<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 1O-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 October 3, 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: 0-27635
-------
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 4,071,019 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
October 3, 1998 and January 3, 1998 4
Consolidated Statements of Operations for the
Quarter ended October 3, 1998 and September 27, 1997
and the Three Quarters ended October 3, 1998
and September 27, 1997 5
Consolidated Statements of Cash Flows for the
Three Quarters ended October 3, 1998
and September 27, 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 5
Vote of Securities Holders 26
Item 5 - Other Information 26
Item 6 - Exhibits and Reports on Form 8-K 26
(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 three quarters ended October 3,
1998 and September 27, 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 October 3, 1998 and January 3, 1998, and the results of operations and cash
flows for the quarter and three quarters ended October 3, 1998 and September 27,
1997.
(3)
<PAGE>
The Eastwind Group, Inc.
Consolidated Balance Sheets
(Unaudited)
<TABLE>
<CAPTION>
October 3, January 3,
ASSETS 1998 1998
------------ ------------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 344,115 $ 64,970
Accounts receivable, net 6,770,789 8,797,027
Stock subscription receivable - 250,000
Recoverable income taxes 56,215 240,065
Marketable securities 250,000
Inventories 2,659,575 5,641,271
Prepaid expenses 217,042 224,515
Prepaid income taxes 0 25,977
------------ ------------
Total current assets 10,297,736 15,243,825
Property, plant and equipment, net 6,952,863 8,100,147
Deferred income taxes - 330,000
Goodwill and other assets 7,029,485 8,239,520
------------ ------------
$ 24,280,084 $ 31,913,492
============ ============
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY
<S> <C> <C>
Current liabilities:
Lines of credit $ 4,409,214 $ 6,038,576
Current portion of long-term debt 715,253 1,238,069
Current portion of capitalized lease obligations 911,757 997,516
Loans payable to officers 150,000 150,000
Accounts payable 4,920,969 6,394,011
Accrued expenses 3,150,719 3,555,073
Other current liabilities 272,001 254,772
------------ ------------
Total current liabilities 14,529,913 18,628,017
------------ ------------
Long-term debt 3,790,090 4,937,040
------------ ------------
Capitalized lease obligations 840,018 1,419,791
------------ ------------
Other liabilities 961,212 780,555
------------ ------------
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 October 3, 1998
and January 3, 1998, respectively 100 100
Series C Convertible Preferred stock, $.10 par value,
750 shares authorized, issued and outstanding at
October 3, 1998 75 -
Common stock, $.10 par value, 7,000,000 shares authorized,
4,071,019 and 3,525,019 issued and outstanding at October 3, 1998
and January 3, 1998, respectively 407,102 352,502
Warrants outstanding 914,797 1,009,797
Additional paid-in capital 10,914,002 9,314,614
Accumulated deficit (7,565,225) (4,690,455)
------------ ------------
4,670,851 5,986,558
Notes receivable from sale of stock (512,000) (762,000)
------------ ------------
Total stockholders' equity 4,158,851 5,224,558
------------ ------------
$ 24,280,084 $ 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 Three Quarters Ended
October 3, September 27, October 3, September 27,
1998 1997 1998 1997
--------- ------------ ---------- ------------
<S> <C> <C> <C> <C>
Net sales $ 6,394,411 $ 9,401,882 $ 22,427,575 $ 33,200,255
Cost of goods sold 4,952,011 8,116,460 18,500,658 27,496,762
------------ ------------ ------------ ------------
Gross profit 1,442,400 1,285,422 3,926,917 5,703,493
Selling, general and administrative expenses 1,692,887 2,067,718 5,454,440 7,733,163
Write-down of assets on operations closed - - 562,244 -
------------ ------------ ------------ ------------
1,692,887 2,067,718 6,016,684 7,733,163
------------ ------------ ------------ ------------
Operating income (loss) (250,487) (782,296) (2,089,767) (2,029,670)
Interest expense, net 455,725 349,659 1,242,654 1,045,960
------------ ------------ ------------ ------------
Income before income taxes and
minority interest (706,212) (1,131,955) (3,332,421) (3,075,630)
Income taxes (benefit) (47,900) (390,300) (54,800) (1,061,792)
------------ ------------ ------------ ------------
Income (loss) from continuing operations (658,312) (741,655) (3,277,621) (2,013,838)
Income from discontinued operations, net of
income taxes of $32,700 and $54,200, respectively - 45,698 60,752 138,359
Gain on sale of Ivy-Tygart Acquisition Corp.,
