<PAGE>
United States
Securities and Exchange Commission
Washington, DC 20549
FORM 10-QSB
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended July 4, 1998
OR
[ ] Transition report pursuant to section 13 or 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transaction period from ____________ to ____________
Commission File Number: 0-27638
--------------
The Eastwind Group, Inc.
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 23-2732753
- --------------------------------------------------------------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) identification No.)
275 Geiger Road, Philadelphia, PA 19115
- --------------------------------------------------------------------------------
(Address of principal executive offices)
(215) 671-0606
- --------------------------------------------------------------------------------
(Registrant's telephone number, including area code)
Not applicable
- --------------------------------------------------------------------------------
(Former name, former address, and former fiscal year, if changed since last
report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No ______
-----
Yes X No ______
-----
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date.
Common stock, $.10 par value 4,201,019 shares
- ------------------------------------- --------------------------------
(Class) (Outstanding at August 20, 1998)
Transitional Small Business Disclosure format (check one)
Yes ______ No X
-----
<PAGE>
THE EASTWIND GROUP, INC.
Page Number
-----------
PART I.
-------
Item 1. - Financial Statements (unaudited)
Consolidated Balance Sheets as of
July 4, 1998 and January 3, 1998 4
Consolidated Statements of Operations for the
Quarter ended July 4, 1998 and June 28, 1997 and
the Two Quarters ended July 4, 1998 and June 28, 1997 5
Consolidated Statements of Cash Flows for the
Two Quarters ended July 4, 1998 and June 28, 1997 6
Notes to Consolidated Financial Statements 7
Item 2 - Management's Discussion and Analysis of
Results of Operations and Financial Condition 17
PART II.
--------
Item 1 - Legal Proceedings 25
Item 2 - Changes in Securities 25
Item 3 - Defaults on Senior Securities 25
Item 4 - Submission of Matters to a
Vote of Securities Holders 25
Item 5 - Other Information 25
Item 6 - Exhibits and Reports on Form 8-K 25
(2)
<PAGE>
THE EASTWIND GROUP, INC.
PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
- -----------------------------
The following financial information sets forth the operations of The Eastwind
Group, Inc. (the "Company") for the quarter and two quarters ended July 4, 1998
and June 28, 1997. Certain information and footnote disclosures normally
included with financial statements prepared in accordance with generally
accepted accounting principles have been omitted pursuant to SEC rules and
regulations.
In the opinion of management, the following unaudited balance sheets and related
statements of operations and cash flows reflect all adjustments (consisting of
normal recurring adjustments) necessary to present fairly the financial position
at July 4, 1998 and January 3, 1998, and the results of operations and cash
flows for the quarter and two quarters ended July 4, 1998 and June 28, 1997.
(3)
<PAGE>
The Eastwind Group, Inc.
Consolidated Balance Sheets
(Unaudited)
<TABLE>
<CAPTION>
July 4, January 3,
ASSETS 1998 1998
------- -----------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 417,779 $ 64,970
Accounts receivable, net 5,158,506 8,797,027
Stock subscription receivable -- 250,000
Recoverable income taxes -- 240,065
Marketable securities 250,000
Inventories 2,468,252 5,641,271
Prepaid expenses 127,673 224,515
Prepaid income taxes 8,315 25,977
------------ ------------
Total current assets 8,430,525 15,243,825
Property, plant and equipment, net 7,071,554 8,100,147
Deferred income taxes -- 330,000
Goodwill and other assets 7,120,096 8,239,520
------------ ------------
$ 22,622,175 $ 31,913,492
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Lines of credit $ 3,495,237 $ 6,038,576
Currrent portion of long-term debt 778,653 1,238,069
Current portion of capitalized lease obligations 822,887 997,516
Loans payable to officers 150,000 150,000
Accounts payable 4,145,491 6,394,011
Accrued expenses 2,650,048 3,555,073
Other current liabilities 265,877 254,772
------------ ------------
Total current liabilities 12,308,193 18,628,017
------------ ------------
Long-term debt 3,839,392 4,937,040
------------ ------------
Capitalized lease obligations 949,784 1,419,791
------------ ------------
Other liabilities 648,828 780,555
------------ ------------
Minority interest in consolidated subsidiary -- 23,531
------------ ------------
Redeemable Series B Preferred Stock -- 900,000
------------ ------------
Stockholders' equity:
Series A Preferred stock, $.10 par value, 3,000,000
shares authorized; 1,000
issued and outstanding at April 4, 1998
and January 3, 1998, respectively 100 100
Series C Convertible Preferred stock, $.10 par value,
750 shares authorized, issued and outstanding at
July 4, 1998 75 --
Common stock, $.10 par value, 7,000,000 shares authorized,
4,201,019 and 3,525,019 issued and outstanding at July 4, 1998
and January 3, 1998, respectively 420,102 352,502
Warrants outstanding 914,797 1,009,797
Additional paid-in capital 10,848,859 9,314,614
Accumulated deficit (6,705,955) (4,690,455)
------------ ------------
5,477,978 5,986,558
Notes receivable from sale of stock (602,000) (762,000)
------------ ------------
Total stockholders' equity 4,875,978 5,224,558
------------ ------------
$ 22,622,175 $ 31,913,492
============ ============
</TABLE>
The accompanying notes and notes to the financial statements included in the
Annual Report on Form 10-KSB for the fiscal year ended January 3, 1998 are
an integral part of these financial statements.
