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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 JANUARY 3, 1998.
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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 April 16, 1998, the
aggregate market value of the voting stock held by nonaffiliates of the
registrant was $6,856,000.
The number of shares outstanding of the registrant's Common stock, $0.10 par
value, was 3,725,019 at April 16, 1998.
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: $ 43,441,000.
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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. Since its inception,
the Company has completed six acquisitions, five of which now comprise the
Company's three operating business segments:
1. Polychem Corporation ("Polychem), acquired March 10, 1995, develops and
manufactures engineered plastic molded products for wastewater treatment
facilities and other industrial uses.
2. TEAM Graphics, Inc ("TEAM Graphics"), through its subsidiaries Centennial
Printing Company ("Centennial"), acquired October 16, 1996, Wickersham
Printing Company ("Wickersham"), acquired January 3, 1997, and Princeton
Academic Press ("Princeton"), acquired March 10, 1995, is engaged in
commercial printing, book maufacturing and the printing of journals and
manuals. Jointly, Wickersham and Princeton do business as Premier Book
Press ("Premier").
3. Lavelle Company ("Lavelle"), acquired January 3, 1997, fabricates and
manufactures sheet metal products for the aerospace industry.
The Company sold its 92.5% ownership interest in Ivy-Tygart Acquisition Corp.
("Ivy") on February 23, 1998. Ivy is engaged in the manufacture of architectural
moulding and picture frame moulding. Ivy was acquired December 31, 1996. Ivy's
operations were treated as discontinued in 1997.
Each of the Company's operating business segments are described in detail below.
On April 13, 1998, the Company decided to close the operations of Premier. These
operations consisted primarily of book manufacturing and the printing of
journals and manuals.
Financial information by industry segment for the years ended January 3, 1998,
December 31, 1996 and 1995, appears in Note Q to the consolidated financial
statements of the Company, which is provided under 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. Polychem develops and
manufactures custom engineered plastic molded products which are marketed
primarily to wastewater treatment plants, as well as to other industrial users.
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 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 57% 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
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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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Polychem primarily maufactures products designed for the wastewater treatment
market; in 1997 revenues from wastewater products comprised approximately 79% 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 and cast nylon buckets 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 1997, Polychem's sales
force generated 63% of its annual sales revenue (55% in 1996), international
distributors accounted for 29% (39% in 1996) and domestic distributors accounted
for 8% (6% in 1996). Domestic revenues were approximately 78% and international
revenues were approximately 22% in 1997, compared to 64% and 36% in 1996,
respectively.
COMPETITION AND STRATEGY
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Competition with Polychem and its products continues to be fragmented, although
several large companies are beginning to consolidate certain product lines. 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.
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Polychem has three significant competitors in the area of non-metallic
rectangular wastewater clarifier systems, of which it considers Envirex, a
subsidiary of U.S. Filter, to be the most significant. Polychem believes it
possesses approximately 30% of this market. However, while Polychem provides
products 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. As part of the industry
consolidation efforts mentioned above, U.S. Filter has recently purchased FMC's
non-metallic waste water treatment operations. U.S. Filter is 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.
MATERIALS AND SUPPLIES
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Polychem's business of manufacturing a broad line of engineered plastic products
requires the purchase of various 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 at 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.
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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 contamination was found.
EMPLOYEES
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Polychem employs 75 employees, of whom approximately 43 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.
Polychem has also renegotiated its defined benefit retirement plan for hourly
rated employees at its Phoenixville, Pennsylvania plant. As of January 3, 1998,
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 seven (7) 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 are awaiting approval. The amounts spent on research and
development by Polychem were $55,000, $173,000 and $100,000 for the years ended
January 3, 1998, December 31, 1996 and 1995, respectively.
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TEAM GRAPHICS, INC.
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BACKGROUND
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In January 1997, the Company formed TEAM Graphics, Inc. as the principal entity
for its operations in the printing industry. The Company exchanged a combination
of its investment in Centennial, Princeton and Wickersham, which was acquired in
January 1997, and cash for all of the outstanding stock of TEAM Graphics.
In mid-1997, the operations of Princeton and Wickersham were consolidated under
the trade name Premier Book Press in two rented facilities in Lancaster,
Pennsylvania to eliminate overhead costs associated with running two separate
operations. Hiring and training new employees and implementing the required
management systems and controls at Wickersham to respond to the near doubling in
throughput resulting from the consolidation proved to be highly problematic.
Consequently, productivity fell, quality levels slipped, and delivery schedules
were not met. As a further consequence, market share also declined. During the
second half of 1997, Premier's operations suffered substantial financial losses.
Despite improvements in productivity and the narrowing of losses during the
first quarter of 1998, the Company concluded that it did not have the financial
resources to continue these operations. The Company decided to close the
operations of Premier effective April 13, 1998. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
PRODUCTS
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Centennial's products include annual reports, high-quality advertising
brochures, pamphlets, and high-profile marketing pieces. Premier'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.
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ACQUISITON
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In May 1996, the Company purchased convertible preferred stock of Wickersham for
$250,000. In addition, during 1996 the Company made working capital advances and
earned preferred stock dividends totalling approximately $91,000. 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 was accounted for using the purchase method of
accounting.
MARKETING AND CUSTOMERS
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Centennial's customer base is primarily comprised of pharmaceutical, financial,
museum, manufacturing, service,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 5,000
to 15,000 copies. In 1997, five customers represented 50% 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.
Premier'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 Premier's products consist of
short to medium run (under 10,000 copies), black and white books, journals and
directories.
COMPETITION AND STRATEGY
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All phases of TEAM Graphics' business are highly competitive. The printing and
publishing industries are highly fragmented. While most establishments are
relatively small, several of TEAM Graphics' competitors are considerably larger
or are affiliated with companies which are considerably larger and have greater
financial and other resources than both TEAM Graphics and the Company. In recent
years, consolidation of customers and competitors within TEAM Graphics' markets
has increased competitive pricing pressures. Currently, approximately 90% of
TEAM Graphics' projects are competitively bid in the marketplace. The major
competitive factors in TEAM Graphics' business in addition to price are product
quality, delivery, customer service, availability of appropriate printing
capacity, rapid turnaround, scheduling flexibility, and technology support. TEAM
Graphics obtains its customers primarily through its own sales force.
Centennial intends to grow through the purchase of additional printing equipment
and applications of computer technology that will increase its capabilities and,
therefore, its product offerings and also enhance its competitive position
through lower costs.
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OPERATIONS, MATERIALS AND SUPPLIES
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TEAM Graphics, through Centennial and Premier, offers a broad line of printing
services. Centennial operates five sheet-fed presses (three six-color, one
four-color, and one two-color). These presses are designed to produce high
quality multi-color products such as annual reports and high-profile advertising
brochures, pamphlets and marketing materials. Premier owns four sheet-fed
presses, two web presses, and three Docutechs, available for on-demand printing.
This combination of printing equipment at Premier allows it to serve the varying
black and white printing needs of a broad range of book and manual publishers,
university presses, and other information providers. In addition, Premier owns
folding equipment and a perfect binder that allow it to deliver a finished
product produced entirely in-house for many of its customers.
TEAM Graphics purchases paper, film, plate materials, cover stock and ink from
outside suppliers. Because these items are readily available from a large number
of suppliers, TEAM Graphics maintains a minimal inventory of raw materials. The
duration of the average job varies from two to six weeks, resulting in the need
to support work-in-process inventory as large as two weeks' sales.
TEAM Graphics' overall business is not subject to predictable seasonal
fluctuations other than the heavy load of corporate annual reports in the
March-April timeframe at Centennial.
ENVIRONMENTAL REGULATIONS
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Management believes that TEAM Graphics' operations comply in all material
respects with applicable federal, state and local environmental laws and
regulations. Because all of TEAM Graphics' 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, TEAM Graphics 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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As of January 3, 1998, TEAM Graphics had 252 employees with 133 employed by
Centennial and 119 employed by Premier. Both Centennial and Premier use part-
time workers throughout the year in peak periods of production. With the
exception of the pressroom at Premier, all employees of TEAM Graphics are non-
union. Twenty pressmen at Premier are members of the Graphics Communications
Union, Local 160C and are covered by an agreement that expires in November 2001.
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LAVELLE COMPANY
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BACKGROUND
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Lavelle Company is a wholly-owned subsidiary of the Company, which was acquired
on January 3, 1997. Lavelle was incorporated in March 1996 to purchase the net
assets of Lavelle Aircraft Company which was liquidated under Chapter 11 of the
US Bankruptcy Law. Lavelle is a manufacturer of sheet metal products for the
aerospace industry.
ACQUISITION
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In March 1996, the Company invested $450,000 in Lavelle in the form of a
subordinated debenture. In addition, the Company made advances to Lavelle for
working capital purposes and guaranteed certain equipment debt of Lavelle. In
January 1997, the Company acquired all of the outstanding common stock of
Lavelle in exchange for 44,537 shares of the Company's common stock and the
forgiveness of certain receivables due from Lavelle.
PRODUCTS
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Lavelle fabricates and manufactures sheet metal products according to design
criteria established by its customers in the aerospace industry. In general, the
products manufactured by Lavelle are in low volume quantities. Because of the
tooling and specialty raw material requirements associated with Lavelle's work,
long lead times from order placement to delivery are normal.
MANUFACTURING PROCESSES
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Lavelle is a custom job shop specializing in sheet metal manufacturing and
forming. To that end, it employs a wide variety of specialized equipment.
Inclusive within its facilities are hot and cold expansion forming equipment,
fusion and resistance welding capabilities, and various automated machine tools
in addition to various punches, breaks and shears. In order to meet customers'
specialized quality requirements, Lavelle maintains a wide variety of
non-destructive testing and measuring equipment including a Cordax Coordinate
Measuring Machine (CMM), a 160 KV X-ray machine and Zyglo equipment in addition
to routine measuring, testing, and analyzing equipment.
MARKETING AND CUSTOMERS
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Lavelle's customer base consists of the United States Government, who purchases
products used in defense applications, and contractors and subcontractors in the
aerospace industry, who purchase products used in the commercial and defense
segments of the aerospace industry. Approximately 50% of Lavelle's sales in 1997
were to the US Government and one other customer. Most of Lavelle's sales result
from the efforts of its in-house sales force, although some contracts are sold
through sales agents who earn commissions on the sales.
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COMPETITION AND STRATEGY
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Lavelle's business is highly competitive and highly fragmented. Competitors in
the industry attempt to differentiate themselves on the basis of their
manufacturing capabilities. Smaller companies such as Lavelle tend to have niche
manufacturing capabilities, resulting in these companies supplying products as
subcontractors to much larger firms. Large competitors have broader
manufacturing capabilities than does Lavelle, allowing them to offer customers a
wider array of services and products which results in a competitive advantage.
Much of Lavelle's work is awarded through competitive bid processes. A history
of on time delivery is important and can overcome small price premiums. Because
the applications for Lavelle' products are primarily aerospace, Lavelle's
ability to meet its customers' quality control requirements is critical.
Lavelle's quality control procedures and manufacturing processes are certified
with their customers, resulting in an advantage relative to some of its
competitors.
MATERIALS AND SUPPLIES
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Lavelle specializes in a wide variety of custom materials obtained specifically
for individual orders. These materials are generally certified by the
manufacturer and approved by Lavelle's quality department. As these materials
are usually applicable only to the job for which they are ordered, inventories
beyond immediate requirements are not often maintained. Materials and supplies
are readily obtained from several potential suppliers.
ENVIRONMENTAL REGULATIONS
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Management believes that Lavelle's operations comply in all material respects
with applicable federal, state and local environmental laws and regulations.
During 1997, Lavelle successfully completed both Phase I and Phase II
environmental audits in conjunction with its purchase of its manufacturing
facility in January 1998. Wherever possible, Lavelle utilizes environmentally
safe, water-based solvents and fluids. Where applicable, all waste products are
properly manifested to licensed disposal facilities.
EMPLOYEES
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Lavelle is non-union and has a total employment of 50 full time employees. There
are, at present, no retirement plans.
RESEARCH AND DEVELOPMENT
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Lavelle does not perform any research and development activities.
DISCONTINUED OPERATIONS -- IVY-TYGART ACQUISITION CORPORATION
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BACKGROUND
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Ivy was 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. On February 23, 1998, the Company sold its 92.5% ownership
in Ivy to an investment group that included Ivy's President. The Company
received $377,000 in cash, $377,000 in a short term (30 day) note, which has
been paid, and $397,000 in a three year note, which was sold at face value to an
officer of the Company for cash.
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ITEM 2 PROPERTY
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POLYCHEM PROPERTY AND EQUIPMENT
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Polychem operates from a 220,000 square foot facility in Phoenixville,
Pennsylvania, which it owns, subject to a mortgage with Congress Financial Corp.
Polychem uses approximately 120,000 square feet for manufacturing and
warehousing, and 20,000 square feet for offices. Polychem leases approximately
41,500 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 $124,000 per year, net of utilities. Polychem leases an
additional 7,200 square feet of the facility on a month to month lease at the
rate of $36,000 per year. An additional 25,000 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 $150,000,
$177,000 and $41,000 in 1997, 1996 and 1995, respectively, nearly all of which
were funded by capital leases. In 1998, capital expenditures are expected to be
approximately $300,000. 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.
TEAM GRAPHICS PROPERTY AND EQUIPMENT
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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. Capital expenditures in 1997 were $151,000.
In 1998, capital expenditures are expected to approximate $150,000, 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.
Premier's operations are housed in two leased facilities in Lancaster,
Pennsylvania. One facility, housing the primary operations of the business, is
located in a 50,000 square foot building including 14,000 square feet of office
space. Annual rental is approximately $126,000 per year. The second facility
houses the business's on-demand printing equipment and storage space, and
consists of approximately 27,000 square feet. Annual rental is $124,000 per
year.
Premier's capital expenditures in 1997 were $137,000. Because the business was
shut down in April 1998, capital expenditures for Premier are expected to be
immaterial in 1998.
In connection with the shut down of Premier, the Company expects to dispose of
Premier's property and equipment. The Company expects there to be no significant
loss on disposal versus the recorded amount of such property and equipment.
Management believes that all of TEAM Graphics' real and personal property is
adequately covered by insurance.
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LAVELLE PROPERTY AND EQUIPMENT
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Lavelle owns and operates an approximate 100,000 square foot facility on eight
acres in Northeast Philadelphia, PA, subject to a mortgage of $1.7 million. The
facility is comprised of 12,000 square feet of office space with the balance
being shop floor and mezzanine storage area. During 1997 the facility was leased
from its predecessor, Lavelle Aircraft Company. This facility was subsequently
acquired by Lavelle in January 1998.
Lavelle leases all of its equipment through a sale/lease back arrangement with
Quaker State Financial Corporation. All equipment is maintained in excellent
operating condition and deemed adequate for immediate manufacturing
requirements.
Management believes that all of Lavelle's real and personal property are
adequately covered by insurance.
