, Registration no. 33-94252.
10.3* Employment agreement Incorporated by reference to Exhibit
between the Company and 10.3 to the Registrant's Registration
John R. Thach. Statement on Form SB-2 filed under
the Securities Act of 1933, as
amended, Registration no. 33-94252.
</TABLE>
3
<PAGE>
<TABLE>
<CAPTION>
Exhibit No. Description Method of Filing
- ----------- ----------- ----------------
<S> <C> <C>
10.4* Employment agreement Incorporated by reference to Exhibit
between the Company and 10.4 to the Registrant's Registration
William B. Miller. Statement on Form SB-2 filed under
the Securities Act of 1933, as
amended, Registration no. 33-94252.
10.5 Loan agreement between Incorporated by reference to Exhibit
Princeton Academic Press 10.5 to the Registrant's Registration
and Fremont Financial Statement on Form SB-2 filed under
Corporation. the Securities Act of 1933, as
amended, Registration no. 33-94252.
10.6 Loan agreement between Incorporated by reference to Exhibit
Polychem Corporation and 10.6 to the Registrant's Registration
Congress Financial Statement on Form SB-2 filed under
Corporation. the Securities Act of 1933, as
amended, Registration no. 33-94252.
10.7 Term note of the Company Incorporated by reference to Exhibit
in favor of The Budd 10.7 to the Registrant's Registration
Company. Statement on Form SB-2 filed under
the Securities Act of 1933, as
amended, Registration no. 33-94252.
10.8 Surety agreement of the Incorporated by reference to Exhibit
Company in favor of The 10.13 to the Registrant's
Budd Company. Registration Statement on Form SB-2
filed under the Securities Act of
1933, as amended, Registration no.
33-94252.
10.9 Limited guaranty of the Incorporated by reference to Exhibit
Company in favor of 10.14 to the Registrant's
Congress Financial Registration Statement on Form SB-2
Corporation. filed under the Securities Act of
1933, as amended, Registration no.
33-94252.
</TABLE>
4
<PAGE>
<TABLE>
<CAPTION>
Exhibit No. Description Method of Filing
- ----------- ----------- ----------------
<S> <C> <C>
10.10 Intercreditor agreement Incorporated by reference to Exhibit
between Congress Financial 10.15 to the Registrant's
Corporation and The Budd Registration Statement on Form SB-2
Company dated March filed under the Securities Act of
10,1995 to which Polychem 1933, as amended, Registration no.
Corporation has signed an 33-94252.
Acknowledgment and
Agreement.
10.11 Mortgage on Phoenixville, Incorporated by reference to Exhibit
Pennsylvania property by 10.16 to the Registrant's
Polychem Corporation in Registration Statement on Form SB-2
favor of Congress filed under the Securities Act of
Financial Corporation. 1933, as amended, Registration no.
33-94252.
10.12 Real estate lease between Incorporated by reference to Exhibit
Polychem Corporation, as 10.20 to the Registrant's
successor to The Budd Registration Statement on Form SB-2
Company, and Windsor filed under the Securities Act of
Designs, Inc. for a term 1933, as amended, Registration no.
expiring November 30, 1999. 33-94252.
10.13 Real estate lease between Incorporated by reference to Exhibit
Princeton University 10.21 to the Registrant's
Press, as lessor, and Registration Statement on Form SB-2
Princeton Academic Press, filed under the Securities Act of
Inc., as lessee dated 1933, as amended, Registration no.
July, 1, 1993. 33-94252.
</TABLE>
5
<PAGE>
<TABLE>
<CAPTION>
Exhibit No. Description Method of Filing
- ----------- ----------- ----------------
<S> <C> <C>
10.14 The Corporate Plan for the Incorporated by reference to Exhibit
Profit Sharing/401 (k) 10.25 to the Registrant's
Plan Fidelity Basic as Registration Statement on Form SB-2
Document No. 07. filed under the Securities Act of
1933, as amended, Registration no.
33-94252.
10.15 Spectra Regional Prototype Incorporated by reference to Exhibit
Non-Standardized Cash or 10.26 to the Registrant's
Deferred Profit Sharing Registration Statement on Form SB-2
Plan and Trust. filed under the Securities Act of
1933, as amended, Registration no.
33-94252.
10.16 Adoption Agreement for the Incorporated by reference to Exhibit
Spectra Regional Prototype 10.27 to the Registrant's
Non-Standardized Cash or Registration Statement on Form SB-2
Deferred Profit Sharing filed under the Securities Act of
Plan and Trust. 1933, as amended, Registration no.
33-94252.
10.17 * The Eastwind Group, Inc. Incorporated by reference to Exhibit
Stock Option Incentive 10.28 to the Registrant's
Plan. Registration Statement on Form SB-2
filed under the Securities Act of
1933, as amended, Registration no.
33-94252.
</TABLE>
6
<PAGE>
<TABLE>
<CAPTION>
Exhibit No. Description Method of Filing
- ----------- ----------- ----------------
<S> <C> <C>
10.18 * The Eastwind Group, Inc. Incorporated by reference to Exhibit
Non-Employee Directors 10.29 to the Registrant's
Stock Option Plan. Registration Statement on Form SB-2
filed under the Securities Act of
1933, as amended, Registration no.
33-94252.
10.19 Securities Purchase Incorporated by reference to Exhibit
Agreement between the 10.1 to the Registrant's form 8-K
Company and Odyssey dated May 10, 1996 filed under the
Capital Group, LP dated Securities Exchange Act of 1934.
May 10, 1996.
10.20 Amendment No. 1 to Incorporated by reference to Exhibit
Securities Purchase 10.27 to the Registrant's Registration
Agreement between the Statement on Form SB-2 filed under the
Company and Odyssey Securities Act of 1933, as amended,
Capital Group, LP dated Registration no. 333-08227.
June 20, 1996.
10.21 Securities Purchase Incorporated by reference to Exhibit
Agreement between the 10.28 to the Registrant's Registration
Company and Mentor Special Statement on Form SB-2 filed under the
Situation, LP dated June Securities Act of 1933, as amended,
20, 1996. Registration no. 333-08227.
21 Subsidiaries of the Filed herewith.
Registrant.
27 Financial Data Schedule. in electronic format only.
</TABLE>
_________________________
* Management contract or compensatory plan or arrangement.
7
<PAGE>
EXHBIT 4.7
----------
THE SECURITIES REPRESENTED HEREBY HAVE NOT BEEN REGISTERED UNDER THE SECURITIES
ACT OF 1933, AS AMENDED (THE "ACT"), OR UNDER THE SECURITIES LAW OF ANY STATE.
