U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-K
Annual Report Under Section 13 or 15 (d)
of the Securities Exchange Act of 1934
For the fiscal year ended April 30, 2001
Commission File No. 0-17072
WINDSWEPT ENVIRONMENTAL GROUP, INC.
(exact name of Registrant as specified in its charter)
Delaware 11-2844247
-------- ----------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
100 Sweeneydale Avenue, Bay Shore, New York 11706
------------------------------------------- -----
(Address of principal executive offices) (Zip Code)
Registrant's telephone number: (631) 434-1300
Securities registered pursuant to Section 12 (b) of the Exchange Act: None
Securities registered pursuant to Section 12 (g) of the Exchange Act:
Common Stock, $.0001 par value per share
(Title of Class)
Check whether the registrant (1) has filed all reports required to be filed by
Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding
12 months (or for such shorter periods 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__
Check if disclosure of delinquent filers in response to Item 405 of Regulation
S-K is not contained in this form, and no disclosure will be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this form 10-K or any amendment to this
form 10-K. [ ]
Based upon the average bid and ask price on July 13, 2001 ($0.20 per share), the
aggregate market value of the Common Stock held by non-affiliates of the
registrant was approximately $3,145,760.
As of July 13, 2001, the issuer had 38,481,254 shares of Common Stock
outstanding.
DOCUMENTS INCORPORATED BY REFERENCE: NONE
PART I
Introductory Comment - Forward Looking Statements
-------------------------------------------------
Statements contained in this Annual Report on Form 10-K include "forward-looking
statements" within the meaning of Section 27A of the Securities Act and Section
21E of the Securities Exchange Act. Forward-looking statements involve known and
unknown risks, uncertainties and other factors which could cause the actual
results, performance and achievements, whether expressed or implied by such
forward-looking statements, not to occur or be realized. Such forward-looking
statements generally are based upon the Company's best estimates of future
results, performance or achievement, based upon current conditions and the most
recent results of operations. Forward-looking statements may be identified by
the use of forward-looking terminology such as "may," "will," "expect,"
"believe," "estimate," "anticipate," "continue" or similar terms, variations of
those terms or the negative of those terms. Potential risks and uncertainties
include, among other things, such factors as:
o the market acceptance and amount of sales of the Company's services,
o the Company's success in increasing revenues and reducing expenses,
o the frequency and magnitude of environmental disasters or disruptions
resulting in the need for the types of services the Company provides,
o the extent of the enactment, enforcement and strict interpretations
of laws relating to environmental remediation,
o the competitive environment within the industries in which the Company
operates,
o the Company's ability to raise additional capital,
o the Company's ability to attract and retain qualified personnel, and
o the other factors and information disclosed and discussed under the
"Risk Factors" section of Item 1 and in other sections of this Annual
Report on Form 10-K.
Investors should carefully consider such risks, uncertainties and other
information, disclosures and discussions which contain cautionary statements
identifying important factors that could cause actual results to differ
materially from those provided in the forward-looking statements. The Company
undertakes no obligation to publicly update or revise any forward-looking
statements, whether as a result of new information, future events or otherwise.
ITEM 1. DESCRIPTION OF BUSINESS
--------------------------------
GENERAL
Windswept Environmental Group, Inc. ("Windswept" or "the Company"), through its
wholly-owned subsidiaries, Trade-Winds Environmental Restoration, Inc.
("Trade-Winds"), New York Testing Laboratories, Inc. ("NYTL") and North Atlantic
Laboratories, Inc. ("NAL"), provides a full array of emergency response,
remediation and disaster restoration services to a broad range of clients. The
Company has expertise in areas of hazardous materials remediation, testing,
toxicology, training, wetlands restoration, wildlife and natural resources
rehabilitation, technical advisory, restoration and site renovation services.
The Company believes that it has assembled the resources, including key
environmental professionals, construction managers, and specialized equipment to
become a leader in the expanding worldwide emergency services market. The
Company further believes that few competitors provide the diverse range of
services provided by Windswept on an emergency response basis. Management
believes that its unique breadth of services and its emergency response
capability has positioned the Company for rapid growth in this expanding market.
The Company was incorporated under the laws of the state of Delaware on March
21, 1986 under the name International Bankcard Services Corporation, which was
subsequently changed to Comprehensive Environmental Systems, Inc. On March 19,
1997, the Company's name was changed to its present name. The Company's
principal executive offices are located at 100 Sweeneydale Avenue, Bay Shore,
New York, 11706. The Company's telephone number is (631) 434-1300.
In December 1993, the Company acquired Trade-Winds, an asbestos abatement and
lead remediation company. In June 1995, the Company purchased NYTL, a testing
laboratory that offered hazardous materials testing capabilities. On February
24, 1997, the Company acquired NAL, a certified environmental training,
laboratory testing and consulting services company. As of June 30, 2001, NYTL
had ceased operations and substantially all of its fixed assets had been sold.
2
On October 29, 1999, the Company entered into a subscription agreement with
Spotless Plastics (USA), Inc. ("Spotless"), a Delaware corporation, pursuant to
which the Company sold to Windswept Acquisition Corporation ("Acquisition
Corp."), a Delaware corporation and a wholly-owned subsidiary of Spotless,
22,284,683 shares (the "Acquisition Corp. Common Shares") of common stock, par
value $.0001 per share ("Common Stock"), and 9,346 shares of Series B
Convertible Preferred Stock, par value $.01 per share ("Series B Preferred"),
for an aggregate subscription price of $2,500,000 or $.07904 per share of Common
Stock and $79.04 per share of Series B Preferred. Each share of Series B
Preferred has the equivalent voting power of 1,000 shares of Common Stock. Each
share of Series B Preferred is convertible into 1,000 shares of Common Stock. As
of July 13, 2001, the Acquisition Corp. Common Shares represented approximately
58% of the Company's outstanding Common Stock and the Acquisition Corp. Common
Shares and Series B Preferred shares collectively represented approximately 66%
of the voting power of the outstanding securities of the Company.
In addition, the Company and Trade-Winds, NAL and NYTL, each of which is a
wholly-owned subsidiary of the Company, as joint and several obligors
(collectively, the "Obligors"), borrowed $2,000,000 from Spotless. This
borrowing is evidenced by a secured convertible promissory note, dated October
29, 1999 (the "Note"). Outstanding principal under the Note bears interest at a
rate equal to the London Interbank Offering Rate ("LIBOR") plus an additional 1%
and is payable monthly. The Note matures on October 29, 2004, unless Spotless
elects to defer repayment until October 29, 2005. The outstanding principal
amount and all accrued and unpaid interest under the Note is convertible, at the
option of Spotless, in whole or in part, at any time, into shares of Common
Stock at the rate of one share of Common Stock for every $.07904 of principal
and accrued interest so converted (or, in the event that certain approvals have
not been obtained at the time of conversion, into shares of Series B Preferred
at the rate of one share of Series B Preferred for every $79.04 of principal and
accrued interest so converted). In connection with the Note, each of the
Obligors granted to Spotless a security interest in all of their respective
assets pursuant to a Security Agreement dated October 29, 1999. Spotless has
agreed to release their security interest on certain NYTL assets as of June 30,
2001. The transaction with Spotless described above is hereafter referred to as
the "Spotless Transaction".
As a result of the conversion features of the Series B Preferred and the Note,
as of July 13, 2001, if Acquisition Corp. were to convert its Series B Preferred
shares into Common Stock and Spotless were to convert all of the outstanding $2
million principal amount and $259,838 accrued and unpaid interest under the Note
into Common Stock, Acquisition Corp. and Spotless would collectively own
60,222,459 shares, or approximately 79%, of the then issued and outstanding
shares of Common Stock.
OPERATIONS
In order to position itself into stronger and more profitable markets, the
Company has evolved during the past three years from an asbestos abatement
contractor to a hazardous materials clean-up and natural resource restoration
firm, and finally, to a full service emergency response provider. The Company
provides a broad range of services through vertically integrated businesses in
the service areas described below:
o Emergency Response and Catastrophe Restoration
o Site Restoration
o Mold Contamination Remediation
o Natural Resource/Wetlands Restoration/Wildlife Rehabilitation
o Forensic Investigation
o Asbestos Abatement
o Fire and Flood Restoration
o Demolition
o Lead Abatement
o Underground Storage Tank Removal
o Soil Remediation
o Oil Spill Response - Land and Marine
o Hazardous Waste/Biohazard Clean-up
o Chemical Spill Response
o Duct Cleaning
o Indoor Air Quality Investigation
o Environmental and Health and Safety Training
o Environmental Testing
o Environmental Consulting Services
3
The Company has specially trained emergency response teams that respond to both
hazardous and non-hazardous spills and other emergencies on land and water on a
24 hour, seven day a week basis. The following examples are types of emergencies
for which the Company is capable of conducting response and remediation
services: explosions, fires, earthquakes, mudslides, hazardous spills,
transportation catastrophes, storms, hurricanes, tornadoes, floods, and
biological threats.
The Company believes that its comprehensive emergency response abilities have
greatly expanded its customer base to include those entities that value
immediate response, enhanced capabilities and customer service. The Company's
customers include Fortune 500TM companies, insurance companies, industrial
concerns, oil companies, banks, school districts, state, local and county
governments, commercial building owners and real estate development concerns.
Currently, the Company's customers include Keyspan Energy Corporation, Long
Island Rail Road, State Farm Insurance Company, Travelers Insurance Company,
Turner Construction Company and the New York State Department of Environmental
Conservation for services including hazardous materials spill response, oil
spill containment, sub-surface investigation and site remediation.
Management expects insurance loss remediation and restoration to be an
increasingly significant portion of the Company's future revenues. In order to
address the needs of the insurance industry, the Company has dedicated itself
toward the strategic integration of all of its services. As a result, the
Company provides its insurance customers with the capability to respond to
virtually any type of insurance loss. The Company believes that it is able to
perform all the tasks necessary to rapidly restore a property to pre-loss
conditions, thus minimizing dislocation, downtime and business interruption.
The Company estimates that in excess of 50% of its revenues are derived from
previously served customers. Insurance customers represent a substantial portion
of the Company's target market; those with recurring needs for emergency
services. During the Company's fiscal years ended April 30, 2001 ("fiscal
2001"), April 30, 2000 ("fiscal 2000") and April 30, 1999 ("fiscal 1999")
revenues from insurance customers represented approximately 12%, 15% and 5%,
respectively, of total revenues. During fiscal 2001, one of the Company's
customers accounted for approximately 35% of its total revenues. During fiscal
2001, 2000 and 1999 another customer accounted for 11%, 15% and 10%,
respectively, of the Company's total revenues. During fiscal 2000, a different
customer accounted for approximately 12% of the Company's total revenues. While
the Company intends to increase the amount of work performed for entities other
than these customers, it expects to continue to be dependent on these customers
and/or the incurrence of large projects. The Company has repeat business with
many of its customers, although the level of business with a particular customer
in a succeeding period is not expected to be commensurate with the prior period,
principally because of the project nature of the Company's services. However,
because of the significant expansion of the Company's customer base and services
provided, the Company believes that the loss of any single customer would not
have a material adverse effect on the Company's financial condition and results
of operations. See "Risk Factors" section of Item 1.
In order to provide emergency response services, it is necessary for the Company
to employ a professional staff and to maintain an inventory of vehicles,
equipment and supplies. The Company currently maintains a fleet of 24 spill
response vessels with skimmer, diving and booming capabilities, 51 vehicles
(including vacuum trucks, earth moving equipment, supply trucks and drilling
vehicles) and 29 trailers equipped with various capabilities (such as a mobile
wildlife clinic). The Company has the equipment capacity to move 100,000 gallons
of environmental waste in any 24-hour period directly to a disposal facility
either in drums, roll-offs or directly in tanker trucks.
The Company has on its staff experts and licensed personnel in natural resource
restoration, spill response, hazardous material clean-up, wildlife
rehabilitation, environmental investigation and testing, construction, oil spill
response, and health and safety. The Company's staff includes three United
States Coast Guard certified captains and two certified divers. The Company
employs 14 wildlife rehabilitators, 14 certified asbestos handlers, 14
accredited lead workers, 61 certified hazardous material workers, and a chemical
engineer, as well as individuals with various other applicable expertise.
COMPETITION
The environmental industry in the United States has developed rapidly since the
passage of the Resources Conservation and Recovery Act of 1976 ("RCRA") and is
highly competitive. The Company believes that the industry is going through a
rapid transition resulting from several mergers and consolidations during the
last several years. Several large companies have emerged from this transition
period but the Company believes that the industry
4
still has numerous small and medium-sized companies serving niche markets
according to geography, industry, media (air, water, soil, etc.), and
technological specialization (bioremediations, etc.). The Company competes with
approximately 20 environmental remediation companies of similar size and
approximately 50 construction firms of all sizes, and believes that few of its
competitors provide the full array of services that the Company performs as an
emergency response firm. The Company differentiates itself from its competitors
by providing some unique services (such as wildlife rehabilitation, natural
resource recovery, water spill clean-up, forensic testing, biohazard clean-up)
and complementary packages of services. For example, the oil spill response
service line includes the Company's wetlands/natural resource restoration,
laboratory and construction related services. The Company further believes that
the turnkey approach to the emergency response business provides a distinct
advantage over its competition.
The Company has obtained a "Class E" marine oil spill response designation from
the United States Coast Guard. This designation, which is the highest
designation that can be obtained, allows the Company to respond to contamination
containment spills, such as oil tanker disasters. The Company believes that it
is one of approximately ten companies in the Northeastern United States with
this "Class E" designation. To the best of management's knowledge, only two
companies on the east coast of the United States perform on-site natural
resource restoration/wildlife rehabilitation. The Company believes that it is
the only company in the Northeastern United States to possess both of these
critical oil spill response capabilities.
The Company believes that the principal competitive factors applicable to all
areas of its business are price, breadth of services offered, ability to collect
and transport waste products efficiently, reputation for customer service and
dependability, technical proficiency, environmental integrity, operational
experience, quality of working relations with federal, state and local
environmental regulators and proximity to customers and licensed waste disposal
sites. The Company further believes that it is, and will continue to be, able to
compete favorably on the basis of these factors. However, many of the Company's
competitors have financial and capital equipment resources that are greater than
those available to the Company. Additionally, at any time and from time to time,
the Company may face competition from new entrants into the industry. The
Company may also face competition from technologies that may be introduced in
the future, and there can be no assurance that the Company will be successful in
meeting the challenges that may be created by competition in the future.
The Company's ability to compete effectively depends upon its success in
networking, generating leads and bidding opportunities through its marketing
efforts; the quality, safety and timely performance of its contracts; the
accuracy of its bidding; its ability to hire and train field operations and
supervisory personnel; and the ability of the Company to generate sufficient
capital to hire and retain personnel with requisite skills, meet its ongoing
obligations, and fuel growth.
MARKETING AND SALES
The Company has an aggressive marketing program that is directed toward
establishing and maintaining relationships with businesses that have ongoing
needs for one or more of the Company's services. The Company strives to achieve
internal growth by expanding services to its existing customer base and by
marketing itself as a multiple-service company with immediate response
capabilities. Clients who begin by utilizing one service often use other
services provided by the Company. The Company believes that, ultimately, all of
a client's environmental, related construction and emergency response needs can
be serviced by the Company.
Consistent with this strategy, commencing in fiscal 1999 and continuing through
fiscal 2000 and fiscal 2001, the Company consolidated the sales and marketing
efforts of its subsidiary companies. This has allowed the Company to capitalize
on the synergy between service lines while realizing a reduction in selling and
overhead expenses. The business development staff was recruited by the Company
for their experience, reputation, and customer relationships in respective areas
of the Company's business lines. Once they join the Company sales team,
salespersons undergo an orientation in the full suite of Company services.
The Company's services are principally marketed in the Northeastern United
States. Business is obtained through client referral, cross selling of services
to existing clients, sponsorship of training and development programs,
professional referrals from insurance companies, architect/engineering firms and
construction management firms for whom the Company has provided services,
competitive bidding, and advertising. In all of its marketing efforts, including
competitive bidding, the Company emphasizes its experience, industry knowledge,
safety record and reputation for timely performance of contracts.
5
As a result of this marketing effort, in fiscal 2000, the Company was selected
by Travelers Insurance Company as a preferred responder on a national basis for
large-scale catastrophes.
GOVERNMENT REGULATION
The Company's operations are subject to extensive regulation supervision and
licensing by the Environmental Protection Agency ("EPA") and various other
federal, state, and local environmental authorities. These regulations directly
impact the demand for the services offered by the Company. The Company believes
that it is in substantial compliance with all federal, state, and local
regulations governing its business.
The Resource Conservation and Recovery Act ("RCRA") is the principal federal
statute governing hazardous waste generation, treatment, storage, and disposal.
RCRA, or EPA approved state programs, govern any waste handling activities of
substances classified as "hazardous." In 1984, RCRA was amended to substantially
expand its scope by, among other things, providing for the listing of additional
wastes as "hazardous" and also for the regulation of hazardous wastes generated
in lower quantities than had been previously regulated. The amendments imposed
additional restrictions on land disposal of certain hazardous wastes, prescribe
more stringent standards for hazardous waste and underground storage tanks
("UST"), and provided for "corrective" action at or near sites of waste
management units.
Regulation of UST legislation, in particular Subtitle I of RCRA, focuses on the
regulation of underground tanks in which liquid petroleum or hazardous
substances are stored and provides the regulatory setting for a portion of the
Company's business. Subtitle I of RCRA requires owners of all existing
underground tanks to list the age, size, type, location, and use of each tank
with a designated state agency. The EPA has published performance standards and
financial responsibility requirements for storage tanks over a five year period.
RCRA and EPA regulations also require that all new tanks be installed in such a
manner as to have protection against spills, overflows, and corrosion. Subtitle
I of RCRA provides civil penalties of up to $15,000 per violation for each day
of non-compliance with such tank requirements and $10,000 for each tank for
which notification was not given or was falsified. RCRA also imposes substantial
monitoring obligations on parties which generate, transport, treat, store, or
dispose of hazardous waste.
The Comprehensive Environmental Response Compensation and Liability Act of 1980
("Superfund Act") generally addresses the clean-up of inactive sites at which
hazardous waste treatment, storage, or disposal took place. The Superfund Act
assigns joint and several liability for cost of clean-up and damages to natural
resources to any person who, currently or at the time of disposal of a hazardous
substance, by contract, agreement, or otherwise, arranged for disposal or
treatment, or arranged with a transporter for transport of hazardous substances
owned or possessed by such person for disposal or treatment, and to any person
who accepts hazardous substances for transport to disposal or treatment
facilities or sites from which there is a release or threatened release of such
hazardous substances. Among other things, the Superfund Act authorizes the
federal government either to clean up these sites itself or to order persons
responsible for the situation to do so. The Superfund Act created a fund,
financed primarily from taxes on oil and certain chemicals, to be used by the
federal government to pay for these clean-up efforts. Where the federal
government expends money for remedial activities, it may seek reimbursement from
the Potentially Responsible Parties ("PRPs").
In October 1986, the Superfund Amendment and Reauthorization Act ("SARA") was
enacted. SARA increased environmental remediation activities significantly. SARA
imposed more stringent clean-up standards and accelerated timetables. SARA also
contains provisions which expand the EPA's enforcement powers and which are
expected to encourage and facilitate settlements with PRPs. The Company believes
that, even apart from funding authorized by SARA, industry and governmental
entities will continue to try to resolve hazardous waste problems due to their
need to comply with other statutory and regulatory requirements and to avoid
liabilities to private parties.
The liabilities provided by the Superfund Act could, under certain
circumstances, apply to a broad range of the Company's possible activities,
including the generation or transportation of hazardous substances, release of
hazardous substances, designing a clean-up, removal or remedial plan and failure
to achieve required clean-up standards, leakage of removed wastes while in
transit or at the final storage site, and remedial operations on ground water.
Such liabilities can be joint and several where other parties are involved.
The Oil Pollution Act of 1990, which resulted from the Exxon Valdez oil spill
and the subsequent damage to Prince William Sound, requires all entities engaged
in the transport and storage of petroleum to maintain a written
6
contingency plan to react to such types of events. Under the contingency
plan, the petroleum products storage or transportation company must retain an
Oil Spill Response Organization ("OSRO") and a natural resources/wildlife
rehabilitator. OSRO'S are certified by the United States Coast Guard and receive
designations based upon level of capability. In the event of an incident, the
OSRO on standby must respond by being on site with containment capability within
two to six hours of notification.
Asbestos abatement firms are subject to federal, state and local regulators,
including the Occupational Safety and Health Administration ("OSHA"), the EPA
and the Department of Transportation ("DOT"). EPA regulations establish
standards for the control of asbestos fiber and airborne lead emissions into the
environment during removal and demolition projects. OSHA regulations establish
maximum airborne asbestos fiber, airborne lead and heavy metal exposure levels
applicable to asbestos and demolition employees and set standards for employee
protection during the demolition, removal or encapsulation of asbestos, as well
as storage, transportation and final disposition of asbestos and demolition
debris. DOT regulations, in addition to the regulations imposed by the Superfund
Act, cover the management of the transportation of asbestos and demolition
debris and establish certain certification labeling and packaging requirements.
Government regulations have heightened public awareness of the danger of
asbestos contamination, creating pressure on both private and public building
owners to abate this hazard, even in the absence of specific regulations
requiring corrective action.
In 1992, in an effort to protect families from exposure to the hazards of lead
based paint, Congress amended the Toxic Substances Control Act to add Title X,
titled "Lead Exposure Reduction." Since May 1993, OSHA has had standards for
lead exposure in the construction industry that requires testing before, during
and after construction or renovation. OSHA estimates that 1,000,000 workers fall
under its Lead Based Paint Hazard Reduction Act.
The Company's operations also are subject to other federal laws protecting the
environment, including the Clean Water Act and Toxic Substances Control Act. In
addition, many states also have enacted statutes regulating the handling of
hazardous substances, some of which are broader and more stringent than the
federal laws and regulations.
COMPLIANCE/HEALTH AND SAFETY
The Company regards compliance with applicable environmental regulations and the
health and safety of its workforce as critical components of its overall
operations. A substantial portion of the Company's equipment is OSHA approved
and is operated pursuant to a written corporate health and safety plan.
Additionally, all members of the Company's on-site work force are trained in all
relevant aspects of OSHA requirements. This includes medical surveillance as
required by these regulations. Management believes that all requisite health and
safety programs are in place and comply with the regulations in all material
respects.
Among its many services, the Company provides training programs on environmental
and safety hazards in the environmental, industrial and construction industry
trades. The training program is designed for use by supervisors, foremen,
project safety and health trainers, construction workers and laborers. The
training program includes the following topics: sources of exposure; health
effects; personal protective equipment and the medical surveillance required by
OSHA; and engineering controls and remediation procedures.
INSURANCE AND SURETY BONDS
The Company maintains comprehensive general liability insurance written on an
occurrence basis. The Company also carries comprehensive auto, professional and
pollution liability as well as worker's compensation and disability coverage.
Basic limits of liability are $9,000,000. In addition, the Company carries all
risk property insurance on all furniture, fixtures, equipment, machinery and
watercraft.