net of income taxes of $373,000 - - 565,847 -
------------ ------------ ------------ ------------
Net income (loss) (658,312) (695,957) (2,651,022) (1,875,479)
Preferred stock dividends (200,957) (49,500) (223,750) (148,500)
------------ ------------ ------------ ------------
Net income (loss)available to
Common stockholders $ (859,269)$ (745,457)$ (2,874,772)$ (2,023,979)
============ ============ ============ ============
Earnings (loss) per share $ (0.21)$ (0.27)$ (0.72)$ (0.78)
============ ============ ============ ============
Shares used in computing earnings per share 4,071,019 2,763,338 3,975,437 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>
Three Quarters Ended
October 3, September 27,
1998 1997
------------ ------------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $ (2,651,022)$ (1,875,479)
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Depreciation and amortization 1,196,257 1,210,358
Amortization of deferred credit - (18,487)
Imputed interest 81,063 46,647
Minority interest in income of consolidated subsidiary - 11,218
Changes in assets and liabilities, net of effect
from acquisitions:
(Increase) decrease in:
Accounts receivable 1,687,636 1,017,008
Marketable securities (250,000) -
Inventories 488,719 (129,045)
Prepaid expenses (17,846) (31,911)
Prepaid income taxes 103,769 (1,147,768)
Deferred taxes 330,000 -
Other assets (102,731) (377,479)
Increase (decrease) in:
Accounts payable (936,491) 444,635
Accrued expenses (294,325) (972,983)
Liability to former officer - 380,137
Other liabilities (264,752) (9,505)
------------ ------------
Net cash (used in) operating activities (629,723) (1,452,654)
------------ ------------
Cash flows from investing activities:
Purchase of property and equipment (1,902,414) (244,506)
Net assets of subsidiary sold 107,925 -
Net assets of disposed by Premier Press 618,377 -
Net cash acquired in purchase of Lavelle - 172,550
Other - 11,720
------------ ------------
Net cash provided by (used in) investing activities (1,176,112) (60,236)
------------ ------------
Cash flows from financing activities:
Net borrowings (repayments) under lines of credit (520,731) 1,594,314
Principal payments on term notes and capital leases (2,680,809) (1,264,530)
Proceeds from long-term debt 3,452,000 -
Proceeds from sale of preferred stock 653,874 -
Stock subscription receivable 580,000 -
Proceeds from sale of common stock and warrants 625,189 321,609
Net proceeds from exercise of warrants 200,000 450,000
Payment of preferred stock dividends (223,750) (67,500)
------------ ------------
Net cash provided by financing activities 2,085,773 1,033,893
------------ ------------
Net increase (decrease) in cash and cash equivalents 279,938 (478,997)
Cash and cash equivalents, beginning of period 64,177 709,697
------------ ------------
Cash and cash equivalents, end of period $ 344,115 $ 230,700
============ ============
</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 October 3, 1998 and January 3, 1998, and the results of operations
and cash flows for the quarter and three quarters ended October 3, 1998
and September 27, 1997, have been made. The results of operations for
the three quarters ended October 3, 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 October 3, January 3,
- - ------ ------------------- 1998 1998
----------- -----------
Trade receivables $ 6,848,750 $ 8,877,277
Retainage receivables 431,933 361,124
Bad debt reserves (356,873) (288,353)
----------- -----------
6,923,810 8,950,048
Less: Retainage receivables
due in over one year (153,021) (153,021)
----------- -----------
$ 6,770,789 $ 8,797,027
=========== ===========
Note 3: Inventories October 3, January 3,
- - ------ ----------- 1998 1998
----------- -----------
Raw Materials $ 406,432 $ 1,599,996
Work in Process 1,995,202 2,362,413
Finished Goods 257,941 1,641,271
----------- -----------
$ 2,659,575 $ 5,641,271
=========== ===========
(7)
<PAGE>
THE EASTWIND GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 4: Property, Plant and Equipment
- - ------- -----------------------------
October 3, January 3,
1998 1998
------------ ------------
Land $ 326,000 $ 352,135
Buildings 3,003,500 2,898,881
Machinery and Equipment 5,743,258 6,673,136
------------ ------------
9,072,758 9,924,152
Less: Accumulated depreciation (2,119,895) (1,824,005)
------------ ------------
$ 6,952,863 $ 8,100,147
============ ============
Machinery and equipment includes $3,782,373 and $4,017,872 of
production equipment under capital leases at October 3, 1998 and
January 3, 1998, respectively. Accumulated depreciation on such
equipment was $778,129 and $732,104 at October 3, 1998 and January 3,
1998, respectively.