ITEM 3 LEGAL PROCEEDINGS
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CENTENNIAL
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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 Amended and Restated Agreement and Plan of Merger by and
between Centennial, the Company, and Centennial Acquisition Corp. (a transitory
subsidiary of the Company used to effect the acquisition of Centennial from the
former owner). The Demand for Arbitration asserts various theories of recovery,
including the matters referred to in the paragraph below, and seeks damages of
at least $4.5 million. Prior to the formal arbitration proceedings, the Company
received an offer of settlement from the former owner, which would relieve the
Company of (1) the obligation to pay the former owner $191,312 over the next two
years; (2) any obligation relating to the Series B Preferred stock, including
all accrued dividends; and (3) any responsibility for market price support on
the Company's Common Stock. Also, as part of the settlement, the Company would
issue 45,000 additional shares of its Common Stock to the former owner. While
settlement discussions continue, the settlement agreement has not been
executed. The Company was recently advised that the Commonwealth of Pennsylvania
has initiated a criminal investigation into the failure of Centennial to file
and pay sales taxes attributable to periods predating its acquisition of the
Company, but the Company has been advised by the investigator that neither it,
Centennial, nor any current employee of the Company is the target of such
investigation.
ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
- ------ ---------------------------------------------------
None
Page 13
<PAGE>
ITEM 5 MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER
- ------ ----------------------------------------------------------------
MATTERS
-------
The Company's Common stock is currently traded on the Nasdaq SmallCap Market,
under the symbol EWND. Prior to its listing on the Nasdaq SmallCap 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 SmallCap Market and, prior to
that, by the National Quotations 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 April 4, 1998 was approximately 1,800.
The market price per share by quarter was:
<TABLE>
<CAPTION>
Three months ended High Low
------------------ ---- ---
<S> <C> <C>
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 29, 1997 $ 7 $ 4 3/4
June 28, 1997 $ 5 9/16 $ 3 11/16
September 27, 1997 $ 5 3/16 $ 3 3/8
January 3, 1998 $ 4 1/2 $ 2 7/16
April 4, 1998 $ 2 7/8 $ 1 3/4
</TABLE>
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 are 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.
By letter dated February 26, 1998, the Company was notified by the Nasdaq Stock
Market, Inc. that according to its records the Company was not in compliance
with the requirements of its Marketplace Rules, which became effective on
February 23, 1998, and therefore the Company's securities were scheduled for
delisting effective at the close of business on March 16, 1998. However, it was
further provided that the Company could request a temporary exception to the new
requirements by sending a hearing request prior to the close of business on
March 13, 1998, which was in fact done on March 4, 1998, indicating that the
Company would make a written submission on or before March 27, 1998 supporting
its position that its securities should not be delisted. The Company made such a
written submission in a timely fashion. On April 14, 1998, the Nasdaq Stock
Market notified the Company that it was not in agreement with its position. The
Company will request an oral hearing expected to be scheduled in late May
1998 or early June 1998, which will stay the delisting process until a final
determination thereafter by the Nasdaq Stock Market.
If the Company's appeal is unsuccessful, its Common Stock will be delisted from
the Nasdaq SmallCap Market. Trading, if any, in the Company's Common Stock would
thereafter be conducted on the Nasdaq Electronic Bulletin Board which could
substantially reduce the liquidity and the market for the Company's Common
Stock and consequently, could adversely affect the trading price of such Common
Stock.
Between March 10, 1995 and March 31, 1995, the Company sold 295,750 shares of
its Common Stock to eight investors in private placements exempt from
registration under the Securities Act of 1933, pursuant to Section 4(2) thereof,
for cash or services (either for investment banking services, as an inducement
for an officer to join the Company in the nature of a signing bonus or as
inducements for bridge financing loans), which resulted in cash consideration
received in the aggregate of $400,000. These investors were Sector Associates,
Ltd. (200,000 shares), FAC Enterprises, Inc. (49,000 shares), Andrew Panzo
(10,000 shares), Mitchell K. Posner (9,500 shares), William B. Miller (10,000
shares), Centaur Financial Corp. (7,500 shares), Rozel International Holdings,
Ltd. (6,000 shares) and HST Partners (3,750 shares).
On March 10, 1995, the Company issued a total of 220,000 shares of Common Stock
to Graeme B. Frazier, IV (66,000 shares), Robert N. Spahr (22,000 shares), Paul
A. DeJuliis (66,000 shares) and John R. Thach (66,000 shares), in exchange for
all of the issued and outstanding shares of Princeton Academic Press through a
share exchange with DTF Media, Inc., which in turn distributed such shares to
the four DTF Media stockholders. The issuance of these shares was exempt as a
private placement pursuant to Section 4(2) of the Securities Act of 1933, as
amended.
Between March 10 and March 31, 1995, the Company issued a total of 1,252,500
Class A-1, Class A, Class B, Class C and Class D Common Stock purchase warrants
at varying exercise prices ranging from $4.00 to $8.00 per share to nine
investors in exchange for acquisition related services performed for the benefit
of the Company, or as an inducement for bridge investment loans, or as a bonus
to an employee of an operating subsidiary for the performance of services or in
the nature of a signing bonus to induce an individual to assume the position of
an officer of the Company. The Company received an additional $240,000 in cash
for a portion of these warrants issued. The investors who received such warrants
were Paul A. DeJuliis (250,000 Class A-1 Warrants), John R. Thach (250,000 Class
A-1 Warrants), Sector Associates, Ltd. (250,000 Class A Warrants, 187,500 Class
B Warrants and 250,000 Class C Warrants), Graeme B. Frazier, IV (25,000 Class A-
1 Warrants), William B. Miller (25,000 Class A-1 Warrants), FAC Enterprises,
Inc. (12,000 Class D Warrants), Centaur Financial Corp. (10,000 Class D
Warrants), Rozel International Holdings, Ltd. (8,000 Class D Warrants) and HST
Partners (5,000 Class D Warrants). The issuance of these shares was exempt as a
private placement pursuant to Section 4(2) of the Securities Act of 1933, as
amended.
On December 29, 1995, the Company issued a total of 35,000 shares of Common
Stock to four investors in cancellation of outstanding debt owed by the Company
to these investors totaling $175,000 of principal amount, all of which were
exempt from registration under Section 4(2) of the Securities Act of 1933, as
amended. These investors were Rozel International Holdings, Ltd. (8,000 shares),
Centaur Financial Corp. (10,000 shares), FAC Enterprises, Inc. (12,000 shares)
and HST Partners (5,000 shares).
On May 20, 1996, the Company issued 1,000 shares of its Series A Preferred Stock
together with 220,000 Common Stock purchase warrants to Odyssey Capital Group,
L.P. in exchange for $1,000,000 cash for the preferred shares and $220 for the
warrants, which had an exercise price of $6.00 per share.
On June 14, 1996, the Company sold 200,000 units of securities, each unit
consisting of one share of Common Stock and Common Stock purchase warrants for
one and one-quarter shares to Clifton Capital Ltd. for cash of $1,200,000. The
warrants had an exercise price of $6.00 per share. The units were issued
pursuant to the private placement exemption in Section 4(2) of the Securities
Act of 1933, as amended.
On June 20, 1996, the Company sold a subordinated debenture having a face amount
of $500,000 together with 80,000 Common Stock purchase warrants to Mentor
Special Situation Fund L.P. for cash consideration of $500,080. The debenture
has a maturity date with respect to one-third of the principal amount on June
30, 1999, another third on June 30, 2000 and the final balance by June 30, 2001.
Interest is at a fixed rate of 12% per annum. The exercise price of the Common
Stock purchase warrants is $6.00 per share. The debenture and warrants were
issued pursuant to the private placement exemption in Section 4(2) of the
Securities Act of 1933, as amended.
On October 7, 1996, the Company issued 30,000 common stock purchase warrants to
Mentor Management Co. in exchange for investment advisory services. The issuance
was exempt from registration under Section 4(2) of the Securities Act of 1933,
as amended. The exercise price of the warrants was $6.00 per share.
On October 7, 1996, the Company issued 100,000 common stock purchase warrants to
American Maple Leaf Financial Corporation in exchange for investment advisory
services. The issuance was exempt from registration under Section 4(2) of the
Securities Act of 1933, as amended. The exercise price of the warrants was $9.00
per share.
On October 17, 1996, the Company issued 182,232 shares of common stock and 9,000
shares of its Series B Preferred Stock to Bruce K. Worrall as consideration for
the acquisition of Centennial Printing Company in a merger transaction, which
transaction was exempt from registration pursuant to Section 4(2) of the
Securities Act of 1933, as amended. In exchange, the Company received all of the
issued and outstanding shares of Centennial Printing Company. The Series B
Preferred Stock carried a 6% cumulative dividend rate and was redeemable in
installments at a stated value of $100 per share upon call by the holder.
On November 4, 1996, the Company issued 22,500 Common Stock purchase warrants to
Equibond S.A. in exchange for investment advisory services. The issuance was
exempt from registration under Section 4(2) of the Securities Act of 1933, as
amended. The exercise price of the warrants was $6.00 per share.
In March, 1997, the Company issued a total of 44,537 shares of Common Stock to
eleven investors in exchange for all of the issued and outstanding common stock
of the Lavelle Company, consisting of 156,700 shares pursuant to a Stock
Exchange Agreement dated as of January, 1997. The following investors received
the following shares of Common Stock pursuant to such Exchange Agreement: C.D.L.
Perkins 4,438 shares; Steven Perkins 4,438 shares; Dorothy P. Gilbert 2,219
shares; Edward H. Merves 4,438 shares; Samuel R. Foster 2,219 shares; John W.
Burrows 4,438 shares; Albert C. Bailey, Jr. 6,508 shares; Michael L. Schlupp
2,839 shares; Patricia Medvic 2,000 shares; Barbara Marks 1,000 shares; and The
Lavelle Charitable Trust 10,000 shares. The issuance of these shares was exempt
from registration pursuant to Section 4(2) of the Securities Act of 1933, as
amended.
On May 9, 1997, the Company issued a total of 30,000 shares of Common Stock to
four individuals, in exchange for all of the 1,280,925 shares of Common Stock of
Wickersham Printing Company then issued and outstanding. The issuance was
pursuant to a Stock Exchange Agreement dated in January 1997 pursuant to which
John Yurchak, Jr. received 25,493 shares, Stephen J. Cooper received 2,576
shares, Arthur R. Dean, Jr. received 1,890 shares and James L. Porter received
41 shares. The issuance was exempt from registration under Section 4(2) of the
Securities Act of 1933, as amended.
On March 1, 1997, the Company issued 5,000 Common Stock purchase warrants to
Quaker State Financial Corp. as an inducement for certain lending accommodations
to the Company in connection with equipment purchases, which warrants had an
exercise price of $6.63 per share. The issuance of such warrants was exempt from
registration pursuant to Section 4(2) of the Securities Act of 1933, as amended.
On July 16, 1997, the Company issued 125,000 shares of its Common Stock with
500,000 Common Stock purchase warrants exercisable at $3.00 per share and
200,000 Common Stock purchase warrants exercisable at $5.00 per share for cash
consideration of $325,000. The Common Stock and Common Stock purchase warrants
were issued to Clifton Capital Ltd. pursuant to an exemption from registration
under Section 4(2) of the Securities Act of 1933, as amended.
On August 20, 1997, the Company issued 45,000 Common Stock purchase warrants to
Canterbury Companies, Inc. in exchange for investment advisory services. The
issuance was exempt from registration under Section 4(2) of the Securities Act
of 1933, as amended. The exercise price of the warrants was $4.00 per share.
Page 14
<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 operations, (iii) manage its
growth, (iv) achieve operating efficiencies associated with the acquisitions of
separate businesses, (v) integrate the operation of separate businesses and the
operating subsidiaries' ability to successfully compete in their respective
markets and (vi) realize the savings and liquidity improvements to be
implemented by the Company and as described under "Consolidated Liquidity of
the Company at January 3, 1998" below. Although the Company believes that the
forward looking statements contained herein are reasonable, it can give no
assurance that the Company's expectations will be met. 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 Media, Inc. and the Company's wholly-owned
subsidiary acquired the assets of the Polychem Division of The Budd Company.
The acquisitions of Princeton, Polychem, Centennial, Ivy, Wickersham and Lavelle
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.
Effective January 1, 1997, the Company has elected to report its results of
operations on a fifty-two or fifty-three week fiscal year basis. Accordingly,
the first quarter of 1997 contained twelve weeks and four days. Each subsequent
fiscal quarter contained thirteen weeks, except for the final fiscal quarter of
1997, which contained fourteen weeks and ended on January 3, 1998.
Page 15
<PAGE>
CONSOLIDATED RESULTS OF OPERATIONS
- ----------------------------------
Results of Operations are presented for the fiscal years ended January 3, 1998
and December 31, 1996. Results of Operations in fiscal 1997 include the Company
and its six wholly-owned subsidiaries, Princeton, Polychem, Centennial, Ivy,
Wickersham and Lavelle. Wickersham and Lavelle were acquired effective the first
day of business in fiscal 1997. The operations of Ivy, which was acquired as of
the close of business on December 31, 1996, are included in the consolidated
statements of operations as income from discontinued operations, net of income
taxes, as the Company sold all of the outstanding Common stock of Ivy on
February 23, 1998.
The following table sets forth certain statement of operations items as a
percentage of total net sales for the periods indicated:
<TABLE>
<CAPTION>
FISCAL YEAR ENDED
-----------------
JANUARY 3, DECEMBER 31,
1 9 9 8 1 9 9 6
------- -------
<S> <C> <C>
Net sales 100.0% 100.0%
Cost of goods sold 83.5 75.3
----- -----
Gross Profit 16.5 24.7
Selling, general and administrative 22.4 20.3
Asset carrying value adjustment
for operations closed after year end 2.0 ---
Contract settlement with former officer 1.0 ---
----- -----
Operating income (loss) (8.9) 4.4
Interest expense 3.3 3.0
Interest and dividend income 0.0 1.0
----- -----
Income (loss) before income taxes (benefit) (12.2) 2.5
Income taxes (benefit) ( 2.4) 1.1
----- -----
Net Income (loss) from continuing operations (10.2) 1.3
Net Income (loss) of Ivy-discontinued operations 0.2 ---
----- -----
Net Income (loss) (10.0)% 1.3%
===== =====
</TABLE>
Net sales for the fiscal year ended January 3, 1998 were $43,441,000, compared
to $23,633,000 for the prior year. The principal reasons for the significant
increase in net sales in fiscal 1997 versus 1996 were the inclusion of net sales
from Centennial for the entire year versus the period from October 17, 1996 (the
date of acquisition) through December 31, 1996 (an increase of $13,178,000), and
the inclusion of net sales of Wickersham and Lavelle for 1997 of $7,264,000 and
$4,680,000, respectively.
Polychem's net sales decreased 18% in fiscal 1997 versus 1996, principally due
to a decrease in net sales to foreign customers, particularly in the Pacific Rim
market, due to unsettled ecomnomic conditions there.
Net sales for Princeton in fiscal 1997 reflected a decrease of 35% from 1996.
Loss of market share due to production difficulties and competition were the
major contributors to the decline in revenues.
Page 16
<PAGE>
Gross profits for fiscal 1997 were 16.5%, fiscal compared to 24.7% in 1996.
Gross profits were $7,184,000 and $5,839,000, for fiscal 1997 and 1996,
respectively. The decrease in gross profits was principally due to two factors.
The first factor is related to revenue mix. The Company had a higher percentage
of printing revenue in fiscal 1997 than in 1996 and printing generally produces
a lower gross margin than fiscal Company's other businesses. The second factor
relates specifically to the performance of the Company's printing operations;
TEAM Graphics' gross profit was 9.8%. Centennial's fiscal 1997 results were
below industry norms primarily due to an unusually soft sales market during the
summer months, during which period Centennial failed to develop revenue adequate
to absorb its substantial fixed manufacturing overhead. Centennial's gross
profit for fiscal 1997 was 15.2%. Premier experienced production and delivery
problems and, accordingly, was barely profitable at the gross profit line.