(4)
<PAGE>
The Eastwind Group, Inc.
Consolidated Statements of Operations
(Unaudited)
<TABLE>
<CAPTION>
Quarter Ended Two Quarters Ended
July 4, June 28, July 4, June 28,
1998 1997 1998 1997
---------------- ---------------- ------------- ----------------
<S> <C> <C> <C> <C>
Net sales $ 6,619,656 $ 11,826,752 $ 16,033,164 $ 23,798,373
Cost of goods sold 5,822,963 10,098,192 13,548,647 19,380,302
---------------- ---------------- ------------- ---------------
Gross profit 796,693 1,728,560 2,484,517 4,418,071
Selling, general and administrative expenses 1,894,872 3,475,113 3,817,496 5,665,445
Write-down of assets on operations closed 506,300 - 506,300 -
---------------- ---------------- ------------- ---------------
2,401,172 3,475,113 4,323,796 5,665,445
---------------- ---------------- ------------- ---------------
Operating income (loss) (1,604,479) (1,746,553) (1,839,279) (1,247,374)
Interest expense, net 403,273 337,609 786,929 696,301
---------------- ---------------- ------------- ---------------
Income before income taxes and
minority interest (2,007,752) (2,084,162) (2,626,208) (1,943,675)
Income taxes (benefit) 39,099 (715,692) (6,900) (671,492)
---------------- ---------------- ------------- ---------------
Income (loss) from continuing operations (2,046,851) (1,368,470) (2,619,308) (1,272,183)
Income from discontinued operations, net of
income taxes of $32,700 and $54,200, respectively - (1,234) 60,752 92,661
Gain on sale of Ivy-Tygart Acquisition Corp.,
net of income taxes of $373,000 - - 565,847 -
---------------- ---------------- ------------- ---------------
Net income (loss) (2,046,851) (1,369,704) (1,992,709) (1,179,522)
Preferred stock dividends (47,543) (49,500) (22,793) (99,000)
---------------- ---------------- ------------- ---------------
Net income (loss)available to
Common stockholders $ (2,094,394) $ (1,419,204) $ (2,015,502) $ (1,278,522)
================ ================ ============= ===============
Earnings (loss) per share $ (0.51) $ (0.51) $ (0.52) $ (0.49)
================ ================ ============= ===============
Shares used in computing earnings per share 4,084,008 2,763,338 3,885,832 2,596,589
================ ================ ============= ===============
</TABLE>
The accompanying notes and notes to the financial statements included in the
Annual Report on Form 10-KSB for the fiscal year ended January 3, 1998 are
an integral part of these financial statements.
(5)
<PAGE>
The Eastwind Group, Inc.
Consolidated Statements of Cash Flows
(Unaudited)
<TABLE>
<CAPTION>
Two Quarters Ended
July 4, June 28,
1998 1997
------------------------- ------------------------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $ (1,992,709) $ (1,179,522)
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Depreciation and amortization 775,927 817,801
Amortization of deferred credit - (12,325)
Imputed interest 52,546 22,347
Minority interest in income of consolidated subsidiary - 7,602
Changes in assets and liabilities, net of effect from acquisitions:
(Increase) decrease in:
Accounts receivable 3,299,919 1,311,355
Marketable securities (250,000) -
Inventories 680,042 76,899
Prepaid expenses 71,523 145,209
Prepaid income taxes 151,669 -
Deferred taxes 330,000 (766,933)
Other assets (21,292) (65,533)
Increase (decrease) in:
Accounts payable (1,711,969) (445,321)
Accrued expenses (794,996) (947,905)
Liability to former officer 430,137
Other liabilities (172,015) (18,500)
------------------------- ------------------------
Net cash (used in) operating activities 418,645 (624,689)
------------------------- ------------------------
Cash flows from investing activities:
Purchase of property and equipment (1,911,244) (239,481)
Net assets of subsidiary sold 107,925
Net assets disposed by Premier Press 618,377
Net cash acquired in purchase of Lavelle - 172,550
Other - 20,631
------------------------- ------------------------
Net cash provided by (used in) investing activities (1,184,942) (46,300)
------------------------- ------------------------
Cash flows from financing activities:
Net borrowings (repayments) under lines of credit (1,434,708) 733,967
Principal payments on term notes and capital leases (1,291,519) (1,014,124)
Proceeds from long-term debt 1,952,000 -
Proceeds from sale of preferred stock 653,874
Stock subscription proceeds 490,000 -
Proceeds from sale of common stock and warrants 573,046 174,337
Net proceeds from exercise of warrants 200,000 450,000
Payment of preferred stock dividends (22,794) (45,000)
------------------------- ------------------------
Net cash provided by financing activities 1,119,899 299,180
------------------------- ------------------------
Net increase (decrease) in cash and cash equivalents 353,602 (371,809)
Cash and cash equivalents, beginning of period 64,177 709,697
------------------------- ------------------------
Cash and cash equivalents, end of period $ 417,779 $ 337,888
========================= ========================
</TABLE>
The accompanying notes and notes to the financial statements included in the
Annual Report on Form 10-KSB for the year ended January 3, 1998 are an
integral part of these financial statements.
(6)
<PAGE>
THE EASTWIND GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1: BASIS OF PRESENTATION
- ------- ---------------------
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.
The unaudited consolidated financial statements included herein have
been prepared by the Company pursuant to the rules and regulations of
the Securities and Exchange Commission. Certain information and
footnote disclosures normally included in financial statements
prepared in accordance with generally accepted accounting principles
have been omitted pursuant to such rules and regulations.