Note 5: Goodwill and Other Assets
- - ------- -------------------------
October 3, January 3,
1998 1998
------------ ------------
Goodwill, net $ 5,956,407 $ 7,036,605
Covenant not to compete, net 402,083 439,583
Retainage receivables
due in over one year 153,021 153,021
Deferred financing, net 293,234 225,956
Other 224,740 834,355
------------ ------------
$ 7,029,485 $ 8,239,520
============ ============
(8)
<PAGE>
THE EASTWIND GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 6: Long-term Debt
------- --------------
Long-term debt consists of the following:
<TABLE>
<CAPTION>
October 3, January 3,
1998 1998
---------- ----------
<S> <C> <C>
Polychem note payable to the Budd Company, interest at 8%,
principal payable in 20 quarterly installments of $81,315,
beginning March 31, 1998 $1,382,350 1,626,093
Polychem note payable to finance company, interest at prime
rate plus 1.5% (9.75% at June 28, 1997), payable in 35
monthly installments of $25,000 plus a final payment on
September 30, 2001 1,475,000 951,963
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 741,146 ---
Lavelle note payable to PIDC, interest at 4.0%, payable in
120 monthly installments of $4,050 commencing in March 1998 375,287 ---
Lavelle note payable to a PIDA, interest at 3.0%, payable in
120 monthly installments of $4,750, plus interest,
commencing March 1998 468,549 ---
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
</TABLE>
(continued)
(9)
<PAGE>
THE EASTWIND GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 6: Long--term Debt (continued)
- - ------- ---------------------------
<TABLE>
<S> <C> <C>
Ivy term notes payable to a bank, secured by certain property, October 3, January 3,
interest at 9.4%, due in 240 monthly installments of principal 1998 1998
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 396,250 357,052
Other 63,011 111,149
----------- -----------
4,901,593 6,175,109
Less: current portion (715,253) (1,238,069)
----------- -----------
$4,186,340 $4,937,040
=========== ===========
</TABLE>
(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 October 3, 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 finance
company on September 29, 1998, which provides for a three-year
$3,500,000 revolving line of credit and a three-year term loan of
$1,500,000. Outstanding borrowings on the line of credit were
$1,633,993 and $1,492,511 at October 3, 1998 and January 3, 1998
(previous line of credit), respectively. As of October 3, 1998, there
was $668,000 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 $348,247 as of October 3, 1998.
Future maturities of long-term debt at October 3, 1998 are as follows:
October 2, 1999 715,253
September 30, 2000 912,626
September 29, 2001 1,433,412
September 28, 2002 563,034
September 27, 2003 191,888
Thereafter 1,085,380
---------- ---------
$4,901,593
==========
(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 $1,152,2S0. 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 4,369,251
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 $660,000, 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 coats, 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 three quarters ended October 3, 1998, Premier experienced
operating losses of $1,120,000, including the write down assets to
realizable values by $562,000.
