<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 April 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.)
100 Four Falls Corporate Center, Suite 305, West Conshohocken, PA 19428
- --------------------------------------------------------------------------------
(Address of principal executive offices)
(610) 828-6860
- --------------------------------------------------------------------------------
(Registrant's telephone number, including area code)
Not applicable
- --------------------------------------------------------------------------------
(Former name, former address, and former fiscal year, if changed since last
report)
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has
been subject to such filing requirements for the past 90 days.
Yes X No
---- ----
Yes X No
---- ----
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date.
Common stock, $.10 par value 4,071,019 shares
- --------------------------------- ---------------------------------------
(Class) (Outstanding at May 15, 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
April 4, 1998 and January 3, 1998 4
Consolidated Statements of Operations for the
Quarters ended April 4, 1998 and March 29, 1997 5
Consolidated Statements of Cash Flows for the
Quarters ended April 4, 1998 and March 29, 1997 6
Notes to Consolidated Financial Statements 7
Item 2 - Management's Discussion and Analysis of
Results of Operations and Financial Condition 18
PART II.
- --------
Item 1 - Legal Proceedings 24
Item 2 - Changes in Securities 24
Item 6 - Exhibits and Reports on Form 8-K 24
(2)
<PAGE>
THE EASTWIND GROUP, INC.
PART I - FINANCIAL INFORMATION
Item 1 - Financial Statements
- -----------------------------
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
April 4, 1998 and January 3, 1998, and the results of operations and cash
flows for the quarters ended April 4, 1998 and March 29, 1997, have been
made. The results of operations for the quarter ended April 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 which was filed for the year ended January 3, 1998.
(3)
<PAGE>
The Eastwind Group, Inc.
Consolidated Balance Sheets
(Unaudited)
<TABLE>
<CAPTION>
April 4, January 3,
ASSETS 1998 1998
-------------- --------------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 606,252 $ 64,970
Accounts receivable, net 7,236,732 8,797,027
Stock subscription receivable - 250,000
Recoverable income taxes 240,065 240,065
Inventories 3,022,419 5,641,271
Prepaid expenses 148,495 224,515
Prepaid income taxes 35,846 25,977
-------------- --------------
Total current assets 11,289,809 15,243,825
Property, plant and equipment, net 7,861,590 8,100,147
Deferred income taxes - 330,000
Goodwill and other assets 7,034,486 8,239,520
-------------- --------------
$ 26,185,885 $ 31,913,492
============== ==============
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY
<S> <C> <C>
Current liabilities:
Lines of credit $ 5,302,019 $ 6,038,576
Current portion of long-term debt 970,009 1,238,069
Current portion of capitalized lease obligations 876,368 997,516
Loans payable to officers 150,000 150,000
Accounts payable 4,577,467 6,394,011
Accrued expenses 2,825,354 3,555,073
Other current liabilities 228,865 254,772
-------------- --------------
Total current liabilities 14,930,082 18,628,017
-------------- --------------
Long-term debt 3,749,476 4,937,040
-------------- --------------
Capitalized lease obligations 1,241,102 1,419,791
-------------- --------------
Other liabilities 741,772 780,555
-------------- --------------
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
Common stock, $.10 par value, 7,000,000 shares authorized,
3,725,019 and 3,525,019 issued and outstanding at April 4, 1998
and January 3, 1998, respectively 372,502 352,502
Warrants outstanding 914,797 1,009,797
Additional paid-in capital 9,689,614 9,314,614
Accumulated deficit (4,611,560) (4,690,455)
-------------- --------------
6,365,453 5,986,558
Notes receivable from sale of stock (842,000) (762,000)
-------------- --------------
Total stockholders' equity 5,523,453 5,224,558
-------------- --------------
$ 26,185,885 $ 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
April 4, March 29,
1998 1997
-------------- ---------------
<S> <C> <C>