In the opinion of management, all adjustments, consisting of only
normal recurring adjustments necessary to present fairly the financial
position at July 4, 1998 and January 3, 1998, and the results of
operations and cash flows for the quarter and two quarters ended July
4, 1998 and June 28, 1997, have been made. The results of operations
for the two quarters ended July 4, 1998 are not necessarily indicative
of the results for the year ending January 2, 1999. These financial
statements should be read in conjunction with the audited financial
statements and the notes thereto included in the Company's Annual
Report on Form 10-KSB for the year ended January 3, 1998.
NOTE 2: ACCOUNTS RECEIVABLE
- ------- -------------------
<TABLE>
<CAPTION>
July 4, January 3,
1998 1998
----------- -------------
<S> <C> <C>
Trade receivables $5,108,128 $ 8,877,277
Retainage receivables 560,278 361,124
Bad debt reserves (356,873) (288,353)
----------- -------------
5,311,527 8,950,048
Less: Retainage receivables
due in over one year (153,021) (153,021)
----------- -------------
$5,158,506 $8,797,027
=========== =============
</TABLE>
NOTE 3: INVENTORIES
- ------- -----------
<TABLE>
<CAPTION>
July 4, January 3,
1998 1998
----------- -------------
<S> <C> <C>
Raw Materials $ 361,923 $1,599,996
Work in Process $1,821,604 $2,362,413
Finished Goods $ 284,725 $1,678,862
---------- -------------
$2,468,252 $5,641,271
========== =============
</TABLE>
(7)
<PAGE>
THE EASTWIND GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 4: PROPERTY, PLANT AND EQUIPMENT
- ------- -----------------------------
<TABLE>
<CAPTION>
July 4, January 3,
1998 1998
----------- -------------
<S> <C> <C>
Land $ 326,000 $ 352,135
Buildings 3,003,500 2,898,881
Machinery and Equipment 5,613,668 6,673,136
------------- -------------
8,943,168 9,924,152
Less:Accumulated depreciation (1,871,614) (1,824,005)
------------- -------------
$ 7,071,554 $ 8,100,147
============= =============
</TABLE>
Machinery and equipment includes $3,720,629 and $4,017,872 of
production equipment under capital leases at July 4, 1998 and January
3, 1998, respectively. Accumulated depreciation on such equipment was
$629,825 and $732,104 at July 4, 1998 and January 3, 1998,
respectively.
NOTE 5: GOODWILL AND OTHER ASSETS
- ------- -------------------------
<TABLE>
<CAPTION>
July 4, January 3,
1998 1998
----------- -------------
<S> <C> <C>
Goodwill, net $6,052,345 $ 7,036,605
Covenant not to compete, net 414,583 439,583
Retainage receivables
due in over one year $ 153,021 $ 153,021
Deferred financing, net 292,091 225,956
Other $ 208,056 $ 384,355
----------- -------------
$7,120,096 $ 8,239,520
=========== =============
</TABLE>
(8)
<PAGE>
THE EASTWIND GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 6: LONG-TERM DEBT
- ------- --------------
Long-term debt consists of the following:
July 4, January 3,
1998 1998
---------- -------------
Polychem note payable to the
Budd Company, interest at 8%,
principal payable in 20
quarterly installments of
$81,315, beginning March 31,
1998 $1,463,665 1,626,093
Polychem note payable to bank,
interest at the bank's prime
rate plus 1.5% (9.75% at June
28, 1997), payable in 36
monthly installments of
$32,386 1,071,494 951,963
Centennial term note payable
to seller, interest at 8%,
due in 36 monthly
installments of principal and
interest of $8,333, beginning
November 1996 --- 191,312
Lavelle note payable to a
bank, interest at 9.25%, due
in 240 monthly installments
of principal and interest of
$6,869 commencing March 1998 744,511 ---
Lavelle note payable to PIDC,
interest at 4.0%, payable in
120 monthly installments of
$4,050 commencing in March
1998 386,355 ---
Lavelle note payable to a
PIDA, interest at 3.0%,
payable in 120 monthly
installments of $4,750, plus
interest, commencing March
1998 439,300 ---
Ivy note payable to a bank,
secured by certain property,
interest at 7.3%, due in 240
monthly installments of
principal and interest of
$5,909 beginning in April
1997 --- 735,206
Ivy note payable to a bank,
secured by certain property,
interest at the bank's prime
rate plus 2.0% (10.5% at June
28, 1997) due in 240 monthly
installments of principal and
interest of $10,487 beginning
in April 1997 --- 1,065,075
(continued)
(9)
<PAGE>
THE EASTWIND GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 6: LONG-TERM DEBT (CONTINUED)
- ------- --------------------------
July 4, January 3,
1998 1998
--------- -------------
Ivy term notes payable to a
bank, secured by certain
property, interest at 9.4%,
due in 240 monthly
installments of principal and
interest of $2,777 beginning
in March 1997 $ --- $ 553,986
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 June 28, 1997) --- 360,000
Wickersham note payable to a
bank, interest at prime plus
1.75% (10.25% at June 28,
1997), due in monthly
installments of $5,000 and a
balloon payment in December
1997 --- 164,935
Princeton term note payable to
bank, secured by all of its
assets, due in 60 monthly
installments of $8,333, plus
interest at the bank's prime
rate plus 3.75% --- 58,338
Eastwind subordinated note
payable to an investor,
interest at 12%, due in three
equal annual installments commencing
June 30, 1999 382,728 357,052
Other 129,992 111,149
----------- -----------
4,618,045 6,175,109
Less: current portion (778,653) (1,238,069)
----------- -----------
$ 3,839,392 $4,937,040
=========== ===========
(10)
<PAGE>
THE EASTWIND GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 6: LONG-TERM DEBT (CONTINUED)
- ------- --------------------------
Centennial has a $2,500,000 line of credit with a bank, with
outstanding borrowings of $2,426,974 at July 4, 1998. The line of
credit expired as of July 31, 1998, but has been informally extended
by the bank pending the refinancing of Centennial's senior debt.