Polychem's gross profit decreased to 24.6% in 1997 from 29.7% due principally to
fixed manufacturing overhead being spread over fewer units as a result of
Polychem's 18% period to period decline in revenue. Lavelle's gross profit of
34% in fiscal 1997 was in line with expectations and comparable to 1996.
Selling, general and administrative expenses totalled $9,728,000 and $4,795,000
for 1997 and 1996, respectively. The increase in selling, general and
administrative expenses in fiscal 1997 was principally due to the inclusion of
Centennial for an entire year in 1997, versus a shorter period in 1996 (October
17, 1996 through December 31, 1996). This accounted for $2,641,000 of the
increase. The acquisitions of Wickersham and Lavelle added $1,004,000 and
$987,000 to selling, general and administrative expenses, respectively. Due to
the consolidation of Princeton and Wickersham into Premier, Princeton's selling,
general and administrative expenses were reduced by $356,000. Polychem also
reduced selling, general and administrative expenses by $145,000. Corporate
overhead increased in fiscal 1997 over 1996 by $1,021,000. The principal
components of this increase were additional staffing at headquarters, increased
expenditures for investor relations, costs related to the unconsummated
refinance effort, cost of potential acquisitions which did not come to fruition,
plus significant increases in professional fees as a result of significantly
expanded operations.
By agreement, dated June 20, 1997 and effective July 1, 1997, John R. Thach
resigned from his office as President of the Company and from his position as a
member of the Executive Committee of the Board of Directors. He remained a
Director of the Company until December 1997 when he resigned from that position.
The agreement provides for equal monthly payments through December 1999 in
satisfaction of his employment contract plus a lump sum contingent payment. That
portion that was fixed and determinable ($500,000) has been recorded in the
accompanying financial statements as a $430,137 charge to income in fiscal 1997
at its present value.
Due to continuing operating losses of Premier, the Company decided to close down
the operations of Premier, effective April 13, 1998. At January 3, 1998, the
Company has written off net goodwill related to the Wickersham and Princeton
acquisitions, and recorded valuation allowances on certain assets in the amount
of $900,000.
As stated above, the Company sold all of the outstanding Common stock of Ivy on
February 23, 1998. The net income of Ivy for fiscal 1997 was $102,000,
which is recorded as a separate line item in the Company's statement of
operations for fiscal 1997.
Page 17
<PAGE>
Interest expense for fiscal 1997 was $1,459,000 or 3.3% of net sales, 0.3
percentage points higher than 1996. This increase is due to increased borrowings
on lines of credit to continue to fund the Company's consolidated losses.
Interest and dividend income was virtually non-existent in fiscal 1997 versus
$250,000 in 1996. This also occurred as a result of the need to fund the
Company's consolidated losses with previously raised capital.
In fiscal 1997, the Company recorded a federal income tax benefit totalling
$881,000. A component of the benefit is $240,000 recoverable tax, representing
the refund available to the Company by carrying the fiscal 1997 loss back to
1996. In addition, the gain on the 1998 sale of Ivy will be offset by net
operating loss carryovers from fiscal 1997 resulting in an approximate $330,000
benefit. Also, the net deferred tax liability as recorded in the Company's
consolidated balance sheet at December 31, 1996 has been reversed to the extent
of $311,000.
CONSOLIDATED LIQUIDITY OF THE COMPANY AT JANUARY 3, 1998
- --------------------------------------------------------
The Company sustained a net loss of $4,350,000 for the fiscal year ended January
3, 1998, which resulted in a net use of cash of $645,000 leaving a cash balance
of $65,000 at January 3, 1998.
Cash used in operating activities in fiscal 1997 was $2,676,000 resulting from
the net loss plus increases in inventory ($321,000), prepaid and recoverable
income taxes ($175,000), other assets ($414,000), net deferred tax benefit
($811,000), and other liabilities ($563,000). These uses of cash were offset by
net depreciation and amortization ($1,778,000), inputed interest ($104,000),
minority interest ($9,000), a net reduction in accounts receivable ($22,000), a
reduction in prepaid expenses ($84,000), an increase in accounts payable
($1,350,000), an increase in accrued expenses ($117,000), and the write down of
assets on operations subsequently closed ($494,000).
Investment activities in fiscal 1997 reflected a use of cash of $272,000 due to
the purchase of property and equipment ($444,000) offset by cash acquired from
acquisitions.
In fiscal 1997, net cash provided by financing activities was $2,303,000,
including net borrowing under lines of credit ($1,807,000), loans from officers
($150,000), net proceeds from the exercise of warrants ($1,542,000), and the
sale of Common stock ($531,000). The cash provided was offset by repayments of
principal in term debt ($638,000) and capital leases ($999,000), and preferred
stock dividends ($90,000).
At January 3, 1998, the Company had a working capital deficit of $3,384,000, a
decrease of $4,870,000 from December 31, 1996. A significant component of the
decrease is the net working capital deficit of Wickersham ($1,333,000 at January
3, 1998) together with the substantial impact of operating losses during fiscal
1997 on current assets.
The Company has no significant capital spending or purchase commitments other
than normal commitments under facility and capital leases. See Item 2
"Property".
The Company's operating subsidiaries are subject to various loan agreements and
commitments described in "Note I" to the Company's Consolidated Financial
Statements, and some of these obligations are guaranteed by the Company,
including in SBA loan agreement (Section 504 Loan Program) in which the
Company's discontinued Ivy-Tygert operation is the obligor (and as to which the
Company is the beneficiary of a guarantee from one of the individual purchasers
of that operation). Recently, the Budd Company gave notice of a nonpayment of
principal and interest under the Polychem term note payable to the Budd Company,
which amounts were subsequently paid by the Company.
The Company's cash requirements for fiscal 1998 include principal payments on
term loans, capital leases and other debt obligations in the amount of
$2,156,000, as well as accumulated payables and, if its appeal for the abatement
of civil penalties for Centennial's sales tax obligations is not granted, a
significant tax payment to Pennsylvania. Cash flows from operations in fiscal
1998, together with a combination of other financing actions being taken by the
Company, if successful, are expected to provide sufficient cash flow to meet the
Company's obligations.
Page 18
<PAGE>
OVERVIEW
- --------
As a result of the audit of the Company's financial statements for the fiscal
year ended January 3, 1998, Grant Thornton LLP has issued a qualified opinion
related to its doubt about the Company's ability to continue as a going concern.
Significant actions by the Company, which have either taken place to date in
fiscal 1998 or are planned to take place in 1998, to alleviate the concerns of
Grant Thornton are as follows:
1. The Company has executed a Confidential Private Offering Memorandum for the
sale of 400,000 shares of its Common stock together with a Stock Purchase
Warrant for up to 200,000 shares of its Common stock. This offering will
result in net proceeds to the Company of $470,000, expected in May 1998.
2. The lender at Polychem has indicated an interest in refinancing Polychem's
term debt, resulting in net proceeds of approximately $300,000 for
Polychem's use, expected in April 1998.
3. The Company will file its 1997 Consolidated Federal Income Tax return by
April 30, 1998 and, as a result, file for a loss carryback refund to 1996,
thus recovering $240,000 in federal tax paid for that year.
4. On February 23, 1998, the Company sold its 92.5% ownership in the
outstanding Common stock of its subsidiary Ivy for $1,152,250 in cash and
notes plus intercompany advances. All cash from this transaction
(including under the notes) was realized as of March 30, 1998. The sale
resulted in an after tax gain of approximately $698,000.
5. The Company effectively closed its Premier operations on April 13, 1998 in
order to avoid continuing losses from this business entity, which
experienced pre-tax losses of approximately $1,600,000 in fiscal 1997. The
write down of certain assets and the write off of goodwill resulted in an
additional $727,000 non-cash pre-tax charge to operations for fiscal 1997.
The Company currently believes there will be no significant further losses
related to this closing.
6. The Centennial Printing subsidiary of Team Graphics, which had pre-tax
losses of $1,066,000 in fiscal 1997, has operated with positive cash flow
for the last four months of fiscal 1997 and through the first quarter of
fiscal 1998.
7. The operation of other subsidiaries of the Company, Polychem and Lavelle,
show moderate net losses during the first quarter of fiscal 1998, but
operated at a positive cash flow. Sales order backlogs are increasing for
both companies, indicating, based upon required lead times for shipments,
a profitable second half of fiscal 1998.
8. The subscription receivable recorded at $762,000 in the Company's balance
sheet at January 3, 1998 as a reduction of stockholders' equity is
collateralized by Common Stock in a company which is currently in
registration with the U.S. Securities and Exchange Commission. Under its
agreement, the Company is to be listed as a selling shareholder in the
registration statement. The Company expects to realize this subscription
receivable within 60 days through the sale of stock, either in the public
market or by exercising its rights in a put option.
9. The Company continues to focus on refinancing its lines of credit and term
debt, principally to realize excess cash available from under-leveraged
real estate and machinery and equipment. By excluding Premier Book Press
from the loan request, the Company believes that it can meet the excess
cash and collateral availability requirements of the lender and close the
credit facility, which will result in cash proceeds of approximately
$500,000 in excess of that required to pay off existing debt and lengthen
the maturity of the Company's term debt.
Other than Items 3, 4, and 5 above, there is no certainty that any or all of
these planned actions will be accomplished, or accomplished in the time frame
described.
Page 19
<PAGE>
ITEM 7 FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
- ------ -------------------------------------------
The financial statements required by this Item can be found at pages F-1 to F-32
of this Report.
ITEM 8 CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
- ------ ---------------------------------------------------------------
FINANCIAL DISCLOSURE
--------------------
On September 24, 1997, the Company filed a Form 8-K (which was subsequently
amended on October 17, 1997), reflecting the mutual agreement with Arthur
Andersen LLP to terminate Authur Andersen as the Company's independent auditors
effective September 26, 1997. On November 6, 1997, the Company filed a Form 8-K
reflecting the appointment of Grant Thornton LLP as the Company's independent
auditors effective October 31, 1997.
Page 20
<PAGE>
PART III
ITEM 9 DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
- ------ --------------------------------------------------
The present members of the Board of Directors (see below definitions of Director
Classes for terms), their ages and positions with the Company are set forth
below:
<TABLE>
<CAPTION>
DIRECTOR POSITIONS WITH
NAME CLASS AGE THE COMPANY
---- ----- --- -----------
<S> <C> <C> <C>
Paul A. DeJuliis I 42 Chairman of the Board of Directors and Chief Executive Officer
Anthony J. Mendicino II 50 President, Chief Operating Officer and a Director
William B. Miller I 57 Senior Vice President, Chief Financial Officer and a Director
Bruce P. Murray II 52 Director
Andrew Panzo III 33 Director
Edward F. Sager III 50 Director
</TABLE>
Director Class I -- Term expires at Annual Meeting of Stockholders in 2000
Director Class II -- Term expires at Annual Meeting of Stockholders in 1999
Director Class III -- Term expires at Annual Meeting of Stockholders in
1998
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 has a B.S. in
finance and accounting from the University of Delaware. He is also a certified
public accountant.
ANTHONY J. MENDICINO - 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.
Page 21
<PAGE>
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's 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.
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 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.
EDWARD F. SAGER - A DIRECTOR, has been the President of Mentor Management
- ----------------------------
Company since 1994, general partner of Mentor Special Situation Fund LP, an
investment fund, and President of Mentor Capital Partners Ltd., a venture
capital firm since 1994. From 1985 to 1994 Mr. Sager was President of Sager &
Associates, a merchant banking firm providing access to venture capital for
small to medium size companies. His is a graduate of Lafayette College with a
B.S. degree in Mechanical Engineering and he received an MBA in Finance from New
York University.
Page 22
<PAGE>
MANAGEMENT OF OPERATING SUBSIDIARIES
- ------------------------------------
The following is a summary of the business experience of the management of the
Company's operating subsidiaries:
TEAM GRAPHICS, INC.
- ------------------
BRUCE H. JACKSON - PRESIDENT, has been with TEAM Graphics, Inc. since May 1997,
- ----------------------------
first as Vice president of Sales and Marketing, then effective December 23,
1997, as President. Mr. Jackson has extensive experience in graphic arts sales
and management, having been Vice President-Marketing of Webcraft Technologies,
Inc., Horsham PA (1994-1997); Business Unit Manager of Graphic Packaging
Corporation, Wayne PA (1992-1994); Vice President of Sales and Marketing of The
Lehigh Press, Inc., Cherry Hill NJ (1988-1992).
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 rapidly 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.
MICHAEL P. LAMOREUX -- CONTROLLER has been Controller of Centennial Printing for
- ---------------------------------
15 months. He has over seven years experience in accounting and financial
management in the graphics arts industry. Prior to joining Centennial in January
1997, Mr. Lamoreux held the positions of Manager of Information Systems and
Accounting manager at Baum Printing Company in Philadelphia PA (1990-1996). He
holds a BS degree in accounting from LaSalle University and an MS degree in
finance from Temple University.
POLYCHEM CORP.
- -------------
THEODORE F. RUTKOWSKI - PRESIDENT, prior to assuming that position in 1995, 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 23
<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.
LAVELLE COMPANY
- ---------------
ALBERT C. BAILEY - PRESIDENT, has been with Lavelle Company since March 1, 1996
- ----------------------------
at which time Lavelle purchased the assets of the former Lavelle Aircraft
Company. Mr. Bailey has extensive turn-around management experience having
previously been President and CEO of Berwick Forge & Fabricating (1991-1996)
prior to joining Lavelle. He has a bachelors degree in economics from Muhlenberg
College and an MBA from the University of Scranton.
ROBERT ASHWORTH - CONTROLLER, has been with Lavelle since November 1997. Prior
- ----------------------------
to joining Lavelle, Mr. Ashworth was the Accounting Manager and Controller with
Modern Dental Concepts (1995-1997) and was Controller for Dock Street Brewing
Company, Inc. (1991-1994). He holds a bachelors degree from West Virginia
Wesleyan College and an MBA from Rutgers University.
Page 24
<PAGE>
ITEM 10 EXECUTIVE COMPENSATION
- ------ ----------------------
The following table discloses for the fiscal years ended December 31, 1995,
1996, and January 3, 1998, individual compensation information relating to the
chief executive officer of the Company and the executive officers of the Company
who earned in excess of $100,000 during 1997 (the "Named Executive Officers").
<TABLE>
<CAPTION>
ANNUAL COMPENSATION LONG TERM COMPENSATION
Restricted
Other Annual Stock Options/ LTIP All Other
Name and Salary Bonus Compensation Awards SARS Payouts Compensation
<S> <C> <C> <C> <C> <C> <C> <C>
Principal Position ($) ($) ($) ($) (#) ($) ($)
Paul A. DeJuliis
Chief Executive Officer
1997 262,000 0 3,815 0 0 0 0
1996 204,167 0 4,812 0 75,000 0 0
1995 157,917 0 3,661 0 125,000 0 0
Anthony J. Mendicino
President
1997 150,321 0 4,500 0 0 0 0
1996 0 0 0 0 55,000 0 0
1995 0 0 0 0 40,000 0 0
William B. Miller
Chief Financial Officer
1997 108,000 22,500 2,104 0 0 0 0
1996 103,500 0 2,765 0 35,000 0 0
1995 70,000 0 1,814 0 70,000 0 0
John R. Thach
Former President
1997 115,500 0 4,500 0 0 0 0
1996 190,321 0 3,841 0 75,000 0 0
1995 161,167 0 1,916 0 70,000 0 0
</TABLE>
Page 25
<PAGE>
AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR AND F/Y END
---------------------------------------------------------------
OPTION/SAR VALUES
-----------------
The following table sets forth information with respect to option exercises and
fiscal year-end option values for the Named Executive Officers.