Net sales $ 9,490,554 $ 11,971,621
Cost of goods sold 7,802,730 9,282,110
-------------- ---------------
Gross profit 1,687,824 2,689,511
Selling, general and administrative expenses 1,922,624 2,190,332
-------------- ---------------
1,922,624 2,190,332
-------------- ---------------
Operating income (loss) (234,800) 499,179
Interest expense, net 383,656 358,692
-------------- ---------------
Income before income taxes and
minority interest (618,456) 140,487
Income taxes (benefit) (45,999) 44,200
-------------- ---------------
Income (loss) from continuing operations (572,457) 96,287
Income from discontinued operations, net of income taxes of $32,700
and $54,200, respectively 60,752 93,895
Gain on sale of Ivy-Tygart Acquisition Corp., net of
income taxes of $373,000 565,847 -
-------------- ---------------
Net income 54,142 190,182
Preferred stock dividends--recovered (paid) 24,750 (49,500)
-------------- ---------------
Net income available to
Common stockholders $ 78,892 $ 140,682
============== ===============
Earnings per share $ 0.02 $ 0.06
============== ===============
Shares used in computing earnings per share 3,687,656 2,490,224
============== ===============
</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>
Quarter Ended
April 4, March 29,
1998 1997
--------------- ---------------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $ 54,142 $ 190,182
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Depreciation and amortization 387,735 385,001
Amortization of deferred credit - (6,162)
Imputed interest 30,463 10,980
Minority interest in income of consolidated subsidiary - 7,110
Changes in assets and liabilities, net of effect from acquisitions:
(Increase) decrease in:
Accounts receivable 1,221,693 1,396,407
Inventories 125,875 (479,725)
Prepaid expenses 50,701 (8,370)
Prepaid income taxes (115,927) 54,339
Deferred taxes 330,000 -
Other assets 194,333 (43,430)
Increase (decrease) in:
Accounts payable (1,279,993) (422,847)
Accrued expenses (619,690) (1,217,387)
Other liabilities (94,004) 6,165
--------------- ---------------
Net cash provided by (used in) operating activities 285,328 (127,737)
--------------- ---------------
Cash flows from investing activities:
Purchase of property and equipment (1,824,725) (99,783)
Net cash acquired in purchase of Lavelle - 172,550
Other (36,427) 20,631
--------------- ---------------
Net cash provided by (used in) investing activities (1,861,652) 93,398
--------------- ---------------
Cash flows from financing activities:
Net proceeds (repayments) under lines of credit 372,074 (101,475)
Principal payments on term notes and capital leases (353,968) (626,410)
Proceeds from long-term debt 1,652,000 -
Stock subscription receivable 250,000 -
Proceeds from sale of common stock and warrants 20,000 -
Net proceeds from exercise of warrants 200,000 450,000
Payment of preferred stock dividends (22,500) (22,500)
--------------- ---------------
Net cash provided by (used in) financing activities $2,117,606 (300,385)
--------------- ---------------
Net increase (decrease) in cash and cash equivalents 541,282 (334,724)
Cash and cash equivalents, beginning of period 64,970 709,697
--------------- ---------------
Cash and cash equivalents, end of period $ 606,252 $ 374,973
=============== ===============
</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
- ------- ---------------------
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. Effective January 1, 1997
the Company elected to report its results 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
operation, 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.
Wickersham, located in Lancaster, Pennsylvania, is a printing and
book manufacturer.
Due to continuing operating losses, the Company decided to close down
the operations of Premier Book Press, effective April 13, 1998.
Lavelle Company (Lavelle)
-------------------------
Lavelle, located in Philadelphia, Pennsylvania, manufactures and
sells sheet metal fabricated products for the aerospace industry.
Reporting Comprehensive Income
------------------------------
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.
Business Segment Presentation
-----------------------------
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.