Wickersham had a $1,000,000 line of credit with a finance company
through April 17, 1998. The finance company, which was a secured
creditor, has been completely repaid through collection of accounts
receivable subsequent to the closing of Wickersham operations.
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. The facility was renewed for a one year
term in March 1998. Outstanding borrowings on the line of credit were
$909,620 and $1,492,511 at July 4, 1998 and January 3, 1998,
respectively. As of July 4, 1998, there was $514,000 available under
the line.
Lavelle has a borrowing arrangement for up to $1,500,000 with a
financing institution through March 22, 1999, whereby it sells
substantially all of its accounts receivable to the institution and is
permitted to receive advances up to 80% of such receivables.
Outstanding borrowings were $158,643 as of July 4, 1998.
Future maturities of long-term debt at July 4, 1998 are as follows:
June 26, 1999 778,653
July 1, 2000 908,047
June 30, 2001 914,047
June 29, 2002 557,955
June 28, 2003 272,611
Thereafter 1,186,732
---------- ----------
$4,618,045
==========
(11)
<PAGE>
THE EASTWIND GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 7: ACQUISITIONS AND DISPOSITIONS
- ------- -----------------------------
On February 23, 1998, Ivy 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 promissory note was
paid in full on March 18, 1998. The consolidated balance sheet at
January 3, 1998 contains the net assets of Ivy in the amount of
$324,128 consisting of the following:
Current assets $ 557,386
Noncurrent assets 4,389,251
Current liabilities 1,995,717
Noncurrent liabilities 2,650,323
Stockholders' equity 300,597
Ivy revenues were $6,343,000 for the fiscal year ended January 3,
1998.
Lavelle
-------
In January 1997, the Company entered into an agreement to acquire all
of the outstanding common stock of Lavelle in exchange for 44,537
shares of the Company's Common Stock and forgiveness of certain
receivables due from Lavelle. The acquisition was accounted for using
the purchase method of accounting. The purchase price was allocated to
the assets and liabilities acquired based on estimates that may be
revised at a later date. The purchase price, including estimated
transaction costs, exceeded the fair value of the net assets acquired
by approximately $680,000, which has been recorded as goodwill and is
being amortized over 20 years. Lavelle's results from operations have
been included in the Company's consolidated financial statements from
the date of acquisition.
(12)
<PAGE>
THE EASTWIND GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 7: ACQUISITIONS AND DISPOSITIONS (CONTINUED)
- ------- -----------------------------------------
Wickersham
----------
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. The purchase price was
allocated to the assets and liabilities acquired based on the fair
values at the acquisition date. Such allocation was based on estimates
that may be revised at a later date. The purchase price, including
estimated transaction costs, exceeded the fair value of the net assets
acquired by approximately $628,000, which has been recorded as
goodwill and is being amortized over 20 years. Wickersham's results
from operations have been included in the Company's consolidated
financial statements from the date of acquisition.
In July, 1997, the Company combined the operations of Wickersham and
Princeton into Premier Book Press ("Premier"). Due to continuing
operating losses, the Company decided to close down the operations of
Premier, effective April 13, 1998. As of January 3, 1998, the Company
had written off net goodwill related to the Wickersham and Princeton
acquisitions, and recorded valuation allowances on certain assets.
During the quarter ended July 4, 1998, Premier experienced operating
losses of $380,000 and also was required to write down assets to
realizable values by $506,000, thus causing total losses of $886,000
in the quarter. The 1998 year to date losses of Premier through two
quarters were $1,064,000.
(13)
<PAGE>
THE EASTWIND GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 8: EARNINGS PER SHARE
- ------- ------------------
In February 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards ("SFAS") No. 128,
"Earnings Per Share", which provides changes in the calculation of
earnings per share. The statement was effective for fiscal years
ending after December 15, 1997.
<TABLE>
<CAPTION>
Quarter ended Two Quarters Ended
July 4, June 28, July 4, June 28,
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Earnings per share $(.51) $(.51) $ (.52) $(.49)
====== ====== ======= ======
Effect of dilutive securities - - - -
------ ------ ------- ------
Diluted earnings per share $(.51) $(.51) $(.52) $(.49)
====== ====== ======= ======
</TABLE>
(14)
<PAGE>
THE EASTWIND GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 9: 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 for 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 had a stated
value of $100 per share, and the holder was entitled to receive cash
dividends at 6% per year. Additionally, the holder was able to 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 cash value plus accrued dividends. Accrued dividends at January
3, 1998 were $60,750.
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 settlement was agreed to by all parties
on May 11, 1998.
The settlement agreement relieved 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 of Centennial.
This settlement has been recorded in the accompanying financial
statements at July 4, 1998 as an adjustment to the purchase accounting
for Centennial by a net reduction of goodwill and the reversal of
accrued preferred stock dividends.