THESE SECURITIES ARE SUBJECT TO RESTRICTIONS ON TRANSFERABILITY AND RESALE AND
MAY NOT BE TRANSFERRED OR RESOLD EXCEPT AS PERMITTED UNDER THE ACT AND
APPLICABLE STATE SECURITIES LAWS, PURSUANT TO AN EFFECTIVE REGISTRATION
STATEMENT OR AN EXEMPTION THEREFROM. THE ISSUER OF THESE SECURITIES REQUIRES AN
OPINION OF LEGAL COUNSEL IN FORM AND SUBSTANCE SATISFACTORY TO THE ISSUER TO THE
EFFECT THAT ANY PROPOSED TRANSFER OR RESALE IS IN COMPLIANCE WITH THE ACT AND
ANY APPLICABLE STATE SECURITIES LAW.
EXHIBIT "B"
WARRANT TO PURCHASE
COMMON STOCK OF
THE EASTWIND GROUP, INC.
Void after 5:00 p.m. Eastern Time on 2003.
THE EASTWIND GROUP, INC., a Delaware corporation (the "Company"), FOR VALUE
RECEIVED, hereby certifies that MENTOR SPECIAL SITUATION FUND, L.P.,
Pennsylvania limited partnership ("MSSF" or "Holder"), is entitled to purchase,
subject to the terms and conditions hereof, 80,000 shares of Common Stock, par
value $.10 per share, of the Company (the "Common Stock") during the period
commencing at 9:00 a.m., Eastern Time on ________, 1996 (the "Commencement
Date") and ending at 5:00 p.m. Eastern Standard Time on ________, 2003, (the
"Termination Date") at an exercise price of $6.00 per share of Common Stock. The
number of shares of Common Stock purchasable upon exercise of this Warrant (the
"Warrant(s)") and the exercise price per share shall be subject to adjustment
from time to time upon the occurrence of certain events as set forth below.
The shares of Common Stock or any other shares or other units of stock or
other securities or property, or any combination thereof then receivable upon
exercise of this Warrant, as adjusted from time to time, are sometimes referred
to hereinafter as "Exercise Shares". The exercise price per share
<PAGE>
as from time to time in effect is referred to hereinafter as the "Exercise
Price".
1. Exercise of Warrant; Issuance of Exercise Shares.
------------------------------------------------
(a) Exercise of Warrant. This Warrant may be exercised in whole or in
-------------------
part at any time or from time to time on or after the Commencement Date and
until and including the Termination Date. This Warrant may be surrendered on any
business day to the Company at its principal office, presently located at the
address of the Company set forth in Paragraph 9 hereof (or such other office of
the Company, if any, as shall therefore have been designated by the Company by
written notice to the Holder), together with: (i) a completed and executed
Notice of Warrant Exercise in the form set forth in Appendix A hereto and made a
part hereof and (ii) payment of the full Exercise Price for the amount of
Exercise Shares set forth in the Notice of Warrant Exercise, in lawful money of
the United States of America by certified check or cashier's check, made payable
to the order of the Company, or payment in the manner provided in subsection (f)
below.
In the event that this Warrant shall be duly exercised in part prior to the
Termination Date, the Company shall issue, within the time period specified in
subsection (b) below, a new Warrant or Warrants of like tenor evidencing the
rights of the Holder thereof to purchase the balance of the Exercise Shares
purchasable under the Warrant so surrendered that shall not have been purchased.
No adjustments shall be made for any cash dividends on Exercise Shares
issuable upon exercise of the Warrant. The Company shall cancel Warrant
Certificates surrendered upon exercise of Warrants.
(b) Issuance of Exercise Shares; Delivery of Warrant Certificate. The
------------------------------------------------------------
Company shall, within five (5) business days or as soon thereafter as is
practicable of the exercise of this Warrant, issue in the name of and cause to
be delivered to the Holder (or such other person or persons, if any, as the
Holder shall have designated in the Notice of Warrant Exercise) one or more
certificates representing the Exercise Shares to which the Holder (or such other
person or persons) shall be entitled upon such exercise under the terms hereof
together with payment of the Current Market value of any fractional shares
pursuant to Section
2
<PAGE>
1(e). Such certificate or certificates shall be deemed to have been issued and
the Holder (or such other person or persons so designated) shall be deemed to
have become the record Holder of the Exercise Shares as of the date of the due
exercise of this Warrant in accordance with Section 1(e).
(c) Exercise Shares Fully Paid and Non-assessable. The Company agrees and
---------------------------------------------
covenants that all Exercise Shares issuable upon the due exercise of the Warrant
represented by this Warrant Certificate will, upon issuance in accordance with
the terms hereof, be duly authorized, validly issued, fully paid and non-
assessable and free and clear of all taxes (other than taxes which, pursuant to
Paragraph 2 hereof, the Company shall not be obligated to pay) or liens,
charges, and security interests created by the Company with respect to the
issuance thereof.
(d) Reservation of Exercise Shares. For as long as this Warrant is
------------------------------
outstanding, including at the time of or before taking any action which would
cause an adjustment pursuant to Paragraph 6 hereof increasing the number of
shares of capital stock constituting the Exercise Shares, the Company will take
any corporate action which may, in the opinion of its counsel, be necessary in
order that the Company have remaining, after such adjustment, a number of shares
of such authorized capital stock, unissued and unreserved for other purposes,
sufficient to permit the exercise of all the then outstanding Warrants.
At the time of or before taking any action which would cause an adjustment
pursuant to Paragraph 6 hereof reducing the Exercise price below the then par
value (if any) of the Exercise Shares issuable upon exercise of the Warrants,
the Company will take any corporate action which may, in the opinion of its
counsel, be necessary in order to assure that the par value per share of the
Exercise Shares is at all times equal to or less than the Exercise Price per
share and so that the Company may validly and legally issue fully paid and
non-assessable Exercise Shares at the Exercise Price, as so adjusted.
(e) Fractional Shares. The Company shall not be required to issue
-----------------
fractional shares of capital stock upon the exercise of this Warrant or to
deliver Warrant Certificates which evidence fractional shares of capital stock.
In the event that any fraction of an Exercise Share would, except for the
provisions of this subparagraph (e), be issuable upon the exercise of this
Warrant, the Company shall pay to the Holder
3
<PAGE>
exercising the Warrant an amount in cash equal to such fraction multiplied by
the Current Market Value of the Exercise Share. For the purposes of this
Agreement, the Current Market Value shall be determined as follows:
(i) if the Exercise Shares are traded in the over-the-counter
market and not on any national securities exchange and not in the NASDAQ
Reporting System, the average of the mean between the last bid and asked prices
per share, as reported by the National Quotation Bureau, Inc., or an equivalent
generally accepted reporting service, for the ten (10) business days prior to
the date on which this Warrant is exercised, or if not so reported, the average
of the closing bid and asked prices for an Exercise Share during such ten (10)
business days period Share as furnished to the Company by any member of the
National Association of Securities Dealers, Inc., selected by the Company for
that purpose.