<TABLE>
<CAPTION>
Number of
Securities Underlying Value of
Shares Acquired Value Unexercised Options/ Unexercised in-the-money
On Exercise Realized SARS at FY-End (#) Options/SARS at FY-End ($)
Name ( # ) ( $ ) Exercisable/Unexercisable Exercisable/Unexercisable(1)
<S> <C> <C> <C> <C>
Paul A. DeJuliis 0 --- 133,334 / 66,666 0 / 0
Anthony J. Mendicino 0 --- 45,000 / 50,000 0 / 0
William B. Miller 0 --- 58,334 / 46,666 0 / 0
</TABLE>
(1) Based upon the closing price of the Company's Common stock on January 2,
1998 of $2.375.
OPTION/SAR GRANTS IN LAST FISCAL YEAR
- -------------------------------------
There were no option grants in 1997.
EMPLOYMENT ARRANGEMENTS
- -----------------------
Effective as of January 1, 1995, the Company entered into an employment
agreement with Paul A. DeJuliis. The agreement 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 his 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 he shall be entitled to
annual minimum incentive compensation equal to 3% of the Company's annual pre-
tax net income. The agreement also provides 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 agreement
contains covenants regarding confidentiality of proprietary information of the
Company and a restrictive covenant in favor of the Company under certain
circumstances. The agreement has an initial term of five years, and thereafter
is annually renewable for successive two-year periods. Such agreement will
Page 26
<PAGE>
earlier terminate as a result of the employee's death, permanent disability or
dismissal for "just cause." If the termination results from death or permanent
disability, the agreement provided 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.
By agreement, dated June 20, 1997 and effective July 1, 1997, John R. Thach
resigned from his office as President of the Company and from his position as a
member of the Executive Committee of the Board of Directors. He remained a
Director of the Company until December 1997 when he resigned from that position.
The agreement provides for equal monthly payments through December 1999 in
satisfaction of his employment contract plus a lump sum contingent payment. That
portion that was fixed and determinable ($500,000) has been recorded in the
accompanying financial statements as a $430,137 charge to income in 1997 at its
present value.
In January 1997, the Company entered into an employment agreement with Anthony
J. Mendicino. Such agreement provides for a base salary of $150,000 per year,
together with discretionary bonuses, if any, to be declared by the Board of
Directors. The agreement also provides for certain benefits, including vacation,
health and medical insurance, car allowance 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.
In May 1997, the Company entered into an employment agreement with William B.
Miller. Such agreement provides for a base salary in the first year of $84,00
per year, together with discretionary bonuses, if any, to be declared by the
Board of Directors. The based salary automatically increased to $108,000 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.
COMPENSATION OF DIRECTORS
- -------------------------
Non-employee directors receive no cash compensation, but they participate in a
non-qualified stock option plan. The listed non-employee directors received no
option grants in 1996 and fiscal 1997. Employee directors receive no
compensation in connection with their services as director.
Page 27
<PAGE>
ITEM 11 SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
- ------- --------------------------------------------------------------
PRINCIPAL STOCKHOLDERS
- ----------------------
The following table sets forth, as of April 16, 1998, 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 each Named Executive Officer and
director and all officers and directors, individually and as a group.
<TABLE>
<CAPTION>
Amount & Nature
of Beneficial % of
Ownership Ownership
--------- ---------
<S> <C> <C>
Paul A. DeJuliis 609,334/(1)/ 15.1%
John R. Thach 427,000/(2)/ 11.0%
William B. Miller 83,334/(3)/ 2.2%
Andrew Panzo 36,666 1.0%
Bruce P. Murray 26,666 0.7%
Anthony J. Mendicino 63,000 1.7%
Edward F. Sager 30,000 0.8%
All Officers and Directors
as a group (6 persons) 819,000 28.6%
</TABLE>
/(1)/ Includes 175,000 shares which may be obtained through currently
exercisable warrants.
/(2)/ Includes 175,000 shares which may be obtained through currently
exercisable warrants.
/(3)/ Includes 15,000 shares which may be obtained through currently
exercisable warrants.
The addresses of Messrs. DeJuliis, 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 2 Penn Center Plaza Suite 605,
Philadelphia, PA 19103. The address of Mr. Murray is c/o Bannock Burn Group, 712
Pheasant Run, Suite Two, Kennett Square, PA 19348. The address of Mr. Sager is
PO Box 560, Yardley, PA 19067. The address of Mr. Thach is c/o The Eastwind
Group, 100 Four Falls Corporate Center, Suite 305, West Conshohocken, PA 19428.
ITEM 12 CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
- ------- ----------------------------------------------
None.
Page 28
<PAGE>
ITEM 13 LIST OF EXHIBITS AND REPORTS ON FORM 8-K
- ------- ----------------------------------------
<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.
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 November 1,
Centennial Printing 1996.
Corporation, The
Eastwind Group, Inc.
and Centennial
Acquisition Corp.
2.4 Stock Exchange Agreement Incorporated by reference to Exhibit
by and among the 2.1 of the Registrant's Form 8-K (No.
Registrant, John Yurchak 0-27638) filed on April 2, 1997.
Jr., Stephen J. Cooper,
Arthur R. Dean and James
L. Porter dated as of
January 3, 1997.
2.5 Lavelle Stock Exchange Incorporated by reference to Exhibit
Agreement dated as of 2.2 of the Registrant's Form 10-QSB
January 3, 1997. filed on May 19, 1997.
2.6 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.
2.7 Note for Stock Exchange Filed herewith.
Agreement by and among
the Company and the D.A.R.
Group dated as of November
19, 1997.
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.
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 Incorporated by reference to Exhibit
Stock Purchase Warrant 4.7 of the Registrant's Form 10-KSB
issued to Mentor Special (No. 0-27638) filed on April 15, 1997.
Situation, LP.
4.8 Certificate of Designation Incorporated by reference to Exhibit
Series B Preferred Stock. 4.7 of the Registrant's Form 10-KSB
(No. 0-27638) filed on April 15, 1997.
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.
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.
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.
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.
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.
10.22 * Loan Plan for Officers Incorporated by reference to Exhibit
and Key Employees. 10.1 to the Registrant's Form 10-QSB
filed on May 19, 1997,
10.23 * Employment Agreement Incorporated by reference to Exhibit
between the Company and 10.2 to the Registrant's Form 10-QSB
Anthony J. Mendicino. filed on May 19, 1997.
10.24 * Severence Agreement Incorporated by reference to Exhibit
between the Company and 10.1 to the Registrant's Form 10-QSB
John R.Thach dated June filed on August 18, 1997 (subsequently
20,1997 amended by Form 10-QSB/A filed on
August 19, 1997).
21 Subsidiaries of the Filed herewith.
Registrant.
23.1 Consent of Arthur Andersen Filed herewith.
LLP
23.2 Consent of Grant Thornton Filed herewith.
LLP
27 Financial Data Schedule. in electronic format only.
</TABLE>
_________________________
* Management contract or compensatory plan or arrangement.
(B) REPORTS ON FORM 8-K
- -------------------
On September 29, 1997, the Company filed a Form 8-K reflecting the Mutual
Agreement with Arthur Andersen LLP to terminate Arthur Andersen LLP as the
Company's independent auditors effective September 26, 1997. Such Form 8-K was
amended on October 17, 1997.
On November 6, 1997, the Company filed a Form 8-K reflecting the appointment of
Grant Thornton LLP as the Company's auditors effective October 31, 1997.
Page 29
<PAGE>
FINANCIAL STATEMENTS AND REPORT OF
INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
THE EASTWIND GROUP, INC. AND SUBSIDIARIES
JANUARY 3, 1998 AND DECEMBER 31, 1996
F-1
<PAGE>
C O N T E N T S
Page
----
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS F-3
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS F-4
FINANCIAL STATEMENTS
CONSOLIDATED BALANCE SHEETS F-5
CONSOLIDATED STATEMENTS OF OPERATIONS F-6
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY F-8
CONSOLIDATED STATEMENTS OF CASH FLOWS F-9
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS F-10
F-2
<PAGE>
Report of Independent Certified Public Accountants
--------------------------------------------------
Board of Directors
The Eastwind Group, Inc.
We have audited the accompanying consolidated balance sheet of The Eastwind
Group, Inc. (a Delaware corporation) and Subsidiaries as of January 3, 1998, and
the related consolidated statements of operations, changes in stockholders'
equity and cash flows for the year then ended. These financial statements are
the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audit.
We conducted our audit in accordance with 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 audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of The Eastwind
Group, Inc. and Subsidiaries as of January 3, 1998, and the consolidated results
of their operations and their consolidated cash flows for the year then ended in
conformity with generally accepted accounting principles.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note C to the
financial statements, the Company has suffered significant losses from
operations that raise substantial doubt about its ability to continue as a going
concern. Management's plans with regard to these matters are also described in
Note C. The financial statements do not include any adjustments that might
result from the outcome of this uncertainty.
GRANT THORNTON LLP
Philadelphia, Pennsylvania
April 17, 1998
F-3
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To The Eastwind Group, Inc.:
We have audited the accompanying consolidated balance sheet of The Eastwind
Group, Inc. (a Delaware corporation) and Subsidiaries as of December 31, 1996,
and the related consolidated statements of operations, stockholders' equity and
cash flows for the year then ended. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audit.
We conducted our audit in accordance with 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 audit provides 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 the results of their operations and
their cash flows for the year then ended in conformity with generally accepted
accounting principles.
ARTHUR ANDERSEN LLP
Philadelphia, Pa.
March 26, 1997
F-4
<PAGE>
The Eastwind Group, Inc. and Subsidiaries
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
ASSETS January 3, December 31,
1998 1996
------------ -------------
<S> <C> <C>
Current assets
Cash and cash equivalents $ 64,970 $ 709,697
Accounts receivable, net 8,797,027 7,655,763
Stock subscription receivable 250,000 -
Recoverable income taxes 240,065 -
Due from related parties - 1,047,354
Inventories 5,641,271 4,001,007
Prepaid expenses 224,515 203,820
Prepaid income taxes 25,977 91,500
----------- -----------
Total current assets 15,243,825 13,709,141
Property, plant and equipment, net 8,100,147 7,024,393
Investments in investee companies - 700,000
Deferred income taxes 330,000 -
Goodwill and other assets 8,239,520 7,024,489
----------- -----------
$31,913,492 $28,458,023
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Lines of credit $ 6,038,576 $ 3,626,365
Current portion of long-term debt 1,238,069 880,012
Current portion of capitalized lease obligations 997,516 848,701
Loans payable to officers 150,000 -
Accounts payable 6,394,011 3,775,002
Accrued expenses 3,555,073 2,718,391
Due to related party - 276,260
Deferred income taxes - 98,186
Other current liabilities 254,772 -
----------- -----------
Total current liabilities 18,628,017 12,222,917
Long-term debt 4,937,040 5,537,523
Capitalized lease obligations 1,419,791 1,695,229
Deferred credit, net - 160,224
Deferred income taxes - 382,814
Other liabilities 780,555 218,510
----------- -----------
Total liabilities 25,765,403 20,217,217
----------- -----------
Minority interest in consolidated subsidiary 23,531 14,927
----------- -----------
Redeemable Series B preferred stock 900,000 900,000
----------- -----------
Commitments and contingencies - -
----------- -----------
Stockholders' equity
Series A preferred stock, $0.10 par value, 3,000,000 shares authorized,
1,000 shares issued and outstanding 100 100
Common stock, $0.10 par value, 5,000,000 shares authorized, 3,525,019
and 2,411,482 shares issued and 3,525,019 and 2,376,482 shares outstanding 352,502 241,148
Warrants outstanding 1,009,797 1,271,597
Additional paid-in capital 9,314,614 6,408,621
Accumulated deficit (4,690,455) (147,051)
----------- -----------
5,986,558 7,774,415
Less
Common stock in treasury, 35,000 shares at cost - (193,609)
Notes receivable from sale of stock (762,000) (240,000)
Deferred compensation - (14,927)
----------- -----------
Total stockholders' equity 5,224,558 7,325,879
----------- -----------
$31,913,492 $28,458,023
=========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-5
<PAGE>
The Eastwind Group, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Fiscal year ended
----------------------------
January 3, December 31,
1998 1996
------------- ------------
<S> <C> <C>
Net sales $43,441,259 $23,632,872
Cost of goods sold 36,256,982 17,793,635
----------- -----------
Gross profit 7,184,277 5,839,237
Selling, general and administrative expenses 9,727,507 4,795,227
Contractual settlement with former officer 430,137 -
Write-down of assets on operations subsequently closed 900,498 -
----------- -----------
Operating (loss) income (3,873,865) 1,044,010
Interest expense 1,458,566 716,381
Interest and dividend income - 249,982
----------- -----------
(Loss) income from continuing operations before income
tax (benefit) expense (5,332,431) 577,611
Income tax (benefit) expense (881,020) 261,927
----------- -----------
(Loss) income from continuing operations (4,451,411) 315,684
Income from discontinued operations, net of income taxes of $69,279 101,507 -
----------- -----------
NET (LOSS) INCOME $(4,349,904) $ 315,684
=========== ===========
Per share data
(Loss) income from continuing operations $(1.63) $ 0.11
=========== ===========
Net (loss) income $(1.60) $ 0.11
=========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-6
<PAGE>
The Eastwind Group, Inc. and Subsidiaries
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
Fiscal years ended January 3, 1998 and December 31, 1996
<TABLE>
<CAPTION>
Series A Additional
preferred Common Warrants paid-in Accumulated Treasury
stock stock outstanding capital deficit stock
------------ ----------- ------------ ------------ ------------- ---------------
<C> <C> <C> <C> <C> <C> <C>
Balance, January 1, 1996 $ - $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 - -
Issuance of warrants to
subordinated
noteholders, net of
expenses of $15,010 - - 196,190 - - -
Issuance 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 - -
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)
============ =========== ========== ========== ============ ==============
<CAPTION>
Notes
receivable Total
from sale Deferred stockholders'
of stock compensation equity
--------------- --------------- --------------
<S> <C> <C> <C>
Balance, January 1, 1996 $ - $ - $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
Issuance of warrants to
subordinated
noteholders, net of
expenses of $15,010 - - 196,190
Issuance 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 (240,000) - 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 $(240,000) $(14,927) $7,325,879
============== ============== ==========
</TABLE>
(Continued)
F-7
<PAGE>
The Eastwind Group, Inc. and Subsidiaries
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY - CONTINUED
Fiscal years ended January 3, 1998 and December 31, 1996
<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, 1996 $100 $241,148 $1,271,597 $6,408,621 $ (147,051) $(193,609)
Issuance of 44,537 shares
of common
stock in connection with
Lavelle
acquisition - 4,454 - 207,097 - -
Issuance of 30,000 shares
of common
stock in connection with
Wickersham
acquisition - 3,000 - 139,500 - -
Exercise of 914,000 warrants - 91,400 (424,100) 2,396,589 - -
Issuance of Common stock,
net of
expenses of $37,500 - 16,000 162,300 352,916 - -
Amortization of deferred
compensation
expense - - - - - -
Preferred stock dividends - - - - (193,500) -
Retirement of treasury stock - (3,500) - (190,109) - 193,609
Net loss - - - - (4,349,904) -
-------------- -------- ----------- ---------- ----------- --------------
Balance, January 3, 1998 $100 $352,502 $1,009,797 $9,314,614 $(4,690,455) $ -
============== ======== =========== ========== =========== ==============
<CAPTION>
Notes
receivable Total
from sale Deferred stockholders'
of stock compensation equity
------------ --------------- --------------
<S> <C> <C> <C>
Balance, December 31, 1996 $(240,000) $(14,927) $ 7,325,879
Issuance of 44,537 shares
of common
stock in connection with
Lavelle
acquisition - - 211,551
Issuance of 30,000 shares
of common
stock in connection with
Wickersham
acquisition - - 142,500
Exercise of 914,000 warrants (522,000) - 1,541,889
Issuance of Common stock,
net of
expenses of $37,500 - - 531,216
Amortization of deferred
compensation
expense - 14,927 14,927
Preferred stock dividends - - (193,500)
Retirement of treasury stock - - -
Net loss - - (4,349,904)
----------- -------------- -----------
Balance, January 3, 1998 $(762,000) $ - $ 5,224,558
=========== ============== ===========
</TABLE>
The accompanying notes are an integral part of this financial statement.