(15)
<PAGE>
THE EASTWIND GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 10: CONVERTIBLE PREFERRED STOCK
- -------- ---------------------------
In June 1998, the Company sold 750 shares of its Series C Convertible
Preferred stock for $750,000, which resulted in net proceeds to the
Company of $654,000. The preferred stock has a dividend rate of 6%, is
convertible into the Company's Common stock at a maximum price of
$2.00 per share or a minimum price of $.84 per share with certain
minimum price guarantees by the Company.
In addition, as part of this transaction, the Company issued a Common
stock purchase warrant for 75,000 shares of its Common stock with an
exercise price of $1.65 per share.
(16)
<PAGE>
THE EASTWIND GROUP, INC.
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
- ---------------------------------------------------------------------
AND RESULTS OF OPERATIONS
-------------------------
RESULTS OF OPERATIONS
- ---------------------
QUARTER ENDED JULY 4, 1998 AND JUNE 28, 1997
- --------------------------------------------
OVERVIEW
- --------
The Company generated a net loss, before preferred stock dividends, of
$2,047,000 for the quarter ended July 4, 1998, compared to a net loss of
$1,370,000 for the quarter ended June 28, 1997. The net loss in the quarter
ended July 4, 1998 includes operating losses of Premier Book Press of $380,000
together with a write down of assets by $506,000 due to its closedown of
operations in April 1998. As there has not been an adjudication of liabilities
of Premier, there has been no consideration given to any relief from liabilities
as of July 4, 1998.
NET SALES
- ---------
Net sales for the quarter ended July 4, 1998 were $6,620,000, compared to
$11,827,000 for the quarter ended June 28, 1997. The decrease in net revenue in
the second quarter of 1998 versus the comparable period of the prior year was in
part due to the reduction in sales of Premier of $2,457,000. Sales decreased in
the second period of 1998 versus the comparable period of 1997 for the other
continuing operations; Polychem ($569,000); Lavelle ($1,264,000) and Centennial
($917,000) due to delays in shipping orders or softness in the market. Based
upon current sales backlogs each of these latter businesses expect to
significant increases in sales volume in the second half of 1998.
COST OF GOODS SOLD
- ------------------
Cost of goods sold for the quarter ended July 4, 1998 of $5,823,000 represents a
decrease of $7,749,000 versus the comparable period of the prior year. The
decrease is due in part to the closed operations of Premier ($2,094,000). In
addition, lower cost of sales of Polychem ($637,000), Lavelle ($720,000) and
Centennial ($824,000) as a result of lower net sales caused the decrease.
Polychem's cost of sales percentage improved in the quarter ended July 4, 1998
over the comparable period of the prior year by 8 percentage points due to cost
cutting measures and improved production methods. Centennial's cost of sales
percentage for the quarter ended July 4, 1998 improved by .6 percentage points
versus the prior year's quarter while Lavelle, due to a significant reduction in
net sales volume in the quarter declined by 33.2 percentage points. The
anticipated increase in Lavelle's sales volume in the second half of 1998 should
result in significant improvement in its gross profit percentage.
(17)
<PAGE>
THE EASTWIND GROUP, INC.
RESULTS OF OPERATIONS (CONTINUED)
- ---------------------------------
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
- --------------------------------------------
Selling, general and administrative expenses totalled $1,895,000 for the quarter
ended July 4, 1998, a reduction of $1,580,000 versus the comparable period of
1997. Polychem and Centennial each experienced a 1 percentage point increase
versus the comparable period in 1997 in selling, general and administrative
expenses as a percentage of sales, which, given the lesser net sales in the
quarter, is indicative of the cost cutting measures having been implemented.
Corporate overhead of the holding company decreased by $1,070,000 in the quarter
ended July 4, 1998 versus the second quarter of 1997, principally due to a
reduction in staffing costs, accounting and legal fees and other costs incurred
in 1997 due to the rapid expansion of the Company in 1996 and early 1997. The
1997 quarter also included a charge for the contractual settlement with a former
officer and certain one time charges in the 1997 period. Further reductions in
corporate overhead have been made in the third quarter of 1998 through
significant cuts in staffing and facility expenses.
INTEREST EXPENSE
- ----------------
Interest expense for the quarter ended July 4, 1998 was $403,000 or 6.1% of net
sales, versus $338,000 or 2.9% of net sales for the comparable period of 1997.
Interest expense as a percentage of sales during the quarter ended July 4, 1998
was higher than the comparable period of 1997 due to the debt incurred for the
funding of operating losses during the last quarter of 1997 and the first
quarter of 1998, plus the impact of the building acquisition at Lavelle.
(18)
<PAGE>
THE EASTWIND GROUP, INC.
TWO QUARTERS ENDED JULY 4, 1998 AND JUNE 28, 1997
- -------------------------------------------------
OVERVIEW
- --------
The Company experienced a net loss, before preferred stock dividends, of
$1,993,000, compared to a net loss of $1,180,000 for the two quarters ended June
28, 1997.
Results of operations of Ivy-Tygart Acquisition Corporation ("Ivy"), which was
sold in February 1998, are included in the Statement of Operations as income
from discontinued operations.
Operations for the two quarters in 1998 losses from Premier Book Press (which
was closed down April 13, 1998) totalled $1,064,000, including a write down of
assets to realizable value by $506,000. As there has not been an adjudication of
liabilities of Premier, there has been no consideration given to any relief from
liabilities as of July 4, 1998.