(ii) if the Exercise Shares are listed or traded on a national
securities exchange or in the NASDAQ National Market System, the average closing
prices on the principal national securities exchange on which they are so listed
or traded or in the NASDAQ National Market System, as the case may be, for the
ten (10) business days prior to the date of the exercise of this Warrant. The
closing price referred to in this clause (ii) shall be the last reported sales
price or, in case no such reported sale takes place on such day, the average of
the reported closing bid and asked prices, in either case on the national
securities exchange on which the Exercise Shares are then listed or in the
NASDAQ Reporting System; or
(iii) If no such closing price or closing bid and asked prices
under subsection (i) and (ii) above are available, the value as determined by
a firm of independent public accountants of recognized standing selected by the
Board of Directors of the Company and approved by the Holder hereof.
(f) In addition to and without limiting the rights of the Holder under any
other terms set forth herein, the Holder shall have the right, upon written
request by the Holder delivered to the Company together with this Warrant, to
exchange this Warrant, in whole or in part at any time on or before the
Termination Date, for the number of shares of Common Stock of the Company having
an aggregate Current Market value on the date of such exchange (determined as
provided in Section 1(e) above) equal to
4
<PAGE>
the difference between (a) the aggregate Current Market Value on the date of
such exchange of a number of Exercise Shares designated by the Holder, and (b)
the aggregate Exercise Price the Holder would have paid to the Company to
purchase such designated number of Exercise Shares upon exercise of this
Warrant. Upon such exchange, the number of Exercise Shares purchasable upon
exercise of this Warrant shall be reduced by such designated number of Exercise
Shares and, if a balance of purchasable Exercise Shares remains after such
exchange, the Company shall execute and deliver to the Holder a new Warrant
evidencing the right to purchase such balance of Exercise Shares; provided, that
no fractional shares shall be issuable upon such exchange, and if the number of
shares of Common Stock determined in accordance with the foregoing formula is
other than a whole number, the Company shall pay the Holder an amount by check,
determined in accordance with the provisions of Section 1(e) hereof.
2. Payment of Taxes. The Company will pay all documentary stamp taxes, if
----------------
any, attributable to the initial issuance of Exercise Shares upon the exercise
of this Warrant; provided, however, that the Company shall not be required to
pay any tax or taxes which may be payable in respect of any transfer involved in
the issue of any Warrant Certificates or any certificates for Exercise Shares in
a name other than that of the Holder of a Warrant Certificate surrendered upon
the exercise of a Warrant, and the Company shall not be required to issue or
deliver such certificates unless or until the person or persons requesting the
issuance thereof shall have paid to the Company the amount of such tax or shall
have established to the satisfaction of the Company that such tax has been paid.
3. Mutilated or Missing Warrant Certificates. In case any Warrant Certificate
-----------------------------------------
shall be mutilated, lost, stolen or destroyed, the Company may in its discretion
issue, in exchange and substitution for and upon cancellation of the mutilated
Warrant Certificate, or in lieu of and in substitution for the Warrant
Certificate lost, stolen or destroyed, a new Warrant Certificate or Warrant
Certificates of like tenor and in the same aggregate denomination, but only (i)
in the case of loss, theft or destruction, upon receipt of evidence satisfactory
to the Company of such loss, theft or destruction of such Warrant Certificate
and indemnity or bond, if requested, also satisfactory to them and (ii) in the
case of mutilation, upon surrender of the mutilated Warrant. Applicants for such
5
<PAGE>
substitute Warrant Certificates shall also comply with such other reasonable
regulations and pay such other reasonable charges as the Company or its counsel
may prescribe.
4. Rights of Holder. The Holder shall not, by virtue of anything
----------------
contained in this Warrant Certificate, be entitled to any right whatsoever,
either in law or equity, of a stockholder of the Company, including without
limitation, the right to receive dividends or to vote or to consent or to
receive notice as a shareholder in respect of the meetings of shareholders or
the election of directors of the Company or any other matter except as otherwise
provided herein.
5. Registration of Transfers and Exchanges. The Warrant shall be
---------------------------------------
transferable, subject to the provisions of Paragraph 8 hereof, only upon the
books of the Company if any, to be maintained by it for that purpose, upon
surrender of the Warrant Certificate to the Company at its principal office
accompanied (if so required by it) by a written instrument or instruments of
transfer in form satisfactory to the Company and duly executed by the Holder
thereof or by the duly appointed legal representative thereof or by a duly
authorized attorney and upon payment of any necessary transfer tax or other
governmental charge imposed upon such transfer. In all cases of transfer by an
attorney, the original letter of attorney, duly approved, or an official copy
thereof, duly certified, shall be deposited and remain with the Company. In case
of transfer by executors, administrators, guardians or other legal
representatives, duly authenticated evidence of their authority shall be
produced, and may be required to be deposited and remain with the Company in its
discretion. Upon any such registration of transfer, a new Warrant Certificate
shall be issued to the transferee named in such instrument of transfer, and the
surrendered Warrant Certificate shall be canceled by the Company.
Any Warrant Certificate may be exchanged, at the option of the Holders
thereof and without change, when surrendered to the Company at its principal
office, or at the office of its transfer agent, if any, for another Warrant
Certificate or other Warrant Certificates of like tenor and representing in the
aggregate the right to purchase from the Company a like number and kind of
Exercise Shares as the Warrant Certificate surrendered for exchange or transfer,
and the Warrant Certificate so surrendered shall be canceled by the Company or
transfer agent, as the case may be.
6
<PAGE>
6. Adjustment of Exercise Shares and Exercise Price. The Exercise Price
------------------------------------------------
and the number and kind of Exercise Shares purchasable upon the exercise of this
Warrant shall be subject to adjustment from time to time upon the happening of
certain events as hereinafter provided. The Exercise Price in effect at any time
and the number and kind of securities purchasable upon exercise of each Warrant
shall be subject to adjustment as follows:
(a) In case the Company shall (i) pay a dividend or make a distribution on
its shares of Common Stock in shares of Common Stock, (ii) subdivide or classify
its outstanding Common Stock into a greater number of shares, or (iii) combine
or reclassify its outstanding Common Stock into a smaller number of shares, the
Exercise Price in effect at the time of the record date for such dividend or
distribution or on the effective date of such subdivision, combination or
reclassification shall be proportionally adjusted so that the Holder of this
Warrant shall be entitled to receive the aggregate number and kind of shares
which, if this Warrant had been exercised by such Holder immediately prior to
such date, he would have owned upon such exercise and been entitled to receive
upon such dividend, subdivision, combination or reclassification. For example,
if the Company declares a 2 for 1 stock dividend or stock split and the Exercise
Price immediately prior to such event was $5.00 per share, the adjusted Exercise
Price immediately after such event would be $2.50 per share. Such adjustment
shall be made successively whenever any event listed above shall occur.