Certain of the Company's remediation and abatement contracts require performance
and payment bonds. The continuance of relationships with its various sureties
and the issuance of bonds is dependent on the sureties' continued willingness to
write bonds for the various types of work the Company performs, their assessment
of the Company's performance record and their view of the credit worthiness of
the Company. At present, the Company believes that surety bonds for a number of
the Company's service lines are available only from a limited number of
sureties. While the Company has no reason to believe that it will not continue
to be able to obtain the required surety bonds, no assurance can be given in
this regard. Any failure of the Company to obtain these bonds could materially
and adversely affect certain components of the Company's operations.
7
EMPLOYEES/TECHNICAL STAFF
As of June 30, 2001, the Company employed a core group of approximately 125
persons including executive officers, project managers, specialists,
supervisors, field staff, marketing and clerical personnel. The Company attempts
to provide year-round employment for its core field staff by cross training. The
Company believes a stable work force results in increased productivity at the
work site and that its reputation for steady employment permits it to pay
reasonable hourly rates. The Company promotes qualified field workers to
supervisory positions and supervisors into production management and other staff
positions, when applicable.
The Company employs laborers for field operations based upon the current
workload. Approximately 75 field staff and supervisors are employed on a steady
basis, with additional labor hired on an as-needed basis to supplement the work
force. The Company had an agreement that expired in May 2000 with several local
unions that supply labor for bonded contract work. The Company is currently in
negotiations with these unions to extend the term of the agreement. The Company
believes that failure to reach agreement with the unions would not have a
material adverse effect on its operations, primarily because the availability of
a pool of skilled temporary labor allows the Company to meet peak workloads. The
Company has never had a work stoppage and believes that it has good relations
with its employees.
PERMITS AND LICENSES
The Federal Government and certain states in the areas in which the Company
operates require that asbestos and lead abatement firms be licensed. Licensing
generally requires that workers and supervisors receive training from state
certified organizations and pass required tests. Certain states also require
that wildlife rehabilitators be licensed. The Company has approximately 14 such
licensed individuals on staff.
While the Company believes that it is in substantial compliance with all of its
licensing and permit requirements, and the Company, or its personnel, maintains
the required licenses and permits in all locations for which it conducts any
applicable operations, the Company may need additional licenses or permits in
areas into which it plans to expand its operations. In addition, the Company may
be required to obtain additional permits or licenses if new environmental
legislation or regulations are enacted or existing legislation or regulations
are amended or enforced differently than in the past. There can be no assurance
that the Company will be able to continue to comply will all of the permit and
licensing requirements applicable to its business. The Company believes that the
types of licenses the Company possesses have reciprocity in most of the states
due to their adherence to Federal standards, but no assurances can be given in
that regard.
PATENTS, TRADEMARKS, LICENSES AND COPYRIGHTS
The Company does not own any patents or registered trademarks or trade names.
The Company has common law trademark protection for certain of its trade names
and service marks. The Company has copyrights for certain of its promotional and
employee training materials. The Company does not believe that intellectual
property is a competitive factor in its industry.
RISK FACTORS
The Company's operations, as well as an investment in its securities, involve
numerous risks and uncertainties. The reader should carefully consider the risk
factors discussed below and elsewhere in this Annual Report on Form 10-K before
making any investment decision involving the Company's securities.
Factors Affecting Future Operating Results
------------------------------------------
DUE TO THE NATURE OF THE COMPANY'S BUSINESS AND THE INTENSE REGULATORY CLIMATE
IN WHICH IT OPERATES, THE COMPANY'S SERVICES ARE SUBJECT TO EXTENSIVE FEDERAL,
STATE AND LOCAL LAWS AND REGULATIONS THAT ARE CONSTANTLY CHANGING. These
regulations impose stringent guidelines on companies that handle hazardous
materials as well as other companies involved in various aspects of the
environmental remediation services industry. Failure to comply with applicable
federal, state and local regulations could result in substantial costs to the
Company, the imposition of penalties or in claims not covered by insurance, any
of which could have a material adverse effect on the Company's business.
In addition to the burdens imposed on operations by various environmental
regulations, federal law imposes strict
8
liability upon present and former owner and operators of facilities that
release hazardous substances into the environment and the generators and
transporters of such substances, as well as persons arranging for the disposal
of such substances. All such persons may be liable for the costs of waste site
investigation, waste site clean up, natural resource damages and related
penalties and fines. Such costs can be substantial.
ENVIRONMENTAL REMEDIATION OPERATIONS MAY EXPOSE THE COMPANY'S EMPLOYEES AND
OTHERS TO DANGEROUS AND POTENTIALLY TOXIC QUANTITIES OF HAZARDOUS PRODUCTS. Such
products can cause cancer and other debilitating diseases. Although the Company
takes extensive precautions to minimize worker exposure and has not experienced
any such claims from workers or others, there can be no assurance that, in the
future, it will avoid liability to persons who contract diseases that may be
related to such exposure. Such persons potentially include employees, persons
occupying or visiting facilities in which contaminants are being, or have been,
removed or stored, persons in surrounding areas, and persons engaged in the
transportation and disposal of waste material. In addition, the Company is
subject to general risks inherent in the construction industry. It may also be
exposed to liability from the acts of its subcontractors or other contractors on
a work site.
THE FAILURE TO OBTAIN AND MAINTAIN REQUIRED GOVERNMENTAL LICENSES, PERMITS AND
APPROVALS COULD HAVE A SUBSTANTIAL ADVERSE AFFECT ON THE COMPANY'S OPERATIONS.
The remediation industry is highly regulated. The Company is required to have
federal, state and local governmental licenses, permits and approvals for its
facilities and services. There can be no assurance as to the successful outcome
of any pending application or demonstration testing for any such license, permit
or approval. In addition, the Company's existing licenses, permits and approvals
are subject to revocation or modification under a variety of circumstances.
Failure to obtain timely, or to comply with the conditions of, applicable
licenses, permits or approvals could adversely affect the Company's business,
financial condition and results of operations. As the Company's business expands
and as new procedures and technologies are introduced, it may be required to
obtain additional operating licenses, permits or approvals. It may be required
to obtain additional operating licenses, permits or approvals if new
environmental legislation or regulations are enacted or promulgated or existing
legislation or regulations are amended, reinterpreted or enforced differently
than in the past. Any new requirements that raise compliance standards may
require the Company to modify its procedures and technologies to conform to more
stringent regulatory requirements. There can be no assurance that the Company
will be able to continue to comply with all of the environmental and other
regulatory requirements applicable to its business.
THE COMPANY IS DEPENDENT ON THE SUCCESSFUL DEVELOPMENTAL AND COMMERCIAL
ACCEPTANCE OF ITS PROCEDURES AND TECHNOLOGIES. The Company is constantly
developing, refining and implementing its procedures and technologies for
environmental remediation. Its operations and future growth are dependent, in
part, upon the acceptance and implementation of these procedures and
technologies. There can be no assurance that successful development of future
procedures and technologies will occur or, even if successfully developed, that
the Company will be able to successfully commercialize such procedures and
technologies. The successful commercialization of the Company's procedures and
technologies may depend in part on ongoing comparisons with other competing
procedures and technologies and more traditional treatment, storage and disposal
alternatives, as well as the continuing high cost and limited availability of
commercial disposal options. There can be no assurance that the Company's
procedures and technologies will prove to be commercially viable or
cost-effective or, if commercially viable and cost-effective, that the Company
will be successful in timely securing the requisite regulatory licenses, permits
and approvals for any such technologies or that such technologies will be
selected for use in future projects. The Company's inability to develop,
commercialize or secure the requisite licenses, permits and approvals for its
procedures and technologies on a timely basis could have a material adverse
effect on its business, financial condition and results of operations.
A SUBSTANTIAL PORTION OF THE COMPANY'S REVENUES IS GENERATED AS A RESULT OF
REQUIREMENTS ARISING UNDER FEDERAL AND STATE LAWS, REGULATIONS AND PROGRAMS
RELATED TO PROTECTION OF THE ENVIRONMENT. Environmental laws and regulations
are, and will continue to be, a principal factor affecting demand for the
Company's services. The level of enforcement activities by federal, state and
local environmental protection agencies and changes in such laws and regulations
also affect the demand for such services. If the requirements of compliance with
environmental laws and regulations were to be modified in the future, the demand
for the Company's services, and its business, financial condition and results of
operations, could be materially adversely affected.
THE COMPANY IS SUBJECT TO QUARTERLY FLUCTUATIONS IN OPERATING RESULTS. The
Company's revenue is dependent on its contracts and the timing and performance
requirements of each contract. Its revenue is also affected by the timing of its
clients' planned remediation activities and need for its services. Due to this
variation in demand, the Company's quarterly results fluctuate. Accordingly,
specific quarterly or interim results should not be considered indicative of
results to be expected for any future quarter or for the full year. It is
possible that in future quarters, the
9
operating results will not meet the expectations of securities analysts and
investors. In such event, the price of the Company's common stock could be
materially adversely affected.
The Company is increasingly pursuing large, multi-year contracts as a method of
achieving more predictable revenues, more consistent utilization of equipment
and personnel, and greater leverage of sales and marketing costs. These larger
projects pose significant risks if actual costs are higher than those estimated
at the time of bid. A loss on one or more of such larger contracts could have a
material adverse effect on the Company's business, financial condition and
results of operations. In addition, the failure to obtain, or a delay in
obtaining, targeted large, multi-year contracts could result in significantly
less revenue for the Company than anticipated.
THE COMPANY'S OPERATIONS ARE AFFECTED BY WEATHER CONDITIONS. While the Company
provides its services on a year-round basis, the services it performs outdoors
or outside of a sealed environment may be adversely affected by inclement
weather conditions. Extended periods of rain, cold weather or other inclement
weather conditions may result in delays in commencing or completing projects, in
whole or in part. Any such delays may adversely affect the Company's operations
and financial results and may adversely affect the performance of other projects
due to scheduling and staffing conflicts.
THE COMPANY MUST CORRECTLY MANAGE ITS GROWTH. The Company is currently pursuing
a business plan intended to further expand its business. Any future growth may
place significant demands on the Company's operational, managerial and financial
resources. There can be no assurance that its current management and systems
will be adequate to address any future expansion of its business. In such event,
any inability to manage the Company's growth effectively could have a material
adverse effect on its business, financial condition and results of operations.
THE COMPANY'S ABILITY TO PERFORM UNDER ITS CONTRACTS AND TO SUCCESSFULLY BID FOR
FUTURE CONTRACTS IS DEPENDENT UPON THE CONSISTENT PERFORMANCE OF EQUIPMENT AND
FACILITIES IN CONFORMITY WITH SAFETY AND OTHER REQUIREMENTS OF THE LICENSES AND
PERMITS UNDER WHICH IT OPERATES. The Company's equipment and facilities are
subject to frequent routine inspections by the regulatory authorities issuing
such licenses and permits. In the event any of the key equipment and facilities
were to be shut down for any appreciable period of time, either due to equipment
breakdown or as the result of regulatory action in response to an alleged safety
or other violation of the terms of the licenses under which the Company
operates, its business, financial condition and results of operations could be
materially adversely affected.
THE ENVIRONMENTAL REMEDIATION INDUSTRY IS HIGHLY COMPETITIVE AND THE COMPANY
FACES SUBSTANTIAL COMPETITION FROM OTHER COMPANIES. Many of the Company's
competitors have greater financial, managerial, technical and marketing
resources than the Company has. To the extent that competitors possess or
develop superior or more cost effective environmental remediation solutions or
field service capabilities, or otherwise possess or acquire competitive
advantages compared to the Company, its ability to compete effectively could be
materially adversely affected.
THE COMPANY'S FUTURE SUCCESS DEPENDS ON ITS CONTINUING ABILITY TO ATTRACT,
RETAIN AND MOTIVATE HIGHLY QUALIFIED MANAGERIAL, TECHNICAL AND MARKETING
PERSONNEL. The Company is highly dependent upon the continuing contributions of
key managerial, technical and marketing personnel. Employees may voluntarily
terminate their employment with the Company at any time, and competition for
qualified technical personnel, in particular, is intense. The loss of the
services of any of its key managerial, technical or marketing personnel,
especially Michael O'Reilly, its chief executive officer, could materially
adversely affect the Company's business, financial condition and results of
operations.
THE COMPANY SOMETIMES HAS A CONCENTRATION OF CREDIT RISK. The Company contracts
with a limited number of customers that are involved in a wide range of
industries. A small number of customers may therefore be responsible for a
substantial portion of revenues at any time. While management assesses the
credit risk associated with each proposed customer prior to the execution of a
definitive contract, no assurances can be given that such assessments will be
correct and that the Company will not incur substantial, noncollectible accounts
receivable.
THE LOSS OF ANY MAJOR CUSTOMER COULD HAVE A MATERIALLY ADVERSE IMPACT ON THE
COMPANY. The Company is dependent upon its relationships and contracts with two
customers that accounted for approximately 46% of its revenues in fiscal 2001.
While the Company intends to increase the amount of work performed for entities
other than these two customers, it expects to continue to be significantly
dependent on these customers and/or the incurrence of large projects for the
foreseeable future.
10
IN ORDER TO SUCCESSFULLY BID ON AND SECURE CONTRACTS TO PERFORM ENVIRONMENTAL
REMEDIATION SERVICES OF THE NATURE OFFERED BY THE COMPANY TO ITS CUSTOMERS, IT
OFTEN MUST PROVIDE SURETY BONDS WITH RESPECT TO EACH PROSPECTIVE AND, UPON
SUCCESSFUL BID, ACTUAL PROJECTS. The number and size of contracts that the
Company can perform is directly dependent upon its ability to obtain bonding.
This ability to obtain bonding, in turn, is dependent, in material part, upon
the Company's net worth and working capital. There can be no assurance that the
Company will have adequate bonding capacity to bid on all of the projects which
it would otherwise bid upon were it to have such bonding capacity or that it
will in fact be successful in obtaining additional contracts on which it may
bid.
COST OVERRUNS ON PROJECTS CALLING FOR FIXED PRICE PAYMENTS COULD HAVE MATERIALLY
ADVERSE EFFECTS ON THE COMPANY. Cost overruns on projects covered by such
contracts, due to such things as unanticipated price increases, unanticipated
problems, inefficient project management, inaccurate estimation of labor or
material costs or disputes over the terms and specifications of contract
performance, could have a material adverse effect on the Company and its
operations. There can be no assurance that cost overruns will not occur in the
future and have a material adverse effect on the Company. In addition, in order
to remain competitive in the future, the Company may have to agree to enter into
more fixed price and per unit contracts than in the past.
THE COMPANY CANNOT GIVE ANY ASSURANCE THAT IT WILL BE ABLE TO SECURE ADDITIONAL
FINANCING TO MEET ITS FUTURE CAPITAL NEEDS. The Company's long term capital
requirements will depend on many factors, including, but not limited to, cash
flow from operations, the level of capital expenditures, working capital
requirements and the growth of its business. Historically, the Company has
relied upon commercial borrowings, debt and equity securities offerings and
borrowings from shareholders and affiliates of shareholders to fund its
operations and capital needs.
The Company may need to incur additional indebtedness to fund the capital
needs related to its growth. To the extent additional debt financing cannot be
raised on acceptable terms, the Company may need to raise additional funds
through public or private equity financings. No assurance can be given that
additional debt or equity financing will be available or that, if either or such
financing is available, the terms of such financing will be favorable to the
Company or to its stockholders without substantial dilution of their ownership
and rights. If adequate funds are not available, the Company may be required to
curtail its future operations significantly or to forego market expansion
opportunities.
Factors Affecting the Company's Securities
------------------------------------------
THE COMPANY IS CONTROLLED BY ONE MAJOR STOCKHOLDER. Currently, one major
stockholder owns an aggregate of approximately 58% of the Company's Common Stock
and holds approximately 77% of its voting power. If this major stockholder
converted all of its convertible preferred stock and its convertible note, it
would own approximately 79% of the then outstanding Common Stock. Accordingly,
such major stockholder is able to control the Board of Directors and thereby
determine the corporate policy and the direction of the Company's operations.
THE COMPANY DOES NOT ANTICIPATE PAYING ANY CASH DIVIDENDS FOR THE FORESEEABLE
FUTURE. The Company expects that future earnings, if any, will be used to
finance growth. The payment of any future cash dividends by the Company will be
dependent upon the earnings of the Company, its financial requirements and other
relevant factors. Further, prior to paying any dividends on the Common Stock,
the Company is required to pay quarterly dividends on the Series A Convertible
Preferred Stock, par value $.01 per share, of the Company (the "Series A
Preferred"). The Company is currently in arrears on such dividend payments. Upon
conversion of the Series A Preferred into Common Stock, dividends on the Series
A Preferred shall no longer accrue and all accrued and unpaid dividends, and any
accrued and unpaid interest thereon, as of the date of such conversion, shall be
paid in cash.
FUTURE SALES OF SUBSTANTIAL AMOUNTS OF THE COMPANY'S COMMON STOCK IN THE PUBLIC
MARKET COULD HAVE AN ADVERSE EFFECT ON THE MARKET PRICE OF ITS COMMON STOCK. As
of July 13, 2001, the Company had 38,481,254 shares of Common Stock outstanding.
The existence of a large number of shares eligible for sale could have an
adverse effect on the market price of the Company's Common Stock and its ability
to raise additional equity capital on terms beneficial to it.
THE COMPANY HAS EXPERIENCED SIGNIFICANT OPERATING LOSSES IN PRIOR YEARS AND MAY
INCUR LOSSES IN THE FUTURE. These loses could adversely affect the market value
of the Common Stock. The Company incurred net losses of approximately $2.3
million in fiscal 2000 and approximately $1.3 million in fiscal 1999. As of
April 30, 2001, the Company had an accumulated deficit of $33,487,992. Even
though the Company has taken steps in an effort to reduce costs and expenses and
to increase revenues, and had net income of approximately $1.1 million in fiscal
11
2001, it may not incur profits at any time in the foreseeable future.
THE MARKET PRICE OF THE COMMON STOCK HAS FLUCTUATED CONSIDERABLY AND WILL
PROBABLY CONTINUE TO DO SO. The stock markets have experienced extreme price and
volume fluctuations, and the market price for the Common Stock has been
historically volatile. The market prices of the Common Stock could be subject to
wide fluctuations in the future as well in response to a variety of events or
factors, some of which may be beyond its control. These could include, without
limitation:
o future announcements of new competing technologies and procedures;
o changing policies and regulations of the federal state, and local
governments;
o fluctuations in the Company's financial results;
o liquidity of the market for the Company's securities;
o public perception of the Company and its entry into new markets; and
o general conditions in the Company's industry and the economy.
THE COMPANY'S CHARTER CONTAINS AUTHORIZED, UNISSUED PREFERRED STOCK THAT MAY
INHIBIT A CHANGE OF CONTROL OF THE COMPANY UNDER CIRCUMSTANCES THAT COULD
OTHERWISE GIVE ITS STOCKHOLDERS THE OPPORTUNITY TO REALIZE A PREMIUM OVER
PREVAILING MARKET PRICES OF THE COMPANY'S SECURITIES. The Company's Restated
Certificate of Incorporation, as amended (the "Certificate of Incorporation"),
and By-laws contain provisions that could make it more difficult for a third
party to acquire the Company under circumstances that could give stockholders an
opportunity to realize a premium over then-prevailing market prices of its
securities. The Company's Certificate of Incorporation authorizes the Company's
Board of Directors to issue preferred stock without stockholder approval and
upon terms as the Board may determine. The rights of holders of common stock are
subject to, and may be adversely affected by, the rights of future holders of
preferred stock. Section 203 of the Delaware General Corporation Law makes it
more difficult for an "interested stockholder" (generally, a 15% stockholder) to
effect various business combinations with a corporation for a three-year period
after the stockholder becomes an "interested stockholder." In general, these
provisions may discourage a third party from attempting to acquire the Company
and, therefore, may inhibit a change of control of the Company.
ITEM 2. DESCRIPTION OF PROPERTY
--------------------------------
The Company holds a six-year lease expiring in 2007 for its 50,000 square foot
facility located at 100 Sweeneydale Avenue, Bay Shore, New York 11706, which
contains an option to purchase such facility. The lease provides for a current
annual rent of $323,399 and is subject to a 4% annual escalation. The option to
purchase expires on April 30, 2002. This facility houses all the operations of
the Company, other than an oil spill response center located in Brooklyn, New
York.
The Company has a month-to-month lease that provides for a monthly rental of
$1,000, for a facility located at 1100 Grand Street in Brooklyn, New York.
Management considers the Company's facilities sufficient for its present and
currently anticipated future operations, and believes that these properties are
adequately covered by insurance.
ITEM 3. LEGAL PROCEEDINGS
--------------------------
On November 22, 1999, the Securities and Exchange Commission ("SEC") accepted
the Company's settlement offer in its "Order Instituting Public Administrative
Proceedings, Making Findings, Imposing Remedial Sanctions and Issuing
Cease-and-Desist Order" (the "Order"). Under the terms of the Order, the Company
neither admitted nor denied any allegations and did not incur any monetary fines
in connection with an investigation of the Company by the SEC which stemmed from
the prior convictions of two of the Company's former officers for violations of,
among other things, the federal securities laws. The Order required the Company
to develop and institute certain policies, procedures and manuals to improve its
corporate governance, including the adoption of an audit committee charter, a
formal conflict of interest policy and a formal employee handbook. The Order
also required the Company to obtain a secure off site storage facility to store
its backup data files and system software and to make certain reporting
disclosures. The Company has implemented such policies, procedures and manuals,
obtained an off site storage facility and made such disclosures.
In November 1997, Trade-Winds was named as a third party defendant in an action
commenced in the New York State Supreme Court, County of New York, under the
caption NICOLAI GRIB AND VLADISLAV KAZAROV V. TRADE-WINDS
12
ENVIRONMENTAL RESTORATION, INC. AND GULF INSURANCE COMPANY, by a class of
plaintiffs claiming to be entitled to additional wages while working for a
subcontractor of Trade-Winds. The Company believes that a verdict in favor of
the plaintiff will not have a material adverse effect on the Company's
consolidated financial statements.
The Company is a party to other litigation matters and claims which are normal
in the course of its operations, and while the results of such litigation and
claims cannot be predicted with certainty, management believes that the final
outcome of such matters will not have a materially adverse effect on the
Company's consolidated financial position, results of operations and cash flows.
In January 1996, Laboratory Testing Services, Inc. ("LTS"), a wholly-owned
subsidiary of the Company, filed a Chapter 11 petition in United States
Bankruptcy Court in the Eastern District of New York. Subsequently, this case
was converted to a Chapter 7 Bankruptcy proceeding. LTS is in the process of
liquidation through these bankruptcy proceedings. Management believes that the
Company's financial condition and results of operations will not be materially
affected by this proceeding.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
-----------------------------------------------------------
The 2001 Annual Meeting of Stockholders of the Company was held on March 5,
2001, the results of which are disclosed in Item 4 of the Company's quarterly
report on Form 10-Q for the period ended January 31, 2001 as filed with the SEC
on March 19, 2001.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
------------------------------------------------------------------------------
(a) Market Information
Since October 22, 1996, the Company's common stock has been traded on the OTC
Electronic Bulletin Board of the NASD, under the symbol "WEGI." The following
table sets forth the range of quarterly high and low sale prices, for the last
two fiscal years, as provided by Standard and Poor's ComStock. These quotations
represent inter-dealer prices, do not reflect retail mark-up, mark-down, or
commission and may not represent actual transactions.