NET SALES
- ---------
Net sales for the two quarters ended July 4, 1998 of $16,033,000, represent a
decrease of $7,766,000 versus the comparable period of the prior year. The
principal reason for the reduction in net sales versus the prior year comparable
period was erosion of revenues at Premier Book ($3,405,000), which was closed
down on April 13, 1998. In addition, reductions in comparable net sales for
Polychem ($2,168,000) and Lavelle ($1,697,000) are the result of delays in
receiving authorization to ship goods and other external factors relating to
timing. The sales backlogs of both companies are approaching historical highs.
The decrease in Centennial net sales ($496,000) was due to market softness in
the second quarter of 1998. Net sales for the three continuing operations are
expected to significantly improve in the second half of 1998.
(19)
<PAGE>
THE EASTWIND GROUP, INC.
RESULTS OF OPERATIONS (CONTINUED)
- ---------------------------------
COST OF GOODS SOLD
- ------------------
Cost of goods sold for the two quarters ended July 4, 1998 was $13,549,000, a
decrease of $5,831,000 versus the comparable period of the prior year. The
decrease in cost of goods sold is principally related to reductions in revenue
causing lower cost of goods sold at Polychem ($1,678,000), Lavelle ($820,000)
and Centennial ($663,000). Cost of goods sold at Premier Book Press decreased by
($2,670,000) due to a combination of significantly less revenue and expenses
relating to the closedown of operations in April 1998.
The consolidated gross profit percentage for the two quarters ended July 4, 1998
was 15.5%, a reduction of 3.1% from the comparable period of the prior year.
Polychem's gross profit percentage was the same as the prior year due to cost
cutting and streamlining manufacturing methods. The gross profit percentage of
Centennial of 17.4% for the two quarters ended July 4, 1998 was an improvement
of 2.9 percentage points versus the prior year. Lavelle gross profits dropped by
14.6% versus the prior year due principally to manufacturing overhead being
spread over fewer units. Cost of goods sold percentages should improve during
the remainder of 1998 due to anticipated increases in revenue.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
- --------------------------------------------
Selling, general and administrative expenses for the two quarters ended July 4,
1998 were $3,817,000 or 23.8% of net sales, compared to $5,665,000 or 23.8% of
net sales in the comparable period of the prior year. The percentage
relationship to sales of selling, general and administrative expenses remained
the same in the two quarters of 1998 versus the comparable period of 1997, even
though Polychem's percentage increased (4.9%), Centennial increased (.6%) and
Lavelle increased (19.6%) due to lesser sales volume. Selling, general and
administrative expenses at the holding company decreased by $1,070,000, or 6.7%
of consolidated net sales, due to reductions in staffing, accounting and legal
fees and other costs incurred in the first two quarters of 1997 related to the
rapid expansion of the Company in late 1997 and early 1998. Further reductions
in corporate overhead have been made in the third quarter of 1998 through
significant cuts in staffing and facilities expense.
INTEREST EXPENSE
- ----------------
Interest expense for the two quarters ended July 4, 1998 was $787,000, versus
$696,000 for the comparable period of 1997. Interest expense increased as a
percentage of net sales by 2 percentage points due to increases in balances of
lines of credit to fund operating losses and lesser net sales for the 1998
period.
(20)
<PAGE>
THE EASTWIND GROUP, INC.
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
The Company has financed its working capital requirements and capital
expenditures through cash flows generated from operations, bank debt, sale of
common stock and warrants, preferred stock and equipment leases. Net cash
provided by operating activities for the first two quarters of 1998 was $419,000
compared to net cash used in operating activities of $625,000 during the first
two quarters of 1997. The change was principally attributable to collection of
accounts receivable, reduction of inventories and a tax refund as of July 4,
1998 as compared to June 28, 1997, offset partially by decreases in accounts
payable and accrued expenses.
For the two quarters ended July 4, 1998, the Company funded the payment of
accounts payable ($1,712,000) and accrued expenses ($795,000) with proceeds from
significant collections of accounts receivable ($3,300,000). The reduction in
accounts receivable for the two quarters ended July 4, 1998 was $1,989,000
greater than the comparable period of the prior year. The Company continues to
focus on the management of accounts receivable and inventories in order to
improve liquidity and reduce interest cost.
Prepaid or recoverable income taxes ($767,000) for the two quarters ended June
28, 1997 was a major component of cash used in operations. The liability to a
former officer in settlement of his employment contract was charged to
operations but will be paid in the future. Depreciation and amortization was
$776,000 for the two quarters ended July 4, 1998 compared to $818,000 for the
comparable period of the prior year.
Net cash used in investing activities for the two quarters ended July 4, 1998
was $1,185,000, compared to cash used in investing activities of $46,000 for the
two quarters ended June 28, 1997. Cash used in the two quarters ended July 4,
1998 for the purchase of property and equipment ($1,911,000), principally the
purchase of Lavelle's building which previously had been leased. The components
of cash used in investing activities during the two quarters ended June 28, 1997
were cash acquired in the purchase of Lavelle and purchase of property and
equipment ($239,000).