F-8
<PAGE>
The Eastwind Group, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Fiscal year ended
----------------------------
January 3, December 31,
1998 1996
------------ -------------
<S> <C> <C>
Cash flows from operating activities
Net (loss) income $(4,349,904) $ 315,684
Adjustments to reconcile net (loss) income to net cash (used in)
provided by operating activities
Depreciation and amortization 1,802,178 529,387
Amortization of deferred credit (24,650) (24,650)
Imputed interest 103,763 21,952
Deferred income tax (benefit) provision (811,000) 40,794
Minority interest 8,604 -
Write-down of assets on operations subsequently closed 494,434 -
Changes in assets and liabilities, net of effect from acquisitions
(Increase) decrease in assets
Accounts receivable 22,323 (117,925)
Recoverable income taxes (240,065) -
Inventories (320,491) (93,156)
Prepaid expenses 84,473 (94,900)
Prepaid income taxes 65,523 (91,500)
Other assets (414,207) (48,756)
Increase (decrease) in liabilities
Accounts payable 1,349,622 (201,311)
Accrued expenses 117,047 776,777
Other current liabilities (542,074) -
Other liabilities (21,109) -
----------- -----------
Net cash (used in) provided by operating activities (2,675,533) 1,012,396
----------- -----------
Cash flows from investing activities
Purchase of property and equipment (444,686) (49,777)
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)
Cash acquired from acquisitions 172,550 -
----------- -----------
Net cash used in investing activities (272,136) (2,694,452)
----------- -----------
Cash flows from financing activities
Net borrowings (repayments) under lines of credit 1,807,394 (2,207,940)
Borrowings on term notes - 104,000
Repayments of term notes (637,907) (418,881)
Repayments of capitalized lease obligations (999,650) (242,677)
Loans from officers 150,000 -
Proceeds from sale of preferred stock, net of expenses - 929,134
Proceeds from exercise of warrants, net of expenses 1,541,889 1,781,000
Collection of stock subscription receivable - 746,000
Proceeds from sale of Common stock units, net of expenses 531,216 1,018,716
Proceeds from issuance of subordinated note payable and warrants,
net of expenses - 484,990
Payment of dividends (90,000) (35,357)
Purchase of Common stock for treasury - (193,609)
----------- -----------
Net cash provided by financing activities 2,302,942 1,965,376
----------- -----------
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (644,727) 283,320
Cash and cash equivalents at beginning of year 709,697 426,377
----------- -----------
Cash and cash equivalents at end of year $ 64,970 $ 709,697
=========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-9
<PAGE>
The Eastwind Group, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
January 3, 1998 and December 31, 1996
NOTE A - NATURE OF BUSINESS
The Eastwind Group, Inc. (the Company) is a management holding company which
has three operating business segments. A fourth business segment, Ivy-Tygart
Acquisition Corp. (Ivy), existed at January 3, 1998 and was subsequently sold
(NOTE R). Effective January 1, 1997, the Company has elected to report its
results of operations on a 52- or 53-week fiscal year basis.
Polychem Corporation (Polychem)
-------------------------------
Polychem, located in Phoenixville, Pennsylvania, manufactures and sells
clarifier components for wastewater treatment applications and other plastic
molded products, including buckets, sprockets and bearings.
TEAM Graphics, Inc. (TEAM Graphics)
-----------------------------------
TEAM Graphics is the parent company for the Company's printing industry, which
consists of the following subsidiaries:
Centennial Printing Corp. (Centennial)
--------------------------------------
Centennial, located in King of Prussia, Pennsylvania, provides high-quality
commercial printing services, including annual reports, advertising
brochures, pamphlets and marketing pieces.
Princeton Academic Press (Princeton) and Wickersham Printing Company
--------------------------------------------------------------------
(Wickersham), collectively doing business as Premier Book Press
---------------------------------------------------------------
Princeton, located in Lancaster, Pennsylvania, is engaged in the printing
and binding of books and related activities for publishers, university
presses and other information providers (NOTE R).
Wickersham, located in Lancaster, Pennsylvania, is a printing and book
manufacturer (NOTE R).
Lavelle Company (Lavelle)
-------------------------
Lavelle, located in Philadelphia, Pennsylvania, manufactures and sells sheet
metal fabricated products for the aerospace industry.
F-10
<PAGE>
The Eastwind Group, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
January 3, 1998 and December 31, 1996
NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
1. 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%
minority interest in Ivy. All intercompany accounts and transactions have been
eliminated in consolidation.
2. 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.
3. 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 as of January 3, 1998 and
December 31, 1996.
4. 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.
5. Property, Plant and Equipment
-----------------------------
Property, plant and equipment are stated at cost less accumulated depreciation.
Depreciation is recorded using the straight-line and accelerated depreciation
methods over the estimated useful life of the assets. Leasehold improvements
are amortized over the term of the lease or estimated useful life, whichever is
shorter.
In 1996, the Company adopted 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 provides guidance on when to
recognize and how to measure impairment losses of long-lived assets and certain
identifiable intangibles and how to value long-lived assets to be disposed of.
The initial adoption of SFAS No. 121 did not have a material impact on the
Company's consolidated financial position or results of operations.
(Continued)
F-11
<PAGE>
The Eastwind Group, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
January 3, 1998 and December 31, 1996
NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued
6. Income Taxes
------------
The Company accounts for its income taxes under the liability method specified
by SFAS No. 109, Accounting for Income Taxes. Deferred tax assets and
liabilities are determined based on the difference between the financial
statement and tax bases of assets and liabilities as measured by the enacted
tax rates which will be in effect when these differences reverse. Deferred tax
expense is the result of changes in deferred tax assets and liabilities. The
Company files a consolidated federal income tax return, and the amount of
income tax expense or benefit is computed and allocated on a separate return
basis.
7. (Loss) Earnings Per Share
-------------------------
The Company adopted the provisions of SFAS No. 128, Earnings Per Share. SFAS
No. 128 eliminates primary and fully diluted earnings per share (EPS) and
requires the presentation of basic and diluted EPS in conjunction with the
disclosure of the methodology used in computing such EPS. Basic EPS excludes
dilution and is computed by dividing income available to common shareholders by
the weighted average common shares outstanding during the period. Diluted EPS
takes into account the potential dilution that could occur if securities or
other contracts to issue Common stock were exercised and converted into Common
stock. Prior period EPS calculations have been restated to reflect the
adoption of SFAS No. 128.
All options and warrants to purchase shares of Common stock were not included
in the computation of EPS because the exercise prices were greater than the
average market prices of the common shares (NOTES M and N).
<TABLE>
<CAPTION>
January 3, December 31,
1998 1996
------------ ------------
<S> <C> <C>
Net (loss) income $(4,349,904) $ 315,684
Net income from operations of discontinued subsidiary 101,507 -
Less preferred stock dividends 193,500 99,321
----------- ----------
(Loss) income available to common stockholders
from continuing operations $(4,644,911) $ 216,363
=========== ==========
Shares used in computing (loss) earnings per share 2,842,848 1,971,137
=========== ==========
Per share data
(Loss) income from continuing operations $ (1.63) $ 0.11
=========== ==========
Net income from discontinued operations (NOTE R) $ 0.03 $ -
=========== ==========
</TABLE>
(Continued)
F-12
<PAGE>
The Eastwind Group, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
January 3, 1998 and December 31, 1996
NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued
8. Goodwill
--------
Goodwill arising from acquisitions is being amortized using the straight-line
method over 20 years. Management reviews the valuation and amortization of
goodwill on an ongoing basis. As part of this review, the Company estimates
the value and the estimated undiscounted future net income expected to be
generated by the related subsidiary to determine if impairment has occurred
(NOTES H and R).
9. Other Information
-----------------
In June 1997, the Financial Accounting Standards Board (FASB) issued SFAS No.
130, Reporting Comprehensive Income. SFAS No. 130 establishes standards to
provide prominent disclosure of comprehensive income items. Comprehensive
income is the change in equity of a business enterprise during a period from
transactions and other events and circumstances from nonowner sources. SFAS
No. 130 is effective for all periods beginning after December 15, 1997.
Subsequent to the effective date, all prior-period amounts are required to be
restated to conform to the provisions of SFAS No. 130. The adoption of SFAS
No. 130 is not expected to have a material impact on the Company's consolidated
financial position or results of operations.
In June 1997, the FASB issued SFAS No. 131, Disclosures about Segments of an
Enterprise and Related Information. SFAS No. 131 requires that public business
enterprises report certain information about operating segments in complete
sets of financial statements of the enterprise and in condensed financial
statements of interim periods issued to shareholders. It also requires that
public business enterprises report certain information about their products and
services, the geographic areas in which they operate, and their major
customers. SFAS No. 131 is effective for all periods beginning after December
15, 1997. The adoption of SFAS No. 131 will have no impact on the Company's
consolidated financial position or results of operations.
10. Reclassifications
-----------------
Certain reclassifications have been made to the 1996 financial statements to
conform to the 1997 presentation.
NOTE C - REALIZATION OF ASSETS
The accompanying financial statements have been prepared in conformity with
generally accepted accounting principles, which contemplate continuation of the
Company as a going concern. However, the Company has sustained substantial
losses from operations in 1997.
(Continued)
F-13
<PAGE>
The Eastwind Group, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
January 3, 1998 and December 31, 1996
NOTE C - REALIZATION OF ASSETS - Continued
The Company experienced a net loss in the fiscal year ended January 3, 1998 of
$4,349,904, which resulted in cash used in operations of $2,675,533. Cash
resources of the Company are not sufficient to sustain such cash losses, should
they continue to occur. The Company has been attempting to refinance its
senior debt in order to expand its lines of credit and borrow on under-
leveraged assets to solve cash flow difficulties. The refinance project has
been delayed due principally to the Company's current inability to meet certain
closing requirements of the lender.
In view of the matters described in the preceding paragraph, recoverability of
a major portion of the recorded asset amounts shown in the accompanying
consolidated balance sheets is dependent upon continued operations of the
Company, which in turn is dependent upon the Company's ability to meet its
financing requirements on a continuing basis, to maintain present financing,
and to succeed in its future operations. The financial statements do not
include any adjustments relating to the recoverability and classification of
recorded asset amounts or amounts and classification of liabilities that might
be necessary should the Company be unable to continue in existence.
Management has taken steps to revise its operating and financial condition,
which it believes are sufficient to provide the Company with the ability to
continue in existence. In addition to closing down certain unprofitable
operations as noted in NOTE R, the Company has instituted certain revenue-
enhancing measures and cost-cutting programs. As noted above, the Company is
also in the process of attempting to refinance its senior debt and continues to
work toward raising additional capital through private placements.
NOTE D - ACQUISITIONS
1. Wickersham
----------
On May 24, 1996, the Company purchased convertible preferred stock of
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 had a receivable
from Wickersham of $91,493 as of December 31, 1996, representing working
capital advances and dividends receivable.
In January 1997, the Company acquired all of the outstanding Common stock of
Wickersham in exchange for 30,000 shares of the Company's Common stock. The
acquisition was accounted for using the purchase method of accounting. The
fair value of assets acquired and liabilities assumed was $2,667,424 and
$2,274,924, respectively.
(Continued)
F-14
<PAGE>
The Eastwind Group, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
January 3, 1998 and December 31, 1996
NOTE D - ACQUISITIONS - Continued
2. Lavelle
-------
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 was owned by nonaffiliates 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 a rate of 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 was subordinate to the equipment
facility indebtedness. In addition, the Company pledged a $100,000 security
interest in favor of the equipment facility lender. As of 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 have been 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 acquired 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 was
accounted for using the purchase method of accounting. The fair value of
assets acquired and liabilities assumed was $2,550,434 and $2,531,410,
respectively.
3. Pro Forma Information
---------------------
The following unaudited pro forma information is presented for the acquisition
of Centennial, Wickersham and Lavelle as if the acquisition had occurred on
January 1, 1996. 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>
December 31,
1996
------------
<S> <C>
Net sales $47,282,000
Net (loss) available to common stockholders $ (78,000)
Pro forma (loss) per share available to common stockholders $ ( 0.04)
Shares used in computing pro forma loss per share 1,971,137
</TABLE>
F-15
<PAGE>
The Eastwind Group, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
January 3, 1998 and December 31, 1996
<TABLE>
<CAPTION>
NOTE E - ACCOUNTS RECEIVABLE
January 3, December 31,
1998 1996
------------ -------------
<S> <C> <C>
Trade receivables $8,877,277 $7,699,041
Retainage receivables 361,124 316,822
Allowance for doubtful accounts (288,353) (207,079)
---------- ----------
8,950,048 7,808,784
Less retainage receivables due in over one year 153,021 153,021
---------- ----------
$8,797,027 $7,655,763
========== ==========
</TABLE>
Polychem sells clarifier components to general contractors for use in building
and maintaining wastewater treatment facilities operated by government
municipalities. Sales 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.
<TABLE>
<CAPTION>
NOTE F - INVENTORIES
January 3, December 31,
1998 1996
----------- ------------
<S> <C> <C>
Raw materials $1,599,996 $1,246,482
Work-in-process 2,362,413 1,189,328
Finished goods 1,678,862 1,565,197
---------- ----------
$5,641,271 $4,001,007
========== ==========
</TABLE>
Had the FIFO method of valuing all inventories of Princeton and Polychem been
used, the value of inventories would not have been significantly different as
of January 3, 1998 and December 31, 1996.