Price Range of Common Stock
---------------------------
FISCAL 2000
-----------
Quarter Ended HIGH LOW
------------- ---- ----
July 31, 1999 $.41 $.16
October 31, 1999 .41 .27
January 31, 2000 .36 .14
April 30, 2000 $.23 $.08
FISCAL 2001
-----------
Quarter Ended HIGH LOW
------------- ---- ---
July 31, 2000 $.20 $.11
October 31, 2000 .19 .09
January 31, 2001 .27 .08
April 30, 2001 $.34 $.15
The Company has approximately 705 common stockholders of record as of July 6,
2001. There have been no dividends declared or paid on the Common Stock in the
past two fiscal years and the Company has no current intentions to declare or
pay dividends on the Common Stock. Under its Series A Convertible Preferred
Stock Agreement, no common stock dividends may be paid until all preferred
dividends are paid in full. Subject to the foregoing, the Company currently
intends to retain any future earnings for reinvestment in its business. Any
future determination to pay cash dividends will be at the discretion of the
Board of Directors and will be dependent upon the Company's financial condition,
results of operations, capital requirements and other relevant factors.
13
(b) Recent Sales of Unregistered Securities
There were no sales or issuances by the Company of the Company's equity
securities occurring during fiscal 2001, except to the extent previously
disclosed in the Company's Quarterly Reports on Form 10-Q.
ITEM 6. SELECTED FINANCIAL DATA
-------------------------------
Fiscal Year Ended April 30,
------------------------------------------------------------------------------------
2001 2000 1999 1998 1997
------------------------------------------------------------------------------------
Consolidated Operations Data:
Revenues $22,022,766 $12,845,165 $13,926,812 $11,968,774 $15,275,209
Net income (loss) 1,065,877 (2,256,997) (1,307,476) (5,609,795) (4,613,750)
Net income (loss) per common share-basic 0.03 (0.09) (0.11) (0.55) (0.51)
Net income (loss) per common share-diluted $ 0.01 $ (0.09) $ (0.11) (0.55) $ (0.51)
Weighted average common shares outstanding:
Basic 38,459,953 26,927,083 13,064,314 10,404,111 9,026,797
Diluted 76,244,295 26,927,083 13,064,314 10,404,111 9,026,797
Consolidated Balance Sheet Data:
Total assets $ 8,806,398 6,699,204 5,745,122 6,354,689 $ 8,385,390
Long-term debt and other liabilities 457,084 197,172 198,732 264,604 454,560
Convertible notes 2,780,000 2,780,000 790,000 800,000 800,000
Redeemable convertible preferred stock 1,300,000 1,300,000 1,300,000 1,300,000 1,300,000
Stockholders' equity (deficit) $(1,753,853) $(2,744,980) $(3,347,257) $(2,936,730) $ 1,929,409
The Company did not pay any cash dividends on its common stock during any of the
periods set forth in the table above.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
--------------------------------------------------------------------------------
The following discussion and analysis provides information that the Company's
management believes is relevant to an assessment and understanding of the
Company's results of operations and financial condition. This discussion and
analysis information should be read in conjunction with the accompanying
consolidated financial statements and notes thereto.
This discussion contains forward-looking statements that are subject to a number
of known and unknown risks, that in addition to general, economic, competitive
and other business conditions, could cause actual results, performance and
achievements to differ materially from those described or implied in the
forward-looking statements.
The Company is subject to significant external factors that could significantly
impact its business. These factors could cause future results to differ
materially from historical trends.
RESULTS OF OPERATIONS
Fiscal Year Ending April 30, 2001 Compared to Fiscal Year Ending April 30, 2000
-------------------------------------------------------------------------------
Revenues
--------
Revenues increased to $22,022,766 in fiscal 2001 compared to $12,845,165 in
fiscal 2000. This increase of $9,177,601, or 71.4%, was primarily the result of
revenue increases in the Company's Trade-Winds subsidiary of
14
$9,007,157 to $20,440,646 in fiscal 2001 from $11,433,489 in fiscal 2000,
and the Company's NAL subsidiary, the revenues of which increased by $259,123 to
$845,609 in fiscal 2001 from $586,486 in fiscal 2000. These increases were
partially offset by revenue decreases in the Company's NYTL subsidiary of
$88,679 to $736,510 in fiscal 2001 from $825,189 in fiscal 2000.
The increase in Trade-Winds revenue of $9,007,157 was primarily attributable to
a large mold remediation project that accounted for revenues of $7,734,631. The
remaining Trade-Winds revenue increase was primarily attributable to increases
in emergency spill response revenues of approximately $990,022, environmental
remediation projects of $389,763, insurance construction/renovation projects of
$268,086 and waste disposal of $124,694. The increases were partially offset by
decreases in oil tank projects of $316,205 and fireproofing projects of
$240,031. The increase in NAL revenues of $259,123 is primarily attributable to
new management and expanded marketing efforts. The decrease in NYTL revenues is
primarily attributable to management turnover. Due to the instability of NYTL
management and the resulting incurred losses, the Company determined that NYTL's
services could be better supplied by outsourcing. Accordingly, as of June 30,
2001, NYTL has ceased operations and substantially all of its fixed assets were
sold.
Gross Profit/Cost of Revenues
-----------------------------
Cost of revenues increased to $15,336,191 in fiscal 2001 compared to $10,179,948
in fiscal 2000. This increase of $5,156,243, or 50.7%, was primarily the result
of the direct costs incurred on a large mold remediation project of $3,196,520,
an increase in the number of project managers of approximately $329,000 and
increases in NYTL direct costs of $111,921. The remaining increase is due to the
direct costs associated with the other increases in revenues. The Company's cost
of revenues consists primarily of labor and labor related costs, including
salaries to laborers, supervisors and foremen, payroll taxes, training,
insurance and benefits. Additionally, cost of revenues include bonding and job
related insurance cost, repairs, maintenance and rental of job equipment, job
materials and supplies, testing and sampling, and transportation, disposal, and
depreciation of capital equipment.
Cost of revenues as a percentage of revenues was 69.6% in fiscal 2001 as
compared to 79.3% in fiscal 2000. Accordingly, gross profit as a percentage of
revenues increased to 30.4% in fiscal 2001 from 20.7 % in fiscal 2000. Gross
profit in fiscal 2001 was positively impacted by a large mold remediation
project that generated gross profits of $4,538,111 or 58.7% that was partially
offset by increases in project managers costs.
Selling, General and Administrative Expenses
--------------------------------------------
Selling, general and administrative expenses for the year increased by $338,491,
or 8.2%, to $4,466,052 in fiscal 2001 from $4,127,561 in fiscal 2000, and
constituted approximately 20.3% and 32.1% of revenues in fiscal years 2001 and
2000, respectively.
The increase of $338,491 in fiscal 2001 as compared to fiscal 2000 was primarily
the result of increases of $225,098 in office salaries, $206,338 in legal fees
and settlements, $163,685 in marketing expenses, $140,715 in sales salaries and
$99,042 in the provision for doubtful accounts. These increases were partially
offset by decreases of $254,304 in a provision for delinquent income taxes,
$150,000 in the provision for litigation and $48,940 in accounting fees.
Expense Related to Variable Accounting Treatment for Officer Options
--------------------------------------------------------------------
Under the terms of an employment agreement (see Item 11 "Executive Compensation
- Employment Agreement"), the Company's President and Chief Executive Officer
may sell to the Company all shares of common stock of the Company held by him
and all shares of common stock underlying vested options to purchase shares of
common stock of the Company held by him. Expense related to variable accounting
treatment for officer options increased by $225,913 to $328,080 in fiscal 2001
from $102,167 in fiscal 2000. This was due to an increase in the market price of
the Company's Common Stock to $.19 per share on April 30, 2001 from $.125 per
share on April 30, 2000. Due to the terms of the options, changes in the market
price of the Company's Common Stock, in either direction, result in a
corresponding expense or income.
Interest Expense
----------------
Interest expense decreased by $371,958 in fiscal 2001 to $339,015 from $710,973
in fiscal 2000. The decrease in interest expense was attributable to replacing a
secured credit facility with a lending institution with proceeds from
15
the Spotless Transaction in fiscal 2000. The resulting debt facility with
Spotless carries a significantly lower interest rate than the previous facility.
Other Income
------------
Other income decreased $60,038 to $58,449 in fiscal 2001 from $118,487 in fiscal
2000. The decrease was primarily attributable to less savings realized through
negotiations with vendors to reduce trade payables balances.
Provision for Income Taxes
--------------------------
The provision for income taxes reflects an effective rate of 33.9% in fiscal
2001. No income taxes were provided in fiscal 2000 due to the incurrence of a
taxable loss. The book benefit for taxable losses generated in fiscal 2000 was
offset by recording a full valuation allowance. Such valuation allowance was
recorded because management does not believe that the utilization of the tax
benefits from operating losses, and other temporary differences are "more likely
than not" to be realized, as required by accounting principles generally
accepted in the United States of America.
Net Income
----------
Net income and basic net income attributable to common stockholders per share
for fiscal 2001 were $1,065,877 and $.03, respectively. This compares to a net
loss and basic net loss attributable to common stockholders per share of
($2,256,997) and ($.09), respectively for fiscal 2000.
The Company reported losses from operations in each of the first two quarters of
fiscal 2001. The Company's performance improved in the third and fourth quarter
of fiscal 2001 primarily due to a large mold remediation project.
Fiscal Year Ending April 30, 2000 Compared to Fiscal Year Ending April 30, 1999
-------------------------------------------------------------------------------
Revenues
--------
Revenues decreased to $12,845,165 in fiscal 2000 compared to $13,926,812 in
fiscal 1999. This decrease of $1,081,647, or 7.8%, was primarily the result of
revenue decreases in the Company's Trade-Winds subsidiary of $549,170 to
$11,433,489 in fiscal 2000 from $11,982,659 in fiscal 1999, and the Company's
NAL subsidiary, the revenues of which decreased by $636,457 to $586,486 in
fiscal 2000 from $1,222,943 in fiscal 1999.
The decrease in Trade-Winds revenue of $549,170 was primarily attributable to
reductions in asbestos and construction /renovation projects of approximately
$2,100,000 and $1,100,000, respectively, which were partially offset by
increases in emergency response and environmental remediation/compliance
projects of approximately $1,500,000 and $1,200,000, respectively. During fiscal
2000, the Company experienced cash flow constraints, high interest costs and the
inability of key personnel to focus on the development of revenue prior to and
during the negotiation and due diligence phases of the debt and equity
transaction with Spotless (See Item 1-"Description of Business") which limited
its ability to fund and procure additional construction and abatement projects.
The decrease in NAL revenues of $636,457 is primarily attributable to the loss
of key management and sales personnel.
Gross Profit/Cost of Revenues
-----------------------------
Cost of revenues decreased to $10,179,948 in fiscal 2000 compared to $10,930,054
in fiscal 1999. This decrease of $750,106, or 6.9%, was a result of the decrease
in revenues. The Company's cost of revenues consists primarily of labor and
labor related costs, including salaries to laborers, supervisors and foremen,
payroll taxes, training, insurance and benefits. Additionally, cost of revenues
include bonding and job related insurance cost, repairs, maintenance and rental
of job equipment, job materials and supplies, testing and sampling, and
transportation, disposal, and depreciation of capital equipment.
Cost of revenues as a percentage of revenues was 79.3% in fiscal 2000 as
compared to 78.5% in fiscal 1999. Accordingly, gross profit as a percentage of
revenues decreased to 20.7% in fiscal 2000 from 21.5 % in fiscal 1999. Gross
profit in fiscal 2000 was adversely affected by a loss of approximately $532,000
related to one large construction project. The loss was mainly attributable to a
significant amount of change orders to the original contract that increased the
overhead allocation to the project.
16
Selling, General and Administrative Expenses
--------------------------------------------
Selling, general and administrative expenses for the year increased by $765,532,
or 22.8%, to $4,127,561 in fiscal 2000 from $3,362,029 in fiscal 1999, and
constituted approximately 32.1% and 24.1% of revenues in fiscal years 2000 and
1999, respectively.
The increase of $765,532 in fiscal 2000 as compared to fiscal 1999 was primarily
the result of increases of approximately $277,000 in the provision for doubtful
accounts, $221,000 in office salaries, $260,000 in legal costs and litigation
reserves, $118,000 in consulting fees and $254,000 provision for delinquent
income taxes partially offset by decreases in sales salaries of $441,000.
Expense Related to Variable Accounting Treatment for Officer Options
--------------------------------------------------------------------
Expense related to variable accounting treatment for officer options increased
by $102,167 in fiscal 2000. This was due to the market price of the Company's
Common Stock, $.125 per share on April 30, 2000. Due to the terms of the
options, changes in the market price of the Company's Common Stock, in either
direction, will result in a corresponding expense or income to the Company.
Interest Expense
----------------
Interest expense decreased by $259,296 or 26.7% in fiscal 2000 to $710,973 from
$970,269 in fiscal 1999. The decrease in interest expense was attributable to
replacing a secured credit facility with a lending institution with proceeds
from the Spotless Transaction. The resulting debt facility with Spotless carries
a significantly lower interest rate than the previous facility.
Other Income
------------
Other income increased $90,423 to $118,487 in fiscal 2000 from $28,064 in fiscal
1999. The increase was primarily attributable to savings realized through
negotiations with vendors to reduce trade payables balances.
Extraordinary Item
------------------
The extraordinary item in fiscal 2000 is a result of a prepayment penalty paid
to Business Alliance Capital Corporation, the Company's former principal lender,
of $100,000, net of taxes. Such borrowing was repaid as a result of cash
received from the Spotless Transaction.
Net Loss
--------
Net loss and basic net loss attributable to common stockholders per share for
fiscal 2000 were ($2,256,997) and ($.09), respectively. This compares to a net
loss and basic net loss attributable to common stockholders per share of
($1,307,476) and ($.11), respectively for fiscal 1999.
The Company reported losses from operations for each quarter of fiscal 2000. The
Company's performance improved in the fourth quarter of fiscal 2000 due to an
increase in insurance related projects and improved working capital as a result
of the Spotless Transaction.
LIQUIDITY AND CAPITAL RESOURCES
As of April 30, 2001, 2000 and 1999, the Company had a stockholders' deficit of
$1,753,853, $2,744,980 and $3,347,257, respectively, and an accumulated deficit
of $33,487,992, $34,553,869 and $32,296,872, respectively. The Company has
financed its operations to date primarily through issuance of debt and equity
securities. As of April 30, 2001, 2000 and 1999, the Company had $616,088,
$816,560 and $46,336 in cash. As of April 30, 2001, the Company had working
capital of $552,850. As of April 30, 2000 and 1999, the Company had a working
capital deficit of $473,619 and $3,741,523, respectively. In addition, as of
April 30, 2001, the Company was in arrears with respect to preferred stock
dividends plus interest of approximately $137,000. The Company also has $680,000
of convertible notes that will be due in full on March 15, 2002. In the opinion
of management, the Company will have sufficient working capital to fund current
operations and repay the convertible notes and any related accrued interest on
March 15, 2002, however, market conditions and their effect on the Company's
liquidity may restrict the
17
Company's use of cash which may result in the Company not making payment on
the convertible notes when they become due on March 15, 2002. In the event that
sufficient positive cash flow from operations is not generated, the Company may
need to seek additional financing from Spotless to satisfy the convertible notes
when they become due, although Spotless is under no legal obligation to provide
such funds. The Company currently has no credit facility for additional
borrowing.
While the Company's working capital has improved during fiscal 2001, primarily
through borrowings from Spotless and cash generated from a large mold
remediation project, the above factors raise substantial doubt as to the
Company's ability to continue as a going concern. As indicated in the report of
the Company's Independent Auditors, the Company's financial statements have been
prepared assuming that the Company will continue as a going concern. The
financial statements do not include any adjustments that might result from the
outcome of this uncertainty.
During fiscal 2001, in order to address cash flow and operational concerns, the
Company borrowed and repaid an additional $1,000,000 from Spotless. In fiscal
2001, the Company also borrowed an additional $450,000 from Spotless on an
existing short-term note payable. The increased borrowings from Spotless and the
cash generated by a large mold remediation project significantly improved the
Company's liquidity. However, management believes the Company will require
positive cash flow from operations to meet its working capital needs over the
next twelve months. In the event that positive cash flow from operations is not
generated, the Company may be required to seek additional financing to meet its
working capital needs. Management continues to pursue additional funding
sources. The Company anticipates revenue growth in new and existing service
areas and continues to bid on large projects, though there can be no assurance
that any of the Company's bids will be accepted. The Company is striving to
improve its gross margin and control its selling, general and administrative
expenses. There can be no assurance, however, that changes in the Company's
plans or other events affecting the Company's operations will not result in
accelerated or unexpected cash requirements, or that it will be successful in
achieving positive cash flow from operations or obtaining additional financing.
The Company's future cash requirements are expected to depend on numerous
factors, including, but not limited to: (i) the ability to obtain environmental
or related construction contracts, (ii) the ability to generate positive cash
flow from operations, and the extent thereof, (iii) the ability to raise
additional capital or obtain additional financing, and (iv) economic conditions.
During fiscal 2000, in order to address the Company's cash flow and operational
concerns, management pursued various options including, but not limited to,
refinancing the Company's credit facility and securing capital through an equity
infusion. On October 29, 1999, the Company consummated an equity and debt
financing transaction with Spotless that significantly improved the Company's
liquidity and cash position. The Company received $2,500,000 in exchange for
equity and $2,000,000 of debt financing which enabled it to repay in full its
outstanding balance under a credit facility and reduce certain outstanding
vendor balances. The Spotless Transaction significantly reduced the Company's
cost of capital.
In September 1999, the Company borrowed $100,000 from Spotless Enterprises,
Inc., an affiliate of Spotless. The borrowing bore interest at a rate of 6% and
was repaid with accrued interest in November 1999. In March and April 2000, the
Company borrowed a total of $500,000 from Spotless for working capital
requirements. During fiscal 2001, the Company borrowed $450,000 from Spotless
for working capital requirements and an additional $1,000,000 from Spotless for
working capital requirements related to a large mold remediation project. The
Company repaid this $1,000,000 plus interest to Spotless in fiscal 2001. A
balance of $950,000 in loans from Spotless was outstanding as of April 30, 2001.
In June 2001, the Company borrowed an additional $250,000 from Spotless for
working capital requirements. All borrowings bear interest at LIBOR plus 1
percent. As of April 30, 2001, interest of $18,156 was accrued on these
borrowings.
Cash Flow
---------
Net cash used in operating activities was $136,364 and $2,055,433 in fiscal 2001
and 2000, respectively, as compared to net cash generated by operating
activities of $601,368 in fiscal 1999. Accounts receivable increased $2,164,282
or 58.9% to $5,852,793 in fiscal 2001, reflecting the increase in sales relative
to a large mold remediation project. Accounts receivable increased $1,339,313 or
57.0% to $3,688,511 in fiscal 2000, reflecting the increase in sales during the
fourth quarter of fiscal 2000. Accounts receivable declined $335,177 or 12.0% to
$2,349,198 in fiscal 1999, reflecting improved collection procedures and
controls implemented during fiscal 1999. Accounts payable and accrued expenses
increased by $40,006 or 1.2% to $3,026,377 in fiscal 2001. Accounts payable and
accrued expenses decreased by $425,325 or 10.4% to $2,988,382 in fiscal 2000
primarily as a result of the reductions in outstanding obligations made possible
by improved working capital as a result of the Spotless
18
Transaction.
Cash used for capital expenditures was $381,729, $275,417 and $379,367 in fiscal
2001, 2000 and 1999, respectively.
In fiscal 2000, the Company received cash from Spotless of $2,500,000 in
exchange for equity and $2,000,000 in exchange for debt. The proceeds were used
to repay in full the Company's outstanding balance under a credit facility and
to reduce certain outstanding vendor obligations. In March and April 2000, the
Company borrowed an additional $500,000 from Spotless to meet working capital
needs. During fiscal 2001, the Company borrowed $450,000 from Spotless for
working capital requirements and an additional $1,000,000 from Spotless for
working capital requirements related to a large mold remediation project. The
Company repaid this $1,000,000 plus interest to Spotless in fiscal 2001. A
$950,000 balance in loans from Spotless was outstanding as of April 30, 2001. In
June 2001, the Company borrowed an additional $250,000 from Spotless for working
capital requirements. In fiscal 2000 and 1999, the Company received proceeds of
$142,350 and $130,000, respectively, from the sale of Common Stock.
EFFECT OF INFLATION
Inflation has not had a material impact on the Company's operations over the
past three years.
SEASONALITY
Since the Company and its subsidiaries are able to perform their services
throughout the year, the business is not considered seasonal in nature. However,
it is affected by the timing of large contracts in certain of its service areas,
i.e., asbestos and mold abatement and construction, as well as the timing of
catastrophes.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
-------------------------------------------------------------------
Equity Price Risk - The Company's primary market risk exposure relates to the
variable accounting treatment related to a put option for shares of common stock
and common stock options held by an officer of the Company. Under the terms of
an employment agreement (see Item 11 "Executive Compensation - Employment
Agreement"), the officer may sell to the Company all shares of common stock of
the Company held by him and all shares of common stock underlying vested options
to purchase shares of common stock of the Company held by him. As of April 30,
2001, such shares and vested options to purchase shares aggregated 4,418,905
shares. Each $.01 increase or decrease in market price of the Company's stock
impacts earnings by approximately $44,000.
Interest Rate Sensitivity - The Company's exposure to market risk for changes in
interest rate primarily relates to its debt obligations to Spotless. The
interest rate on the Note and other borrowings from Spotless is LIBOR plus 1%.
At April 30, 2001, total debt owed to Spotless was $2,950,000 with additional
accrued interest of $226,827. Assuming variable rate debt at April 30, 2001, a
one point change in interest rates would impact annual net interest payments by
approximately $34,000. The Company does not use derivative financial instruments
to manage interest rate risk.
ITEM 8. FINANCIAL STATEMENTS
-----------------------------
Set forth below is a list of the financial statements of the Company included in
this Annual Report on Form 10-K.
Item Page
---- ----
Independent Auditors' Reports 36 to 37
Consolidated Balance Sheets as of April 30, 2001 and 2000 38
Consolidated Statements of Operations for the fiscal years ended
April 30, 2001, 2000 and 1999 39
Consolidated Statements of Stockholders' Deficiency for the fiscal
years ended April 30, 2001, 2000 and 1999 40
Consolidated Statements of Cash Flows for the fiscal years ended
April 30, 2001, 2000 and 1999 41
Notes to Consolidated Financial Statements 42 to 56
19
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
------------------------------------------------------------------------
FINANCIAL DISCLOSURE
--------------------
On December 1, 1999, the Company's Board of Directors appointed Deloitte &
Touche, LLP (the "Accountants") as its independent accountants, replacing BDO
Seidman, LLP (the "Former Accountants").
