FORM 10-K
U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
Annual Report Under Section 13 or 15 (d)
of the Securities Exchange Act of 1934
For the fiscal year ended July 2, 2002
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, $.0001 par value per share
(Title of Class)
Check whether the registrant (1) has filed all reports required to be filed by
Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding
12 months (or for such shorter periods that the registrant was required to file
such reports), and (2) has been subject to such filing requirements for the past
90 days. Yes X No
--- ---
Check if disclosure of delinquent filers in response to Item 405 of Regulation
S-K is not contained in this form, and no disclosure will be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this form 10-K or any amendment to this
form 10-K. [X]
Based upon the closing sale price as reported on the OTC Electronic Bulletin
Board of the NASD on September 10, 2002 ($.18 per share), the aggregate market
value of the Common Stock held by non-affiliates of the registrant was
approximately $2,905,826.
As of September 10, 2002, the issuer had 77,936,358 shares of Common Stock
outstanding.
DOCUMENTS INCORPORATED BY REFERENCE:
Portions of the definitive proxy statement to be delivered to stockholders in
connection with the Annual Meeting of Stockholders to be held in 2002 are
incorporated into Part III of this Form 10-K.
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:
- the market acceptance and amount of sales of the Company's services,
- the Company's success in increasing revenues and reducing expenses,
- the frequency and magnitude of environmental disasters or disruptions
resulting in the need for the types of services the Company provides,
- the extent of the enactment, enforcement and strict interpretations
of laws relating to environmental remediation,
- the competitive environment within the industries in which the
Company operates,
- the Company's ability to raise additional capital,
- the Company's ability to attract and retain qualified personnel, and
- 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") 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. 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. On February 24, 1997, the Company acquired NAL, a
certified environmental training, laboratory testing and consulting services
company.
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
2
"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 had the
equivalent voting power of 1,000 shares of Common Stock. Each share of Series B
Preferred was convertible into 1,000 shares of Common Stock.
In addition, the Company, Trade-Winds and NAL, 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 was evidenced by
a secured convertible promissory note, dated October 29, 1999 (the "Note").
Outstanding principal under the Note bore interest at a rate equal to the London
Interbank Offering Rate ("LIBOR") plus an additional 1% and was payable monthly.
The Note had a maturity date of October 29, 2004, unless Spotless elected to
defer repayment until October 29, 2005. The outstanding principal amount and all
accrued and unpaid interest under the Note was 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. The transaction
with Spotless described above is hereafter referred to as the "Spotless
Transaction".
On November 16, 2001, Acquisition Corp. exercised its right to convert all 9,346
shares of the Company's Series B preferred stock. As a result of such conversion
and in accordance with the terms of the Company's Series B preferred stock,
Acquisition Corp. was issued 10,495,174 shares of the Company's common stock.
Such amount included 9,346,000 shares as a result of the 1,000:1 conversion
ratio, and an additional 1,149,174 shares that were calculated based upon a
formula that took into consideration the value of the Series B preferred stock
on the date of issuance and the number days elapsed from the date of the
issuance of the Series B preferred stock through the conversion date. The
issuance of the additional shares of common stock was recorded as a dividend of
$390,719. The dividend represents the difference between the fair market value
of the Company's common stock issued on November 16, 2001 and the fair market
value of the Company's common stock at the date the Series B preferred stock was
issued.
On November 16, 2001, Spotless exercised its right to convert all principal and
accrued and unpaid interest on the $2,000,000 Note. As a result of the
conversion of the Note and accrued and unpaid interest, the Company issued an
additional 28,555,250 shares of its common stock to Acquisition Corp. in full
satisfaction of the Note and the related accrued and unpaid interest.
After giving effect to these conversions, Spotless currently beneficially owns
61,335,107 shares, or approximately 79%, of the Company's issued and outstanding
shares of common stock.
In August 2001, the Company changed its fiscal year from the twelve months ended
April 30 to a 52-53 week fiscal year ending on the Tuesday nearest June 30. Each
fiscal year shall generally be comprised of four 13-week quarters, each
containing two four-week months followed by one five-week month. As a result of
such change in fiscal year, in October 2001, the Company filed a Transition
Report on Form 10-K for the period from May 1, 2001 through July 3, 2001 (the
"transition period"). Revenues, net loss and basic and diluted earnings per
common share in the transition period were $2,322,511, ($733,303) and $(.02),
respectively.