<TABLE>
<CAPTION>
NOTE G - PROPERTY, PLANT AND EQUIPMENT
Estimated January 3, December 31,
useful lives 1998 1996
---------------- ----------- ------------
<S> <C> <C> <C>
Land - $352,135 $ 368,916
Buildings and improvements...... 10 - 15 years 2,898,881 2,142,863
Machinery and equipment......... 3 - 7 years 6,673,136 5,141,739
----------- ------------
9,924,152 7,653,518
Less accumulated depreciation 1,824,005 629,125
----------- ------------
$8,100,147 $7,024,393
=========== ============
</TABLE>
(Continued)
F-16
<PAGE>
The Eastwind Group, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
January 3, 1998 and December 31, 1996
NOTE G - PROPERTY, PLANT AND EQUIPMENT - Continued
Machinery and equipment as of January 3, 1998 and December 31, 1996 includes
$4,017,872 and $3,484,800, respectively, of equipment under capital leases,
with accumulated depreciation of $732,104 and $205,509, respectively.
<TABLE>
<CAPTION>
NOTE H - GOODWILL AND OTHER ASSETS
January 3, December 31,
1998 1996
----------- ------------
<S> <C> <C>
Goodwill, net $7,036,605 $6,042,889
Covenant not to compete, net 439,583 489,583
Retainage receivables due in over one year 153,021 153,021
Deferred financing, net 225,956 138,253
Cash surrender value of officers' life insurance - 92,496
Other 384,355 108,247
---------- ----------
$8,239,520 $7,024,489
========== ==========
NOTE I - LONG-TERM DEBT
January 3, December 31,
1998 1996
---------- ------------
Princeton term note payable to bank, secured by all of its
assets, due in monthly installments of $8,333, plus
interest at the bank's prime rate plus 3.75% (12.25% at
January 3, 1998), repaid February 1998 $ 58,338 $ 158,341
Polychem term note payable to the Budd Company, interest
at 8%, principal payable in quarterly installments of
$81,305 commencing March 1998, through March 2003 1,626,093 1,626,093
Polychem note payable to bank, interest at the bank's prime
rate plus 1.5% (10% at January 3, 1998), payable
in 18 monthly installments of $21,155 and 41 monthly
installments of $29,617 plus interest, with a final payment
in March 2000 951,963 1,307,364
</TABLE>
(Continued)
F-17
<PAGE>
The Eastwind Group, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
January 3, 1998 and December 31, 1996
<TABLE>
<CAPTION>
NOTE I - LONG-TERM DEBT - Continued
January 3, December 31,
1998 1996
---------- ------------
<S> <C> <C>
Centennial notes payable to individuals, interest at 12.5%,
repaid 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, through November 1999 191,312 251,235
Centennial term note payable to a vendor, interest at 8%, due
in 24 semimonthly 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
7.2%, due in monthly installments of principal and interest
of $5,909 through March 2017 735,206 750,000
Ivy note payable to a bank, secured by certain property, interest at
the bank's prime rate plus 2% (10.5% at January 3, 1998), due
in monthly installments of principal and interest of $10,757,
through April 2017 1,065,075 1,054,750
Ivy term note payable to a bank, secured by certain property, interest
at 9.4%, due in monthly installments of principal and interest
of $2,777, through December 2016 295,934 300,000
Ivy term note payable to a bank, secured by certain property, interest
at 10.1%, due in monthly installments of principal and interest of
$5,856, through July 2002 258,052 -
Ivy automobile notes payable, secured by the automobiles, interest
at 9% and 10%, due in monthly installments of principal and
interest of $568 each, maturing June 2001 and May 2002 43,869 -
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% (13% at January 3, 1998) 360,000 450,000
</TABLE>
(Continued)
F-18
<PAGE>
The Eastwind Group, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
January 3, 1998 and December 31, 1996
<TABLE>
<CAPTION>
NOTE I - LONG-TERM DEBT - Continued
January 3, December 31,
1998 1996
---------- ------------
<S> <C> <C>
Wickersham term note payable to bank, due in monthly installments
of $6,000 principal and interest at the bank's prime rate plus
1.75% (10.25% at January 3, 1998), secured by the assets and
certain real estate of the Company $ 164,935 $ -
Wickersham debt payable to an equipment supplier, due in monthly
installments of $1,835 principal, secured by equipment 52,495 -
Wickersham debt payable to financing company, due in monthly
installments of $1,083 principal, unsecured 14,785 -
Eastwind subordinated note payable to an investor 357,052 310,752
---------- ----------
6,175,109 6,417,535
Less current portion 1,238,069 880,012
---------- ----------
$4,937,040 $5,537,523
========== ==========
</TABLE>
Interest expense of $728,570 and $312,624 on the term notes was charged to
operations for the years ended January 3, 1998 and December 31, 1996,
respectively.
1. Princeton
---------
Princeton has a $1,000,000 demand line of credit with a bank through June 30,
1998, subject to renewal. Borrowings under the line of credit bear interest at
the bank's prime plus 3.75% (12.25% at January 3, 1998) and are limited to 80%
of eligible accounts receivable plus the lesser of 50% of paper stock inventory
or $350,000. Outstanding borrowings were $270,024 and $343,812 as of January
3, 1998 and December 31, 1996, respectively. Interest expense of $70,728 and
$64,888 was charged to operations for the years ended January 3, 1998 and
December 31, 1996, respectively. The line is collateralized by substantially
all of Princeton's assets. The line of credit and term loan were repaid in
February 1998 (NOTE R).
(Continued)
F-19
<PAGE>
The Eastwind Group, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
January 3, 1998 and December 31, 1996
NOTE I - LONG-TERM DEBT - Continued
2. 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% (10% at January 3, 1998) and are limited to 75% of eligible
accounts receivable plus the lesser of 55% of eligible inventory or $1,000,000
less 55% of then undrawn amounts of outstanding letters of credit for inventory
purchases. Outstanding borrowings were $1,492,511 and $310,139 as of January
3, 1998 and December 31, 1996, respectively. As of January 3, 1998, there was
$7,507,489 available under the line. Interest expense of $139,190 and $91,155
was charged to operations for the years ended January 3, 1998 and December 31,
1996, respectively. The line is collateralized by substantially all of
Polychem's assets, except for 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.
3. Centennial
----------
Centennial has a $2,500,000 line of credit with a bank expiring on June 30,
1998. Borrowings under the line bear interest at the bank's prime rate plus
1.25% (9.75% at January 3, 1998) and are limited to 80% of eligible accounts
receivable as defined. Outstanding borrowings were $2,499,207 and $2,223,205
at January 3, 1998 and December 31, 1996, respectively. Interest expense of
$236,552 and $43,793 was charged to operations for the year ended January 3,
1998 and the period from acquisition (October 17, 1996) through December 31,
1996, respectively. The line of credit is collateralized by substantially all
of Centennial's assets and the unlimited guarantee 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.
4. 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% (12% at January 3, 1998) 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 $1,108,631 and $749,209 as
of January 3, 1998 and December 31, 1996, respectively. Interest expense of
$128,780 was charged to operations for the year ended January 3, 1998. 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, 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.
(Continued)
F-20
<PAGE>
The Eastwind Group, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
January 3, 1998 and December 31, 1996
NOTE I - LONG-TERM DEBT - Continued
In connection with the acquisition of Ivy, Ivy obtained a $1,804,750 bridge
note which was originally due on March 31, 1997. During 1997, Ivy replaced the
bridge note with $750,000 and $1,054,750 of term notes. The Company sold all
of the outstanding Common stock of Ivy in February 1998 (NOTE R).
5. Wickersham
----------
Wickersham has a $1,000,000 demand line of credit with a finance company.
Wickersham pledges accounts receivable to the lender and receives 80% of their
face value. Customers are instructed to make payments directly to the lender.
The lender sets up a reserve account for the 20% portion of the receivable that
was not funded at the time of purchase. The lender charges the reserve account
for interest and fees, and remits the balance to Wickersham on a weekly basis.
Interest is charged at the bank's prime rate plus 2% (10.5% at January 3,
1998). Outstanding borrowings were $668,203 at January 3, 1998. Interest
expense of $112,362 was charged to operations for the year ended January 3,
1998. The line is collateralized by accounts receivable and inventory (NOTE
R).
6. 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 $6.00 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 $46,300
and $54,452 was recorded for the years ended January 3, 1998 and December 31,
1996, respectively. The effective interest rate on the subordinated debenture
is 14.8%.
Future maturities of debt as of January 3, 1998 are as follows:
<TABLE>
<S> <C>
1998 $1,049,412
1999 951,792
2000 741,534
2001 491,925
2002 325,258
----------
3,559,921
Less unamortized interest 142,948
----------
3,416,973
Add Ivy debt (NOTE R) 2,758,136
----------
$ 6,175,104
==========
</TABLE>
F-21
<PAGE>
The Eastwind Group, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
January 3, 1998 and December 31, 1996
NOTE J - CAPITALIZED LEASE OBLIGATIONS
The Company leases certain equipment under capital leases. The weighted
average interest rate was 14.2% and 11.2% for the years ended January 3, 1998
and December 31, 1996, respectively. Interest expense of $352,584 and $108,465
on the capitalized lease obligations was charged to operations for the years
ended January 3, 1998 and December 31, 1996, respectively. Future minimum
lease payments as of January 3, 1998 are as follows:
<TABLE>
<S> <C>
1998 $1,096,588
1999 1,044,980
2000 254,208
2001 195,222
2002 193,375
----------
Total minimum lease payments 2,784,373
Less amounts representing interest 459,451
----------
Present value of future minimum lease payments 2,324,922
Less current portion 997,516
Add Ivy capital lease obligations (NOTE R) 92,385
----------
$ 1,419,791
==========
</TABLE>
NOTE K - EMPLOYEE BENEFIT PLANS
1. 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 for the years ended
January 3, 1998 and December 31, 1996 were $30,270 and $30,708, 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 $93,964
and $97,920 for the years ended January 3, 1998 and December 31, 1996,
respectively.
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.
(Continued)
F-22
<PAGE>
The Eastwind Group, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
January 3, 1998 and December 31, 1996
NOTE K - EMPLOYEE BENEFIT PLANS - Continued
All employees of Wickersham that meet minimum eligibility requirements, as
defined, may participate in a qualified 401(k) plan. Participants can
contribute a portion of their pretax compensation to the plan. Wickersham may
make contributions to the plan at its discretion. For the year ended January
3, 1998, Wickersham did not make a discretionary contribution; however,
Wickersham provided a matching contribution on certain employee contributions
to the plan. The amounts of matching contributions for the years ended January
3, 1998 and December 31, 1996 were $9,694 and $12,466, respectively.
All employees of Centennial who 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, on a
discretionary basis, up to 25% of the first 6% of compensation contributed by
the employee. Contributions to the plan for the year ended January 3, 1998 and
the period from acquisition (October 17, 1996) to December 31, 1996 were $-0-
and $10,571, respectively. Participants vest in Centennial's contributions
over six years.
2. Defined Benefit Plans
---------------------
In accordance with the terms of the Polychem acquisition agreement, 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 Statement of
Financial Accounting Standards (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>
January 3, December 31,
1998 1996
------------------- --------------------
<S> <C> <C>
Actuarial present value of
Vested benefit obligation $2,213,711 $2,223,820
Nonvested benefit obligation - 895
---------- ----------
Accumulated benefit obligation 2,213,711 2,224,715
Fair market value of plan assets 2,157,972 1,907,801
---------- ----------
Projected benefit obligation in excess of plan assets 55,739 316,914
Unrecognized net gain (loss) 221,635 (128,332)
Unrecognized prior service cost (61,393) -
---------- ----------
Accrued pension cost $ 215,981 $ 188,582
========== ==========
</TABLE>
(Continued)
F-23
<PAGE>
The Eastwind Group, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
January 3, 1998 and December 31, 1996
NOTE K - EMPLOYEE BENEFIT PLANS - Continued
A discount rate of 7.0% and 7.5% and an expected long-term rate of return on
plan assets of 9.0% and 8.5% were used in determining the actuarial present
value of the obligations as of January 3, 1998 and December 31, 1996,
respectively. The pension plan assets held as of January 3, 1998 and December
31, 1996 consist of amounts invested in fixed-income money market funds.
The net periodic pension cost includes the following components:
<TABLE>
<CAPTION>
January 3, December 31,
1998 1996
----------- -------------
<S> <C> <C>
Service cost benefits earned during the period... $ 28,445 $ 25,639
Interest cost on projected benefit obligation.... 155,221 152,192
Return on assets................................. (470,163) (208,168)
Net amortization and deferrals................... 313,896 55,949
--------- ---------
$ 27,399 $ 25,612
========= =========
</TABLE>
3. 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% was used in
determining the actuarial present value of the obligations as of January 3,
1998 and December 31, 1996. The unfunded accumulated postretirement benefit
obligation as of January 3, 1998 and December 31, 1996 was $25,782 and $29,928,
respectively, and the net periodic postretirement benefit cost for the years
ended January 3, 1998 and December 31, 1996 was immaterial.
NOTE L - INCOME TAXES
The components of income taxes are as follows:
<TABLE>
<CAPTION>
January 3, December 31,
1998 1996
--------- --------
<S> <C> <C>
Current
Federal $ (10,811) $ 38,834
State 10,070 182,299
--------- --------
(741) 221,133
--------- --------
Deferred
Federal (811,000) 146,108
State - (25,486)
--------- --------
(811,000) 120,622
Decrease in valuation allowance - (79,828)
--------- --------
$(811,741) $261,927
========= ========
</TABLE>
(Continued)
F-24
<PAGE>
The Eastwind Group, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
January 3, 1998 and December 31, 1996
NOTE L - INCOME TAXES - Continued
The reconciliation of the statutory federal rate to the Company's effective
income tax rate is as follows:
<TABLE>
<CAPTION>
January 3, December 31,
1998 1996
------------ --------------
<S> <C> <C>
Statutory tax (benefit) provision........................ (34.0)% 34.0%
State income tax provision, net of federal tax benefit... 0.2 17.9
Increase (decrease) in valuation allowance............... 11.4 (13.8)
Other.................................................... 5.9 7.2
------ -----
(16.5)% 45.3%
====== ======
</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.
The tax effect of temporary differences that give rise to deferred income taxes
is as follows:
<TABLE>
<CAPTION>
January 3, December 31,
1998 1996
----------- -------------
<S> <C> <C>
Deferred tax assets
Accruals and reserves $ 288,935 $ 169,748
Inventory 19,301 -
Net operating loss carryforwards 979,492 -
Valuation allowance on deferred tax asset (414,289) -
Other 20,183 50,726
--------- ---------
893,622 220,474
--------- ---------
Deferred tax liabilities
Property, plant and equipment (563,622) (523,709)
Inventory - (177,765)
--------- ---------
(563,622) (701,474)
--------- ---------
</TABLE> $ 330,000 $ (481,000)
========== ==========
F-25
<PAGE>
The Eastwind Group, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
January 3, 1998 and December 31, 1996
NOTE M - EQUITY TRANSACTIONS
In May 1996, the Company issued 1,000 shares of its newly designated Series A
preferred stock (the Series A Preferred Stock) to a third-party investor for
gross proceeds of $1,000,000. The Series A Preferred Stock has a stated value
of $1,000 per share and pays quarterly dividends at 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 30 days'
prior notice at the stated value per share plus accrued and unpaid dividends
thereon to the date of redemption. The holders of the Series A Preferred Stock
are entitled to payment of the stated value plus accrued and unpaid dividends
thereon, prior to payment in respect of any class of capital stock of the
Company, in the event of a liquidation or dissolution of the Company. The
Series A Preferred Stock is not entitled to any voting rights. In connection
with the issuance of the Series A Preferred Stock, the Company issued 220,000
Common stock purchase warrants which are exercisable at $6.00 per share until
they expire on May 10, 2003. The warrants were valued at $521,400 for
financial reporting purposes and 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
1-1/4 Common stock purchase warrants, for $1,200,000. Each warrant is
exercisable at $3.00 per share for a three-year period commencing 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 the
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 (NOTE D), 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, warrants were exercised at prices ranging from $3.50 to $6.00.