Net cash provided by financing activities during the two quarters ended July 4,
1998 totalled $1,120,000, compared to cash provided by financing activities for
the two quarters ended June 28, 1997 of $299,000. Components of cash provided by
financing activities were the receipt of proceeds from the exercise of certain
warrants ($200,000), sale of Common stock ($573,000), proceeds from long-term
debt ($1,952,000), sale of preferred stock ($654,000), and receipt of proceeds
from stock subscriptions ($490,000), offset by repayments of lines of credit
($1,435,000) and repayment of principal on long term debt and capital lease
obligations ($1,292,000) and preferred stock dividends ($23,000).
(21)
<PAGE>
THE EASTWIND GROUP, INC.
LIQUIDITY AND CAPITAL RESOURCES (CONTINUED)
- -------------------------------------------
The Company had a net working capital deficit of $3,877,000 and $3,384,000 as of
July 4, 1998 and January 3, 1998, respectively. Working capital decreased by
$493,000 due to the impact on working capital of net operating losses during the
two quarters ended July 4, 1998.
The Company continues to work toward refinancing its senior debt and has, in
fact, received favorable response from its prospective lenders. Based upon an
existing commitment letter, it is expected that the new financing will close in
late August 1998.
The Company has no other significant capital spending or purchase commitments,
other than normal commitments under facility and capital leases. There are no
commitments to purchase significant property, plant and equipment during the
remainder of 1998.
The $9,000,000 credit facility at Polychem includes a term loan with an
outstanding balance of $1,071,000 at July 4, 1998, leaving an aggregate
availability of $7,929,000 as of that date under the credit facility, dependent
upon eligible collateral assets. As of July 4, 1998, availability under the line
of credit, based upon available eligible collateral assets, was $1,424,000, and
outstanding borrowings were $910,000.
Centennial has a $2,500,000 line of credit with a bank, with outstanding
borrowings of $2,427,000 at July 4, 1998, which expired July 31, 1998. The
Company has informally extended the facility until a refinancing takes place.
Wickersham had a $1,000,000 line of credit with a finance company through April
17, 1998. As Wickersham operations were closed down effective April 13, 1998,
the finance company liquidated its collateral, resulting in a total payoff of
the lender.
Lavelle has a borrowing arrangement for up to $1,500,000 with a financing
institution through March 22, 1999, whereby it sells substantially all of its
accounts receivable to the institution and is permitted to receive up to 80% of
such receivables. The amount outstanding under this arrangement was $159,000.
As of March 29, 1997, the Company had outstanding Class A-1, C, C-4, C-5, D and
Clifton Common Stock purchase warrants. During the quarter ended April 4, 1998,
exercises of Class C-3 and Clifton warrants to purchase 100,000 and 100,000
shares of Common Stock, respectively, generated gross capital proceeds to the
Company of $300,000. The remaining Class A-1, C, C-4, C-5, and D warrants, if
fully exercised, would generate additional net capital to the Company of
$4,166,000 on the issuance of 1,149,464 shares of common stock. The Company
currently anticipates using any such funds, if received, for working capital,
including potential acquisitions.
(22)
<PAGE>
THE EASTWIND GROUP, INC.
LIQUIDITY AND CAPITAL RESOURCES (CONTINUED)
- -------------------------------------------
In addition, in April 1998 the Company's CEO purchased 301, 000 shares of Common
stock for $1.25 per share, resulting in proceeds to the Company of $376,250.
These shares replaced an identical number of shares sold by the CEO at the same
price in a private transaction.
The Company was able to carry back a portion of its 1997 tax losses to 1996 in
order to receive a refund. Accordingly, such refund ($228,000) was received May
20, 1998.
(23)
<PAGE>
THE EASTWIND GROUP, INC.
CAUTIONARY STATEMENT
- ---------------------
When used in this Quarterly Report on Form 10-QSB and in other public
statements by the Company and Company officers, the words "estimate",
"project", "intend", "believe", "anticipate" and similar expressions are
intended to identify forward-looking statements regarding events and
financial trends which may affect the Company's future operating results
and financial position. Such statements are subject to risks and
uncertainties that could cause the Company's actual results and financial
position to differ materially. Such factors include, among others: (i) the
Company's ability to identify appropriate acquisition candidates, complete
acquisitions on satisfactory terms, or successfully integrate acquired
businesses; (ii) the intense competition and low barriers to entry in the
industries in which the Company competes; (iii) the Company's ability to
obtain financing on satisfactory terms and the degree to which the Company
is leveraged, including the extent to which currently outstanding options
and warrants are exercised; (iv) the sensitivity of the Company's
businesses to general economic conditions; (v) the timing of orders from,
and shipments to, major customers; (vi) the timing of new product sales;
(vii) the introduction and market acceptance of new products; (viii)
factors associated with international sales such as the relative strength
of the dollar when compared to the currencies of the countries into which
the Company exports product; (ix) the Company's ability to remain in
compliance with the numerous environmental, health and safety requirements
to which it is subject; (x) changes in accounting principles, policies or
guidelines; and (xi) other economic, competitive, governmental and
technological factors affecting the Company's operations, markets,
products, services and prices. Additional factors are described in the
Company's other public reports filed with the Securities and Exchange
Commission. Readers are cautioned not to place undue reliance on these
forward-looking statements, which speak only as of the date made. The
Company undertakes no obligation to publicly release the result of any
revision of these forward-looking statements to reflect events or
circumstances after the date they are made or to reflect the occurrence of
unanticipated events.
(24)
<PAGE>
Item 1. Legal Proceedings.