(b) In case the Company shall hereafter issue additional shares of Common
Stock at a price less than the effective Exercise Price of the Warrant
("Additional Shares") the Exercise Price shall be adjusted so that it shall
equal the price determined by multiplying the then effective Exercise Price by a
fraction, the numerator of which shall be the sum of the number of shares of
Common Stock outstanding immediately prior to the date of issuance of the
Additional Shares plus the number of shares of Common Stock which the aggregate
consideration for the total number of Additional Shares so issued would purchase
at the then effective Exercise Price, and the denominator of which shall be the
sum of the number of Shares of Common Stock outstanding immediately prior to the
date of issuance of the Additional Shares plus the number of Additional Shares
so issued. Such adjustment shall be made successively whenever such Additional
7
<PAGE>
Shares are issued and shall become effective immediately after the Additional
Shares are issued.
(c) In case the Company shall hereafter issue rights, warrants, or
convertible securities to purchase shares of Common Stock at a price per share
(or having a conversion price per share) less than the effective Exercise Price,
the Exercise Price shall be adjusted so that the same shall equal the price
determined by multiplying the effective Exercise Price by a fraction, the
numerator of which shall be the sum of the number of shares of Common Stock
outstanding immediately prior to such issuance plus the number of shares of
Common Stock which the aggregate consideration to the Company for the issuance
of the total number of shares of Common Stock issuable in connection with the
exercise or conversion of all of the rights, warrants, or convertible securities
would purchase at the effective Exercise Price, and the denominator of which
shall be the sum of the number of shares of Common Stock outstanding immediately
prior to such issuance plus the number of shares of Common Stock issuable in
connection with the exercise or conversion of all of such rights, warrants or
convertible securities. Such adjustment shall be made successively whenever such
rights, warrants or convertible securities are issued and shall become effective
immediately after the date such rights, warrants or convertible securities are
issued; and upon the expiration of such rights, warrants or convertible
securities, if any such rights, warrants or convertible securities have not been
converted or exercised in full, then the Exercise Price shall be readjusted to
the Exercise Price which would then be in effect had the adjustments made upon
the issuance of such rights, warrants or convertible securities been made upon
the basis of the issuance of only the number of shares of Common Stock actually
issued and the consideration actually received.
(d) Whenever the Exercise Price payable upon exercise of each Warrant is
adjusted pursuant to Subparagraphs (a), (b) or (c) above, the number of Exercise
Shares purchasable upon exercise of this Warrant shall simultaneously be
adjusted by multiplying the number of Exercise Shares initially issuable upon
exercise of this Warrant by the Exercise Price in effect on the date hereof and
dividing the product so obtained by the Exercise Price, as adjusted.
(e) No adjustment in the Exercise Price shall be required unless such
adjustment would require an increase or
8
<PAGE>
decrease of at least ten cents ($0.10) in such price; provided, however, that
any adjustments which by reason of this subparagraph (e) are not required to be
made shall be carried forward and taken into account in any subsequent
adjustment required to be made hereunder and the Company shall, upon exercise of
the Warrant, make all adjustments through and including the date of exercise.
All calculations under this Paragraph (6) shall be made to the nearest cent or
to the nearest one-hundredth of a share, as the case may be. Anything in this
Paragraph (6) to the contrary notwithstanding, the Company shall be entitled,
but shall not be required, to make such changes in the Exercise Price, in
addition to those required by this Paragraph (6), as it, in its sole discretion,
shall determine to be advisable in order that any dividend or distribution in
shares of Common Stock, subdivision, reclassification or combination of Common
Stock, issuance of Warrants to purchase Common Stock or distribution of
evidences of indebtedness or other assets (excluding cash dividends) referred to
hereinabove in this Paragraph (6) hereafter made by the Company to the Holders
of its Common Stock shall not result in any tax to the Holders of its Common
Stock or securities convertible into Common Stock.
(f) Whenever the Exercise Price is adjusted, as herein provided, the
Company shall promptly cause a notice setting forth the adjusted Exercise Price
and adjusted number of Exercise Shares issuable upon exercise of each Warrant to
be mailed to the Holders, at their last addresses appearing in the Warrant
Register, and shall cause a certified copy thereof to be mailed to its transfer
agent, if any. The Company may retain a firm of independent certified public
accountants selected by the Board of Directors (who may be the regular
accountants employed by the Company) to make any computation required by this
Paragraph (6), and a certificate signed by such firm shall be conclusive
evidence of the correctness of such adjustment.
(g) In the event that at any time, as a result of an adjustment made
pursuant to subparagraph (a) above, the Holder of this Warrant thereafter shall
become entitled to receive any Exercise Shares of the Company, other than Common
Stock, thereafter the number of such other shares so receivable upon exercise of
this Warrant shall be subject to adjustment from time to time in a manner and on
terms as nearly equivalent as practicable to the provisions with respect to the
Common Stock contained in Subparagraphs (a) to (e), inclusive above.
9
<PAGE>
(h) Irrespective of any adjustments in the Exercise Price or the number or
kind of Exercise Shares purchasable upon exercise of this Warrant, Warrants
theretofore or thereafter issued may continue to express the same price and
number and kind of shares as are stated in the similar Warrants initially
issuable pursuant to this Agreement.
(i) Whenever the Exercise Price shall be adjusted as required by the
provisions of the foregoing Paragraph, the Company shall forthwith file in the
custody of its Secretary or an Assistant Secretary at its principal office and
with its stock transfer agent, if any, an officer's certificate showing the
adjusted Exercise Price determined as herein provided, setting forth in
reasonable detail the facts requiring such adjustment, including a statement of
the number of additional shares of Common Stock, if any, and such other facts as
shall be necessary to show the reason for and the manner of computing such
adjustment. Each such officer's certificate shall be made available at all
reasonable times for inspection by the Holder and the Company shall, forthwith
after each such adjustment, mail a copy by certified mail of such certificate to
the Holder.