The net proceeds from the exercise of these warrants was $1,781,000.
In 1997, in conjunction with the issuance of shares of Common stock, the
Company issued Common stock purchase warrants to acquire 700,000 shares of the
Company's Common stock at exercise prices ranging from $3.00 to $5.00.
At January 3, 1998, the Company has reserved 1,002,500 shares of Common stock
for issuance upon exercise of outstanding warrants at prices ranging from $1.50
to $6.63, which includes warrants held by officers/stockholders to purchase
385,000 shares of Common stock at an exercise price of $4.00.
F-26
<PAGE>
The Eastwind Group, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
January 3, 1998 and December 31, 1996
NOTE N - STOCK PLANS
The Company has two stock plans that 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, 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
- ------------------------------ -------- ----- ------- -----
Grants 10,000 6.75 - -
Forfeitures.................. (162,500) 5.31 -
-------- ----- ------- -----
Balance, January 3, 1998..... 427,500 $5.32 160,000 $7.89
======== ===== ======= =====
</TABLE>
These options vest ratably over three years. As of January 3, 1998, 326,655
options were exercisable and 1,412,500 were available for future grant. As of
January 3, 1998, no SARs had been granted.
(Continued)
F-27
<PAGE>
The Eastwind Group, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
January 3, 1998 and December 31, 1996
NOTE N - STOCK PLANS - Continued
The Company accounts for its stock option plans under APB Opinion No. 25,
Accounting for Stock Issued to Employees. Accordingly, no compensation expense
has been recognized for stock options issued to employees. The disclosure
requirements of SFAS No. 123, Accounting for Stock-Based Compensation, 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) income available to common stockholders and (loss) earnings per
share available to common stockholders would have been as follows:
<TABLE>
<CAPTION>
January 3, December 31,
1998 1996
------------ -------------
<S> <C> <C>
Net (loss) income available to common stockholders
As reported $(4,543,404) $ 216,363
Pro forma (5,377,054) (407,023)
(Loss) earnings per share available to common stockholders
As reported (1.60) 0.11
Pro forma (1.89) (0.21)
</TABLE>
The weighted average fair value of each stock option granted during the years
ended January 3, 1998 and December 31, 1996 was $4.22 and $3.19, 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>
January 3, December 31,
1998 1996
----------- -------------
<S> <C> <C>
Risk-free interest rate 6.7% 6.3%
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 January 3, 1998 is 8.3 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 (NOTE R).
F-28
<PAGE>
The Eastwind Group, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
January 3, 1998 and December 31, 1996
NOTE O - COMMITMENTS AND CONTINGENCIES
1. Operating Leases
----------------
The Company leases certain facilities and equipment under noncancellable
operating leases that expire through June 2002. Rent expense of $1,483,295 and
$491,844 has been charged to operations for the years ended January 3, 1998 and
December 31, 1996, respectively. Minimum future rental payments under leases
as of January 3, 1998 are as follows:
<TABLE>
<S> <C>
1998 $ 531,199
1999 509,569
2000 416,071
2001 317,500
2002 158,750
---------
$ 1,933,089
==========
</TABLE>
2. Employment Agreements
---------------------
In 1995, the Company entered into a five-year employment agreement with an
executive officer/stockholder. This agreement provides for aggregate base
compensation of $250,000 per year plus scheduled increases in base compensation
of $25,000 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 officer/stockholder is entitled to incentive
compensation equal to 3% of pretax income if his respective stock ownership is
reduced to 10% or less. No additional compensation was earned during the
fiscal years ended January 3, 1998 and December 31, 1996. The employment
agreement also provides for certain payments upon termination of employment and
change in control of the Company.
By agreement dated June 20, 1997 and effective July 1, 1997, the former
President of the Company resigned from his office and from his position as a
member of the Executive Committee of the Board of Directors. He remained a
Director of the Company until his resignation in December 1997. The agreement
provides for equal monthly payments in satisfaction of his employment contract
plus a lump-sum contingent payment. That portion that was fixed and
determinable ($500,000) has been recorded in the accompanying financial
statements as a charge to income at its present value.
In January 1997, the Company entered into an employment agreement with another
executive. Such agreement provides for a base salary of $150,000 per year,
together with discretionary bonuses, if any, to be declared by the Board of
Directors. The agreement also provides for certain benefits, including
vacation, health and medical insurance, car allowance 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.
The Company entered into a one-year employment agreement with another executive
officer. This agreement provides for a base compensation of $84,000 per year
plus benefits, which was subsequently increased to $108,000.
(Continued)
F-29
<PAGE>
The Eastwind Group, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
January 3, 1998 and December 31, 1996
NOTE O - COMMITMENTS AND CONTINGENCIES - Continued
3. Litigation
----------
In connection with the acquisition of Centennial, the Company issued Series B
Redeemable Preferred Voting stock, agreed to pay the former owner $100,000 per
year over three years, and guaranteed the aggregate sales price of the 182,232
shares of the Company's Common stock to be $7.00 per share.
The Series B Redeemable Preferred Voting stock issued has stated value of $100
per share, and the holder is entitled to received cash dividends at 6% per
year. Additionally, the holder 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
January 3, 1998 and December 31, 1996 were $60,750 and $6,750, respectively.
In March 1997, the Company instituted a demand for arbitration against the
former owner of Centennial pursuant to the indemnification provisions of the
stock purchase agreement. Prior to the formal arbitration proceedings, the
Company received an offer of settlement from the former owner, which would
relieve the Company of:
. the remainder of the $100,000 per year payments ($191,312 at January 3,
1998);
. any obligation relating to the Series B Preferred Voting Stock, including
all accrued dividends; and
. any responsibility for market price support on the Company's Common
stock.
The Company also agreed to issue 45,000 additional shares of its Common stock
to the former owner.
While there has been an agreement in principle, the settlement agreement has
not been executed.
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.
NOTE P - SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid for interest was $1,715,458 and $706,901 for the years ended January
3, 1998 and December 31, 1996, respectively.
The Company paid income taxes of $-0- and $337,564 for the years ended January
3, 1998 and December 31, 1996, respectively.
The Company entered into $85,685 and $453,189 of capital lease obligations for
computer equipment and various furniture and fixtures for the years ended
January 3, 1998 and December 31, 1996, respectively.
F-30
<PAGE>
The Eastwind Group, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
January 3, 1998 and December 31, 1996
NOTE Q - INDUSTRY SEGMENT AND FOREIGN SALES INFORMATION
The Company continues operations in three business segments through its
subsidiaries: Polychem, Team Graphics and Lavelle. Net sales, operating income
(loss), identifiable assets, capital expenditures, and depreciation and
amortization for continuing operations are presented below:
<TABLE>
<CAPTION>
Year Ended January 3, 1998
--------------------------------------------------------------------------
Corporate and
Polychem TEAM Graphics Lavelle eliminations Total
----------- -------------- ----------- -------------- ------------
<S> <C> <C> <C> <C> <C>
Net sales $12,130,000 $26,631,000 $4,680,000 $ - $43,441,000
Operating income (loss) 1,046,000 (2,169,000) 604,000 (3,354,000) (3,874,000)
Identifiable assets 7,311,000 16,442,000 3,059,000 169,000 26,981,000
Capital expenditures - 294,000 96,000 13,000 402,000
Depreciation and amortization 233,000 1,241,000 186,000 34,000 1,694,000
Year Ended December 31, 1996
--------------------------------------------------------------------------
Corporate and
Polychem Printing Ivy eliminations Total
----------- ------------- ----------- ------------- -----------
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
</TABLE>
For the fiscal year ended January 3, 1998, Polychem's sales to foreign
customers were approximately $2,722,000, or 6% of consolidated net sales, and
consist of sales to customers in Asia (1%), Europe (3%) and North America (2%).
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 as of December
31, 1996.
F-31
<PAGE>
The Eastwind Group, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
January 3, 1998 and December 31, 1996
NOTE R - SUBSEQUENT EVENTS
On January 26, 1998, Lavelle purchased the building they were occupying for
$1,670,670. Lavelle financed the building through mortgages totalling
$1,652,000.
The stock subscription receivable of $250,000 recorded at January 3, 1998 was
paid in February 1998.
On February 23, 1998, the Company sold all of the outstanding Common stock of
Ivy for $1,152,250. The Company received $755,000 in cash and $397,250 in the
form of a promissory note due in 36 monthly principal installments of $11,635
plus interest of 8.5%. The consolidated balance sheet at January 3, 1998
contains the net assets of Ivy in the amount of $324,128 consisting of the
following:
<TABLE>
<S> <C>
Current assets $ 557,386
Noncurrent assets 4,389,251
Current liabilities 1,995,717
Noncurrent liabilities 2,650,323
Stockholders' equity 300,597
</TABLE>
Ivy revenues were $6,343,000 for the fiscal year ended January 3, 1998.
Due to continuing operating losses, the Company decided to close down the
operations of Premier Book Press, effective April 13, 1998. As of January 3,
1998, the Company has written off net goodwill related to the Wickersham and
Princeton acquisitions, and recorded valuation allowances on certain assets.
F-32
<PAGE>
SIGNATURES
In accordance with Section 13 or 15d 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 20th day of April, 1998.
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 20, 1998
Chief Executive Officer
/s/ Anthony J. Mendicino
- ----------------------------
Anthony J. Mendicino President and
Chief Operating Officer
and Director April 20, 1998
/s/ William B. Miller
- ----------------------------
William B. Miller Senior Vice President April 20, 1998
and Chief Financial Officer
and Director
/s/ Bruce P. Murray
- ----------------------------
Bruce P. Murray Director April 20, 1998
/s/ Andrew Panzo
- ----------------------------
Andrew Panzo Director April 20, 1998
/s/ Edward F. Sager
- ----------------------------
Edward F. Sager Director April 20, 1998
</TABLE>
Page 30
<PAGE>
NOTE FOR STOCK EXCHANGE AGREEMENT
---------------------------------
This Exchange Agreement is made as of this 19th day of November, 1997 by
and among The Eastwind Group, Inc., a Delaware corporation ("Eastwind") and The
D.A.R. Group, a New York corporation ("DAR").
WHEREAS, Eastwind is the holder and payee of the following obligations from
DAR: (i) a Note of which DAR is the maker dated April 16, 1997 in a principal
amount of $530,000; (ii) the obligation of DAR to pay $40,000 to Eastwind at the
date of the delivery of the April 16, 1997 Note, which amount was not paid; and
(iii) a Note of which DAR is the maker dated May 15, 1997 in a principal amount
of $42,000. Such notes and obligations, totaling a principal amount of
$612,000, are intended to be exchanged hereunder.
WHEREAS, contemporaneously with the delivery of this Exchange Agreement,
DAR has exercised additional common stock purchase warrants of Eastwind for a
total of 200,000 shares of Eastwind common stock at an exercise price of $2.50
per share, by the payment in cash of $350,000 and by an open obligation of DAR
to Eastwind of $150,000, which obligation together with the notes and
obligations already outstanding and referenced above, total $762,000 in
principal amount, and are all to be exchanged hereunder (hereafter referred to
collectively as the "DAR Obligations").
WHEREAS, DAR currently owns, among other shares, 125,000 shares of the
common stock of Jet Aviation Trading, Inc., a Florida corporation ("Jet
Aviation"), which stock is currently restricted stock, and which stock is to be
exchanged hereunder for the DAR Obligations (hereafter referred to as the "Jet
Aviation Shares").
WHEREAS, Jet Aviation is currently in the process of registering a number
of shares of its common stock, including the Jet Aviation Shares, in an initial
public offering with the Securities and Exchange Commission ("SEC") pursuant to
a Registration Statement on Form SB-2 (the "Registration Statement").
NOW, THEREFORE, the parties hereto agree as follows:
1. Exchange of DAR Obligations for Jet Aviation Shares.
---------------------------------------------------
1.1 Eastwind wishes to exchange the DAR Obligations for the Jet
Aviation Shares and DAR wishes to exchange the Jet Aviation Shares for the DAR
Obligations.
1.2 The exchange of the DAR Obligations for the Jet Aviation
Shares shall occur at a Closing held at Eastwind as soon as reasonably
practicable following the date of execution and delivery of this Exchange
Agreement by the parties, but in no event later than January 31, 1998. It shall
be a condition to Closing for the benefit of Eastwind that DAR shall
<PAGE>
have delivered all of the Jet Aviation Shares in exchange for the DAR
Obligations, including the other instruments and documents set forth herein. It
shall be a condition to Closing for the benefit of DAR that the DAR Obligations
shall be canceled as of the Closing resulting in no further obligations
thereunder by DAR for principal or interest, except only as otherwise provided
in this Exchange Agreement.
2. Representations and Warranties of Eastwind.
------------------------------------------
2.1 Eastwind is a corporation duly organized, validly existing
and in good standing under the laws of the State of Delaware and has all
requisite power and authority to enter into and perform this Exchange Agreement.
All corporate action on the part of Eastwind, its officers, directors and
stockholders necessary for the authorization, execution and delivery of this
Exchange Agreement, the performance of its obligations hereunder and the
authorization for the delivery of the DAR Obligations in exchange for the Jet
Aviation Shares has been taken prior to the execution and delivery of this
Exchange Agreement. This Exchange Agreement and any other instruments or
agreements to be entered into in connection with the transactions described
herein constitute the valid and legally binding obligations of Eastwind,
enforceable in accordance with their terms except (i) as enforceability may
limited by applicable bankruptcy, insolvency, reorganization, moratorium and
other laws of general application affecting enforcement of creditors' rights
generally, and (ii) as enforceability may be limited by laws relating to the
availability of specific performance, injunctive relief or other equitable
remedies.
2.3 No consent, approval, order or authorization of, or
registration, qualification, designation, declaration or filing with, any
federal, state, local or provincial governmental authority on the part of
Eastwind is required in connection with the consummation of the transactions
contemplated by this Exchange Agreement.
2.4 Eastwind owns title to the DAR Obligations free and clear of
all liens, charges and encumbrances.
3. Representations and Warranties of DAR.
-------------------------------------
3.1 DAR is a corporation duly organized, validly existing and in
good standing under the laws of the State of New York and has all requisite
power and authority to enter into and perform this Exchange Agreement. All
corporate action on the part of DAR, its officers, directors and stockholders
necessary for the authorization, execution and delivery of this Exchange
Agreement, the performance of its obligations hereunder and the authorization
for the delivery of the Jet Aviation Shares and of the Default Note in exchange
for the DAR Obligations has been taken prior to the execution and delivery of
this Exchange Agreement. This Exchange Agreement and any other instruments or
agreements to be entered into in connection with the transactions described
herein constitute the valid and legally binding obligations of DAR, enforceable
in accordance with their terms except (i) as enforceability may limited by
applicable
2
<PAGE>
bankruptcy, insolvency, reorganization, moratorium and other laws of general
application affecting enforcement of creditors' rights generally, and (ii) as
enforceability may be limited by laws relating to the availability of specific
performance, injunctive relief or other equitable remedies.