During the Company's three most recent fiscal years, there were no disagreements
with the Former Accountants or the Accountants on any matter of accounting
principle or practices, financial statement disclosure, auditing scope or
procedure, which disagreements, if not resolved to the satisfaction of the
Former Accountants or the Accountants, would have caused them to reference to
the subject matter of the disagreement in their report. None of the Former
Accountants' or the Accountants' reports on the Company's financial statements
for either of the past three years contained an adverse opinion or disclaimer of
opinion. However, the Former Accountants' and the Accountants' reports on the
Company's financial statements for the fiscal years ended April 30, 2001, 2000
and 1999 contained a qualification relating to the Company's ability to continue
as a going concern.
A letter from the Former Accountants addressed to the Securities and Exchange
Commission in accordance with Item 304(a)(3) of Regulation S-K, stating that
they agree with the Registrant's response to Item 4 of the Registrant's Current
Report on Form 8-K, dated December 1, 1999, is filed as an exhibit hereto.
PART III
--------
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
------------------------------------------------------------
Directors of the Company hold office until the next annual meeting of
stockholders and until their successors have been elected and shall qualify, or
until their death, resignation or removal from office. The officers of the
Company are elected by the Board of Directors at the first meeting after each
annual meeting of the Company's stockholders and from time to time, and hold
office until their successors are chosen and qualified, or until their death,
resignation or removal from office. The current executive officers and directors
of the Company, and their ages, positions and offices held are as follows:
Name Age Position with the Company
---- --- -------------------------
Michael O'Reilly 51 Director, President and Chief Executive Officer
Charles L. Kelly, Jr. 42 Director and Chief Financial Officer
Peter A. Wilson 56 Chairman of the Board
Brian S. Blythe 61 Director
Ronald B. Evans 62 Director
John J. Bongiorno 61 Director
Samuel Sadove 47 Director
Anthony Towell 70 Director and Secretary
Dr. Kevin Phillips 53 Director
Joseph Murphy 43 Vice President - Finance & Administration
The following is a brief summary of the business experience and background of
the current executive officers and directors of the Company, based upon
information provided to the Company by such persons:
Michael O'Reilly has been a director, President and Chief Executive Officer of
the Company since 1996, and has been President of Trade-Winds Environmental
Restoration, Inc., a subsidiary of the Company, since 1993. From 1996 to 1999,
he was Chairman of the Board of Directors of the Company. Prior to joining the
Company, Mr. O'Reilly was Vice President and COO of North Shore Environmental
Solutions, Inc., an environmental remediation firm that provided a wide array of
services, including asbestos, hazardous materials and lead removal. He has
eighteen years experience as an executive in the environmental industry.
Charles L. Kelly, Jr. has been a director of the Company since October 1999
and has served as Chief Financial Officer since April 2000. Since April 1995,
Mr. Kelly has been the Vice President of Finance and Administration of Spotless
Plastics (USA), Inc. Prior to that, Mr. Kelly held senior financial positions at
Luitpold Pharmaceuticals, Inc., IMC Magnetics Corp. and was a senior audit
manager at PricewaterhouseCoopers, LLP.
Peter A. Wilson has been the Chairman of the Board of Directors of the Company
since October 1999. Mr. Wilson is the President and CEO of Spotless Plastics
(USA), Inc. and is the Executive Director - Plastics Division of
20
Spotless Group Limited, an Australian company which indirectly owns
Spotless Plastics (USA), Inc. Mr. Wilson held various senior executive positions
within Spotless Group Limited since 1976 and has been a member of Spotless Group
Limited's board of directors since 1984.
Brian S. Blythe has been a director of the Company since October 1999. Since
1992, Mr. Blythe has been the Chairman of the Board of Directors of Spotless
Group Limited. Between 1972 and 1992, Mr. Blythe has held numerous executive
positions with Spotless Group Limited including Managing Director of Spotless
Group Limited and Managing Director of its Spotless Services Limited subsidiary.
Mr. Blythe is also the Chairman of the Board of Directors of Taylor's Group
Limited, a New Zealand company, and was a member of the Police Board of
Victoria, Australia between 1993 and 1998.
Ronald B. Evans has been a director of the Company since October 1999.
Since 1978, Mr. Evans has been Executive Director of Spotless Group Limited.
Between 1969 and 1999, Mr. Evans has held numerous executive positions at
Spotless Group Limited. Mr. Evans is also a director of Taylor's Group Limited
and is a director of Health Scope Limited, an Australian company. Since 1998, he
has been the Chairman of the Australian Football League.
John J. Bongiorno has been a director of the Company since March 2001.
Since 1986, Mr. Bongiorno has been the Director of Finance of Spotless Group
Limited. Mr. Bongiorno is also a director of Spotless Group Limited, Taylor's
Group Limited and is Chairman of the Board of Directors of National Can
Industries Limited, an Australian company.
Samuel Sadove, Ph.D, has been a director of the Company since 1996. Dr.
Sadove is a marine biologist who was the director of the Okeanos Ocean Research
Foundation, Inc. since founding the organization in 1980 until 1996. He is an
adjunct Professor at Long Island University, Southhampton College. Dr. Sadove
received an honorary Ph.D in Marine Sciences from Universite d'Aux Marseille.
Dr. Sadove is a member of the Technical Advisory Board of the Peconic National
Estuary Program, the U.S. Department of State's Habitat Working Group, and the
Board of Trustees of The Coastal Research and Education Society of Long Island.
Anthony Towell has been a director of the Company since November 1996. Prior to
December 2000, he was a Vice President, Co-Chairman, and a Director of Worksafe
Industries, Inc., a publicly traded manufacturing company specializing in
industrial safety. He had held executive positions during a 25 year career with
the Royal Dutch Shell Group. Mr. Towell is also a director of DiaSys Corporation
and Chairman of the Board of directors of Gulf West Oil.
Dr. Kevin Phillips has been a director since March 1998. Over the past five
years, Dr. Phillips has been a Partner, Principal and director of FPM Group
Ltd., formerly known as Fanning, Phillips & Molnar, an engineering firm located
in Long Island, New York. Dr. Phillips has a M.S. Degree in Hydrodynamics from
the Massachusetts Institute of Technology and a Ph.D. in Environmental
Engineering from the Polytechnic Institute of New York. He is a licensed
professional engineer in eight states, including New York, New Jersey, and
Connecticut, with over 20 years experience in geohydrology and environmental
engineering.
Joseph Murphy has served as the Vice President - Finance & Administration since
April 2000. From 1998 to 2000, Mr. Murphy held senior financial positions
including Chief Financial Officer at Staff Builders, Inc. From 1987 to 1997, Mr.
Murphy held several senior financial positions including Chief Financial Officer
at Colorado Prime Corporation. From 1980 to 1985, Mr. Murphy worked as an
auditor for Deloitte & Touche, LLP.
Each of the non-employee directors, those directors who are not employed by the
Company or any of its parent, affiliate or subsidiary companies ("Non-Employee
Directors"), receives $5,000 annually for service on the Company's Board of
Directors. In addition, as compensation for service on the Company's Board of
Directors during fiscal 2000, each of the Non-Employee Directors was granted
options to purchase an aggregate of 100,000 shares of the Company's common stock
under the terms of the 2001 Equity Incentive Plan, at an exercise price of $.16,
the fair market value at the date of the grant. All other directors receive no
cash compensation for their services as directors. All of the Company's
directors are reimbursed for expenses actually incurred in connection with
attending meetings of the Board of Directors.
In June 1999, each of the directors received grants of 5,000 shares of Common
Stock as compensation for serving on the Board in fiscal 1999. In June 1999,
non-qualified options to purchase an aggregate of 500,000 shares of Common Stock
at an exercise price of $.1875 per share were granted to non-employee directors
of the Company.
21
During fiscal 2001, the Board of Directors met or acted by written consent four
times. All current directors attended not less than 75% of such meetings (or
executed such written consents) of the Board with the exception of Mr. Blythe,
who attended one meeting, and Mr. Evans and Mr. Bongiorno, who became a director
in March 2001, who each did not attend any meetings.
The Board of Directors has an Audit Committee comprised of Messrs. Towell,
Phillips and Sadove. The Audit Committee recommends engagement of the Company's
independent auditors and is primarily responsible for reviewing and approving
the scope of the audit and other services performed by the Company's independent
auditors. The Audit Committee also reviews and evaluates the Company's
accounting principles and practices, systems of internal controls, quality of
financial reporting and financial staff, as well as any reports or
recommendations issued by the independent auditors. The Board of Directors has a
Compensation Committee comprised of Messrs. Towell and Sadove. The Compensation
Committee generally reviews and approves executive compensation and administers
the Company's stock plans other than the 2001 Equity Incentive Plan. The Board
of Directors has no Nominating Committee.
Section 16(a) Beneficial Ownership Reporting Compliance
-------------------------------------------------------
Section 16(a) of the Exchange Act requires the Company's executive officers,
directors and persons who beneficially own more than ten percent of a registered
class of the Company's equity securities ("Reporting Persons") to file reports
of beneficial ownership and changes in beneficial ownership on Forms 3, 4 and 5
with the SEC. These Reporting Persons are required by SEC regulation to furnish
the Company with copies of all Forms 3, 4 and 5 that they file with the SEC.
Based solely upon the Company's review of the copies of all Forms 3, 4 and 5 and
amendments to these forms, the Company believes that, other than as set forth
below, all Reporting Persons complied on a timely basis with all filing
requirements applicable to them with respect to transactions in fiscal 2001:
Joseph Murphy, the Company's Vice President - Finance & Administration failed to
timely file a Form 3 upon becoming an executive officer of the Company in April
2000 and he failed to timely file a Form 5 upon the Company's granting of an
option to him to purchase 100,000 shares of the Company's Common Stock in
October 2000.
ITEM 11. EXECUTIVE COMPENSATION
--------------------------------
The following table sets forth the cash and other compensation paid by the
Company during the last three fiscal years to the Company's Chief Executive
Officer and President and for the other individual who served as an executive
officer during fiscal 2001 and received compensation for services rendered
during fiscal 2001of $100,000 or more (each a "Named Executive Officer").
Long Term Compensation
Annual Compensation Awards
---------------------------------------- -------------------------------
Other Restricted Securities
Fiscal Annual Stock Underlying
Name and Principal Position(s) Year Salary ($) Bonus ($) Compensation Awards ($) Options
------------------------------ ---- ---------- --------- ------------ ---------- -------
Michael O'Reilly, Chief
Executive Officer and President 2001 $281,500 $40,297 (1) $- $ - -
2000 260,000 55,000 (2) 50,000 (2) 5,736,309 (3)
1999 $259,615 $ 3,846 $- $ 2,400 (2) 250,000 (4)
Joseph Murphy, Vice President - 2001 $150,000 $ - $- $ - 100,000
Finance & Administration 2000 - - - - -
1999 $ - $ - $- $ - -
(1) Mr. O'Reilly, under the terms of an employment agreement, earns a bonus
equal to 2.5% of the Company's pretax income. This bonus was accrued
as of April 30, 2001 and paid in May 2001.
(2) Mr. O'Reilly received an aggregate of $50,000 and 133,333 shares of
Common Stock in fiscal 1999, the fair value of which shares was $50,000
on the date of grant, representing a bonus based upon a calculation
22
of net profits at the end of the second quarter of fiscal 1999. Due to
subsequent losses incurred by the Company in the third and fourth
quarters, the bonus was due back to the Company and, accordingly,
recorded as a loan receivable from officer. In fiscal 2000, the Company
forgave the loan. He received 5,000 shares of Common Stock in fiscal
1999 for service on the Board of Directors in fiscal 1998, the fair
value of which shares was $2,400 on the date of the grant. All of these
shares were fully vested on the date of grant. The aggregate value of
Mr. O'Reilly's restricted stock holdings as of April 30, 2001 was
$33,694. None of the shares are entitled to dividends.
(3) On June 28, 1999, Mr. O'Reilly was granted an option to purchase
250,000 shares of Common Stock at an exercise price of $.1875 per
share, the fair market value on the date of grant. Such option is fully
vested. On October 29, 1999, Mr. O'Reilly was granted an option to
purchase 2,674,714 shares of Common Stock at an exercise price of
$.07904 per share, the fair market value at the date of grant. Such
option vests, to the extent of one third of the option grant, on each
of the first, second and third anniversaries of October 29, 1999.
Additionally, on October 29, 1999, Mr. O'Reilly was granted an option
to purchase 2,811,595 shares of Common Stock at an exercise price of
$.07904 per share, the fair market value at the date of grant. Such
option vests upon the earlier of (i) the conversion of the Note dated
October 29, 1999 issued to Spotless or (ii) October 29, 2006.
(4) On December 29, 1997, Mr. O'Reilly was granted an option to purchase
200,000 shares of Common Stock at an exercise price of $.22 per share,
the fair market value on the date of grant. On August 18, 1998, Mr.
O'Reilly was granted an option to purchase 250,000 shares of Common
Stock at an exercise price of $ 0.34 per share, the fair market value
on the date of the grant. Each of these options is fully vested.
OPTION/STOCK APPRECIATION RIGHTS ("SAR") GRANTS IN LAST FISCAL YEAR
The following table sets forth (a) the number of shares underlying options
granted to each Named Executive Officer during fiscal 2001, (b) the percentage
the grant represents of the total number of options granted to all Company
employees during fiscal 2001, (c) the per share exercise price of each option,
(d) the expiration date of each option and (e) the potential realizable value of
each grant.
Potential realizable value
at assumed annual rates of
stock price appreciation
Individual grants for option term
--------------------------------------------------------------- ---------------------------------------
Percent of
Number of total options/
securities SARs granted
underlying to employees Exercise
options/SARs in fiscal Price Expiration 5% 10%
Name granted (#) year ($/Sh) date ($) ($)
--------------------------------------------------------------- ---------------------------------------
Joseph Murphy 100,000 100% $ 0.1094 October 31, 2004 $ 13,309 $19,660
23
Aggregated Options/SAR Exercises in Last Fiscal Year and
Fiscal Year End Option Values
--------------------------------------------------------
Set forth in the table below is information, with respect to each Named
Executive Officer, as to the (a) number of shares acquired during fiscal 2001
upon each exercise of options granted to such individuals, (b) the aggregate
value realized upon each exercise (i.e. the difference between the market value
of the shares at exercise and their exercise price), (c) the total number of
unexercised options held on April 30, 2001, separately identified between those
exercisable and those not exercisable, and (d) the aggregate value of
in-the-money, unexercised options held on April 30, 2001, separately identified
between those exercisable and those not exercisable.
Number of
securities Value of
underlying unexercised
unexercised in-the-money
options/SARs options/SARs
at fiscal at fiscal
year end (#) year end ($)
---------------------- --------------------
Shares acquired Value Exercisable/ Exercisable/
Name on exercise (#) realized ($) Unexercisable Unexercisable (2)
--------------------------------------------------------------------------- --------------------
Michael O'Reilly - $- 4,241,572 / 4,594,737 (1) $459,554 / $509,832
Joseph Murphy - $- 100,000 / 0 $8,060 / $0
(1) In October 1999, in connection with the change in control of the
Company, pursuant to the provisions of Mr. O'Reilly's Employment
Agreement, dated November 1, 1996, his option to purchase 2,000,000
shares of Common Stock, previously granted, vested. In connection with
the Spotless Transaction, Mr. O'Reilly was granted an option to
purchase 2,674,714 shares of Common Stock at $.07904 per share that
becomes exercisable, to the extent of one third of the option grant, on
each of the first, second and third anniversaries of October 29, 1999
(the "Closing Date Option"). Mr. O'Reilly was also granted an option to
purchase 2,811,595 shares of Common Stock at $.07904 per share that
becomes exercisable upon the earlier of (i) the conversion of the Note
dated October 29, 1999 issued to Spotless or (ii) October 29, 2006 (the
"Conversion Date Option").
(2) The value is calculated based on the aggregate amount of the excess of
$.19 (the closing sale price per share for the Common Stock on April
30, 2001) over the relevant exercise price(s).
Employment Agreement
--------------------
On October 29, 1999, the Company entered into an Amended and Restated Employment
Agreement (the "Employment Agreement") with Michael O'Reilly. The Employment
Agreement is for a term of five years, calls for a base salary of $260,000 per
year and a bonus equal to 2.5% of the Company's pre-tax income (as that term is
defined in the Employment Agreement). Upon the termination of Mr. O'Reilly's
employment by the Company (other than termination for cause, death or disability
or his resignation without good reason, as defined in the Employment Agreement),
Mr. O'Reilly will be entitled to sell, in a single transaction, any or all of
shares of Common Stock held by him as of October 29, 1999 and all shares of
Common Stock underlying options to purchase shares of Common Stock of the
Company held by him as of October 29, 1999 (collectively the "O'Reilly Shares"),
to the extent vested and exercisable, back to the Company (or pursuant to a
letter agreement, dated October 29, 1999, between Michael O'Reilly and Spotless
(the "Letter Agreement"), to Spotless to the extent that the Company's capital
would be impaired by such a purchase) at a mutually agreeable price. If the
parties are not able to agree upon a purchase price, then the purchase price
will be determined based upon a procedure using the appraised value of the
Company at the time such obligation to purchase arises. Similarly, pursuant to
the Letter Agreement, Michael O'Reilly has the right, upon receipt of notice
that Spotless and any of its affiliates has acquired a beneficial ownership of
more than 75% of the outstanding shares of Common Stock (on a fully diluted
basis), to require Spotless to purchase, in a single transaction, the O'Reilly
Shares. The purchase price applicable to any such purchase shall be at a price
mutually agreed upon. If the parties are not able to agree upon a purchase
price, then the purchase price will be determined based upon a procedure using
the appraised value of the Company at the time such obligation to purchase
arises. As a condition precedent to requiring the Company or Spotless, as the
case may
24
be, to repurchase the O'Reilly Shares, Michael O'Reilly must forfeit
options to purchase 2,811,595 shares of Common Stock which are exercisable on or
after October 29, 2006; provided, that the exercisability of such option will be
accelerated if and to the extent that Spotless converts or exchanges its Note.
Compensation Committee Interlocks and Insider Participation
-----------------------------------------------------------
The Compensation Committee (the "Committee") of the Board of Directors of the
Company is composed of Mr. Samuel Sadove and Mr. Anthony Towell, each of whom is
a non-employee director of the Company in the meaning of Rule 16b-3 under the
Securities Exchange Act of 1934.
No member of the Committee was, during the fiscal year ended April 30, 2001, an
officer or employee of the Company or any of its subsidiaries, or was formerly
an officer of the Company or any of its subsidiaries, or had any relationship
requiring disclosure pursuant to applicable rules and regulations of the
Securities and Exchange Commission, except as disclosed under Item 13, "Certain
Relationships and Related Transactions". During the fiscal year ended April 30,
2001, no executive officer of the Company served as (i) a member of the
compensation committee (or other board committee performing equivalent
functions) of another entity, one of whose executive officers served on the
Compensation Committee of the Company, (ii) a director of another entity, one of
whose executive officers served on the Compensation Committee of the Company, or
(iii) a member of the compensation committee (or other board committee
performing equivalent functions) of another entity, one of whose executive
officers served as a director of the Company.
Compensation Committee Report on Executive Compensation
-------------------------------------------------------
General
The Committee determines the cash and other incentive compensation, if any, to
be paid to the Company's executive officers and other key employees. In
addition, the Committee administers the Company's 1998 Stock Incentive Plan and
the 1997 Incentive Plan. The Committee does not administer the Company's 2001
Equity Incentive Plan, which is administered by the Company's Board of
Directors.
Compensation Philosophy
The Committee has developed and implemented a compensation program that is
designed to attract, motivate, reward and retain the broad-based management
talent required to achieve the Company's business objectives and increase
stockholder value. There are three major components of the Company's
compensation program: base salary, short-term incentive compensation, including
annual bonuses, and long-term incentive compensation, including stock options.
These components are intended to provide management with incentives to aid the
Company in achieving both its short-term and long-term objectives. While salary
and bonus provide incentives to achieve short-term objectives, the Committee
believes that the potential for equity ownership by management addresses the
long-term objective of aligning management's and stockholders' interests in the
enhancement of stockholder value.
The Committee's executive compensation philosophy is to base management's pay,
in part, on the achievement of the Company's annual and long-term performance
goals, to provide competitive levels of compensation and to recognize individual
initiative, achievement and length of service to the Company. The Committee does
not assess these factors in a mechanical fashion, but rather relies on its
business experience in making a subjective evaluation of the appropriate level
and mix of compensation for each executive officer and key employee.
The Committee evaluates the Company's performance by reviewing period to period
changes in such quantitative measures of performance as stock price, revenue,
net income and earnings per share. The Committee also considers qualitative
performance criteria such as the development of new business strategies and
resources, improvements in customer satisfaction and cost management. During the
Company's most recently completed fiscal year, the Company increased revenues by
71.4%, it reported net income of approximately $1.1 million and income per share
of $.03. Based upon an employment agreement with Michael O'Reilly, a bonus of
approximately $40,000 was accrued which was based upon 2.5% of pretax income, as
defined. Bonuses would be considered for executives for exemplary performance of
their duties that is deemed to bring a significant benefit to the Company.
The Committee believes that it competes for executives not only with the
companies comprising the Peer Group Index described below under the heading
"Performance Graph" but also with numerous other companies in the
25
emergency response and environmental remediation industries that are
actively seeking executives having the same type of skills and experience as the
Company's executives. The Committee has not made a statistical analysis of the
compensation practices of these competitors, but tries to keep itself generally
informed of such practices. The Committee believes that, notwithstanding the
variety of compensation packages offered by these competitors which make
objective comparisons difficult, the compensation paid by the Company to its
executive officers and other key employees is above average, reflecting the
Company's relative size and desire to retain its current employees.
The Committee also considers other subjective factors bearing on the appropriate
compensation for each of its executive officers and other key employees, such as
the length of an employee's service with the Company, which the Committee
believes enhances the value of the employee to the Company. The Committee takes
note of the individual initiative demonstrated by such officers and employees in
the development and implementation of the Company's business plan. Where
appropriate, the Committee will consider the performance of specific divisions
or departments of the Company for which the employee has direct supervisory
responsibility.
When the Company identifies a talented executive, it seeks to secure his or her
employment for a long term. For this reason, the Company has entered into an
employment agreement with its chief executive officer which provides for a
specified base salary. The existence of this employment agreement establishes
certain minimum salary and benefit levels for the covered employee during the
term of such employee's agreement which may not be reduced by the Committee. The
Committee is able, however, to apply its compensation philosophy at the time
each such employment agreement is negotiated or renewed and in determining what,
if any, additional compensation, including bonuses or issuances of stock or
stock options, is appropriate beyond the minimums established by each employment
agreement.
The particular components of executive compensation employed by the Company are
discussed in greater detail below.
Salaries
Base salaries for the Company's executive officers and other key employees are
determined initially by evaluating the responsibilities of the position held and
the experience of the individual in light of the Committee's compensation
philosophy discussed above. No specific formula is applied in setting an
employee's base salary, either with respect to the total amount of such base
salary or the relative value such base salary should bear to the employee's
total compensation package. The Committee believes that the base salaries paid
by the Company should be maintained at levels at least competitive with those
offered by companies with which the Company competes for executive talent in
order to attract and retain executive officers and other key employees of the
caliber that the Company desires.