(7)
<PAGE>
THE EASTWIND GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 2: Accounts Receivable
- ------- -------------------
April 4, January 3,
1998 1998
---------- -----------
Trade receivables $7,298,761 $ 8,877,277
Retainage receivables 375,345 361,124
Bad debt reserves (284,353) (288,353)
---------- -----------
7,389,753 8,950,048
Less: Retainage receivables
due in over one year (153,021) (153,021)
---------- -----------
$7,236,732 $ 8,797,027
========== ===========
Note 3: Inventories
- ------- -----------
April 4, January 3,
1998 1998
---------- -----------
Raw Materials $ 526,080 $ 1,599,996
Work in Process 2,152,747 2,362,413
Finished Goods 343,592 1,678,862
---------- -----------
3,022,419 5,641,271
========== ===========
(8)
<PAGE>
THE EASTWIND GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 4: Property, Plant and Equipment
- ------- -----------------------------
April 4, January 3,
1998 1998
------------ ------------
Land $ 326,000 $ 352,135
Buildings 3,090,595 2,898,881
Machinery and Equipment 6,457,589 6,673,135
------------ ------------
9,874,184 9,924,152
Less: Accumulated depreciation (2,102,594) (1,824,005)
------------ ------------
$ 7,861,590 $ 8,100,147
============ ============
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.
Note 5: Goodwill and Other Assets
- ------- -------------------------
April 4, January 3,
1998 1998
------------ ------------
Goodwill, net $ 6,067,799 $ 7,036,605
Covenant not to compete, net 427,083 439,583
Retainage receivables
due in over one year 153,021 153,021
Deferred financing costs, net 197,437 225,956
Other 189,146 384,355
------------ ------------
$ 7,034,486 $ 8,239,520
============ ============
(9)
<PAGE>
THE EASTWIND GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 6: Long-term Debt
- ------- --------------
Long-term debt consists of the following:
April 4, January 3,
1998 1998
------------ ------------
Eastwind subordinated note
payable to an investor,
interest at 12%, due in three
equal installments commencing
June 30, 1999 $ 369,667 357,052
Polychem note payable to the Budd
Company, interest at 8%,
principal payable in 20 quarterly
installments of $81,315,
beginning March 31, 1998 1,626,093 1,626,093
Polychem note payable to bank,
interest at the bank's prime
rate plus 1.5% (10.0% at April
4, 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 863,113 951,963
Centennial term note payable to
seller, interest at 8%, due in
36 monthly installments of
principal and interest of
$8,333, beginning November 1996 -0- 191,312
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% -0- 58,338
Wickersham note payable to a bank,
interest at prime plus 1.75%
(10.25% at April 4, 1998), due
in monthly installments of
$5,000 and a balloon payment
in December 1997 164,935 164,935
(continued)
(10)
<PAGE>
THE EASTWIND GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 6: Long-term Debt (continued)
- ------- --------------------------
April 4, January 3,
1998 1998
---------- ----------
Wickersham term notes payable to
vendors due in various monthly
installments at interest rates
ranging up to 10% at April 4,
1998 $ 59,490 $ 67,280
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 747,825 -0-
Lavelle note payable to PIDC,
interest at 4.0%, payable in 120
monthly installments of $4,050
commencing in March 1998 394,558 -0-
Lavelle note payable to a PIDA,
interest at 3.0%, payable in
120 monthly installments of
$4,750, plus interest,
commencing March 1998 484,369 -0-
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 -0- 735,206
Ivy note payable to a bank,
secured by certain property,
interest at the bank's prime rate
plus 2.0% due in 240 monthly
installments of principal and
interest of $10,487 beginning
in April 1997 -0- 1,065,075
Ivy term note payable to a bank,
secured by certain property,
interest at 9.4%, due in 240
monthly installments of
principal and interest of $2,777
beginning in March 1997 -0- 298,709
(continued)
(11)
<PAGE>
THE EASTWIND GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 6: Long-term Debt (continued)
- ------- --------------------------
April 4, January 3,
1998 1998
---------- ----------
Ivy term note payable to a bank,
interest at 10.1%, due in 60
monthly installments of $5,856 $ -0- $ 258,052
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% -0- 360,000
Other 9,435 41,094
---------- ----------
4,719,485 6,175,109
Less: current portion (970,009) (1,238,069)
---------- ----------
$3,749,476 $4,937,040
========== ==========
(12)
<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 $2,441,364 at April 4, 1998, which
expires June 30, 1998.