3.2 No consent, approval, order or authorization of, or
registration, qualification, designation, declaration or filing with, any
federal, state, local or provincial governmental authority on the part of DAR is
required in connection with the consummation of the transactions contemplated by
this Exchange Agreement.
3.3 DAR owns title to the Jet Aviation Shares free and clear of
all liens, charges and encumbrances, and has full power and right to transfer
the Jet Aviation Shares to Eastwind hereunder, the fact that such Jet Aviation
Shares are restricted securities to the contrary notwithstanding.
3.4 DAR has delivered the most recently available draft of the
Registration Statement to Eastwind together with a status report on the progress
of the filing, and DAR has no knowledge of any facts or circumstances which
would render any of the statements made in such Registration Statement to be
untrue nor is it aware of any material omission to such Registration Statement.
3.5 To the best knowledge of DAR, the Jet Aviation Shares, when
delivered to Eastwind in accordance with the terms hereof and in exchange for
the DAR Obligations, will be duly and validly issued, fully paid and non-
assessable shares and will be transferred to Eastwind in compliance with all
applicable federal and state securities laws. Prior to such delivery to
Eastwind, and to the best knowledge of DAR, the Jet Aviation Shares were all
duly and validly authorized and issued, fully paid and non-assessable shares and
were issued to DAR in compliance with all applicable federal and state
securities laws.
3.6 There are no pending or threatened suits, claims or legal
proceedings to which DAR is or has been threatened to be made a party and which
could adversely affect the consummation of the transactions contemplated by this
Exchange Agreement.
3.7 DAR has fully provided Eastwind with all information which
Eastwind has reasonably requested in order to determine whether or not to accept
the Jet Aviation Shares in exchange for the DAR Obligations, including, without
limitation, a copy of Jet Aviation's most recent draft Registration Statement
relating to the Jet Aviation Shares as filed with the SEC. Neither this
Exchange Agreement nor any other information, statements or certificates
provided, made or delivered in connection herewith or in connection with
Eastwind's due diligence investigation conducted hereunder, contains any untrue
statement of a material fact or omits to state a material fact necessary to make
the statements herein not misleading.
3
<PAGE>
4. Jet Aviation Shares.
-------------------
4.1 Eastwind understands that the Jet Aviation Shares are
presently characterized as "restricted securities" under the federal securities
laws in that they were acquired by DAR from Jet Aviation in a transaction not
involving a public offering, and that under such laws and applicable regulations
such securities may only be resold and transferred without registration under
the federal securities laws in certain limited circumstances. It is further
understood that the certificates evidencing the Jet Aviation Shares will bear a
restrictive legend in that regard.
4.2 DAR agrees to provide at the Closing evidence acceptable to
Eastwind and its counsel, either in the form of an appropriate opinion letter of
counsel or by other acceptable evidence from Jet Aviation's securities transfer
agent ("Transfer Agent") that the transfer and assignment of the Jet Aviation
Shares from DAR to Eastwind has been properly made in accordance with all
applicable federal and state securities laws and that when the certificates for
the Jet Aviation Shares are presented by Eastwind to the Transfer Agent in order
to have replacement certificates issued to register the Jet Aviation Shares in
the name of Eastwind, even if such securities remain "restricted securities" and
even if such securities bear restrictive legends, that the Transfer Agent will
issue such certificates and Eastwind will become the unrestricted owner of all
right, title and interest in and to the Jet Aviation Shares, free and clear of
all liens, restrictions, encumbrances, adverse rights or other obligations
(other than applicable federal and state securities laws) impairing the ability
of Eastwind to transfer the Jet Aviation Shares free and clear of any such
encumbrances to any third party.
4.3 DAR shall further provide evidence acceptable to Eastwind
and its counsel that Jet Aviation is currently pursuing a registration of the
Jet Aviation Shares pursuant to the Registration Statement, and shall either
deliver a registration agreement substantially in the form attached hereto as
Exhibit A from Jet Aviation agreeing to register the Jet Aviation Shares held by
Eastwind or shall provide evidence of a comparable registration agreement
already in effect as between Jet Aviation and DAR relating to the Jet Aviation
Shares and appropriate proof of a valid assignment of such registration
agreement, with the written consent of Jet Aviation to such assignment, in favor
of Eastwind.
4.4 DAR shall further provide evidence acceptable to Eastwind
and its counsel, in a form similar to that provided under Section 4.2, that
whether or not the Jet Aviation Shares become registered under the Securities
Act of 1933, as amended, Eastwind will be permitted to offer and transfer the
Jet Aviation Shares back to DAR, and in the event of its default, to the DAR
Principals, pursuant to Section 5 hereof, in such a manner that such transfers
shall not violate applicable federal and state securities laws and in such a
fashion that clear title to such shares may be transferred to DAR or the DAR
Principals, as the case may be.
4
<PAGE>
5. Put Option with respect to the Jet Aviation Shares.
--------------------------------------------------
5.1 Following the date that the Registration Statement is
declared effective by the SEC, or following April 30, 1998 if the Registration
Statement has not been declared effective by such date (the first to occur
referred to herein as the "Option Date"), Eastwind may, but shall not be
required to, require DAR to repurchase all or any portion of the Jet Aviation
Shares (the "Option") at a price per share equal to the greater of (a) the fair
market value per share (as determined on any market upon which the same class of
securities as the Jet Aviation Shares then trade, or in the absence of such an
established market at the median between the bid and asked price per share, less
a discount of $2.00 per share, on the date of the repurchase notice, or (b)
$6.00 per share, by delivering written notice to DAR at any time within ninety
(90) days following the Option Date, which notice shall indicate the number of
shares of the Jet Aviation Shares which Eastwind is requiring DAR to repurchase
(the "Notice"). Promptly following receipt of such Notice by DAR from Eastwind,
and in no event later than fifteen (15) business days following receipt of such
Notice, DAR will be required to repurchase that number of Jet Aviation Shares
offered in such Notice by delivery to Eastwind of a certified or cashier's
check, or by wire transfer of funds, in the full amount of the aggregate
purchase price thereof.
5.2 If within the fifteen (15) business day period set forth
above in paragraph 5.1 DAR has not paid to Eastwind the full amount of the
repurchase price for the Jet Aviation Shares required to be repurchased by it
then DAR shall be in default of this Exchange Agreement within the meaning of
Section 6.1.
6. Default Provisions.
------------------
6.1 If for any reason the full repurchase price for the Jet
Aviation Shares as determined pursuant to paragraph 5.1 above has not been paid
within the fifteen (15) day period by DAR, then DAR shall be in complete default
under this Agreement. If the repurchase price for some, but not all, of the Jet
Aviation Shares tendered for repurchase by Eastwind pursuant to 5.1 above, has
been paid, but a portion has not, then DAR shall be in partial default of this
Agreement in an amount of the full repurchase price determined under Section 5.1
less the amount of such partial repurchase price paid to Eastwind by DAR.
6.2 It shall also be an event of default under this Agreement by
DAR if (i) DAR is liquidated and dissolved, or (ii) DAR becomes insolvent,
applies for the appointment of a receiver, files a petition under any provision
of the federal bankruptcy law or such a petition is filed against it, or makes
an assignment for the benefit of creditors.
6.3 In the event that the repurchase proceeds determined under
Section 5.1 have not been paid in full, then all remaining Jet Aviation Shares
tendered for repurchase by Eastwind pursuant to Section 5.1 which have not been
fully paid for may be retained by Eastwind
5
<PAGE>
as security for offset against amounts owed to it by DAR as a consequence of its
default hereunder.
6.4 Upon the happening of an event of default under this Section
6, Eastwind shall be entitled to immediately confess judgment against DAR, and
DAR hereby authorizes and empowers upon an event of its default any attorney or
attorneys or the prothonotary or clerk of any court of record in the
Commonwealth of Pennsylvania or any other state to appear for and confess
judgment against DAR for such sums as shall have become due under this
Agreement, including the full amount required to be paid by it pursuant to
Section 5.1 hereof if the Option has been exercised by Eastwind, in either case
with or without declaration, with costs of suit, without stay of execution and
with the greater of 5% of such sums or $35,000 added as a reasonable attorneys
fee for collection. DAR hereby waives the right of inquisition on any real
estate levied on, voluntarily condemns the same, authorizes the said
prothonotary or clerk to enter upon the writ of execution said voluntary
condemnation and agrees that said real estate may be sold on a writ of
execution; and also waives and releases all relief from any and all
appraisement, stay or exemption law of any state now in force or hereinafter
enacted. DAR also hereby waives its right to object to and releases all
procedural errors in such proceedings. If a copy of this Agreement, verified by
affidavit of Eastwind or someone on its behalf, shall have been filed in such
action, it shall not be necessary to file the original agreement as a warrant of
attorney. Such authority and power to appear for and enter judgment against DAR
shall not be exhausted by any exercise thereof, and judgment may be confessed as
aforesaid from time to time as often as there is occasion therefor.
7. Indemnification.
---------------
7.1 None of the representations and warranties of Eastwind or
DAR contained in this Exchange Agreement are intended to be extinguished or
otherwise terminated by reason of the Closing of the transactions hereunder, but
are expected to survive such Closing for all relevant statutes of limitation
periods. Whenever any representation has been made by either party hereunder
and is limited by reference to the term "knowledge" or any similar term, such
shall include those facts and circumstances known, or which should have been
known after reasonable investigation, by the officers of such party.
7.2 Each of the parties hereto agrees to indemnify the other and
each officer, director, stockholder, employee and affiliate of the other (the
"Indemnified Parties") for, and hold each Indemnified Party harmless from and
against: (a) any and all damages, losses and other liabilities of any kind,
including, without limitation, judgments and costs of settlement, and (b) any
and all out-of-pocket costs and expenses of any kind, including without
limitation, reasonable fees and disbursements of one counsel for such
Indemnified Parties (selected by Eastwind or DAR, as the case may be) (all of
which expenses shall be periodically reimbursed as incurred), in each case
suffered or incurred in connection with (A) any investigative, administrative or
judicial proceeding or claim (collectively, a "Claim") brought or threatened
relating to or arising out of this Exchange Agreement or the transactions
contemplated hereby or
6
<PAGE>
(B) any inaccuracy or alleged inaccuracy in any representation or warranty of
the indemnifying party ("Indemnitor") made or incorporated by reference in this
Exchange Agreement or by breach or alleged breach by Indemnitor of any covenant
or agreement made or incorporated by reference in this Exchange Agreement;
provided, however, that, without limiting any other remedy such Indemnified
Party may have, such Indemnified Party shall have no right to be indemnified or
held harmless under clause (A) of this section for its own gross negligence or
willful misconduct as finally determined by a court of competent jurisdiction
and provided further that with respect to a Claim referred to in clause (A)
above, (i) Indemnitor shall be entitled to control the defense of such Claim
with counsel reasonably acceptable to the Indemnified Parties (and to pay the
fees and expenses of counsel), unless counsel for either Indemnitor or an
Indemnified Party shall determine that a conflict of interest would occur as a
result of such joint defense, provided that with respect to any Claims in which
the Indemnified Parties are named, the Indemnified Parties shall be entitled to
participate in the defense thereof and shall be required to consent to any
settlement (such consent not to be unreasonably withheld), (ii) Indemnitor shall
not be required to pay any amounts incurred in settlement of any Claim unless it
has consented to such settlement (such consent not to be unreasonably withheld)
and (iii) the Indemnified party shall give Indemnitor notice of such Claim
provided that the failure to give such notice shall not relieve Indemnitor of
its obligation to indemnify hereunder except to the extent Indemnitor is
actually prejudiced thereby. The Indemnified Parties shall provide Indemnitor
with reasonable cooperation in the event of any Claim referred to in clause (A)
above.
8. Miscellaneous.
-------------
8.1 Successors and Assigns.
----------------------
Neither party may, without the prior written consent of the
other, assign its rights under this Exchange Agreement, in whole or in part, and
the terms and conditions of this Exchange Agreement shall enure to the benefit
of and be binding upon the respective successors and assigns of the parties.
Nothing in this Exchange Agreement, express or implied, is intended to confer
upon any party other than the parties hereto or their respective successors and
assigns, any rights, remedies, obligations or liabilities under or by reason of
this Exchange Agreement, except as otherwise expressly provided in this Exchange
Agreement.
8.2 Titles and Subtitles.
--------------------
The titles and subtitles used in this Exchange Agreement are
used for convenience only and are not to be considered in construing or
interpreting this Exchange Agreement.
8.3 Notices.
-------
Unless otherwise provided, any notice required or permitted
under this Exchange Agreement shall be given in writing and shall be deemed
effectively given upon
7
<PAGE>
receipt by the party to be notified or upon deposit with the United States Post
Office, by registered or certified mail, postage prepaid and addressed to the
party to be notified:
If to Eastwind, at the following address:
The Eastwind Group, Inc.
100 Four Falls Corporate Center
Suite 305
West Conshohocken, PA 19428
Attention: Paul A DeJuliis, CEO
If to DAR, at the following address:
The D.A.R. Group
43rd Floor - 30 Broad Street
New York, NY 10004
Attention: ______________________
8.4 Amendments and Waivers.
----------------------
Any term of this Exchange Agreement may be amended and the
observance of any term may be waived (either generally or in a particular
instance and either retroactively or prospectively), only with the written
consent of the parties hereto.
8.5 Severability.
------------
If one or more provisions of this Exchange Agreement are
held to be unenforceable under applicable law, such provision shall be excluded
from this Exchange Agreement and the balance of the Exchange Agreement shall be
interpreted as if such provision were so excluded and shall be enforceable in
accordance with its terms.
8.6 Governing Law.
-------------
This Exchange Agreement shall be governed by and construed
under the laws of the Commonwealth of Pennsylvania without regard to the body of
law controlling conflicts of law.
8.7 Counterparts.
------------
This Exchange Agreement may be executed in two or more
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.
8
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Exchange Agreement
as of the date first above written.
THE EASTWIND GROUP, INC.
By: ________________________________
THE D.A.R. GROUP
By: ________________________________
9
<PAGE>
EXHIBIT 21
Subsidiaries of the Company
(as of January 3, 1998)
Polychem Corporation
Centennial Printing Company
Wickersham Printing Company
Princeton Academic Press
Ivy-Tygart Acquisition Corp
Lavelle Company
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
-----------------------------------------
We have issued our report dated April 17, 1998, accompanying the consolidated
financial statements included in the Annual Report of The Eastwind Group, Inc.
on Form 10-KSB for the fiscal year ended January 3, 1998. We hereby consent to
the incorporation by reference of said report in the Registration Statements of
The Eastwind Group, Inc. on Form S-8 (File No. 333-28103, effective May 30,
1997) and Form S-3 (File No. 333-34697, effective September 10, 1997).
GRANT THORNTON LLP
Philadelphia, Pennsylvania
April 17, 1998
<PAGE>
EXHIBIT 23.2
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation of our
report included in this Form 10-KSB, into The Eastwind Group, Inc.'s previously
filed Form S-8 Registration Statement (File No. 333-28103) filed with the
Securities and Exchange Commission on May 30, 1997 and Form S-3 Registration
Statement (File No. 333-34697) filed with the Securities and Exchange Commission
on August 29, 1997.
ARTHUR ANDERSEN LLP
Philadelphia, Pa.,
April 17, 1998
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<INCOME-PRETAX> (5,332,431) 577,611
<INCOME-TAX> (881,020) 261,927
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