The base salaries for the Company's executive officers and other key employees
may be reflected in the employment agreements negotiated by the Company with
each such employee and, to that extent, are accordingly subject to formal review
only at the time each such contract is entered into or renewed. The terms of the
one existing employment agreement with the Company's President and Chief
Executive Officer is described in greater detail above under the heading
"Employment Agreement." The base salaries for the Company's executive officers
and other key employees who are not subject to employment agreements generally
are evaluated annually. In evaluating the terms of employment agreements, the
Committee considers each of the factors described above, without assigning any
specific weight to such factors.
Stock Option Plans
To promote the long-term objectives of the Company and encourage growth in
stockholder value, options are granted to key executives who are in a position
to make a substantial contribution to the long-term success of the Company. We
believe that the executive officers should benefit together with stockholders as
the Company's stock increases in value. Stock options focus the executives'
efforts on managing the Company from the perspective of an owner with an equity
stake in the business. Because the Company views stock option grants as a part
of the executive officer's total annual compensation package, the amount of
stock options outstanding at the time of a new grant or granted in prior years
does not serve to increase or decrease the size of the new grant.
In the fiscal year ended April 30, 2001, 100,000 stock options were awarded to
Joseph Murphy. The Committee's philosophy is that stock options should be
awarded to executive officers of the Company to promote long-term interests
between such individuals and the Company's stockholders and to assist in the
retention of such individuals.
26
As with the other components of executive compensation, the Committee does
not apply any fixed formula to determine the appropriate number of options to
grant to an executive but rather relies on its subjective judgment in applying
the compensation philosophy described above. In order to avoid any adverse
effect of the Company's earnings or cash flow, the Committee has favored the
granting of stock options over cash bonuses as a means of rewarding the
Company's executive officers and other key employees.
Compensation of Chief Executive Officer
The Committee applies the same factors in considering Michael O'Reilly's
compensation that it applies to the Company's other executive officers and key
employees. Mr. O'Reilly's five-year employment agreement establishes his annual
minimum base salary. The Committee may reduce this base salary only at the time
a new agreement is negotiated. Mr. O'Reilly's base salary was set at $260,000
pursuant to an amendment made in 1999 to his employment agreement. During the
last year, Mr. O'Reilly's efforts contributed to the Company's 71.4% increase in
revenues to $22.0 million, the achievement of profit of approximately $1.1
million and the increase in income per share to $.03.
Compensation Committee
Samuel Sadove
Anthony Towell
27
Performance Graph
-----------------
The following Performance Graph compares the total cumulative return (assuming
dividends were to be reinvested) on the Company's Common Stock during the five
fiscal years ended April 30, 2001, with the cumulative return on the Nasdaq
Market Index and a Peer Group Index, assuming investment of $100 in the
Company's Common Stock, the Nasdaq Market Index and the Peer Group Index at May
1, 1996. The Peer Group consists of a representative group of companies whose
common stock has been publicly traded during the five years ended April 30,
2001, and each of which, like the Company, engages in providing emergency
response, environmental remediation services or waste removal.
The Performance Graph below is presented in accordance with SEC requirements.
Stockholders are cautioned against drawing any conclusions from the data
contained herein, as past results are not necessarily indicative of the future
stock performance. The Performance Graph in no way reflects the Company's
forecast of future stock price performance.
Comparison of 5-Year Cumulative Total Return Among
Windswept Environmental Group, Inc., NASDAQ Market Index and Peer Group Index
-----------------------------------------------------------------------------
------------------------------Fiscal Year Ending---------------------------
Company/Index/Market 4/30/1996 4/30/1997 4/30/1998 4/30/1999 4/28/2000 4/30/2001
Windswept Enviornmental Group 100.00 98.08 55.77 30.77 15.38 23.38
Refuse Systems 100.00 99.51 124.31 106.58 35.55 54.46
NASDAQ Market Index 100.00 106.59 158.32 209.07 324.85 181.39
Assumes $100 invested on May 1, 1996
Assumes dividend reinvested
Fiscal Year Ending April 30, 2001
28
Indemnification
---------------
Section 145 of the Delaware General Corporation Law provides that
indemnification of directors, officers, employees and other agents of a
corporation, and persons who serve at its request as directors, officers,
employees or other agents of another organization may be provided by such
corporation.
The Company's Certificate of Incorporation includes provisions eliminating the
personal liability of its directors for monetary damages resulting from breaches
of their fiduciary duty except, pursuant to the limitations of the Delaware
General Corporation Law, (i) for any breach of their fiduciary duty of loyalty
to the Company or its stockholders, (ii) for acts or omissions not in good faith
or which involve intentional misconduct or a knowing violation of law, (iii)
under Section 174 of the Delaware General Corporation Law, or any amendatory or
successor provisions thereto, or (iv) with respect to any transaction from which
the director derived an improper personal benefit. The Company's By-Laws provide
indemnification to directors, officers, employees, and agents, including against
claims brought under state or Federal Securities laws, to the full extent
allowable under Delaware law.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
------------------------------------------------------------------------
The following table sets forth, as of July 13, 2001, certain information
concerning the beneficial ownership of each class of the Company's voting stock
by (i) each beneficial owner of 5% or more of the Company's voting stock, based
on reports filed with the Securities and Exchange Commission and certain other
information; (ii) each of the Company's executive officers and directors and
(iii) all of the Company's executive officers and directors as a group:
Class
----------------------------------------------------------------------------------------------------
Common Stock Series A Preferred Series B Preferred
------------------------------- ---------------------------------- --------------------------------
Amount and Nature Amount and Nature Amount and Nature
of Beneficial Ownership (1) of Beneficial Ownership (1) of Beneficial Ownership (1)
------------------------------- ---------------------------------- --------------------------------
Name of Number of Shares Percent of Number of Shares Percent of Number of Shares Percent of
Beneficial Owner Beneficially Owned Class Beneficially Owned Class Beneficially Owned Class
---------------------- ----------------------------------------------------------------------------------------------------
Spotless Group Limited (2) 60,222,459 (3) 78.8% - - 9,346 100%
Michael O'Reilly (4) 4,418,905 (5) 10.3% - - - -
Samuel Sadove (4) 561,000 (6) 1.4% - - - -
Anthony Towell (4) 1,958,492 (7) 4.8% - - - -
Brian S. Blythe (8) - (9) - - - - -
John J. Bongiorno (8) - (10) - - - - -
Ronald B.Evans (8) - (11) - - - - -
Charles L. Kelly, Jr. (8) - (12) - - - - -
Peter A. Wilson (8) - (13) - - - - -
Dr. Kevin Phillips (14) 1,400,839(15) 3.5% 650,000 50.0% - -
Gary Molnar (14) 1,000,839(16) 2.6% 650,000 50.0% - -
Joseph Murphy (4) 100,000(17) * - - - -
All directors and
executive officers
as a group
(10 individuals) (18) 8,439,236(18) 18.2% 650,000 50.0% - -
* Less than 1 percent
(1) Beneficial ownership is determined in accordance with the rules of the
SEC. In computing the number of shares beneficially owned by a person
and the percentage ownership of that person, shares of Common Stock
subject to options or warrants held by that person that are currently
exercisable or will become exercisable within 60 days after July 13,
2001 are deemed outstanding, while such shares are not deemed
outstanding for purposes of computing percentage ownership of any other
person. Unless otherwise indicated in the footnotes below, the persons
and entities named in the table have sole voting and investment power
with respect to all shares beneficially owned, subject to community
property laws where applicable.
(2) The address of Spotless Group Limited ("Spotless Group") is c/o
Spotless Plastics (USA) Inc., 150 Motor Parkway, Suite 413, Hauppauge,
New York 11788. Spotless Group directly owns 100% of the voting stock
of Spotless Plastics Pty. Ltd., a company organized under the laws of
Victoria, Australia, which in turn
29
directly owns 100% of the voting stock of Spotless. Spotless directly
owns 100% of the voting stock of Acquisition Corp.
(3) Includes 22,284,683 shares of Common Stock sold to Acquisition Corp.
pursuant to the Subscription Agreement, 9,346,000 shares of Common
Stock issuable upon conversion of the 9,346 shares of Series B
Preferred held by Acquisition Corp., 25,304,352 shares of Common Stock
issuable upon conversion of the outstanding principal of the Note and
3,287,424 shares of Common Stock issuable upon conversion of the
accrued and unpaid interest related to the Note. Spotless Group,
Spotless and Acquisition Corp. may be deemed to share the voting and
investment power over all of these shares.
(4) The address for this person is c/o Windswept Environmental Group, Inc.,
100 Sweeneydale Ave., Bay Shore, New York 11706.
(5) Includes 177,333 shares of Common Stock directly held by Mr. O'Reilly
and options under which he may purchase 4,241,572 shares of Common
Stock. Does not include 11,000 shares of Common Stock directly held by
JoAnn O'Reilly, the wife of Mr. O'Reilly, options under which she may
purchase 300,000 shares of Common Stock, as to each of which Mr.
O'Reilly disclaims beneficial ownership, and the shares of Common Stock
issuable upon conversion of the Closing Date Option and the Conversion
Date Option that are not exercisable within 60 days.
(6) Includes 11,000 shares of Common Stock directly by held by Mr. Sadove
and options under which he may purchase 550,000 shares of Common Stock.
(7) Includes 24,533 shares of Common Stock directly held by Mr. Towell,
9,066 shares of Common Stock held jointly by Mr. Towell and his wife,
Jacqueline Towell, options under which he may purchase 750,000 shares
of Common Stock, 666,667 shares of Common Stock issuable upon
conversion of the outstanding principal of a $100,000 demand
convertible note directly held by Mr. Towell and 508,227 shares of
Common Stock issuable upon conversion of accrued and unpaid interest on
the convertible note.
(8) The address for this person is c/o Spotless Enterprises Inc., 150 Motor
Parkway, Suite 413, Hauppauge, New York 11788.
(9) Excludes shares beneficially held by Spotless Group. Mr. Blythe is a
director and executive officer of Spotless Group and may be deemed to
share voting or investment power with respect to these shares.
Mr. Blythe disclaims beneficial ownership of these shares.
(10) Excludes shares beneficially held by Spotless Group. Mr. Bonjiorno is
a director and executive officer of Spotless Group and may be deemed
to share voting or investment power with respect to these shares. Mr.
Bonjiorno disclaims beneficial ownership of these shares.
(11) Excludes shares beneficially held by Spotless Group. Mr. Evans is a
director and executive officer of Spotless Group and may be deemed to
share voting or investment power with respect to these shares. Mr.
Evans disclaims beneficial ownership of these shares.
(12) Excludes shares held of record by Acquisition Corp. and beneficially
held by Spotless. Mr. Kelly is an executive officer of Acquisition
Corp. and Spotless and may be deemed to share voting or investment
power with respect to these shares. Mr. Kelly disclaims beneficial
ownership of these shares.
(13) Excludes shares beneficially held by Spotless Group. Mr. Wilson is a
director and executive officer of Spotless Group and may be deemed to
share voting or investment power with respect to these shares. Mr.
Wilson disclaims beneficial ownership of these shares.
(14) The address for each of Dr. Phillips and Mr. Molnar is c/o FPM Group
Ltd., 909 Marconi Avenue, Ronkonkoma, New York 11779.
(15) Includes 245,839 shares of Common Stock directly held by Dr. Phillips,
options under which he may purchase 505,000 shares of Common Stock and
650,000 shares of Common Stock issuable upon conversion of 650,000
shares of Series A Preferred directly held by Dr. Phillips.
30
(16) Includes 235,839 shares of Common Stock directly held by Mr. Molnar,
options under which he may purchase 115,000 shares of Common Stock and
650,000 shares of Common Stock issuable upon conversion of 650,000
shares of Series A Preferred directly held by Mr. Molnar.
(17) Includes options under which Mr. Murphy may purchase 100,000 shares of
Common Stock.
(18) Includes options under which members of the group may purchase an
aggregate of 6,146,572 shares of Common Stock, 666,667 shares of Common
Stock issuable upon conversion of a demand convertible note held by a
member of the group, 508,227 shares of Common Stock issuable upon
conversion of accrued interest related to the convertible note and
650,000 shares of Common Stock issuable upon conversion of 650,000
shares of Series A Preferred directly held by a member of the group.
Does not include (a) any shares of Common Stock issuable upon exercise
of the Closing Date Option or the Conversion Date Option that are not
exercisable within 60 days and (b) shares of Common Stock directly held
by JoAnn O'Reilly and the options under which JoAnn O'Reilly may
purchase shares of Common Stock, as to each of which Michael O'Reilly
disclaims beneficial ownership.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
--------------------------------------------------------
During fiscal 2001, the Company borrowed $450,000 from Spotless for working
capital requirements and an additional $1,000,000 from Spotless for working
capital requirements related to a large mold remediation project. The Company
repaid this $1,000,000 plus interest to Spotless in fiscal 2001. There was a
balance of $950,000 in loans from Spotless outstanding as of April 30, 2001
(including an outstanding $500,000 loan from fiscal 2000). In June 2001, the
Company borrowed an additional $250,000 from Spotless for working capital
requirements. All borrowings bear interest at LIBOR plus 1 percent. As of April
30, 2001, interest of $18,156 was accrued on these borrowings.
In fiscal 2001, the Company accrued approximately $40,000 for a bonus due to Mr.
O'Reilly, the Company's President and Chief Executive Officer as provided for in
his Employment Agreement (see Item 11- "Executive Compensation"). Such bonus was
subsequently paid in May 2001.
At April 30, 2001, Anthony Towell, a director of the Company, directly held a
$100,000 convertible promissory note from the Company providing for, at the
option of Mr. Towell, the conversion of the principal and accrued and unpaid
interest at the rate of $.15 per share of Common Stock. As of April 30, 2001,
the Company has included $72,017 of unpaid interest in accrued expenses.
On December 16, 1998, the Company entered into an operating lease arrangement
with Mr. O'Reilly. Under the arrangement, the Company leases a forty-two foot
fully equipped custom Topaz boat for a period of two years for annual rental
payments of approximately $60,000. The leasing arrangement was necessitated by a
Marine Assistance Contract entered into with Keyspan Energy Corporation covering
the period January 1, 1999 through December 31, 2000. The arrangement provides
the Company with its largest floating vessel capable of handling specialty
equipment and facilitating an offshore support crew. The lease carries a
one-year renewal option which was exercised on January 1, 2001 through December
31, 2001. The Company is responsible for all taxes, insurance and reports.
At April 30, 2001, Dr. Kevin Phillips, a director of the Company, directly held
650,000 shares of Series A Preferred. The Series A Preferred is convertible into
Common Stock at the rate of one share of Common Stock for every one share of
Series A Preferred. In fiscal 2001, no dividends or interest were paid.
The Company is required to pay quarterly dividends on its Series A Preferred
Stock. Such dividends accrue from the initial date of issuance of the Series A
Preferred Stock, are cumulative, and, if not paid when due, bear interest on the
unpaid amount of the past due dividends at the prime rate published in The Wall
Street Journal on the date the dividend was payable, plus 3%. The Company
believes, however, that in fiscal 2001 it was legally prohibited from paying
dividends on its capital stock due to the provisions of Section 170 of the
Delaware Law, which require a company to pay dividends on its capital stock only
out of its capital surplus or net profits in one of the two last years. If the
Company fails to make four consecutive quarterly dividend payments on the Series
A Preferred Stock, the majority in interest of the holders of the Series A
Preferred Stock, which includes Dr.Phillips, have the right to elect an
additional director to the Company's Board of Directors, to serve until such
accrued and unpaid dividends have been paid in full. The Company did not pay the
fourth, fifth, sixth and seventh consecutive quarterly dividend payment to the
holders of the Series A Preferred Stock (the seventh being due on June 15,
2001). The holders of the
31
Series A Preferred Stock have not exercised their right to elect an additional
director.
Dr. Samuel Sadove, a director of the Company, performs consulting services
for the Company. The Company paid Dr. Sadove $40,777 for such services in fiscal
2001.
The Company believes that all transactions entered into by the Company with its
officers, directors and principal stockholders have been on terms no less
favorable to the Company than those available from unrelated third parties. See
Item 11-"Executive Compensation."
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
------------------------------------------
(a) Set forth below are all exhibits to this Annual Report on Form 10-K.
3.01 Composite of Certificate of Incorporation of the Company. (Incorporated
by reference to Exhibit 3.1 of the Company's Quarterly Report on Form
10-Q for the quarter ended January 31, 2001, filed with the SEC on
March 19, 2001).
3.02 By-laws of the Company. (Incorporated by reference to Exhibit 3.3 of
the Company's Registration Statement (No. 33-14370 N.Y.) filed with
the SEC on June 1, 1987).
4.01 Specimen Common Stock Certificate. (Incorporated by reference to
Exhibit 4.01 of the Company's Annual Report on Form 10-KSB for the
fiscal year ended April 30, 1998, filed with the SEC on August 13,
1998).
4.02 Specimen Series B Preferred Stock Certificate. (Incorporated by
reference to Exhibit 4.1 of the Company's Current Report on Form 8-K
(Date of Report: October 29, 1999) filed with the SEC on November 12,
1999).
10.01 Form of Convertible Note Agreement. (Incorporated by reference to
Exhibit 4.04 of the Company's Annual Report on Form 10-KSB for the
fiscal year ended April 30, 1997, filed with the SEC on September 29,
1997).
10.02 Convertible Demand Note, dated October 15, 1996, between Trade-Winds
Environmental Restoration, Inc. and Anthony P. Towell, together with
related agreements.
10.03 Option Certificate for 2,000,000 stock options issued to Michael
O'Reilly. (Incorporated by reference to Exhibit 4.05 of the Company's
Annual Report on Form 10-KSB for the fiscal year ended April 30, 1997,
filed with the SEC on September 29, 1997).
10.04 1997 Incentive Plan. (Incorporated by reference to Exhibit 4.1 of the
Company's Registration Statement on Form S-8 (No. 333-22491) filed
with the SEC on February 27, 1997).
10.05 1998 Stock Incentive Plan. (Incorporated by reference to Exhibit 4.1
of the Company's Registration Statement on Form S-8 (No. 333-61905)
filed with the SEC on August 20, 1998).
10.06 Loan and Security Agreement dated June 1, 1998 between Business
Alliance Capital Corporation and the Company and Subsidiaries.
(Incorporated by reference to Exhibit 10.13 of the Company's Annual
Report on Form 10-KSB for the fiscal year ended April 30, 1998, filed
with the SEC on August 13, 1998).
10.07 Individual Guaranty of Michael O'Reilly to Business Alliance Capital
Corporation. (Incorporated by reference to Exhibit 10.14 of the
Company's Annual Report on Form 10-KSB for the fiscal year ended April
30, 1998, filed with the SEC on August 13, 1998).
10.08 Revolving Credit Master Promissory Note for $1,850,000 between the
Company and Business Alliance Capital Corporation. (Incorporated by
reference to Exhibit 10.15 of the Company's Annual Report on Form
10-KSB for the fiscal year ended April 30, 1998, filed with the SEC on
August 13, 1998).
10.09 Term Loan for $595,000 between the Company and Business Alliance
Capital Corporation. (Incorporated by reference to Exhibit 10.16 of the
Company's Annual Report on Form 10-KSB for the fiscal year ended April
30, 1998, filed with the SEC on August 13, 1998).
32
10.10 Origination Fee Amendment dated August 1, 1998 between the Company and
Business Alliance Capital Corporation. (Incorporated by reference to
Exhibit 10.17 of the Company's Annual Report on Form 10-KSB for the
fiscal year ended April 30, 1998, filed with the SEC on August 13,
1998).
10.11 Loan Agreement dated September 16, 1999 between Spotless Enterprises
Inc. and the Company (Incorporated by reference to Exhibit 10.12 of the
Company's Annual Report on Form 10-KSB for the year ended April 30,
2000, filed with the SEC on August 14, 2000).
10.12 Subscription Agreement dated October 29, 1999 between the Company and
Spotless Plastics (USA), Inc. (Incorporated by reference to Exhibit
10.1 of the Company's Current Report on Form 8-K (Date of Report:
October 29, 1999) filed with the SEC on November 12, 1999).
10.13 Convertible Promissory Note dated October 29, 1999 issued by the
Company to Spotless Plastics (USA), Inc. (Incorporated by reference to
Exhibit 10.2 of the Company's Current Report on Form 8-K (Date of
Report: October 29, 1999) filed with the SEC on November 12, 1999).
10.14 Form of Security Agreement dated October 29, 1999 between each of the
Company, Trade-Winds Environmental Remediation, Inc., North Atlantic
Laboratories, Inc. and New York Testing, Inc. and Spotless Plastics
(USA), Inc. (Incorporated by reference to Exhibit 10.3 of the
Company's Current Report on Form 8-K (Date of Report: October 29,
1999) filed with the SEC on November 12, 1999).
10.15 Amended and Restated Employment Agreement dated October 29, 1999
between the Company and Michael O'Reilly. (Incorporated by reference to
Exhibit 10.4 of the Company's Current Report on Form 8-K (Date of
Report: October 29, 1999) filed with the SEC on November 12, 1999).
10.16 Stock Option Agreement dated October 29, 1999 between the Company and
Michael O'Reilly. (Incorporated by reference to Exhibit 10.5 of the
Company's Current Report on Form 8-K (Date of Report: October 29, 1999)
filed with the SEC on November 12, 1999).
10.17 Stock Option Agreement dated October 29, 1999 between the Company and
Michael O'Reilly relating to options vesting upon exercise of the
convertible note. (Incorporated by reference to Exhibit 10.6 of the
Company's Current Report on Form 8-K (Date of Report: October 29, 1999)
filed with the SEC on November 12, 1999).
10.18 Letter Agreement dated October 29, 1999 between Michael O'Reilly and
Spotless Plastics (USA), Inc. (Incorporated by reference to Exhibit
10.7 of the Company's Current Report on Form 8-K (Date of Report:
October 29, 1999) filed with the SEC on November 12, 1999).
10.19 Agreement, dated as of November 3, 2000, by and between Turner
Construction Company and Trade-Winds Environmental Restoration Inc., as
amended (Incorporated by reference to Exhibit 10.1 of the Company's
Quarterly Report on Form 10-Q for the quarter ended October 31, 2000,
filed with the SEC on December 15, 2001).
10.20 Loan Agreement, dated November 4, 2000, by and between the Company and
Spotless Plastics (USA), Inc. (Incorporated by reference to Exhibit
10.2 of the Company's Quarterly Report on Form 10-Q for the quarter
ended October 31, 2000, filed with the SEC on December 15, 2001).
10.21 Line of Credit Note, dated November 4, 2000, by and between the Company
and Spotless Plastics (USA), Inc. (Incorporated by reference to Exhibit
10.3 of the Company's Quarterly Report on Form 10-Q for the quarter
ended October 31, 2000, filed with the SEC on December 15, 2001).
10.22 Security Agreement, dated November 4, 2000, by and between the Company
and Spotless Plastics (USA), Inc. (Incorporated by reference to Exhibit
10.4 of the Company's Quarterly Report on Form 10-Q for the quarter
ended October 31, 2000, filed with the SEC on December 15, 2001).
10.23 2001 Equity Incentive Plan (Incorporated by reference to Exhibit 10.1
of the Company's Quarterly Report on Form 10-Q for the quarter ended
January 31, 2001, filed with the SEC on March 19, 2001).