Wickersham had a $1,000,000 line of credit with a finance company
through April 17, 1998. Outstanding borrowings were $857,293 at
April 4, 1998. As Wickersham operations were closed down
effective April 13, 1998 (See Note 7), the finance company has
been liquidating its collateral, resulting in a loan balance at
May 19, 1998 of $115,000.
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 were
$1,736,494 and $1,492,511 at April 4, 1998 and January 3, 1998,
respectively. As of April 4, 1998, there was $239,000 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.
Future maturities of long-term debt at April 4, 1998 are as
follows:
April 3, 1999 $ 970,009
April 1, 2000 929,824
March 31, 2001 701,312
March 30, 2002 553,602
March 29, 2003 435,240
Thereafter 1,129,498
----------
$4,719,485
==========
(13)
<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.
(14)
<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. 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 had written off net goodwill related to the
Wickersham and Princeton acquisitions, and recorded valuation
allowances on certain assets.
(15)
<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 is effective for fiscal years
ending after December 15, 1997 and requires restatement of prior
years' earnings per share.
Quarter ended
April 4, March 29,
1998 1997
-------- --------
Basic earnings per share $ .02 $ .06
======== ========
Effect of dilutive securities - (.01)
-------- --------
Diluted earnings per share $ .02 $ .05
======== ========
(16)
<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 relieves 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 Redeemable
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 April 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.
(17)
<PAGE>
THE EASTWIND GROUP, INC.
Item 2 - Management's Discussion and Analysis of Financial Condition
- --------------------------------------------------------------------
and Results of Operations
-------------------------
RESULTS OF OPERATIONS
- ---------------------
QUARTERS ENDED APRIL 4, 1998 AND MARCH 29, 1997
- -----------------------------------------------
Overview
- --------
The Company generated net income of $54,000 for the quarter ended April 4, 1998,
compared to $190,000 for the quarter ended March 29, 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. Premier Book Press, which generated losses of $178,000 during the
first quarter of 1998, was closed down effective April 13, 1998.
Net Sales
- ---------
Net sales for the quarter ended April 4, 1998 of $9,437,000 represents a
decrease of $2,535,000 versus the quarter ended March 29, 1997. The decrease
in revenue during the first quarter of 1998 versus the comparable period of
the prior year was due to a decrease in Polychem revenues ($1,599,000), a
decrease in Lavelle revenues ($433,000), and a decrease in Team Graphics
revenues ($501,000). The Polychem and Lavelle decreases were due to delays
in awarding of contracts and should be made up during the remainder of 1998.
Team Graphics' decrease in revenue related to production and shipping
problems experienced at Premier Book Press more than offsetting increased
revenues at Centennial ($237,000) in the first quarter of 1998 versus the
first quarter of 1997.
Cost of Goods Sold
- ------------------
Cost of goods sold for the quarter ended April 4, 1998 of $7,749,000 represents
a decrease of $1,533,000 versus the quarter ended March 29, 1997. Polychem's
cost of goods sold in the quarter ended April 4, 1998 decreased over the
comparable period of 1997 by 7.3 percentage points because of an unfavorable mix
of manufactured versus purchased materials and overhead spread over fewer units
of production. Polychem's cost of goods sold mix is expected to return to a more
favorable result during the remainder of 1998. Lavelle's cost of goods sold
increased by 12.3 percentage points due to a less favorable mix of revenues and
a 20% decrease in revenues, spreading overhead over fewer units. Similar to
Polychem, it is expected that Lavelle's product mix improvement and additional
sales volume will increase its gross profitability during the remainder of 1998.