(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 Three Quarters Ended
October 3, September 27, October 3, September 27,
1998 1997 1998 1997
--------- ------------ --------- -------------
<S> <C> <C> <C> <C>
Earnings per share $(.21) $(.27) $(.72) $(.78)
========= ============ ========= =============
Effect of dilutive securities -- -- -- --
--------- ------------ --------- -------------
Diluted earnings per share $(.21) $(.27) $(.72) $(.78)
========= ============ ========= =============
</TABLE>
<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 October 3, 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 OCTOBER 3, 1998 AND SEPTEMBER 27, 1997
- - ----------------------------------------------------
Overview
- - --------
The Company generated a net loss, before preferred stock dividends, of $658,000
for the quarter ended October 3, 1998, compared to a net loss of $696,000 for
the quarter ended September 27, 1997. The net loss in the quarter ended October
3, 1998 includes a write down of assets of Premier Book Press of $56,000 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 October 3, 1998.
Net Sales
- - ---------
Net sales for the quarter ended October 3, 1998 were $6,394,000, compared to
$9,402,000 for the quarter ended September 27, 1997. The decrease in net revenue
versus the prior year period was principally due to the reduction in sales of
Premier of $2,740,000. Sales decreased in the third period of 1998 versus the
comparable period of 1997 for the other continuing operations; Polychem
($162,000); Lavelle ($242,000) and Centennial ($442,000) due to delays in
shipping orders or softness in the market. Based upon current sales backlogs
each of these latter businesses expect the sales volume in the last quarter of
1998 to be greater than in the third quarter.
Cost of Goods Sold
- - ------------------
Cost of goods sold for the quarter ended October 3, 1998 of $4,952,000
represents a decrease of $3,164,000 versus the comparable period of the prior
year. The decrease is due in part to the closed operations of Premier
($2,935,000). In addition, lower cost of sales of Polychem ($324,000), Lavelle
($28,000) and Centennial ($455,000) as a result of lower net sales caused the
decrease. Polychem's cost of sales percentage improved in the quarter ended
October 3, 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 October 3, 1998
improved by 2 percentage points versus the prior year's quarter while Lavelle,
due to a significant reduction in net sales volume in the quarter declined by 17
percentage points. The anticipated increase in Lavelle's sales volume in the
last quarter 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 totaled $1,693,000 for the quarter
ended October 3, 1998, a reduction of $375,000 versus the comparable period of
1997. Polychem experienced a 5 percentage point increase versus the comparable
period in 1997 in selling, general and administrative expenses as a percentage
of sales, which reflects gearing up for higher sales volume in the last quarter
of 1998. Centennial had a reduction of 1 percentage point in selling, general
and administrative expenses as a percentage of sales versus the comparable
period of 1997, which is indicative of the cost cutting measures having been
implemented. Corporate overhead of the holding company decreased by $178,000 in
the quarter ended October 3, 1998 versus the third quarter of 1997, principally
due to a reduction in staffing costs, facility expenses, accounting and legal
fees and other costs incurred in 1997 due to the rapid expansion of the Company
in 1996 and early 1997.
Interest Expense
- - ----------------
Interest expense for the quarter ended October 3, 1998 was $456,000 or 7.1% of
net sales, versus $350,000 or 3.7% of net sales for the comparable period of
1997. Interest expense as a percentage of sales during the quarter ended October
3, 1998 was higher than the comparable period of 1997 due to exit costs of
$143,000 incurred in the refinance of Polychem's line of credit and term debt.
(18)
<PAGE>
THE EASTWIND GROUP, INC.
THREE QUARTERS ENDED OCTOBER 3, 1998 AND SEPTEMBER 27, 1997
- - -----------------------------------------------------------
Overview
- - --------
The Company experienced a net loss, before preferred stock dividends, of
$2,651,000 for the three quarters ended October 3, 1998, compared to a net loss
of $1,875,000 for the three quarters ended September 27, 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 three quarters in 1998 include losses from Premier Book Press
(which was closed down April 13, 1998) totaling $1,120,000, including a write
down of assets to realizable value by $562,000. As there has not been an
adjudication of liabilities of Premier, there has been no consideration given to
any relief from liabilities as of October 3, 1998.
Net Sales
- - ---------
Net sales for the three quarters ended October 3, 1998 of $22,428,000 represent
a decrease of $10,772,000 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 ($6,121,000), which was closed
down on April 13, 1998. In addition, reductions in comparable net sales for
Polychem ($2,330,000) and Lavelle ($1,939,000) 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 ($955,000) 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 last quarter of 1998.
(19)
<PAGE>
THE EASTWIND GROUP, INC.