33
16.1 Letter dated December 7, 1999 from BDO Seidman LLP to the Securities
and Exchange Commission. (Incorporated by reference to Exhibit 16 of
the Company's Current Report on Form 8-K (Date of Report: December 1,
1999) filed with the SEC on December 8, 1999).
21.01 Subsidiaries of the Company.
23.01 Consent of Deloitte & Touche LLP.
23.02 Consent of BDO Seidman LLP.
(b) There were no reports on Form 8-K filed during the last quarter of the
fiscal year ended April 30, 2001.
34
WINDSWEPT ENVIRONMENTAL GROUP, INC.
TABLE OF CONTENTS
Page
--------
Independent Auditors' Reports 36 to 37
Consolidated Balance Sheets as of April 30, 2001 and 2000 38
Consolidated Statements of Operations for the fiscal years
ended April 30, 2001, 2000 and 1999 39
Consolidated Statements of Stockholders' Deficiency for the
fiscal years ended April 30, 2001, 2000 and 1999 40
Consolidated Statements of Cash Flows for the fiscal years
ended April 30, 2001, 2000 and 1999 41
Notes to Consolidated Financial Statements 42 to 56
35
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and
Stockholders of Windswept Environmental Group, Inc.
We have audited the accompanying consolidated balance sheets of Windswept
Environmental Group, Inc. and Subsidiaries (the "Company") as of April 30, 2001
and 2000 and the related consolidated statements of operations, stockholders'
deficiency and cash flows for the years then ended. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Windswept
Environmental Group, Inc. and Subsidiaries at April 30, 2001 and 2000, and the
results of their operations and their cash flows for the years then ended in
conformity with accounting principles generally accepted in the United States of
America.
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed in Note 3 to the
consolidated financial statements, the Company has a stockholders' deficit and
is experiencing difficulty in generating sufficient cash flow to meet its
obligations and sustain its operations, which raises substantial doubt about the
Company's ability to continue as a going concern. Management's plans in regard
to these matters are also described in Note 3. The consolidated financial
statements do not include any adjustments that might result from the outcome of
this uncertainty.
/s/ Deloitte & Touche, LLP
Deloitte & Touche, LLP
Jericho, New York
July 24, 2001
36
Report of Independent Certified Public Accountants
--------------------------------------------------
To the Board of Directors and
Stockholders of Windswept Environmental Group, Inc.
We have audited the accompanying consolidated statements of operations,
changes in stockholders' equity (deficit) and cash flows of Windswept
Environmental Group, Inc. and Subsidiaries for the year ended April 30, 1999.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, as well
as evaluating the overall financial statement presentation. We believe that our
audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the results of operations and cash
flows of Windswept Environmental Group, Inc. and Subsidiaries for the year ended
April 30, 1999, in conformity with generally accepted accounting principles.
The accompanying consolidated financial statements have been prepared
assuming that the Company will continue as a going concern. As discussed in Note
3 to the consolidated financial statements, the Company has incurred recurring
losses from operations, has a stockholders' deficit and a working capital
deficiency, and is in arrears with respect to certain of its obligations,
including sales and payroll taxes. These factors raise substantial doubt about
the Company's ability to continue as a going concern. Management's plans in
regard to these matters are also described in Note 3. The consolidated financial
statements do not include any adjustments that might result from the outcome of
this uncertainty.
/s/ BDO Seidman, LLP
BDO Seidman, LLP
Melville, New York
August 11, 1999
37
WINDSWEPT ENVIRONMENTAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
April 30, April 30,
2001 2000
------------ ------------
ASSETS:
CURRENT ASSETS:
Cash $ 616,088 $ 816,560
Accounts receivable, net of allowance for doubtful accounts of $381,457
and $266,042, respectively 5,471,336 3,422,469
Inventories 139,816 168,151
Costs and estimated earnings in excess of billings on uncompleted contracts 892,544 150,829
Prepaid expenses and other current assets 136,233 135,384
------------ ------------
Total current assets 7,256,017 4,693,393
PROPERTY AND EQUIPMENT, net of accumulated depreciation and amortization of
$4,410,428 and $3,657,682, respectively (Note 4) 1,344,599 1,749,928
GOODWILL, net of accumulated amortization of $64,892 and $55,387, respectively
(Note 1) 57,171 66,639
OTHER ASSETS (Notes 1 and 8) 148,611 189,244
------------ ------------
TOTAL $ 8,806,398 $ 6,699,204
============ ============
LIABILITIES AND STOCKHOLDERS' DEFICIT:
CURRENT LIABILITIES:
Accounts payable $ 1,159,443 $ 1,536,485
Accrued expenses (Notes 5 and 16) 1,866,934 1,451,897
Short-term notes payable (Notes 3 and 16) 950,000 500,000
Billings in excess of cost and estimated earnings on uncompleted contracts 426,611 302,854
Accrued payroll and related fringe benefits 478,826 475,931
Sales tax payable 93,011 269,518
Current portion of convertible notes (Note 8) 680,000 -
Current portion of long-term debt (Note 7) 68,691 136,153
Obligations of unconsolidated subsidiary, net (Note 6) 210,007 210,007
Income taxes payable (Note 11) 731,362 194,684
Other current liabilities 38,282 89,483
------------ ------------
Total current liabilities 6,703,167 5,167,012
------------ ------------
LONG-TERM DEBT, NET OF CURRENT PORTION (Note 7) 26,837 95,005
------------ ------------
CONVERTIBLE NOTES (Notes 2, 8 and 16) 2,100,000 2,780,000
------------ ------------
COMMITMENTS AND CONTINGENCIES (Notes 13 and 16)
REDEEMABLE COMMON STOCK (Note 10) 430,247 102,167
------------ ------------
SERIES A REDEEMABLE CONVERTIBLE PREFERRED STOCK, $.01 par value; 1,300,000
shares authorized; 1,300,000 shares outstanding at April 30, 2001 and April 30,
2000 (Notes 9 and 16) 1,300,000 1,300,000
------------ ------------
STOCKHOLDERS' DEFICIT:
Series B preferred stock - $.01 par value; 50,000 shares authorized; 9,346
shares outstanding at April 30, 2001 and April 30, 2000 (Notes 2 and 16) 93 93
Nondesignated preferred stock, no par value; 8,650,000 shares authorized; 0
shares outstanding - -
Common stock, $.0001 par value; 100,000,000 shares authorized; 38,481,254 and
38,456,254 shares outstanding at April 30, 2001 and April 30, 2000,
respectively (Notes 2 and 14) 3,848 3,846
Additional paid-in capital 31,730,198 31,804,950
Accumulated deficit (33,487,992) (34,553,869)
------------ ------------
Total stockholders' deficit (1,753,853) (2,744,980)
------------ ------------
TOTAL $ 8,806,398 $ 6,699,204
============ ============
See notes to consolidated financial statements.
38
WINDSWEPT ENVIRONMENTAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE FISCAL YEARS ENDED APRIL 30
2001 2000 1999
-------------- -------------- --------------
Revenues $ 22,022,766 $ 12,845,165 $ 13,926,812
Cost of revenues 15,336,191 10,179,948 10,930,054
------------ ------------ ------------
Gross profit 6,686,575 2,665,217 2,996,758
------------ ------------ ------------
Operating expenses:
Selling, general and administrative expenses (Note 16) 4,466,052 4,127,561 3,362,029
Expense related to variable accounting treatment for officer
options(Note 10) 328,080 102,167 -
------------ ------------ ------------
Total operating expenses 4,794,132 4,229,728 3,362,029
------------ ------------ ------------
Income (loss) from operations 1,892,443 (1,564,511) (365,271)
------------ ------------ ------------
Other expense (income):
Interest expense (Notes 7, 8, 9 and 16) 339,015 710,973 970,269
Other income, net (Note 12) (58,449) (118,487) (28,064)
------------ ------------ ------------
Total other expense 280,566 592,486 942,205
------------ ------------ ------------
Income (loss) before extraordinary item and provision for income taxes 1,611,877 (2,156,997) (1,307,476)
Provision for income taxes (Note 11) 546,000 - -
------------ ------------ ------------
Net income (loss) before extraordinary item 1,065,877 (2,156,997) (1,307,476)
Extraordinary item - loss on extinguishment of debt - 100,000 -
------------ ------------ ------------
Net income (loss) 1,065,877 (2,256,997) (1,307,476)
Dividends on Series A Redeemable Convertible Preferred Stock (Note 9) 78,000 78,000 78,000
------------ ------------ ------------
Net income (loss) attributable to common shareholders $ 987,877 $ (2,334,997) $ (1,385,476)
============ ============ ============
Basic and diluted net income (loss) per common share:
Basic:
Before extraordinary item $ .03 $ (.09) $ (.11)
Extraordinary item - - -
Basic net income (loss) per common share $ .03 $ (.09) $ (.11)
============ ============ ============
Diluted:
Before extraordinary item $ .01 $ (.09) $ (.11)
Extraordinary item - - -
------------ ------------ ------------
Diluted net income (loss) per common share $ .01 $ (.09) $ (.11)
============ ============ ============
Weighted average number of common shares outstanding:
Basic 38,459,953 26,927,083 13,064,314
============ ============ ============
Diluted 76,244,295 26,927,083 13,064,314
============ ============ ============
See notes to consolidated financial statements
39
WINDSWEPT ENVIRONMENTAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIENCY
FOR THE FISCAL YEARS ENDED APRIL 30, 2001, 2000 AND 1999
Preferred Common Stock
--------- ------------
Number Additional
of Par Number of Par Paid-In Accumulated Deferred
Shares Value Shares Value Capital Deficit Compensation Total
------ ----- ------ ----- ------- ------- ------------ -----
Balance at May 1, 1998 - $ - 11,552,374 $ 1,155 $28,126,648 $(30,989,396) $ (75,137) $(2,936,730)
Private placements of common
stock - - 735,000 73 129,927 - - 130,000
Note conversion
- - 20,000 2 9,998 - - 10,000
Issuance of common stock for
services - - 1,284,528 129 466,623 - - 466,752
Issuance of common stock to
settle legal obligations - - 38,874 4 13,420 - - 13,424
Issuance of common stock and
options for employee and
director compensation - - 258,333 26 178,374 - - 178,400
Amortization of deferred
compensation - - - - - - 75,137 75,137
Dividends on preferred stock - - - - (78,000) - - (78,000)
Issuance of common stock and
options for accrued preferred
stock dividends and related
interest - - 245,964 25 101,211 - - 101,236
Net loss - - - - - (1,307,476) - (1,307,476)
----- ----- ---------- ------- ----------- ------------ ----------- -----------
Balance at April 30, 1999 - - 14,135,073 1,414 28,948,201 (32,296,872) - (3,347,257)
Private placements of common and
preferred stock 9,346 93 23,167,017 2,317 2,639,940 - - 2,642,350
Exercise of stock options - - 20,000 2 7,498 - - 7,500
Issuance of common stock for
services - - 863,450 86 201,723 - - 201,809
Issuance of common stock and
stock options for director
compensation - - 25,000 3 5,076 - - 5,079
Issuance of common stock for
accrued preferred stock
dividends and related interest - - 225,714 22 70,514 - - 70,536
Note conversion - - 20,000 2 9,998 - - 10,000
Dividends on preferred stock - - - - (78,000) - - (78,000)
Net loss and comprehensive loss - - - - - (2,256,997) - (2,256,997)
----- ----- ---------- ------- ----------- ------------ ----------- -----------
Balance at April 30, 2000 9,346 93 38,456,254 3,846 31,804,950 (34,553,869) - (2,744,980)
Exercise of stock options - - 25,000 2 3,248 - - 3,250
Dividends on preferred stock - - - - (78,000) - - (78,000)
Net income and comprehensive - - - - - 1,065,877 - 1,065,877
----- ----- ---------- ------- ----------- ------------ ----------- -----------
Balance at April 30, 2001 9,346 $ 93 38,481,254 $ 3,848 $31,730,198 $(33,487,992) $ - $(1,753,853)
===== ===== ========== ======= =========== ============= =========== ============
See notes to consolidated financial statements.
40
WINDSWEPT ENVIRONMENTAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE FISCAL YEARS ENDED APRIL 30, 2001, 2000 AND 1999
2001 2000 1999
-------------- -------------- --------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 1,065,877 $ (2,256,997) (1,307,476)
Adjustments to reconcile net income (loss) to net cash
(used in) provided by operating activities:
Depreciation and amortization 796,526 868,412 929,633
Provision for doubtful accounts 115,415 208,342 (66,858)
Issuance of common stock and stock options for director
compensation - 5,079 178,400
Compensation related to officer options and redeemable common
stock 328,080 102,167 -
Issuance of common stock for dividends and related interest
on redeemable preferred stock - 70,536 101,236
Issuance of common stock and stock options for services - 201,809 480,176
Obligations of unconsolidated subsidiary - 13,895 -
Changes in operating assets and liabilities:
Accounts receivable (2,164,282) (1,339,313) 335,177
Due from officer - 100,000 -
Inventories 28,335 (38,531) 31,646
Costs and estimated earnings in excess of billings on
uncompleted contracts (741,715) 6,171 (101,648)
Prepaid and other current assets (849) 49,392 (29,605)
Other assets 40,633 84,190 5,118
Accounts payable and accrued expenses (40,006) (425,325) 137,963
Payroll and sales tax payable (173,612) (10,309) (52,394)
Income taxes payable 536,678 191,439 -
Other current liabilities (51,201) 36,756 -
Billings in excess of costs and estimated earnings in
uncompleted contracts 123,757 76,854 (40,000)
------------- ------------- -------------
NET CASH (USED IN) PROVIDED BY OPERATING ACTIVITIES (136,364) (2,055,433) 601,368
------------- ------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of fixed assets (381,729) (275,417) (379,367)
Loans to officer - - (100,000)
Collection of notes receivable - 152,895 73,029
------------- ------------- -------------
NET CASH USED IN INVESTING ACTIVITIES (381,729) (122,522) (406,338)
------------- ------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments to factor, net - - (1,505,968)
Proceeds of long-term debt - 79,704 1,123,199
Principal payments of long-term debt (135,629) (1,080,780) (1,110,936)
(Repayment) proceeds from revolving bank line, net - (1,200,596) 1,200,596
Proceeds from private placements of stock - 2,642,351 130,000
Proceeds from loans payable 450,000 500,000 -
Proceeds from notes due affiliate - 2,000,000 -
Dividends paid on redeemable preferred stock - - (19,500)
Proceeds from exercise of stock options 3,250 7,500 -
------------- ------------- -------------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES 317,621 2,948,179 (182,609)
------------- ------------- -------------
NET (DECREASE) INCREASE IN CASH (200,472) 770,224 12,421
CASH - BEGINNING OF PERIOD 816,560 46,336 33,915
------------- ------------- -------------
CASH - END OF PERIOD $ 616,088 $ 816,560 $ 46,336
============= ============= =============
Cash paid during the period for :
Interest $ 138,125 $ 752,424 $ 937,830
============= ============= =============
Taxes $ 20,494 $ - $ -
============= ============= =============
Non cash financing activities:
Issuance of redeemable preferred stock dividend $ 78,000 $ 78,000 $ 78,000
============= ============= =============
Conversion of 10% note to 20,000 shares of common stock $ - $ 10,000 $ 10,000
============= ============= =============
See notes to consolidated financial statements
41
WINDSWEPT ENVIRONMENTAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE FISCAL YEARS ENDED APRIL 30, 2001, 2000 AND 1999
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NATURE OF BUSINESS
Windswept Environmental Group, Inc. and its subsidiaries (the
"Company") provides a broad range of environmental services through
vertically integrated businesses in the areas of hazardous waste
remediation, asbestos removal, mold removal, lead clean-up, emergency
spill response and laboratory testing and training. In providing a
turnkey environmental solution, the Company also provides demolition,
renovation and other general construction services. The Company
provides these services to a diversified customer base located
primarily in the Northeastern United States.
BASIS OF PRESENTATION
The accompanying consolidated financial statements include the accounts
of Windswept Environmental Group, Inc. and its subsidiaries, except for
a wholly-owned laboratory testing subsidiary which is in process of
liquidation through formal bankruptcy proceedings, and is accounted for
by the equity method. All intercompany accounts and transactions have
been eliminated in consolidation.
USE OF ESTIMATES
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the reported
amounts of assets and liabilities, revenues and expenses as well as the
disclosure of contingent assets and liabilities at the date of the
financial statements. Actual results could differ from those estimates.
REVENUE RECOGNITION
Revenue derived from services provided to customers over periods of
less than one month is recognized at the completion of the related
contracts.
Revenue from firm fixed price contracts that extend over periods of one
month or more is recognized using the percentage-of-completion method,
measured by the percentage of costs incurred to date compared to
estimated total costs for each contract. Provisions for estimated
losses on uncompleted contracts are made in the period in which such
losses are determined. Changes in job performance, job conditions,
estimated profitability, the effect of contract penalty provisions and
final contract settlements may result in revisions to estimates of
costs and income and are recognized in the period in which the
revisions are determined.
Revenues from time and material contracts that extend over a period of
more than one month are recognized as services are performed.
INVENTORIES
Inventories consist of materials and supplies utilized on the Company's
remediation projects and are recorded at the lower of cost (first-in,
first-out) or market.
PROPERTY AND EQUIPMENT
Property and equipment, consisting of machinery and equipment, office
furniture and equipment, trucks and vehicles, and leasehold
improvements, are stated at cost. Depreciation is recorded on the
straight-line method over the estimated useful lives of the assets.
Leasehold improvements are amortized over the lesser of the term of the
related lease or the estimated useful lives of the improvements. The
estimated useful lives of the related assets are generally three to ten
years.
42
ALLOWANCE FOR DOUBTFUL ACCOUNTS
The Company establishes an allowance for accounts receivable based upon
factors such as the credit risk of specific customers, historical
trends and other information.
The activity within the allowance for doubtful accounts for the fiscal
years ended April 30, 2001, 2000 and 1999 is as follows:
Fiscal Year Ended
---------------------------------------------------
April 30, April 30, April 30,
2001 2000 1999
-------------- ------------ --------------
Allowance for Doubtful Accounts:
Balance, beginning of period $ 266,042 $ 100,000 $ 280,000
Charged to costs and expenses 295,858 166,253 (58,860)
Deductions (217,320) (211) (144,665)
Recoveries 36,877 - 23,525
---------- ---------- ----------
Balance, end of period $ 381,457 $ 266,042 $ 100,000
========== ========== ==========
GOODWILL
The excess of the purchase price and related acquisition costs over the
fair market value of the net assets of the business acquired is
amortized on a straight line basis over ten years. Long-lived assets,
such as goodwill and property and equipment, are evaluated for
impairment when events or changes in circumstances indicate that the
carrying amount of the assets may not be recoverable through the
estimated undiscounted future cash flows from the use of these assets.
There was no impairment of long-lived assets in fiscal 2001, 2000 or
1999. Goodwill amortization charged against earnings was $9,468, $9,393
and $9,468 in fiscal 2001, 2000 and 1999, respectively.
INCOME (LOSS) PER SHARE
The basic net income (loss) per share is computed using weighted
average number of common shares outstanding for the applicable period.
The diluted net income (loss) per share is computed using the weighted
average number of common shares plus common equivalent shares
outstanding, except if the effect on the per share amounts of including
equivalents would be anti-dilutive.
INCOME TAXES
Deferred income taxes result from timing differences arising between
financial and income tax reporting due to the deductibility of certain
expenses in different periods for financial reporting and income tax
purposes. A valuation allowance is provided against net deferred tax
assets unless, in managements' judgment, it is more likely than not
that such deferred tax asset will be realized.
The Company files a consolidated Federal tax return. Accordingly,
Federal income taxes are provided on the taxable income, if any, of the
consolidated group. State income taxes are provided on a separate
company basis, if and when taxable income, after utilizing available
carry forward losses, exceeds certain levels.
DEBT ISSUANCE COSTS
The costs related to the issuance of the convertible notes (See Notes 2
and 8) totaling $203,168, have been capitalized and are included in
other assets. Debt issue costs are amortized using the straight-line
method over the term of the related debt. Amortization of debt issuance
costs was $40,634, $41,825 and $30,588 during the fiscal 2001, 2000 and
1999, respectively.
STOCK OPTION PLANS
The Company follows Statement of Financial Accounting Standards No.
123, "Accounting for Stock-Based
43
Compensation" ("SFAS 123"). SFAS 123 requires a fair value-based method
of accounting for stock compensation plans. As permitted by SFAS 123,
the Company has chosen to adopt the disclosure requirements of SFAS
123, and continue to record stock compensation in accordance with
Accounting Principles Board Opinion No. 25, "Accounting for Stock
Issued to Employees" ("APB 25"). Under APB 25, charges are made to
earnings in accounting for stock options granted to employees when the
option exercise prices are below the fair market value of common stock
at the grant date.
FAIR VALUE OF FINANCIAL INSTRUMENTS
As of April 30, 2001, the carrying value of cash, accounts receivable,
accounts payable, loans payable and current maturities of long-term
debt approximated fair value because of their short maturity. Based on
a closing market price of the Company's common stock of $.19 at April
30, 2001, and the conversion provisions of the underlying instruments,
the fair value of the Convertible Notes was $5,842,577 and the fair
value of the Series A Redeemable Preferred Stock was $247,000. The
Company believes that an undetermined discount for lack of liquidity
would be appropriate due to the large amount of stock that would be
issuable upon conversion. The fair value of fixed-rate long-term debt,
which approximates the carrying value on the financial statements, is
estimated using discounted cash flow analysis based on the Company's
incremental borrowing rates for similar types of borrowing
arrangements.
SEGMENT REPORTING
During fiscal 1999, the Company adopted Statement of Financial
Accounting Standards No. 131, "Disclosures about Segments of an
Enterprise and Related Information", which establishes standards for
the way that public enterprises report information about operating
segments in financial statements. It also establishes disclosure
standards regarding products and services, geographic areas and major
customers. The Company's operations are conducted in a single segment -
environmental services.
NEW ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 133,
"Accounting for Derivative Instruments and Hedging Activities". SFAS
No. 133 is effective for all fiscal years beginning after June 15,
2000. SFAS No. 133, as amended and interpreted, establishes accounting
and reporting standards for derivative instruments, including certain
derivative instruments embedded in other contracts, and for hedging
activities. All derivatives, whether designated in hedging
relationships or not, will be required to be recorded on the balance
sheet at fair value. If the derivative is designated in a fair value
hedge, the changes in the fair value of the derivative and the hedged
item will be recognized in earnings. If the derivative is designated in
a cash-flow hedge, changes in the fair value of the derivative will be
recorded in other comprehensive income and will be recognized in the
income statement when the hedged item affects earnings. SFAS No. 133
defines new requirements for designation and documentation of hedging
relationships as well as ongoing effectiveness assessments in order to
use hedge accounting. For a derivative that does not qualify as a
hedge, changes in fair value will be recognized in earnings. The
adoption of SFAS No. 133 is not expected to have a significant impact
on the Company's financial statements.
In June 2001, the FASB issued SFAS No. 141, "Business Combinations".
SFAS No. 141 applies prospectively to all business combinations
initiated after June 30, 2001 and to all business combinations
accounted using the purchase method for which the date of acquisition
is July 1, 2001, or later. This statement requires all business
combinations to be accounted for using one method, the purchase method.