Team Graphics' cost of goods sold decreased by .5 percentage points in the first
quarter of 1998 versus the first quarter of 1997, principally due to a 4.2
percentage point improvement at Centennial. Cost of goods sold percentage at
Premier Book Press for the quarter ended
(18)
<PAGE>
THE EASTWIND GROUP, INC.
RESULTS OF OPERATIONS (continued)
- ---------------------------------
April 4, 1998 increased by 11.5 percentage points versus the comparable period
of the prior year. This erosion of gross profits was due to production
difficulties and ultimately led to the decision to close down Premier Book
Press.
Selling, General and Administrative Expenses
- --------------------------------------------
Selling, general and administrative expenses for the quarter ended April 4,
1998 were $1,923,000 or 20.3% of net sales, compared to the comparable period
of the prior year of $2,190,000 or 18.3% of net sales. The decrease in
selling, general and administrative expenses in the first quarter of 1998
versus the comparable period of the prior year was the result of cost cutting
measures to compensate for lower revenues and gross profits at Polychem, Team
Graphics and Lavelle, as well as reductions in expenses at corporate
headquarters. Management believes that the percentage of selling, general
and administrative expenses to net sales will decrease a result of continuing
cost cutting measures together with anticipated increased revenue during the
remainder of 1998.
Interest Expense
- ----------------
Interest expense for the quarter ended April 4, 1998 was $384,000 or 4.0% of net
sales, versus $359,000 or 3.0% of net sales for the comparable period of 1996.
Interest expense as a percentage of sales during the quarter ended April 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.
(19)
<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, and equipment leases. Net cash provided from
operating activities for the first quarter of 1998 was $285,000 compared to net
cash used in operating activities of $128,000 during the first quarter of 1997.
The change was principally attributable to a collection of accounts receivable,
reduction of inventories, reduction of deferred taxes offset by reductions in
accounts payable and accrued expenses. For the quarter ended April 4, 1998,
inventories decreased by $126,000 as compared to an increase in inventory for
the quarter ended March 29, 1997 of $480,000. Accounts payable and accrued
expenses decreased $1,900,000 for the quarter ended April 4, 1998 as compared to
a net decrease in accounts payable and accrued expenses of $1,640,000 for the
quarter ended March 29, 1997. The Company funded the payment of accounts payable
and accrued expenses principally through proceeds from significant collections
of accounts receivable. Accounts receivable decreased $1,222,000 and inventories
decreased $126,000 for the quarter ended April 4, 1998 as compared to a decrease
in accounts receivable of $1,396,000 for the quarter ended March 29, 1997. The
Company continues to focus on the management of accounts receivable and
inventories in order to reduce interest cost. Depreciation and amortization was
$388,000 for the quarter ended April 4, 1998 compared to $379,000 for the
quarter ended March 29, 1997.
Net cash used in investing activities for the quarter ended April 4, 1998 was
$1,862,000, which compares to cash provided by investing activities of $93,000
for the quarter ended March 29, 1997. Cash flows used in investing activities
for the quarter ended April 4, 1998 were due to cash used in the acquisition of
the building occupied by Lavelle ($1,671,000) plus other capital expenditures
($154,000). The components of cash provided from investing activities during the
quarter ended March 29, 1997 included cash acquired in the purchase of Lavelle
($173,000), offset by the purchase of property and equipment ($100,000).
Net cash provided by financing activities during the quarter ended April 4, 1998
totalled $2,118,000, compared to cash used in financing activities for the
quarter ended March 29, 1997 of $300,000. Components of cash provided by
financing activities for the quarter ended April 4, 1998 were proceeds from
notes payable to finance the Lavelle building purchase ($1,652,000), proceeds
from the sale of Common stock and exercise of warrants ($220,000), receipt of
cash related to the stock subscription receivable ($250,000), borrowings on
lines of credit ($372,000), all offset by the repayment of principal on term
notes and capital leases ($354,000). Components of cash used in financing
(20)
<PAGE>
THE EASTWIND GROUP, INC.