RESULTS OF OPERATIONS (continued)
- - ---------------------------------
Cost of Goods Sold
- - ------------------
Cost of goods sold for the three quarters ended October 3, 1998 was $18,501,000,
a decrease of $8,996,000 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 ($2,002,000), Lavelle ($848,000)
and Centennial ($1,118,000) . Cost of goods sold at Premier Book Press decreased
by $5,600,000 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 three quarters ended October 3,
1998 was 17.5%, an increase of .3% from the comparable period of the prior year.
Polychem's gross profit percentage increased by 2.8 percentage points versus the
prior year due to cost cutting and streamlining manufacturing methods. The gross
profit percentage of Centennial of 17.1% for the three quarters ended October 3,
1998 was an improvement of 2.7 percentage points versus the prior year. Lavelle
gross profits dropped by 15.0 percentage points 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
- - -----------------------------------
Selling, general and administrative expenses for the three quarters ended
October 3, 1998 were $6,016,000 or 26.8% of net sales, compared to $7,732,000 or
23.3% 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 three quarters of 1998 versus the comparable period of 1997,
even though Polychem's percentage increased (4.9%), Centennial remained the same
(19.9%) and Lavelle increased (17.5%) due to lesser sales volume. Selling,
general and administrative expenses at the holding company decreased by
$1,248,000, or 5.6% of consolidated net sales, due to reductions in staffing,
accounting and legal fees and other costs incurred in the first three quarters
of 1997 related to the rapid expansion of the Company in late 1996 and early
1997. 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 three quarters ended October 3, 1998 was $1,242,000,
versus $1,046,000 for the comparable period of 1997. Interest expense increased
as a percentage of net sales by 2 percentage points due to exit costs of
$143,000 incurred in the refinancing of Polychem's debt and 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 used
in operating activities for the first three quarters of 1998 was $630,000
compared to net cash used in operating activities of $1,453,000 during the first
three quarters of 1997. The change was principally attributable to collection of
accounts receivable, reduction of inventories and a tax refund as of October 3,
1998 as compared to September 27, 1997, offset partially by decreases in
accounts payable and accrued expenses.
For the three quarters ended October 3, 1998, the Company funded the payment of
accounts payable ($936,000) and accrued expenses ($294,000) with proceeds from
significant collections of accounts receivable ($1,688,000) . The reduction in
accounts receivable for the three quarters ended October 3, 1998 was $671,000
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 ($1,148,000) for the three quarters ended
September 27, 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 $1,196,000 for the three quarters ended October 3, 1998
compared to $1,210,000 for the comparable period of the prior year.
Net cash used in investing activities for the three quarters ended October 3,
1998 was $1,176,000, compared to cash used in investing activities of $60,000
for the three quarters ended September 27, 1997. Cash used in the three quarters
ended October 3, 1998 was principally for the purchase of property and equipment
($1,902,000) . The components of cash used in investing activities during the
three quarters ended September 27, 1997 were cash acquired in the purchase of
Lavelle ($173,000) offset by the purchase of property and equipment ($245,000)
Net cash provided by financing activities during the three quarters ended
October 3, 1998 totaled $2,086,000, compared to cash provided by financing
activities for the three quarters ended September 27, 1997 of $1,034,000.
Components of cash provided by financing activities in 1998 were the receipt of
proceeds from the exercise of certain warrants ($200,000), sale of Common stock
($625,000), proceeds from long-term debt ($3,452,000), sale of preferred stock
($654,000), and receipt of proceeds from stock subscriptions ($580,000), offset
by repayments of lines of credit ($521,000) and repayment of principal on long
term debt and capital lease obligations ($2,681,000) and preferred stock
dividends ($224,000).
(21)
<PAGE>
THE EASTWIND GROUP, INC.
Liquidity and Capital Resources (continued)
- - -------------------------------------------
The Company had a net working capital deficit of $4,232,000 and $3,384,000 as of
October 3, 1998 and January 3, 1998, respectively. Working capital decreased by
$802,000 due to the impact on working capital of net operating losses during the
three quarters ended October 3, 1998 offset by the refinancing of Polychem's
term debt.