Under previously existing accounting rules, business combinations were
accounted for using one of two methods, the pooling-of-interests method
or the purchase method. The adoption of SFAS No. 141 is not expected
to have a significant impact on the Company's financial statements.
In June 2001, the FASB issued SFAS No. 142, "Goodwill and Other
Intangible Assets". SFAS No. 142 addresses financial accounting and
reporting for acquired goodwill and other intangible assets. Under
SFAS No. 142, goodwill and some intangible assets will no longer be
amortized, but rather reviewed for impairment on a periodic basis.
The provisions of this Statement are required to be applied starting
with fiscal years beginning after December 15, 2001. This Statement is
required to be applied at the beginning of the Company's fiscal year
and to be applied to all goodwill and other intangible assets
recognized in its financial statements at that date. Impairment
loses for goodwill and certain intangible assets that arise due
44
to the initial application of this Statement are to be reported as
resulting from a change in accounting principle. Goodwill and
intangible assets acquired after June 30, 2001, will be subject
immediately to the provisions of this Statement. The adoption of SFAS
No. 142 is not expected to have a material impact on the Company's
financial statements.
RECLASSIFICATION
Certain prior year balances have been reclassified to conform with
current year classifications.
2. SALE OF CONTROLLING INTEREST AND REFINANCING
On October 26, 1999, the Board of Directors of the Company created a
class of 50,000 shares of preferred stock, par value $.01 per share,
designated as the Series B Convertible Preferred Stock (the "Series B
Preferred"). Each share of Series B Preferred has a liquidation
preference of $79.04, is initially convertible into 1,000 shares of
Common Stock, par value $.0001 per share, of the Company (the "Common
Stock") (subject to adjustment) and is entitled to cast 1,000 votes,
together with the Common Stock and the Series A Convertible Preferred
Stock, par value $.01 per share (the "Series A Preferred") (see Note
9), on any matters subject to a vote of the holders of the Common
Stock.
On October 29, 1999, the Company entered into a subscription agreement
with Spotless Plastics (USA), Inc. ("Spotless"), a Delaware
corporation, pursuant to which the Company sold to Windswept
Acquisition Corporation ("Acquisition Corp."), a Delaware corporation
and a wholly-owned subsidiary of Spotless, 22,284,683 shares (the
"Acquisition Corp. Common Shares") of Common Stock, and 9,346 shares of
Series B Preferred, for an aggregate subscription price of $2,500,000
or $.07904 per share of Common Stock and $79.04 per share of Series B
Preferred. As of April 30, 2001, the Acquisition Corp. Common Shares
represented approximately 58% of the outstanding Common Stock and the
Acquisition Corp. Common Shares and Series B Preferred shares
collectively represented approximately 66% of the voting power of the
outstanding securities of the Company.
In addition, the Company and Trade-Winds Environmental Restoration,
Inc. ("Trade-Winds"), North Atlantic Laboratories, Inc. ("NAL") and New
York Testing Laboratories, Inc. ("NYTL"), each of which is a
wholly-owned subsidiary of the Company, as joint and several obligors
(collectively, the "Obligors"), borrowed $2,000,000 from Spotless. This
borrowing is evidenced by a secured convertible promissory note, dated
October 29, 1999 (the "Note"). Outstanding principal under the Note
bears interest at a rate equal to the London Interbank Offering Rate
("LIBOR") plus an additional 1% and is payable monthly. The Note
matures on October 29, 2004, unless Spotless elects to defer repayment
until October 29, 2005. The outstanding principal amount and all
accrued and unpaid interest under the Note is convertible, at the
option of Spotless, in whole or in part, at any time, into shares of
Common Stock at the rate of one share of Common Stock for every $.07904
of principal and accrued interest so converted (or, in the event that
certain approvals have not been obtained at the time of conversion,
into shares of Series B Preferred at the rate of one share of Series B
Preferred for every $79.04 of principal and accrued interest so
converted). In connection with the Note, each of the Obligors granted
to Spotless a security interest in all of their respective assets
pursuant to a Security Agreement dated October 29, 1999.
As a result of the conversion features of the Series B Preferred and
the Note, as of April 30, 2001, if Acquisition Corp. were to convert
its Series B Preferred shares into Common Stock and Spotless were to
convert all of the outstanding $2 million principal amount and $208,671
accrued and unpaid interest under the Note into Common Stock,
Acquisition Corp. and Spotless would collectively own 59,575,103
shares, or approximately 79%, of the then issued and outstanding shares
of Common Stock.
See Note 16 for information regarding related party transactions.
3. LIQUIDITY AND BUSINESS RISKS
As of April 30, 2001, 2000 and 1999, the Company had a stockholders'
deficit of $1,753,853, $2,744,980 and $3,347,257, respectively, and an
accumulated deficit of $33,487,992, $34,553,869 and $32,296,872,
respectively. The Company has financed its operations to date primarily
through issuance of debt and equity securities. As of April 30, 2001,
2000 and 1999, the Company had $616,088, $816,560 and $46,336 in cash.
As of April 30, 2001, the Company had working capital of $552,850. As
of April 30, 2000 and
45
1999, the Company had a working capital deficit of $473,619 and
$3,741,523, respectively. In addition, as of April 30, 2001, the
Company was in arrears with respect to preferred stock dividends plus
interest of approximately $137,000. The Company also has $680,000 of
convertible notes that will be due in full on March 15, 2002. In the
opinion of management, the Company will have sufficient working capital
to fund current operations and repay the convertible notes and any
related accrued interest on March 15, 2002, however, market conditions
and their effect on the Company's liquidity may restrict the Company's
use of cash which may result in the Company not making payment on the
convertible notes when they become due on March 15, 2002. In the event
that sufficient positive cash flow from operations is not generated,
the Company may need to seek additional financing from Spotless to
satisfy the convertible notes when they become due, although Spotless
is under no legal obligation to provide such funds. The Company
currently has no credit facility for additional borrowing.
While the Company's working capital has improved during fiscal 2001,
primarily through borrowings from Spotless and cash generated from a
large mold remediation project, the above factors raise substantial
doubt as to the Company's ability to continue as a going concern. As
indicated in the report of the Company's Independent Auditors, the
Company's financial statements have been prepared assuming that the
Company will continue as a going concern. The financial statements do
not include any adjustments that might result from the outcome of this
uncertainty.
During fiscal 2001, in order to address cash flow and operational
concerns, the Company borrowed and repaid an additional $1,000,000 from
Spotless. In fiscal 2001, the Company also borrowed an additional
$450,000 from Spotless on an existing short-term note payable. The
increased borrowings from Spotless and the cash generated by a large
mold remediation project significantly improved the Company's
liquidity. However, management believes the Company will require
positive cash flow from operations to meet its working capital needs
over the next twelve months. In the event that positive cash flow from
operations is not generated, the Company may be required to seek
additional financing to meet its working capital needs. The Company
currently has no credit facility for additional borrowing. Management
continues to pursue additional funding sources. The Company anticipates
revenue growth in new and existing service areas and continues to bid
on large projects, though there can be no assurance that any of the
Company's bids will be accepted. The Company is striving to improve its
gross margin and control its selling, general and administrative
expenses. There can be no assurance, however, that changes in the
Company's plans or other events affecting the Company's operations will
not result in accelerated or unexpected cash requirements, or that it
will be successful in achieving positive cash flow from operations or
obtaining additional financing. The Company's future cash requirements
are expected to depend on numerous factors, including, but not limited
to: (i) the ability to obtain environmental or related construction
contracts, (ii) the ability to generate positive cash flow from
operations, and the extent thereof, (iii) the ability to raise
additional capital or obtain additional financing, and (iv) economic
conditions.
During fiscal 2000, in order to address the Company's cash flow and
operational concerns, management pursued various options including, but
not limited to, refinancing the Company's credit facility and securing
capital through an equity infusion. On October 29, 1999, the Company
consummated an equity and debt financing transaction with Spotless that
significantly improved the Company's liquidity and cash position. The
Company received $2,500,000 in exchange for equity and $2,000,000 of
debt financing which enabled it to repay in full its outstanding
balance under a credit facility and reduce certain outstanding vendor
balances. The Spotless Transaction significantly reduced the Company's
cost of capital.
In September 1999, the Company borrowed $100,000 from Spotless
Enterprises, Inc., an affiliate of Spotless. The borrowing bore
interest at a rate of 6% and was repaid with accrued interest in
November 1999. In March and April 2000, the Company borrowed a total of
$500,000 from Spotless for working capital requirements. During fiscal
2001, the Company borrowed $1,450,000 from Spotless for working capital
requirements. The Company repaid $1,000,000 plus interest to Spotless
in fiscal 2001. A balance of $950,000 in loans from Spotless was
outstanding as of April 30, 2001. These borrowings bear interest at
LIBOR plus 1 percent. As of April 30, 2001, interest of $18,156 was
accrued on these borrowings. In June 2001, the Company borrowed an
additional $250,000 from Spotless for working capital requirements.
46
4. PROPERTY AND EQUIPMENT
Property and equipment as of April 30, 2001 and 2000 consists of the
following:
2001 2000
------------- ------------
Machinery and equipment $3,648,841 $3,517,111
Office furniture and equipment 437,276 397,117
Vehicles 1,142,628 973,027
Leasehold improvements 526,282 520,355
---- ------- -----------
5,755,027 5,407,610
Less: accumulated depreciation and amortization 4,410,428 3,657,682
- --------- - ---------
$1,344,599 $1,749,928
Depreciation and amortization expense was $787,059, $859,020 and
$845,028 in fiscal 2001, 2000 and 1999, respectively.
The Company is obligated under various leases for machinery and
equipment that expire at various dates through 2002. The carrying
amount of machinery and equipment under capital leases included in
property and equipment was as follows as of April 30, 2001 and 2000:
2001 2000
------------ ------------
Machinery and equipment $693,553 $693,553
Less: accumulated depreciation 601,426 494,804
--------- --------
$92,127 $198,749
5. ACCRUED EXPENSES
Accrued expenses at April 30, 2001 and 2000 consist of the following:
2001 2000
------------- -------------
Workers compensation premiums and
insurance adjustments $ 710,535 $ 594,117
Interest and preferred stock dividends 468,721 196,338
Litigation reserves (See Note 17) 410,394 359,044
Professional fees 134,000 125,000
Other 143,285 177,398
---------- ----------
$1,866,934 $1,451,897
=========== ==========
6. OBLIGATION OF UNCONSOLIDATED SUBSIDIARY, NET
In January 1996, Laboratory Testing Services, Inc. ("LTS"), a
wholly-owned subsidiary of the Company filed a bankruptcy petition in
the United States Bankruptcy Court in the Eastern District of New York.
Subsequently, this case was converted to a Chapter 7 Bankruptcy
proceeding. Concurrent with the bankruptcy petition, the operations of
LTS were ceased. Management believes that the Company's financial
condition and results of operations will not be materially affected by
this proceeding (see Note 17). The Company accrued $210,007 related to
this proceeding as of April 30, 2001 and 2000.
47
7. LONG TERM DEBT
Long-term debt consists of the following:
2001 2000
------------- --------------
Notes payable related to the purchase of vehicles
and equipment $ 40,448 $ 135,431
Obligations under capital leases 55,080 95,727
-------- ---------
95,528 231,158
Less: current portion 68,691 136,153
-------- ---------
Long term debt $26,837 $95,005
======== =========
The notes payable and capital lease obligations are secured by the
underlying vehicles and equipment.
Repayments of long-term debt as of April 30, 2001 are as follows:
Fiscal Years Ending April 30,
------------------------------------
2002 $68,691
2003 26,837
-------
$95,528
=======
8. CONVERTIBLE NOTES
On October 29, 1999, in connection with the sale of controlling
interest of the Company (see Note 2), the Company and all of its
subsidiaries (the "Obligors") borrowed $2,000,000 from Spotless
pursuant to a secured convertible promissory note (the "Note") that
bears interest at a rate equal to LIBOR plus 1 percent. The Note
matures on October 29, 2004, and is convertible into either 25,304,352
shares of Common Stock or 25,305 shares of Series B Preferred.
Additionally, Spotless has the right to defer the maturity date of the
Note for one year. At April 30, 2001, the common shares issuable upon
conversion of the Note would represent approximately 40% of the
Company's issued and outstanding common shares. In connection with the
Note, each of the Obligors granted Spotless a security interest in all
of their respective assets pursuant to a Security Agreement dated
October 29, 1999. Direct issuance costs of $29,512 related to the Note
are capitalized and included in other assets in the accompanying
consolidated balance sheet.
In March 1997, the Company completed a private offering of 10%
convertible notes to several accredited investors. The Company received
gross proceeds of $700,000 and incurred direct issuance costs of
$173,656 related to the sale of the notes. The 10% convertible notes
are payable in full in March 2002. Interest is payable semi-annually.
The notes may be converted, at the option of the holder, at any time
prior to maturity at a conversion price of $.50 per share. Holders of
convertible notes chose to convert $10,000 of notes into 20,000 shares
of common stock in both fiscal 2000 and fiscal 1999.
In fiscal 1997, a director of the Company loaned the Company $100,000
and was issued a 12% convertible promissory note providing for, at the
option of the note holder, the conversion of the principal and accrued
and unpaid interest at the rate of $.25 per share of Common Stock. On
December 31, 1997, the conversion price was adjusted to $0.15 per share
of Common Stock. As of April 30, 2001, an aggregate of 1,146,780 shares
of Common Stock are issuable upon conversion of the principal and
accrued and unpaid interest of this convertible promissory note. The
Company has included interest due of $72,017 in accrued expenses as of
April 30, 2001 (see Note 16).
9. REDEEMABLE CONVERTIBLE PREFERRED STOCK
In connection with the acquisition of NAL in February 1997, the Company
issued 1,300,000 shares of redeemable convertible preferred stock
("RCPS") having a liquidation value of $1.00 per share plus accumulated
dividends. The dividend rate is the greater of (i) 6%, or (ii) the
inflation rate (as defined) plus 2.5%. After February 1998, the RCPS
holders can convert their preferred shares to common at a ratio of one
share of preferred to one share of common stock, subject to adjustment.
The RCPS is redeemable by the Company commencing in February 2002.
48
In March 1998, the holders of the RCPS exercised their right to elect
one member to the Board and vote together with common stockholders on
the election of additional Directors and all other Company matters.
Each share of RCPS had ten (10) votes until February 1999 and has one
(1) vote per share thereafter.
Pursuant to the terms of the RCPS, the Company is prohibited, without
first obtaining the approval of at least a majority of the holders of
the RCPS, from (i) altering or changing the rights, preferences,
privileges or restrictions of shares of RCPS, (ii) increasing the
authorized number of shares or adjusting the par value of RCPS, (iii)
issuing any shares of capital stock ranking senior as to dividends or
rights upon liquidation or dissolution to the RCPS or (iv) issuing any
common stock at a price below the conversion price, as defined, to any
officer, director or 10% shareholder.
The liquidation value of the RCPS at April 30, 2001 and 2000 was
$1,435,379 and $1,349,628, respectively.
10. REDEEMABLE COMMON STOCK
On October 29, 1999, the Company entered into an Amended and Restated
Employment Agreement (the "Employment Agreement") with Michael
O'Reilly, the Company's President and Chief Executive Officer. The
Employment Agreement is for a term of five years, calls for a base
salary of $260,000 per year and a bonus equal to 2.5 percent of The
Company's pre-tax income (as that term is defined in the Employment
Agreement). Upon the termination of Mr. O'Reilly's employment by the
Company (other than termination for cause, death or disability or his
resignation without good reason, as defined in the Employment
Agreement), Mr. O'Reilly will be entitled to sell, in a single
transaction, any or all of shares of Common Stock held by him as of
October 29, 1999 and all shares of Common Stock underlying options to
purchase shares of Common Stock of the Company held by him as of
October 29, 1999 (collectively the "O'Reilly Shares"), to the extent
vested and exercisable, back to the Company (or pursuant to a letter
agreement, dated October 29, 1999, between Michael O'Reilly and
Spotless (the "Letter Agreement"), to Spotless to the extent that the
Company's capital would be impaired by such a purchase) at a mutually
agreeable price. If the parties are not able to agree upon a purchase
price, then the purchase price will be determined based upon a
procedure using the appraised value of the Company at the time such
obligation to purchase arises.
Similarly, pursuant to the Letter Agreement, Michael O'Reilly has the
right, upon receipt of notice that Spotless and any of its affiliates
has acquired a beneficial ownership of more than 75 percent of the
outstanding shares of Common Stock (on a fully diluted basis), to
require Spotless to purchase, in a single transaction, the O'Reilly
Shares. The purchase price applicable to any such purchase shall be at
a price mutually agreed upon. If the parties are not able to agree upon
a purchase price, then the purchase price will be determined based upon
a procedure using the appraised value of the Company at the time such
obligation to purchase arises. As a condition precedent to requiring
the Company or Spotless, as the case may be, to repurchase the O'Reilly
Shares, Michael O'Reilly must forfeit options to purchase 2,811,595
shares of Common Stock which are exercisable on or after October 29,
2006; provided, that the exercisability of such option will be
accelerated if and to the extent that Spotless converts or exchanges
its Note.
The Company recorded $328,080 and $102,167 of compensation expense
relating to the redeemable common stock in fiscal 2001 and 2000,
respectively.
49
11. INCOME TAXES
The provision for income taxes is comprised of the following for fiscal
2001 and 2000:
2001 2000
------------- -------------
Current:
Federal $ 385,000 $ -
State 161,000 -
--------- ----------
546,000 -
--------- ----------
Deferred:
Federal - -
State - -
--------- ----------
- -
--------- ----------
$ 546,000 $ -
========= ==========
No provision for income taxes was recorded during the year ended April
30, 2000 due to net losses incurred. At April 30, 2001, the Company has
net operating loss carryforwards for tax purposes of approximately
$1,260,000 that expire through 2020.
The Company's effective tax rate in fiscal 2001 and 2000 differs from
the federal statutory rate as a result of the following:
2001 2000
------------- ------------
Statutory United States federal tax rate 34.0 % 34.0 %
State income taxes, net of federal benefit 8.2 % 0.0 %
Valuation allowance (8.4)% (34.0)%
Other 0.1% 0.0 %
------- -------
33.9% 0.0 %
======= =======
Deferred tax assets consist of the following components at April 30,
2001 and 2000:
2001 2000
------------- --------------
Net operating loss carryforwards $ 428,000 $ 633,000
Reserves 268,000 218,000
Deferred compensation 181,000 42,000
Other, net 137,000 136,000
---------- ----------
1,014,000 1,029,000
Less: Valuation allowance 1,014,000 1,029,000
---------- ----------
Net deferred tax asset $ - $ -
========== ==========
At April 30, 2001 and 2000, the Company has provided a full valuation
allowance against the gross deferred tax asset. Such valuation
allowance was recorded because management does not believe that the
utilization of the tax benefits from operating losses and other
temporary differences are "more likely than not" to be realized.
12. OTHER INCOME
Included in other income at April 30, 2001 and 2000 is approximately
$47,000 and $100,000, respectively, of cost savings attributable to
negotiations with vendors to reduce trade payables.
50
13. COMMITMENTS
Future minimum lease payments under noncancellable operating leases for
office space and equipment as of April 30, 2001 are as follows:
Fiscal Years Ending April 30,
------------------------------------------
2002 $ 359,119
2003 336,334
2004 349,788
2005 363,779
2006 378,330
2007 393,464
----------
Total future minimum lease payments $2,180,814
==========
Total rental expense was $353,236, $358,477 and $304,961 for the fiscal
years ended April 30, 2001, 2000 and 1999, respectively.
On October 29, 1999, the Company entered into the Employment Agreement
with Michael O'Reilly (see Note 10).
14. STOCK ISSUANCES
During the fiscal year ended April 30, 2001, the Company did not issue
any shares of common or preferred stock except for the issuance of
Common Stock related to the exercise of stock options.
During the fiscal year ended April 30, 2000, the Company issued shares
of common stock in the following transactions: (i) 22,284,683 shares in
a private placements with Spotless (see Note 2) valued at $1,761,381,
(ii) 882,334 shares in a private placement valued at $142,350, (iii)
25,000 shares valued at $5,079 as compensation for directors, (iv)
863,450 shares valued at $201,809 as consideration for various legal
and other services, (v) 225,714 shares valued at $70,536 for accrued
dividends and interest on the redeemable convertible preferred stock ,
(vi) 20,000 shares upon the conversion of a convertible note in the
principal amount of $10,000 and (vii) 20,000 shares upon the exercise
of stock options with an aggregate exercise price of $7,500.
During the year ended April 30, 2000, the Company issued 9,346 shares
of Series B Preferred in a private placement with Spotless (see Note 2)
valued at $738,619.
During the year ended April 30, 1999, the Company issued shares of
common stock in the following transactions: (i) 735,000 shares in
several private placements for proceeds of $130,000, (ii) 1,284,528
shares valued at $466,752 as consideration for various legal and
consulting services, (iii) 258,333 shares valued at $98,400 as
compensation for directors and certain employee services provided, (iv)
38,874 shares valued at $13,424 to settle legal obligations, (v)
245,964 shares valued at $92,236 for accrued dividends and interest on
the redeemable convertible preferred stock and (vi) 20,000 shares upon
the conversion of a convertible note in the principal amount of
$10,000.
All of the foregoing stock issuances were valued at fair market value
at the time of issuance.
15. STOCK OPTIONS
As of April 30, 2001, 1,791,764 shares of common stock were reserved
for issuance upon the exercise of options then outstanding and
5,208,236 shares were available for future grant under the Company's
three stock option plans, under which options may be granted to key
employees, directors, and other persons rendering services to the
Company. Options which are designated as "incentive stock options"
under the option plans may be granted with an exercise price not less
than the fair market value of the underlying shares at the date of the
grant and are subject to certain quantity and other limitations
specified in Section 422 of the Internal Revenue Code. Options which
are not intended to qualify as incentive stock options
51
may be granted at any price, but not less than the par value of the
underlying shares, and without restriction as to amount. The options
and the underlying shares are subject to adjustment in accordance with
the terms of the plans in the event of stock dividends,
recapitalizations and similar transactions. The right to exercise the
options generally vests in increments over periods of up to five years
from the date of grant or the date of commencement of the grantee's
employment with the Company, up to a maximum term of ten years for all
options granted.