Liquidity and Capital Resources (continued)
- -------------------------------------------
activities during the quarter ended March 29, 1997 were net proceeds from the
exercise of warrants ($450,000), offset by net repayments under lines of credit
($101,000) and principal payments on term notes and capital leases ($626,000).
The Company had a working capital deficit of $3,640,000 and $3,384,000 as of
April 4, 1998 and January 3, 1998, respectively. Working capital decreased by
$256,000 due to the impact of operating losses in the first quarter of 1998. The
Company is continuing to focus on improving the management of accounts
receivable and inventories and is continuing to work toward refinancing its
diverse debt structure to maximize borrowing capacity, reduce its cost and
increase availability.
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 $863,000 at April 4, 1998, leaving an aggregate
availability of $8,137,000 as of that date under the credit facility, dependent
upon eligible collateral assets. As of April 4, 1998, availability under the
line of credit, based upon available eligible collateral assets, was $2,147,000,
and outstanding borrowings were $1,736,000.
Centennial has a $2,500,000 line of credit with a bank, with outstanding
borrowings of $2,441,364 at April 4, 1998, which expires June 30, 1998. The
Company is actively seeking another lender to replace this facility.
Wickersham had a $1,000,000 line of credit with a finance company through April
17, 1998. Outstanding borrowings were $857,293 at April 4, 1998. As Wickersham
operations were closed down effective April 13, 1998, (See Note 7), the finance
company has been liquidating its collateral, resulting in a loan balance at May
19, 1998 of $115,000.
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 $267,000.
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
(21)
<PAGE>
THE EASTWIND GROUP, INC.
Liquidity and Capital Resources (continued)
- -------------------------------------------
proceeds to the Company of $200,000. 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.
The Company has recently completed the sale of 400,000 shares for $1.25 per
share in a private placement. The private placement also includes a common stock
warrant for the purchase of 200,000 shares of the Company's Common stock at an
exercise price of $1.25. The Company has filed a Registration Statement on Form
S-3 to register the shares issued in this private placement as well as the
shares underlying the warrant for resale by the holder thereof.
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.
(22)
<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; (xi) other economic, competitive, governmental and
technological factors affecting the Company's operations, markets,
products, services and prices; and (xii) the "going concern" qualification
contained in the audit opinion to the financial statements in the Company's
Form 10-KSB for the fiscal year ended January 3, 1998 issued by the
Company's independent public accountants. 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.
(23)
<PAGE>
THE EASTWIND GROUP, INC.
PART II - OTHER INFORMATION
Items 3,4 and 5 are not applicable.
Item 1. Legal Proceedings.
-----------------
On May 11, 1998, the Company and the former owner of Centennial entered
into a settlement agreement which resolved the outstanding arbitration
proceeding commenced by the Company. See Note 9 to the Consolidated Financial
Statements contained in Part I of this Form 10-QSB.
Item 2. Changes In Securities.
---------------------
On April 10, 1998, the Company agreed to issue 400,000 shares of Common
Stock to Clifton Capital Ltd. for gross proceeds of $500,000, or $1.25 per
share. On the same date, the Company also agreed to issue a warrant to Clifton
Capital Ltd. The warrant entitles the holder thereof to purchase up to 200,000
shares of Common Stock at $1.25 per share at any time on or after September 30,
1998 and on or before September 30, 2001. These shares and the warrant will be
issued pursuant to the private placement exemption in Section 4(2) of the
Securities Act of 1933, as amended (the "Act").
On April 21, 1998, the Company agreed to issue 50,000 shares of Common
Stock to SPH Equities, Inc. as compensation for investment banking services
rendered to the Company in connection with the Clifton Capital Ltd. transaction.
The shares to be issued by the Company to SPH Equities, Inc. will be made
pursuant to the private placement exemption in Section 4(2) of the Act.