(j) Computation of Consideration. To the extent that any Additional
-----------------------------
Shares or any convertible securities or any warrants or other rights to
subscribe for or purchase any Additional Shares or any convertible securities
shall be issued for a cash consideration, the consideration received by the
Company therefor shall be deemed to be the amount of the cash received by the
Company therefor, or, if such Additional Shares or convertible securities or
warrants or other rights are offered by the Company for subscription price, the
subscription price, or, if such Additional Shares or convertible securities or
warrants or other rights are sold to underwriters or dealers for public offering
without a subscription offering, the public offering price, in any such case
excluding any amounts paid or receivable for accrued interest or accrued
dividends and without deduction of any compensation, discounts or expenses paid
or incurred by the Company for and in the underwriting thereof, or otherwise in
connection with the issuance thereof. To the extent that such issuance shall be
for a consideration other than cash, then, except as herein otherwise expressly
provided, the amount of such consideration shall be deemed to be the fair value
of such consideration at the time of such issuance as determined in good faith
by the Board of Directors of the Company. The consideration for any Additional
Shares issuable pursuant to any
10
<PAGE>
warrants or other rights to subscribe for or purchase the same shall be the
consideration received by the Company for issuing such warrants or other rights
plus the additional consideration payable to the Company upon the exercise of
such warrants or other rights. The consideration for any Additional Shares
issuable pursuant to the terms of any convertible securities shall be the
consideration received by the Company for issuing any warrants or other rights
to subscribe for or purchase such Convertible Securities plus the consideration
paid or payable to the Company in respect of the subscription for or purchase of
such Convertible Securities plus the additional consideration, if any, payable
to the Company upon the exercise of the right of conversion or exchange of such
Convertible Securities. In case of the issuance at any time of any Additional
Shares or Convertible Securities in payment or satisfaction or any dividend upon
any class of equity securities other than Common Stock, the Company shall be
deemed to have received for such Additional Shares of Common Stock or
Convertible Securities a consideration equal to the amount of such dividend so
paid or satisfied.
(k) Extraordinary Dividends. In case the Company shall declare a dividend
-----------------------
upon its Common Stock (except a dividend payable in shares of Common Stock
referred to in Section 6(a) or a dividend payable in warrants, rights or
Convertible Securities referred to in Section 6(c)) payable otherwise than out
of earnings or surplus, the Exercise Price in effect immediately prior to the
declaration of such dividend shall be reduced by an amount equal, in the case of
a dividend in cash, to the amount thereof payable per share of Common Stock or,
in the case of any other dividend, to the fair value thereof per share of Common
Stock as determined in good faith by the Board of Directors of the Company. For
the purposes of the foregoing, a dividend payable other than in cash shall be
considered payable out of earnings or surplus only to the extent that such
earnings or surplus are charged an amount equal to the fair value of such
dividend as determined by the Board of Directors of the Company. Such reduction
shall take effect as of the date on which a record is taken for the purpose of
such dividend, or if a record is not taken, the date as of which the holders of
the Common Stock of record entitled to such dividend are to be determined.
Appropriate readjustment of the Exercise Price shall be made in the event that
any dividend referred to in this Section 6(k) shall be lawfully abandoned.
11
<PAGE>
(1) Reclassification, Reorganization, Consolidation or Merger. In the
---------------------------------------------------------
event of any reclassification, capital reorganization or other change of
outstanding shares of Common Stock of the Company (other than a subdivision or
combination of the outstanding Common Stock and other than a change in the par
value of the Common Stock) or in the event of any consolidation or merger of the
Company with or into another corporation (other than a merger in which the
Company is the continuing corporation and that does not result in any
reclassification, capital reorganization or other change of outstanding shares
of Common Stock of the class issuable upon exercise of this Warrant) or in the
event of any sale, lease, transfer or conveyance to another corporation of the
property and assets of the Company as an entirety or substantially as an
entirety, the Company shall, as a condition precedent to such transaction, cause
effective provisions to be made so that the Holder shall have the right
thereafter, by exercising this Warrant, to purchase the kind and amount of
shares of stock and of other securities and property (including cash) receivable
upon such reclassification, capital reorganization and other change,
consolidation, merger, sale or conveyance by a holder of the number of shares of
Common Stock that might have been received upon exercise of this Warrant
immediately prior to such reclassification, capital reorganization, change,
consolidation, merger, sale or conveyance. Any such provision shall include
provisions for adjustments in respect of such shares of stock and other
securities and property that shall be as nearly equivalent as may be practicable
to the adjustments provided for in this Warrant. The foregoing provisions of
this Section 6(1) shall similarly apply to successive reclassifications, capital
reorganizations and changes of shares of Common Stock and to successive
consolidations, mergers, sales or conveyances. In the event that in connection
with any such capital reorganization, or reclassification, consolidation,
merger, sale or conveyance, additional shares of Common Stock shall be issued in
exchange, conversion, substitution or payment, in whole or in part, for, or of,
a security of the Company other than Common Stock, any such issuance shall be
treated as an issuance of Common Stock covered by the provisions of Section
6(a).
7. Notice of Corporate Action.
--------------------------
(a) In the event of any taking by the Company of a record of the
holders of any class of securities for the purpose of determining the holders
thereof who are entitled to receive any
12
<PAGE>
dividend (other than a regular periodic dividend payable in cash out of earned
surplus in an amount not exceeding the amount of the immediately preceding cash
dividend for such period) or other distribution, or any right to subscribe for,
purchase or otherwise acquire any shares of stock of any class or any other
securities or property, or to receive any other right, or
(b) any capital reorganization of the Company, any reclassification or
recapitalization of the capital stock of the Company or any consolidation or
merger involving the Company and any other person or any transfer of all or
substantially all the assets of the Company to any person, or
(c) any voluntary, or involuntary dissolution, liquidation or winding-up
of the Company;
the company shall promptly mail to each holder of a Warrant a notice specifying
(i) the date or expected date on which any such record is to be taken for the
purpose of such dividend, distribution or right, and the amount and character of
such dividend, distribution or right, and (ii) the date or expected date on
which any such reorganization, recapitalization, consolidation, merger,
transfer, dissolution, liquidation or winding-up is to take place and the time,
if any such time is to be fixed, as of which the holders of record of Common
Stock (or other securities) shall be entitled to exchange their shares of Common
Stock (or other securities) for the securities or other property deliverable
upon such reorganization, reclassification, recapitalization, consolidation,
merger, transfer, dissolution, liquidation or winding-up. Such notice shall be
mailed at least 45 days prior to the date therein specified.
8. Restrictions on Transferability; Restrictive Legend. Neither this Warrant
---------------------------------------------------
nor the Exercise Shares shall be transferable except in accordance with the
provisions of this paragraph.