The Company continues to work toward refinancing the remainder of its senior
debt and has, in fact, received favorable response from its prospective lender.
Based on an existing commitment letter, it is expected that the new financing of
Centennial's senior debt will close prior to the end of 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.
In September 1998, Polychem entered into a borrowing arrangement with a
financing institution which included a line of credit facility up to $3,500,000
and a term loan of $1,500,000. The line of credit is secured by Polychem's
inventory and receivables and the term loan is secured by real estate and
equipment. As of October 3, 1998, availability under the line of credit was
$2,302,000 and outstanding borrowings were $1,634,000.
Centennial has a $2,500,000 line of credit with a bank, with outstanding
borrowings of $2,427,000 at October 3, 1998, which expired July 31, 1998. The
bank 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 $348,000.
As of March 29, 1997, the Company had outstanding Class A-l, 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-l, 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>
THE EASTWIND GROUP, INC.
PART II - OTHER INFORMATION
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 July 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.
Item 2: Change in Securities
- - ------- --------------------
On June 25, 1998, the Company issued to ProFutures Special 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 of the Common stock for the five trading
days preceding the date of conversion, provided that the conversion
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.
Item 3: Defaults on Senior Securities
- - ------- -----------------------------
None.
(25)
<PAGE>
THE EASTWIND GROUP, INC.
PART II - OTHER INFORMATION
Item 4: Submission of Matters to a Vote of Security Holders
- - ------- ---------------------------------------------------
None.
Item 5: Other Matters
- - ------- -------------
On September 1, 1998, the Nasdaq Stock Market Listing Qualifications
Panel made the determination that the Company failed to meet the
minimum requirements of $2,000,000 in net tangible assets.
Accordingly, the Company was delisted from the Nasdaq Stock Market
effective with the close of business on September 1, 1996.
The Company's Common stock has been trading on the OTC Bulletin Board
since the effective date of the delisting.
Item 6: Exhibits and Reports on Form 8-K
- - ------- --------------------------------
None
(26)
<PAGE>
Signatures
----------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Dated: November 16, 1998
THE EASTWIND GROUP, INC.
(Registrant)
-----------------------------------------
Paul A. DeJuliis
Chairman and CEO
-----------------------------------------
William B. Miller
Senior Vice President and CFO
(Principal financial and accounting officer)
(27)
<PAGE>
Signatures
----------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Dated: November 16, 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)
(28)
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C> <C>
<PERIOD-TYPE> 9-MOS 9-MOS
<FISCAL-YEAR-END> JAN-02-1999 JAN-03-1998
<PERIOD-START> JAN-04-1998 JAN-01-1997
<PERIOD-END> OCT-03-1998 SEP-27-1997
<CASH> 344,115 64,970
<SECURITIES> 0 0
<RECEIVABLES> 6,770,789 8,797,027
<ALLOWANCES> 0 0
<INVENTORY> 2,659,575 5,641,271
<CURRENT-ASSETS> 10,297,736 15,243,825
<PP&E> 9,072,758 9,924,152
<DEPRECIATION> (2,119,895) (1,824,005)
<TOTAL-ASSETS> 24,280,084 31,913,492
<CURRENT-LIABILITIES> 0 0
<BONDS> 0 0
0 0
175 100
<COMMON> 407,102 352,502
<OTHER-SE> 3,751,574 4,871,956
<TOTAL-LIABILITY-AND-EQUITY> 24,280,084 31,913,492
<SALES> 22,427,575 33,200,255
<TOTAL-REVENUES> 22,427,575 33,200,255
<CGS> 18,500,658 27,496,762
<TOTAL-COSTS> 18,500,658 27,496,762
<OTHER-EXPENSES> 6,016,684 7,733,163
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 1,242,654 1,045,960
<INCOME-PRETAX> (3,332,421) (3,075,630)
<INCOME-TAX> (54,800) (1,061,792)
<INCOME-CONTINUING> (3,277,621) (2,013,838)
<DISCONTINUED> 60,752 138,359
<EXTRAORDINARY> 565,847 0
<CHANGES> (2,651,022) (1,875,479)
<NET-INCOME> 0 0
<EPS-PRIMARY> (.72) (.78)
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