The summary of the status of the Company's outstanding stock options
for the fiscal years ended April 30, 2001, 2000 and 1999 is presented
below:
Employees Weighted Weighted
and Average Non-Employee Average
Directors Exercise Options Exercise
Options Price Price
------------- ------------- ------------ -------------
Outstanding at April 30, 1998 4,068,662 $.20 318,100 $.32
Granted 1,600,000 $.34 30,000 $.41
Forfeited (838,306) $.22 (100,000) $.50
------------- ------------- ------------ -------------
Outstanding at April 30, 1999 4,830,356 $.24 248,100 $.21
Granted 8,467,716 $.08 - -
Canceled (80,000) $.38 - -
Forfeited (64,313) $.33 - -
Exercised (20,000) $.38 - -
------------- ------------- ------------ -------------
Outstanding at April 30, 2000 13,133,759 $.15 248,100 $.21
Granted 100,000 $.11 - -
Forfeited (44,360) $.36 - -
Exercised (25,000) $.13 - -
------------- ------------- ------------ -------------
Outstanding at April 30, 2001 13,164,399 $.13 248,100 $.21
============= ============= ============ =============
Options exercisable at April 30, 1999 3,363,194 $.24 248,100 $.21
============= ============= ============ =============
Options exercisable at April 30, 2000 7,067,781 $.19 248,100 $.21
============= ============= ============ =============
Options exercisable at April 30, 2001 8,409,352 $.16 248,100 $.21
============= ============= ============ =============
Weighted
Number Average
Range of Outstanding Remaining Weighted Number Weighted
Exercise at April 30, Contractual Average Exercisable at Average
Prices 2001 Life (years) Exercise Price April 30,2001 Exercise Price
$.01 2,000,000 3.50 $.01 2,000,000 $.01
$.08 5,486,309 2.96 $.08 891,571 $.08
$.11 - $.19 1,136,221 2.98 $.17 1,136,221 $.17
$.22 3,481,560 1.37 $.22 3,481,560 $.22
$.31 - $.40 1,060,309 2.44 $.34 900,000 $.34
In October 1999, in connection with the change in control of the
Company, pursuant to the provisions of Mr. O'Reilly's Employment
Agreement, dated November 1, 1996, his option to purchase 2,000,000
shares of common stock at $0.01 per share, previously granted,
vested. In connection with the sale of controlling interest to
Spotless on October 29, 1999, Mr. O'Reilly was granted an option to
purchase 2,674,714 shares of Common Stock at $.07904 per share that
becomes exercisable, to the extent of one third of the option grant,
on each of the first, second and third anniversaries of October 29,
1999. Mr. O'Reilly was also granted an option to purchase 2,811,595
shares of Common Stock at $.07904 per share that becomes exercisable
upon the earlier of (i) the conversion of the Note dated October 29,
1999 issued to Spotless (See Note 2) or (ii) October 29, 2006. The
Company recognized compensation expense in the financial statements
for the difference between the fair market price and the exercise
price of these options in the amount of $138,000 in fiscal 2000.
On August 18, 1998, the Company granted 850,000 non-qualified stock
options to non-employee directors and officers of the Company at
$0.34 per share. The options vest immediately and expire
52
August 17, 2003. The Company recorded compensation expense of $80,000
in connection with the options granted to non-employee directors.
On October 28, 1998, in connection with a payment of accrued interest
on unpaid preferred stock dividends, the Company issued 30,000
options at an exercise price of $0.41 per share. These options are
exercisable commencing on the date of grant and expire on October 27,
2003.
In June 1999, the Company issued a warrant to purchase 200,000 shares
of Common Stock at an exercise price of $0.20 per share in exchange
for services rendered. The warrants expire in 2004.
The Company applies APB Opinion No. 25 and related interpretations in
accounting for its plans. Accordingly, no compensation cost has been
recognized for its stock option plans. If the Company had elected to
recognize compensation expense based upon the fair value at the grant
date for awards under these plans consistent with the methodology
prescribed by SFAS 123, the Company's net income (loss) and net
income (loss) per share would be $43,635, $(2,893,722) and
$(1,521,309) or $.00 , $.(12) and $.(12) in fiscal 2001, 2000 and
1999, respectively. These pro forma amounts may not be representative
of future disclosures since the estimated fair value of stock options
is amortized to expense over the vesting period for purposes of
future pro forma disclosures, and additional options may be granted
in future years. The fair value of these options was estimated at the
date of grant using the Black-Scholes option-pricing model with the
following weighted average assumptions for fiscal 2001, 2000 and
1999; expected volatility of 173% for 2001, 145% for 2000 and 46% for
1999, no dividend yield, and expected life of two to five years for
the fiscal 2001, 2000 and 1999 options. The weighted average risk
free interest rate was 5.8% for fiscal 2001, 6.0% for fiscal 2000 and
5.3% for fiscal 1999.
16. RELATED PARTY TRANSACTIONS
In fiscal 2000, the Company amended Michael O'Reilly's Employment
Agreement (see Note 10).
On October 29, 1999, the Company consummated an equity and refinancing
transaction with Spotless (see Note 2).
In September 1999, the Company borrowed $100,000 from Spotless
Enterprises, Inc., an affiliate of Spotless. The borrowing bore
interest at a rate of 6% and was repaid with accrued interest in
November 1999. In March and April 2000, the Company borrowed a total of
$500,000 from Spotless for working capital requirements. During fiscal
2001, the Company borrowed $1,450,000 from Spotless for working capital
requirements. The Company repaid $1,000,000 plus interest to Spotless
in fiscal 2001. A balance of $950,000 in loans from Spotless was
outstanding as of April 30, 2001. These borrowings bear interest at
LIBOR plus 1 percent. As of April 30, 2001, interest of $18,156 was
accrued on these borrowings.
In June 2001, the Company borrowed an additional $250,000 from Spotless
for working capital requirements.
During fiscal 1999, Michael O'Reilly, the Company's President and Chief
Executive Officer, received an aggregate of $50,000 and 133,333 shares
of Common Stock, the fair value of which shares was $50,000 on the date
of grant, representing a bonus based upon a calculation of net profits
at the end of the second quarter of fiscal 1999. Due to subsequent
losses incurred by the Company in the third and fourth quarters, the
bonus was due back to the Company and, accordingly, recorded as a loan
receivable from Mr. O'Reilly. In fiscal 2000, the Company forgave the
loan.
On December 16, 1998, the Company entered into an operating lease
arrangement with Michael O'Reilly. Under the arrangement, the Company
leases a forty-two foot custom Topaz boat for a period of two years,
for annual rental payments of $60,000. The leasing arrangement was
necessitated by a Marine Assistance Contract the Company entered into
with Keyspan Energy Corporation covering the period January 1, 1999
through December 31, 2000. The arrangement provides the Company with
its largest floating vessel capable of handling specialty equipment and
facilitating an offshore support crew. The lease carries a one-year
renewal option that was exercised on January 1, 2001 through December
31, 2001. The Company is responsible for all taxes, insurance and
repairs.
In February 1997, the Company issued 650,000 shares of RCPS to a
director of the Company and an
53
additional 650,000 shares of RCPS to a partner of such director (see
Note 9). In fiscal 2001, no dividends or interest was paid. Dividends
and interest of $35,268 and $60,368 were paid to this director in
fiscal 2000 and 1999, respectively. At April 30, 2001 and 2000, accrued
expenses included $127,452 and $24,814, respectively, of dividend and
interest arrearages owed to this director. The Company's subsidiaries
sold approximately $261,000 and $8,000 of services to a company of
which the director is a principal in fiscal 2000 and 1999,
respectively.
In fiscal 1997, a director of the Company loaned the Company $100,000
and was issued a 12% convertible promissory note providing for, at the
option of the note holder, the conversion of the principal and accrued
and unpaid interest at the rate of $.25 per share of Common Stock. On
December 31, 1997, the conversion price was adjusted to $0.15 per share
of Common Stock. As of April 30, 2001, an aggregate of 1,146,780 shares
of Common Stock are issuable upon conversion of the principal and
accrued and unpaid interest of this convertible promissory note. The
Company has included interest of $72,017 and $52,653 in accrued
expenses as of April 30, 2001 and 2000, respectively. This director was
also an officer and director of a company that sold approximately
$3,118 and $189,778 of material and supplies to the Company that were
used on remediation projects during fiscal 2000 and 1999, respectively.
In fiscal 1998, the Company entered into a contract for $1,100,000 to
construct a dwelling for a partner in the Company's former law firm.
Subsequent change orders have brought the contract value to
approximately $2,111,000. The contract was completed in fiscal 2001 and
the Company recognized losses under this contract of approximately
$400,000. In fiscal 1999, the Company entered in a contract for
approximately $170,000 to construct an employee's dwelling. The
contract was completed in fiscal 2001 and the Company recognized losses
under this contract of approximately $153,000. In fiscal 2001, the
Company performed work of approximately $50,000 on a restaurant owned
by the Company's CEO. The Company recorded a loss of approximately
$14,000 on this work.
The Company paid an outside director $40,477 and $42,400 for consulting
services in fiscal 2001 and each of fiscal 2000 and fiscal 1999.
17. CONTINGENCIES
LITIGATION
On November 22, 1999, the Securities and Exchange Commission ("SEC")
accepted the Company's settlement offer in its "Order Instituting
Public Administrative Proceedings, Making Findings, Imposing Remedial
Sanctions and Issuing Cease-and-Desist Order" (the "Order"). Under the
terms of the Order, the Company neither admitted nor denied any
allegations and did not incur any monetary fines in connection with an
investigation of it by the SEC that stemmed from the prior convictions
of two of the Company's former officers for violations of, among other
things, the federal securities laws. The Order requires the Company to
develop and institute certain policies, procedures and manuals that
will improve its corporate governance, including the adoption of an
audit committee charter, a formal conflict of interest policy and a
formal employee handbook. The Order also requires the Company to obtain
a secure off site storage facility to store its backup data files and
system software and to make certain reporting disclosures. The Company
has implemented such policies, procedures and manuals, obtained an
offsite storage facility and made such disclosures.
In November 1997, Trade-Winds was named as a third party defendant in
an action commenced in the New York State Supreme Court, County of New
York, under the caption NICOLAI GRIB AND VLADISLAV KAZAROV V.
TRADE-WINDS ENVIRONMENTAL RESTORATION, INC. AND GULF INSURANCE COMPANY,
by a class of plaintiffs claiming to be entitled to additional wages
while working for a subcontractor of Trade-Winds. The amount of the
claim has not been specified. The Company believes that a verdict in
favor of the plaintiff will not have a material adverse effect on the
Company's consolidated financial statements.
The Company is a party to other litigation matters and claims which are
normal in the course of its operations, and while the results of such
litigation and claims cannot be predicted with certainty, management
believes that the final outcome of such matters will not have a
materially adverse effect on the Company's consolidated financial
position, results of operations and cash flows.
In January 1996, Laboratory Testing Services, Inc. ("LTS"), a
wholly-owned subsidiary of the Company,
54
filed a Chapter 11 petition in United States Bankruptcy Court in the
Eastern District of New York. Subsequently, this case was converted to
a Chapter 7 Bankruptcy proceeding. LTS is in the process of liquidation
through these bankruptcy proceedings. Management believes that the
Company's financial condition and results of operations will not be
materially affected by this proceeding.
CONTRACTS
In fiscal 2001, the Company signed a contract to perform various tasks
at a site in Long Island New York. As a result of the discovery of
unusual subsoil conditions at the site, estimated contract completion
costs have been revised. Due to uncertainties inherent in the
estimation process, it is at least reasonably possible that completion
costs for the contract will be further revised in the near-term. The
Company is in the process of negotiating additional contract change
orders to address this condition. At this time, management believes
that the contract will not incur a loss at completion.
18. MAJOR CUSTOMERS AND CREDIT CONCENTRATIONS
During the years ended April 30, 2001, 2000 and 1999, the Company
recognized net sales to significant customers as set forth below:
Major Customers 2001 2000 1999
--------------- ---- ---- ----
Customer A 35% 0% 0%
Customer B 11% 15% 10%
Customer C 5% 12% 1%
At April 30, 2001, 21 percent and 19 percent, respectively, of the
Company's accounts receivable related to two customers. At April 30,
2000, 20 percent of the Company's accounts receivable related to one
customer.
The Company is highly dependent upon the continuing contributions of
key managerial, technical and marketing personnel. Employees may
voluntarily terminate their employment with the Company at any time,
and competition for qualified technical personnel, in particular, is
intense. The loss of the services of any of its key managerial,
technical or marketing personnel, especially Michael O'Reilly, its
chief executive officer, could materially adversely affect the
Company's business, financial condition and results of operations.
The Company contracts with a limited number of customers that are
involved in a wide range of industries. A small number of customers may
therefore be responsible for a substantial portion of revenues at any
time. While management assesses the credit risk associated with each
proposed customer prior to the execution of a definitive contract, no
assurances can be given that such assessments will be correct and that
the Company will not incur substantial, noncollectible accounts
receivable.
The Company is dependent upon its relationships and contracts with two
customers that accounted for approximately 46% of its revenues in
fiscal 2001. While the Company intends to increase the amount of work
performed for entities other than these two customers, it expects to
continue to be significantly dependent on these customers and/or the
incurrence of large projects for the foreseeable future.
55
19. NET INCOME (LOSS) PER SHARE
The following table sets forth the computation of the basic and diluted
net income (loss) per share:
Fiscal Year Ended
--------------------------------------------------------
April 30, April 30, April 30,
2001 2000 1999
-------------- -------------- ---------------
Numerator:
Net income (loss) attributable
to common shareholders $ 987,877 $(2,334,997) $(1,385,476)
Add interest and amortization on
convertible notes 120,924 - -
-------------- -------------- ---------------
$ 1,108,801 $(2,334,997) $(1,385,476)
============== ============== ===============
Denominator:
Share reconciliation:
Shares used for basic income
(loss) per share 38,459,953 26,927,083 13,064,314
Effect of dilutive items:
Stock options 2,467,323 - -
Convertible securities 35,317,019 - -
-------------- -------------- ---------------
Shares used for dilutive income
(loss) per share 76,244,295 26,927,083 13,064,314
============== ============== ===============
Net income (loss) per share:
Basic $ .03 $ (.09) $ (.11)
============== ============== ===============
Diluted $ .01 $ (.09) $ (.11)
============== ============== ===============
20. UNAUDITED QUARTERLY DATA
Summarized unaudited quarterly financial data for fiscal 2001 and 2000
are as follows:
Fiscal 2001 First Second Third Fourth
----------- Quarter Quarter Quarter Quarter
------------ ------------- -------------- -------------
Total revenues $2,818,802 $3,500,952 $10,121,216 $5,581,796
Net income (loss) attributable to
common shareholders (616,903) (62,093) 1,186,627 480,246
Net income (loss) per common
share - basic (.02) (.00) .03 .01
Net income (loss) per common
share - diluted $(.02) $(.00) $.02 $.01
Fiscal 2000 First Second Third Fourth
----------- Quarter Quarter Quarter Quarter
------------ ------------- -------------- -------------
------------ ------------- -------------- -------------
Total revenues $2,561,010 $3,420,785 $2,493,450 $4,369,920
Net income (loss) attributable to
common shareholders (59,295) (1,670,540) (514,821) (90,341)
Net income (loss) per common
share - basic (.00) (.10) (.01) (.00)
Net income (loss) per common
share - diluted $(.00) $(.10) $(.01) $(.00)
56
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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: July 27, 2001
WINDSWEPT ENVIRONMENTAL GROUP, INC.
By: /s/ Michael O'Reilly
MICHAEL O'REILLY, President and Chief
Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended,
this Annual Report on Form 10-K has been signed on July 27, 2001 by the
following persons, in the capacities indicated.
By: /s/ Michael O'Reilly
Michael O'Reilly, President, Chief
Executive Officer and Director
(Principal Executive Officer)
By: /s/ Charles L. Kelly, Jr.
Charles L. Kelly, Jr.,
Chief Financial Officer and Director
(Principal Financial Officer)
By: /s/ Joseph Murphy
Joseph Murphy, Vice President-Finance
& Administration (Principal Accounting
Officer)
By: /s/ Samuel Sadove
Samuel Sadove, Director
By: /s/Peter A. Wilson
Peter A. Wilson, Chairman
By: /s/ Kevin Phillips
Dr. Kevin Phillips, Director
By: /s/Anthony Towell
Anthony Towell, Director
By:
--------------------------------------
Brian S. Blythe, Director
By:
--------------------------------------
Ronald B. Evans, Director
By:
--------------------------------------
John J. Bongiorno, Director
57
EXHIBIT INDEX
3.01 Composite of Certificate of Incorporation of the Company. (Incorporated
by reference to Exhibit 3.1 of the Company's Quarterly Report on Form
10-Q for the quarter ended January 31, 2001, filed with the SEC on
March 19, 2001).
3.02 By-laws of the Company. (Incorporated by reference to Exhibit 3.3 of
the Company's Registration Statement (No. 33-14370 N.Y.) filed with
the SEC on June 1, 1987).
4.01 Specimen Common Stock Certificate. (Incorporated by reference to
Exhibit 4.01 of the Company's Annual Report on Form 10-KSB for the
fiscal year ended April 30, 1998, filed with the SEC on August 13,
1998).
4.02 Specimen Series B Preferred Stock Certificate. (Incorporated by
reference to Exhibit 4.1 of the Company's Current Report on Form 8-K
(Date of Report: October 29, 1999) filed with the SEC on November 12,
1999).
10.01 Form of Convertible Note Agreement. (Incorporated by reference to
Exhibit 4.04 of the Company's Annual Report on Form 10-KSB for the
fiscal year ended April 30, 1997, filed with the SEC on September 29,
1997).
10.02 Convertible Demand Note, dated October 15, 1996, between Trade-Winds
Environmental Restoration, Inc. and Anthony P. Towell, together with
related agreements.
10.03 Option Certificate for 2,000,000 stock options issued to Michael
O'Reilly. (Incorporated by reference to Exhibit 4.05 of the Company's
Annual Report on Form 10-KSB for the fiscal year ended April 30, 1997,
filed with the SEC on September 29, 1997).
10.04 1997 Incentive Plan. (Incorporated by reference to Exhibit 4.1 of the
Company's Registration Statement on Form S-8 (No. 333-22491) filed
with the SEC on February 27, 1997).
10.05 1998 Stock Incentive Plan. (Incorporated by reference to Exhibit 4.1
of the Company's Registration Statement on Form S-8 (No. 333-61905)
filed with the SEC on August 20, 1998).
10.06 Loan and Security Agreement dated June 1, 1998 between Business
Alliance Capital Corporation and the Company and Subsidiaries.
(Incorporated by reference to Exhibit 10.13 of the Company's Annual
Report on Form 10-KSB for the fiscal year ended April 30, 1998, filed
with the SEC on August 13, 1998).
10.07 Individual Guaranty of Michael O'Reilly to Business Alliance Capital
Corporation. (Incorporated by reference to Exhibit 10.14 of the
Company's Annual Report on Form 10-KSB for the fiscal year ended April
30, 1998, filed with the SEC on August 13, 1998).
10.08 Revolving Credit Master Promissory Note for $1,850,000 between the
Company and Business Alliance Capital Corporation. (Incorporated by
reference to Exhibit 10.15 of the Company's Annual Report on Form
10-KSB for the fiscal year ended April 30, 1998, filed with the SEC on
August 13, 1998).
10.09 Term Loan for $595,000 between the Company and Business Alliance
Capital Corporation. (Incorporated by reference to Exhibit 10.16 of the
Company's Annual Report on Form 10-KSB for the fiscal year ended April
30, 1998, filed with the SEC on August 13, 1998).
10.10 Origination Fee Amendment dated August 1, 1998 between the Company and
Business Alliance Capital Corporation. (Incorporated by reference to
Exhibit 10.17 of the Company's Annual Report on Form 10-KSB for the
fiscal year ended April 30, 1998, filed with the SEC on August 13,
1998).
58
10.11 Loan Agreement dated September 16, 1999 between Spotless Enterprises
Inc. and the Company (Incorporated by reference to Exhibit 10.12 of the
Company's Annual Report on Form 10-KSB for the year ended April 30,
2000, filed with the SEC on August 14, 2000).
10.12 Subscription Agreement dated October 29, 1999 between the Company and
Spotless Plastics (USA), Inc. (Incorporated by reference to Exhibit
10.1 of the Company's Current Report on Form 8-K (Date of Report:
October 29, 1999) filed with the SEC on November 12, 1999).
10.13 Convertible Promissory Note dated October 29, 1999 issued by the
Company to Spotless Plastics (USA), Inc. (Incorporated by reference to
Exhibit 10.2 of the Company's Current Report on Form 8-K (Date of
Report: October 29, 1999) filed with the SEC on November 12, 1999).
10.14 Form of Security Agreement dated October 29, 1999 between each of the
Company, Trade-Winds Environmental Remediation, Inc., North Atlantic
Laboratories, Inc. and New York Testing, Inc. and Spotless Plastics
(USA), Inc. (Incorporated by reference to Exhibit 10.3 of the
Company's Current Report on Form 8-K (Date of Report: October 29,
1999) filed with the SEC on November 12, 1999).
10.15 Amended and Restated Employment Agreement dated October 29, 1999
between the Company and Michael O'Reilly. (Incorporated by reference to
Exhibit 10.4 of the Company's Current Report on Form 8-K (Date of
Report: October 29, 1999) filed with the SEC on November 12, 1999).
10.16 Stock Option Agreement dated October 29, 1999 between the Company and
Michael O'Reilly. (Incorporated by reference to Exhibit 10.5 of the
Company's Current Report on Form 8-K (Date of Report: October 29, 1999)
filed with the SEC on November 12, 1999).
10.17 Stock Option Agreement dated October 29, 1999 between the Company and
Michael O'Reilly relating to options vesting upon exercise of the
convertible note. (Incorporated by reference to Exhibit 10.6 of the
Company's Current Report on Form 8-K (Date of Report: October 29, 1999)
filed with the SEC on November 12, 1999).
10.18 Letter Agreement dated October 29, 1999 between Michael O'Reilly and
Spotless Plastics (USA), Inc. (Incorporated by reference to Exhibit
10.7 of the Company's Current Report on Form 8-K (Date of Report:
October 29, 1999) filed with the SEC on November 12, 1999).
10.19 Agreement, dated as of November 3, 2000, by and between Turner
Construction Company and Trade-Winds Environmental Restoration Inc., as
amended (Incorporated by reference to Exhibit 10.1 of the Company's
Quarterly Report on Form 10-Q for the quarter ended October 31, 2000,
filed with the SEC on December 15, 2001).
10.20 Loan Agreement, dated November 4, 2000, by and between the Company and
Spotless Plastics (USA), Inc. (Incorporated by reference to Exhibit
10.2 of the Company's Quarterly Report on Form 10-Q for the quarter
ended October 31, 2000, filed with the SEC on December 15, 2001).
10.21 Line of Credit Note, dated November 4, 2000, by and between the Company
and Spotless Plastics (USA), Inc. (Incorporated by reference to Exhibit
10.3 of the Company's Quarterly Report on Form 10-Q for the quarter
ended October 31, 2000, filed with the SEC on December 15, 2001).
10.22 Security Agreement, dated November 4, 2000, by and between the Company
and Spotless Plastics (USA), Inc. (Incorporated by reference to Exhibit
10.4 of the Company's Quarterly Report on Form 10-Q for the quarter
ended October 31, 2000, filed with the SEC on December 15, 2001).
59
10.23 2001 Equity Incentive Plan (Incorporated by reference to Exhibit 10.1
of the Company's Quarterly Report on Form 10-Q for the quarter ended
January 31, 2001, filed with the SEC on March 19, 2001).
16.1 Letter dated December 7, 1999 from BDO Seidman LLP to the Securities
and Exchange Commission. (Incorporated by reference to Exhibit 16 of
the Company's Current Report on Form 8-K (Date of Report: December 1,
1999) filed with the SEC on December 8, 1999).
21.01 Subsidiaries of the Company.
23.01 Consent of Deloitte & Touche LLP.
23.02 Consent of BDO Seidman LLP.
60