(a) Restrictions on Transfer; Indemnification. Neither this Warrant nor
-----------------------------------------
any Exercise Share may be offered for sale or sold, or otherwise transferred or
sold in any transaction which would constitute a sale thereof within the meaning
of the Securities Act of 1933, as amended (the "1933 Act"), unless (i) such
security has been registered for sale under the 1933 Act and registered or
qualified under applicable state securities laws relating to the offer and sale
of securities, or (ii) exemptions
13
<PAGE>
from the registration requirements of the 1933 Act and the registration or
qualification requirements of all such state securities laws are available and
the Company shall have received an opinion of counsel satisfactory to the
Company that the proposed sale or other disposition of such securities may be
effected without registration under the 1933 Act and would not result in any
violation of any applicable state securities laws relating to the registration
or qualification of securities for sale, such counsel and such opinion to be
satisfactory to the Company.
The Holder agrees to indemnify and hold harmless the Company against any
loss, damage, claim or liability arising from the disposition of this Warrant or
any Exercise Share held by such Holder or any interest therein in violation of
the provisions of this Paragraph 8.
(b) Securities Purchase Agreement. This Warrant and the underlying shares
-----------------------------
of Common Stock are subject to the terms contained within that certain
Securities Purchase Agreement by and between the Company and MSSF dated as of
June ____, 1996 (the "Agreement").
(c) Restrictive Legends. Unless and until otherwise permitted by this
-------------------
Paragraph 8 or in the Agreement, this Warrant Certificate, each Warrant
Certificate issued to the Holder or to any transferee or assignee of this
Warrant Certificate, and each Certificate representing Exercise Shares issued
upon exercise of this Warrant or to any transferee of the person to whom the
Exercise Shares were issued, shall bear a legend setting forth the requirements
of paragraph (a) of this Paragraph 8, together with such other legend or legends
as may otherwise be deemed necessary or appropriate by counsel to the Company.
(d) Notice of Proposed Transfers. Prior to any transfer, offer to transfer
----------------------------
or attempted transfer of this Warrant or any Exercise Share, the Holder of such
security shall give written notice to the Company of such Holder's intention to
effect such transfer. Each such notice shall (x) describe the manner and
circumstances of the proposed transfer in sufficient detail, and shall contain
an undertaking by the Holder to furnish other information as may be required to
enable Holder's counsel to render the opinion referred to below, and shall (y)
designate Holder's counsel, such counsel to be satisfactory to the Company. The
Holder shall submit a copy thereof to the counsel designated
14
<PAGE>
in such notice and the Company shall submit a copy thereof to its counsel, and
the following provisions shall apply:
(i) If, in the opinion of Holder's counsel the proposed transfer
of this Warrant or Exercise Shares, as appropriate, may be effected pursuant to
the terms of the Agreement and without registration of such security under the
1933 Act, and such opinion is reasonably satisfactory to Company's counsel, the
Company shall, as promptly as practicable, so notify the Holder of such security
and such Holder shall thereupon be entitled to transfer such security in
accordance with the terms of the notice delivered by such Holder to the Company.
Each certificate evidencing the securities thus to be transferred (and each
certificate evidencing any untransferred balance of the securities evidenced by
such certificate) shall bear the restrictive legends referred to in subparagraph
(c) above, unless in the opinion of Holder's counsel such legend is not required
in order to insure compliance with the 1933 Act and such opinion is reasonably
satisfactory to Company's counsel.
(ii) If the opinion of Holder's counsel regarding the proposed
transfer of securities is not reasonably satisfactory to Company's counsel, the
Company shall, as promptly as practicable, so notify the Holder thereof. The
Company shall have no obligation to register such securities under the 1933 Act,
except as otherwise provided herein or in that certain Registration Rights
Agreement by and among the Company and MSSF attached as Exhibit "C" to the
Agreement.
The Holder of the securities giving the notice under this subparagraph (d)
shall not be entitled to transfer any of the securities until receipt of notice
from the Company under paragraph (i) of this subparagraph (d) or registration of
such securities under the 1933 Act has become effective.
(e) Removal of Legend. The Company shall, at the request of any
-----------------
registered Holder of a Warrant or Exercise Share, exchange the certificate
representing such security for a certificate representing the same security not
bearing the restrictive legend required by subparagraph (c) if, in the opinion
of Holder's counsel, the restrictive legend is no longer necessary and such
opinion is reasonably satisfactory to Company's counsel.
15
<PAGE>
9. Notices. All notices or other communications under this Warrant
-------
Certificate shall be in writing and shall be deemed to have been given if
delivered by hand or mailed by certified mail, postage prepaid, return receipt
request, addressed as follows;
If to the Company:
The Eastwind Group, Inc.
100 Four Falls Corporate center
Suite 305
West Conshohocken, PA 19428
Attention: Paul A. DeJuliis
With a Copy to:
Joseph P. Galda, Esquire
Buchanan Ingersoll P.C.
Two Logan Square
18th and Arch Streets
Philadelphia, PA 19103-6933
and to the Holder:
Mentor Special Situation Fund, L.P.
P.O. Box 560
Yardley, PA 19067
Attention: Edward F. Sager, Jr.
With a Copy to:
Robert H. Strouse, Esquire
Drinker, Biddle & Reath
Suite 300
1000 Westlakes Drive
Berwyn, PA 19312-2409
Either of the Company or the Holder may from time to time change the
address to which notices to it are to be mailed hereunder by notice in
accordance with the provisions of this Paragraph 9.
16
<PAGE>
10. Supplements and Amendments. Any amendment or supplement to this
--------------------------
Warrant or Certificate shall be made only in writing signed by both the Company
and MSSF.
11. Successors and Assigns. This Warrant shall inure to the benefit of
----------------------
and be binding on the respective successors, assigns and legal representatives
of the Holder and the Company.
12. Severability. If for any reason any provision, paragraph or terms of
------------
this Warrant Certificate is held to be invalid or unenforceable, all other valid
provisions herein shall remain in full force and effect and all terms,
provisions and paragraphs of this Warrant shall be deemed to be severable.
13. Governing Law. This Warrant shall be deemed to be a contract made
-------------
under the laws of the State of Delaware and for all purposes shall be governed
by and construed in accordance with the laws of State of Delaware, without
regard to that States' laws regarding choice of law.
14. Headings. Paragraph and subparagraph headings, used herein are
--------
included herein for convenience of reference only shall not affect the
construction of this Warrant Certificate nor constitute a part of this Warrant
Certificate for any other purpose.
15. Remedy. The Company stipulates that the remedies at law of the Holder
------
in the event of a breach by Company of its obligations under this Warrant may
not be adequate and that, to the fullest extent permitted by law, such terms may
be specifically enforced by a decree for the specific performance of any
agreement contained herein or by an injunction against a violation of any of the
terms hereof.
17
<PAGE>
IN WITNESS WHEREOF, the Company has caused these presents to be duly
executed the day and year defined herein as the "Commencement Date."