-----------------
As previously disclosed, in April 1997, the Pennsylvania Department of
Revenue issued an assessment against Centennial for sales taxes as well as
penalties and interest thereon in the amount of approximately $772,000. Such
assessment was attributable to periods prior to the Company's acquisition of
Centennial. On July 28, 1998 the Board of Finance and Revenue affirmed the
assessment against Centennial, but the Company intends to appeal the decision to
the Commonwealth Court of Pennsylvania. In June 1998, Centennial reached an
agreement in principle with the Commonwealth of Pennsylvania to pay any such
liability over a three year period. The Company believes such period will
commence when the matter is referred to the Attorney General's Office for
collection. The liability for these sales taxes has been recorded on the
Company's financial statements to reflect the liability.
Item 2. Changes in Securities.
---------------------
On June 25, 1998, the Company issued to ProFutures Special Equity Fund,
L.P. ("ProFutures"), 750 shares of Series C Convertible Preferred Stock, $.10
par value, for gross proceeds of $750,000. The Series C Preferred Stock is
convertible into that number of shares of Common Stock equal to the aggregate
purchase price of $750,000 divided by 82% of the average of the closing bid
price of the Common Stock for the five trading days preceding the date of
conversion, provided that the conversion price shall never be less than $.84 per
share. The Series C Convertible Preferred Stock earns a 6% annual cumulative
dividend, payable in either cash or Common Stock at the election of the Company.
On the same date, the Company also issued a warrant to ProFutures. The warrant
entitles the holder to purchase up to 75,000 shares of Common Stock at an
exercise price of $1.65 per share at any time on or before June 24, 2003. The
number of shares of Common Stock issuable upon exercise of the warrant is
subject to adjustment in the event of stock splits, stock dividends and the
like. The Series C Preferred Stock and warrant were issued pursuant to the
private placement exemption in Section 4(2) of the Act.
As previously disclosed, on April 10, 1998, the Company entered into an
agreement to issue to Clifton Capital Ltd. ("Clifton") an aggregate of 400,000
shares of Common Stock for $1.25 per share, for an aggregate of $500,000. At the
time of execution of the agreement, Clifton paid to the Company an aggregate of
$100,000 and still owes the Company the sum of $400,000. The Company has issued
the 80,000 shares of Common Stock which were paid for by Clifton, and Clifton
has until August 31, 1998 to purchase the remaining shares of Common Stock, or
such right will terminate. The Company also issued to Clifton on April 10, 1998,
a warrant to purchase up to 200,000 shares of Common Stock at $1.25 per share.
As previously disclosed, on April 21, 1998, the Company agreed to issue
50,000 shares of Common Stock to SPH Equities, Inc. for investment banking
services rendered to the Company in connection with the Clifton transaction. The
Company has taken a charge of $100,000 in connection with such issuance,
representing the market value of the shares on April 21, 1998.
Item 3. Defaults Upon Senior Securities.
-------------------------------
None.
Item 4. Submission of Matters to a Vote of Security Holders.
---------------------------------------------------
None.
Item 5. Other Matters.
-------------
Effective July 1, 1998, Anthony J. Mendicino resigned as President and
Chief Operating Officer of the Company and his employment agreement was
terminated as of such date. Mr. Mendicino remains as a Director of the Company.
In connection with such termination, the Company did not incur any material
liabilities to Mr. Mendicino. Mr. DeJuliis has assumed the titles of President
and Chief Operating Officer.
On July 2, 1998, the Company had an oral hearing before the Nasdaq listing
review panel, during which it requested an extension of time to comply with the
net tangible asset requirement and requested that its Common Stock not be
delisted pending such additional period of time. On July 29, 1998, the Nasdaq
review panel issued its determination to allow the Company until August 31, 1998
to satisfy the net tangible asset requirement of $2,000,000. The panel also
determined that the Company must attain net tangible assets of at least
$3,000,000 by October 31, 1998. If the Company does not satisfy the above
conditions, its Common Stock will be delisted from the Nasdaq Small Cap Market.
Trading, if any, in the Company's Common Stock thereafter would be conducted on
the OTC Electronic Bulletin Board.
Item 6. Exhibits and Reports on Form 8-K.
--------------------------------
(a) None.
(b) None.
(25)
<PAGE>
SIGNATURES
----------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Dated: August 24, 1998
THE EASTWIND GROUP, INC.
(Registrant)
/s/ Paul A. DeJuliis
---------------------------------
Paul A. DeJuliis
Chairman and CEO
/s/ William B. Miller
---------------------------------
William B. Miller
Senior Vice President and CFO
(Principal financial and accounting officer)
(26)
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<PAGE>
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<FISCAL-YEAR-END> JAN-2-1999 JAN-3-1998
<PERIOD-START> JAN-4-1998 JAN-1-1997
<PERIOD-END> JUL-4-1998 JUN-28-1997
<CASH> 417,779 64,970
<SECURITIES> 250,000 0
<RECEIVABLES> 5,158,506 8,797,027
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<INVENTORY> 2,468,252 5,641,271
<CURRENT-ASSETS> 8,430,525 15,243,825
<PP&E> 8,943,168 9,924,152
<DEPRECIATION> (1,871,614) (1,824,005)
<TOTAL-ASSETS> 22,622,175 31,913,492
<CURRENT-LIABILITIES> 12,308,193 18,628,017
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0 0
175 100
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<INCOME-PRETAX> (2,626,308) (1,943,675)
<INCOME-TAX> (6,900) (671,492)
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<DISCONTINUED> 60,752 92,661
<EXTRAORDINARY> 565,847 0
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