On April 30, 1998, Mr. DeJuliis, the CEO of the Company, purchased an
aggregate of 301,000 shares of Common Stock from the Company for an aggregate
of $376,250, or for $1.25 per share. On April 21, 1998, Mr. DeJuliis sold
301,000 shares of Common Stock then owned by him to FAC Enterprises, Inc., for
an aggregate of $376,250, or at $1.25 per share. The shares issued by the
Company to Mr. DeJuliis were issued pursuant to the private placement
exemption in Section 4(2) of the Act.
On May 11, 1998, pursuant to the settlement agreement, the Company agreed
to issue to the former owner of Centennial an aggregate of 45,000 additional
shares of Common Stock. The Settlement Agreement provides that the Company will
register these shares for resale under the Act. The shares will be issued by
the Company pursuant to the private placement exemption in Section 4(2) of the
Act. The Settlement Agreement also provides for the cancellation by the Company
of all the Series B Preferred Voting Stock of the Company held by the former
owner of Centennial, including any accrued dividends thereon.
On May 14, 1998, the Company, at its cost and expense, filed with the
Securities and Exchange Commission a Registration Statement on Form S-3 pursuant
to which all of the above shares as well as the shares underlying the warrant
would be registered for resale under the Act by the holder thereof.
Item 6. Exhibits and Reports on Form 8-K.
--------------------------------
(a) Exhibits
<TABLE>
<CAPTION>
Exhibit No. Description Method of Filing
- ----------- ----------- ----------------
<C> <S> <S>
10.1 Settlement Agreement dated May 11, 1998
by and between the Company, Bruce K.
Worrall, Centennial Printing Corporation,
and Centennial Racing Corporation (incorporated
by reference to Exhibit 10.3 to Form S-3 of the
Company, Registration No. 333-52685)
27 Financial Data Schedule In electronic format only
</TABLE>
(b) Reports on Form 8-K
On March 9, 1998, the Company filed a Form 8-K reflecting the sale by the
Company of all the outstanding stock of Ivy Industries, Inc. The Form reported
changes in Items 2 and 7.
(24)
<PAGE>
Signatures
----------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Dated: May 26, 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)
(25)
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C> <C>
<PERIOD-TYPE> OTHER OTHER
<FISCAL-YEAR-END> JAN-02-1999 JAN-03-1998
<PERIOD-START> JAN-04-1998 JAN-01-1997
<PERIOD-END> APR-04-1998 MAR-29-1997
<CASH> 606,252 64,970
<SECURITIES> 0 0
<RECEIVABLES> 7,236,732 8,797,027
<ALLOWANCES> 0 0
<INVENTORY> 3,022,419 5,641,271
<CURRENT-ASSETS> 11,289,809 15,243,825
<PP&E> 9,874,184 9,924,152
<DEPRECIATION> (2,102,594) (1,824,005)
<TOTAL-ASSETS> 26,185,885 31,913,492
<CURRENT-LIABILITIES> 14,930,082 18,628,017
<BONDS> 0 0
0 900,000
100 100
<COMMON> 372,502 352,502
<OTHER-SE> 5,150,851 4,871,956
<TOTAL-LIABILITY-AND-EQUITY> 26,185,885 31,913,492
<SALES> 9,490,554 11,971,621
<TOTAL-REVENUES> 9,490,554 11,971,621
<CGS> 7,802,730 9,282,110
<TOTAL-COSTS> 7,802,730 9,282,110
<OTHER-EXPENSES> 1,922,624 2,190,332
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 383,656 358,692
<INCOME-PRETAX> (618,456) 140,487
<INCOME-TAX> (45,999) 44,200
<INCOME-CONTINUING> (572,457) 96,287
<DISCONTINUED> 60,752 93,895
<EXTRAORDINARY> 565,847 0
<CHANGES> 0 0
<NET-INCOME> 54,142 190,182
<EPS-PRIMARY> .02 .06
<EPS-DILUTED> .02 .05
</TABLE>