THE EASTWIND GROUP, INC.
By:_______________________________
(Authorized Executive Officer)
18
<PAGE>
APPENDIX A
----------
NOTICE OF WARRANT EXERCISE
--------------------------
Pursuant to a Warrant by and between the MENTOR SPECIAL SITUATION FUND,
L.P., a Pennsylvania Limited Partnership ("MSSF" or "Holder"), and THE EASTWIND
GROUP, INC., a Delaware corporation (the "Company"), dated as of
_____________________, MSSF hereby irrevocably elects to exercise its warrant to
the extent of purchasing ____________________ shares of Common Stock (the
"Warrant Shares"), of the Company as provided for therein.
MSSF hereby represents and agrees that the Warrant Shares purchased
pursuant hereto are being purchased for investment and not with a view to the
distribution or resale thereof, and that the undersigned understands that said
Warrant Shares have not been registered under the Securities Act of 1933, as
amended.
Payment of the full Exercise Price of the Warrant Shares is enclosed
herewith, in the form of a check made payable to the Company or is being made
pursuant to Section 1(f) of the Warrant.
The undersigned requests that a certificate for the Warrant Shares be
issued in the name of:
_______________________________________
_______________________________________
_______________________________________
(Please print name, address and social security number)
Dated:_________________________________________, ___________
Address:____________________________________________________
____________________________________________________
____________________________________________________
Signature:__________________________________________________
19
<PAGE>
EXHIBIT 4.9
CERTIFICATE OF POWERS, DESIGNATIONS, PREFERENCE
AND SPECIAL RIGHTS OF SERIES B PREFERRED STOCK
Pursuant to Section 151 of the
General Corporation Law of the State of Delaware
The Eastwind Group, Inc. (the "Corporation"), a corporation organized and
existing under the General Corporation Law of the State of Delaware (the "Act"),
does hereby certify that pursuant to the provisions of Section 151 of the
General Corporation Law of the State of Delaware, the Board of Directors of the
Corporation, by action taken on October 16, 1996, adopted the following
resolution, which resolution remains in full force and effect as of the date
hereof;
RESOLVED, that pursuant to the authority vested in the Board of Directors
of the Corporation pursuant to the Act and the Corporation's Certificate of
Incorporation, the Corporation is authorized to issue, out of the 3,000,000
shares of Preferred Stock of the Corporation authorized in its Certificate of
Incorporation, a series of Preferred Stock to be designated as "Series B
Preferred Stock," $.10 value per share, with the following powers, designations,
preferences and special rights:
1. Designation, Amount and Bank. 9,000 shares of a preferred stock, $.10
----------------------------
par value per share, shall constitute a series of such preferred stock
designated as "Series B Preferred Stock" (the "Series B Preferred Stock"). With
respect to dividend rights, redemption rights and rights on liquidation, winding
up and dissolution, for so long as any shares of Series B Preferred Stock shall
remain outstanding, the Corporation shall not create any other class of capital
stock or series of preferred stock hereafter senior to the Series B Preferred
Stock.
2. Dividends.
---------
2.1 The holder of each issued and outstanding share of Series B Preferred
Stock shall be entitled to receive, out of the funds of the Corporation legally
available for such purpose, when, as and if declared by the Board of Directors
of the Corporation, before any dividend shall be declared, paid or set aside, or
any other distribution shall be declared or made, upon the Common Stock or any
other class or series of stock of the Corporation, cumulative dividends in cash
payable quarterly in arrears in accordance with this Section 2, on January 1,
April 1, July 1 and October 1 of each year ("Dividend Payment Date") commencing
on January 1, 1997. The amount of dividends payable per share of Series B
Preferred Stock shall be based on a dividend rate of six percent (6%) per annum
of the Stated Value (as hereinafter defined) from the date of original issuance.
The amount of dividends payable for the initial dividend
<PAGE>
period any period shorter than a full quarterly period shall be computed on a
pro-rata basis, based on the number of days elapsed.
2.2 Dividends shall be payable on each Dividend Payment Date to the
holders of record of the Series B preferred Stock at the close of business on
the date specified by the Board of Directors of the Corporation; provided,
however, that no such record date shall be more than thirty (30) days nor less
than ten (10) days prior to the respective Dividend Payment Date. Dividends on
shares of Series B Preferred Stock shall accrue from the date of original issue
of such shares of Series B Preferred Stock. Such dividends will accrue whether
or not they have been declared and whether or not there are profits, surplus or
other funds of the Corporation legally available for the payment of dividends.
2.3 The term "State Value" per share means one hundred dollars ($100) plus
all accrued and unpaid dividends, if any, added thereto.
3. Rights of Liquidation, Dissolution or Winding-Up. In the event of any
------------------------------------------------
liquidation, dissolution or winding-up of the Corporation (including, without
limitation, a liquidation or reorganization under Chapter 7 or 11 of Title 11 of
the United States Code, as amended), the holders of shares of the Series B
Preferred Stock then issued and outstanding shall be entitled to be paid out of
the assets of the Corporation available for distribution to its stockholders,
before any payment shall be made to the holders of Common Stock or of shares of
any other class or series of stock of the Corporation, an amount equal to the
Stated Value per share, plus an amount equal to any dividends thereon unpaid and
accrued to and including the date of distribution with respect to such shares.
4. Voting Rights. Except as herein provided or otherwise provided by law,
-------------
the entire voting power for the election of directors and for all other purposes
shall be vested exclusively in the holders of the outstanding Common Stock,
except that the holders of the Series B Preferred Stock shall be entitled to
vote equal to a 1/10th of a vote per share. Upon any corporate action which
would alter or change the rights and preferences so as to adversely affect the
holders of the Series B Preferred Stock, including, without limitation, the
issuance of any additional shares of Series B Preferred Stock, the vote of a
majority of the holders of Series B Preferred Stock, voting as a series, shall
be required to approve such action. The holders of the Series B Preferred Stock
shall be entitled to notice of and to attend all meetings of stockholders.
2
<PAGE>
5. Redemption.
----------
Except as set forth below, the holders of the Series B Preferred Stock
shall have no redemption rights.
5.1 The holders of the Series B Preferred Stock may elect to require the
Corporation to redeem, at Stated Value plus all accrued and unpaid dividends
thereon, not more than 1,800 shares in the aggregate of the Series B Preferred
Stock each quarter beginning on April 1, 1997, and on each July 1, October 1,
January 1, and April 1 thereafter, provided that such holders give notice in
writing of such election to the Corporation at least twenty (20) days prior to
such dates; and in the event of such elections, the Corporation shall redeem
such shares on such dates. If holders of more than 1,800 shares make such
elections, the redemption shall be pro-rata among such holders.
5.2 (a) The Corporation shall have the option to redeem additional shares
of its Series B Preferred Stock at any time after January 1, 1997.
(b) If it exercises its option to redeem shares of its Series B
Preferred Stock pursuant to Section 5.2(a) above, the Corporation will mail to
each holder of Series B Preferred Stock a notice (the "Redemption Notice") (i)
setting forth a purchase date (the "Redemption Date"), which shall be no earlier
than 20 business days nor later than 30 business days from the date the
Redemption Notice is mailed; and (ii) setting forth the instructions reasonably
determined by the Corporation, consistent with this Section 5 and applicable
law, that a holder must follow in order to require the redemption of his Series
B Preferred Stock. The time of mailing of the Redemption Notice shall be deemed
the time of delivery. Holders of Series B Preferred Stock seeking to require
that the Corporation redeem their shares will be required to surrender their
certificates representing their shares to the Corporation prior to the close of
business on the third business day prior to the Redemption Date, In the event
that a Redemption Notice is not mailed by the Corporation, the Redemption Date
shall be no earlier than 20 business days nor later than 30 business days from
the end of the preceding calender quarter.
(c) Notice having been given pursuant to subsection 5.2(b) above,
from and after the date of redemption, as specified in the Redemption Notice,
unless default shall be made by the Corporation in providing for the payment of
the applicable redemption price, all dividends on the Series B Preferred Stock
to which a Redemption Notice relates shall cease to accrue. If the Corporation
so elects, the Corporation shall provide for the payment of the redemption price
by depositing the requisite monies,
3
<PAGE>
or other consideration, as applicable, with a bank or trust company of adequate
capitalization of its choice as paying agent on the date of redemption (provided
the Redemption Notice shall state the name and address of such bank or trust
company and the availability of the monies). All rights of the holders thereof
as stockholders of the Corporation, except the right to receive the applicable
redemption price (without interest) shall cease and terminate. Any interest
allowed on the monies so deposited shall be paid to the Corporation until the
date of redemption. Any monies so deposited which shall remain unclaimed by the
holder of such Series B Preferred Stock at the end of three (3) years after the
redemption date shall become the property of, and be paid by such bank or trust
company to, the Corporation.
6. Conversion Rights.
-----------------
The holders of the Series B Preferred Stock shall have no conversion
rights.
7. Notices of Corporate Action.
---------------------------
In the event of
7.1 any taking by the Corporation of a record of the holders of any
class of securities for the purpose of determining the holders thereof who are
entitled to receive any dividend (other than dividends payable with respect to
the Series B Preferred Stock) or other distribution, or any right to subscribe
for, purchase or otherwise acquire any shares of stock of any class or any other
securities or property, or to receive any other right, or
7.2 any capital reorganization of the Corporation, any
reclassification or recapitalization of the capital stock of the Corporation or
any consolidation or merger involving the Corporation and any other person or
any transfer of all or substantially all of the assets of the Corporation to any
other person, or
7.3 any voluntary or involuntary dissolution, liquidation or
winding-up of the Corporation,
the Corporation will mail to each holder of shares of Series B
Preferred Stock a notice specifying (i) the date or expected date on which any
such record is to be taken for the purpose of such dividend, distribution or
right, and the amount and character of such dividend, distribution or right, and
(ii) the date or expected date on which any such reorganization,
reclassification, recapitalization, consolidation, merger, transfer,
dissolution, liquidation or winding-up is to take place
4
<PAGE>
and the time, if any such time is to be fixed, as of which the holders of record
of Common Stock (or other securities of the Corporation) shall be entitled to
exchange their shares of Common Stock (or other securities of the Corporation)
for the securities or other property deliverable upon such reorganization,
reclassification, recapitalization, consolidation, merger, transfer,
dissolution, liquidation or winding-up.
8. Retirement of Redeemed Shares.
-----------------------------
No share or shares of Series B Preferred Stock acquired by the
Corporation by reason of redemption, or otherwise shall be re-issued and all
such shares shall be cancelled, retired and eliminated from the shares which the
Corporation shall be authorized to issue. The Corporation may from time to time
take such appropriate corporation action as may be necessary to reduce the
authorized number of shares of Series B Preferred Stock accordingly.
FURTHER RESOLVED, that, before the Corporation shall issue any shares of
Series B Preferred Stock, a certificate pursuant to Section 151 of the DGCL
shall be made, executed, acknowledged, filed, and recorded in accordance with
the provisions of Sections 103 and 151 of the DGCL, and the proper officers of
the Corporation be, and they hereby are, authorized and directed to do all acts
and things which may be necessary or proper in their opinion to carry into
effect the purposes and intent of this and the foregoing resolutions.
IN WITNESS WHEREOF, the Corporation has caused this Certificate to be
signed in its name and on its behalf and attested on this ____ day of October,
1996 by a duly authorized officer of this Corporation.
THE EASTWIND GROUP, INC.
BY: /s/ William B. Miller
----------------------------
William B. Miller,
Senior Vice President & CFO
5
<PAGE>
Exhibit 21.
Subsidiaries of the Registrant.
------------------------------
Name of Subsidiary Jurisdiction of Organization Year of Formation
- ------------------ ---------------------------- -----------------
Team Graphics, Inc. Delaware 1996
Polychem Corporation Delaware 1995
Princeton Academic Press, Inc. Delaware 1993
Centennial Printing Corporation Delaware 1977
Ivy-Tygart Acquisition Corp. Delaware 1996
Lavelle Company Delaware 1996
Wickersham Printing Company, Inc. Pennsylvania 1968
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-1-1996
<PERIOD-END> DEC-31-1996
<CASH> 709,697
<SECURITIES> 0
<RECEIVABLES> 7,862,842
<ALLOWANCES> (207,079)
<INVENTORY> 4,001,007
<CURRENT-ASSETS> 13,709,141
<PP&E> 7,653,518
<DEPRECIATION> (629,125)
<TOTAL-ASSETS> 28,458,023
<CURRENT-LIABILITIES> 12,222,917
<BONDS> 6,417,535
900,000
100
<COMMON> 241,148
<OTHER-SE> 7,084,631
<TOTAL-LIABILITY-AND-EQUITY> 28,458,023
<SALES> 23,632,872
<TOTAL-REVENUES> 23,632,872
<CGS> 17,793,635
<TOTAL-COSTS> 17,793,635
<OTHER-EXPENSES> 4,795,227
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 716,381
<INCOME-PRETAX> 577,611
<INCOME-TAX> 261,927
<INCOME-CONTINUING> 315,684
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 315,684
<EPS-PRIMARY> 0.11
<EPS-DILUTED> 0.11
</TABLE>