OPERATIONS
In order to position itself into stronger and more profitable markets, the
Company has evolved 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:
- Emergency Response and Catastrophe Restoration
- Site Restoration
- Mold Contamination Remediation
- Natural Resource/Wetlands Restoration/Wildlife Rehabilitation
- Forensic Investigation
3
- Asbestos Abatement
- Fire and Flood Restoration
- Demolition
- Lead Abatement
- Underground Storage Tank Removal
- Soil Remediation
- Oil Spill Response - Land and Marine
- Hazardous Waste/Biohazard Clean-up
- Chemical Spill Response
- Duct Cleaning
- Indoor Air Quality Investigation
- Environmental and Health and Safety Training
- Environmental Testing
- Environmental Consulting Services
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 500 (TM) 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, Bank of
New York, State Farm Insurance Company, Travelers Insurance 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 24% 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 fiscal year ended July 2, 2002, the period from May 1, 2001
through July 3, 2001 and the fiscal years ended April 30, 2001 and 2000,
revenues from insurance customers represented approximately 9%, 8%, 12% and 15%,
respectively, of total revenues. During the fiscal year ended July 2, 2002, the
period from May 1, 2001 through July 3, 2001 and the fiscal years ended April
30, 2001 and 2000 the Company recognized net sales to significant customers as
set forth below:
May 1,
2001
through
July 2, July 3, April 30, April 30,
Major Customers 2002 2001 2001 2000
-------------------------- ----------- ---------- ---------- -----------
Customer A 0% 13% 36% 0%
Customer B 34% 0% 0% 0%
Customer C 0% 5% 11% 15%
Customer D 7% 14% 5% 12%
While the Company intends to increase the amount of work performed for entities
other than these customers, it
4
expects to continue to be dependent on a few customers and/or the
incurrence of large projects. 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 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,
unless the revenues generated from any such customer, including the Bank of New
York (listed as "Customer B" in the foregoing table), were not replaced by
revenues generated by other customers. 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, 58 vehicles
(including vacuum trucks, earth moving equipment, supply trucks and drilling
vehicles) and 31 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 four certified divers. The Company
employs 3 wildlife rehabilitators, 7 certified asbestos handlers, 27 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 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 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
5
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, 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.
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.
6
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 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.
7
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 relationships with various sureties and the issuance of
bonds is dependent on the sureties' 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. No assurance
can be given that the Company will be able to obtain the required surety bonds.
Any failure of the Company to obtain these bonds could materially and adversely
affect certain components of the Company's operations.
EMPLOYEES/TECHNICAL STAFF
As of August 31, 2002, the Company employed a core group of approximately 101
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 62 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 has an agreement that expires in November 2002 with several
local unions that supply labor for bonded contract work. 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 3 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
8
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 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.
THE COMPANY IS DEPENDENT ON THE INCURRENCE OF LARGE PROJECTS FROM A SMALL NUMBER
OF CUSTOMERS. Because of the nature of the Company's services, the Company must
generate most of its revenues from new customers. The Company cannot anticipate
whether it will be able to replace such revenues with revenues from new projects
in future periods. The inability of the Company to replace the revenues
generated as a result of large projects performed in the fiscal year ended July
2, 2002, particularly the catastrophe response projects in the vicinity of the
World Trade Center following the terrorist attack on September 11, 2001, which
accounted for approximately 52% of the Company's revenues during such fiscal
year, would have a materially adverse impact on the Company.
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.
9
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 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
10
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.
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
11
approximately 79% of the Company's Common Stock and holds approximately 77%
of its voting power. 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"). 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 September 10, 2002, the Company had 77,936,358 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. Future loses could adversely affect the market value
of the Common Stock. The Company incurred net losses of approximately $720,000
for the period from May 1, 2001 through July 3, 2001, approximately $2.3 million
and approximately $1.3 million in the fiscal years ended April 30, 2000 and
1999, respectively. As of July 2, 2002, the Company had an accumulated deficit
of $30,713,428. 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
$3.5 million and approximately $1.1 million in the fiscal years ended July 2,
2002 and April 30, 2001, respectively, it may not incur profits at any time in
the 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:
- future announcements of new competing technologies and procedures;
- changing policies and regulations of the federal state, and local
governments;
- fluctuations in the Company's financial results;
- liquidity of the market for the Company's securities;
- public perception of the Company and its entry into new markets; and
- 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.
12
ITEM 2. DESCRIPTION OF PROPERTY
- --------------------------------
The Company holds a five-year lease expiring in 2007 for its 50,000 square foot
facility located at 100 Sweeneydale Avenue, Bay Shore, New York 11706. The lease
provides for a current annual rent of $338,576 and is subject to a 4% annual
escalation. 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 October 12, 2001, Trade-Winds commenced an action in the New York State
Supreme Court, County of New York, claiming that Trade-Winds is entitled to
approximately $1,060,000 of contractual billings relating to a large mold
remediation project. In addition to denying an obligation to pay the amount
claimed, the defendants have asserted a counterclaim against Trade-Winds for
$389,439. The parties engaged in court-ordered mediation without successful
resolution and are currently engaged in discovery. The court has ordered that
the record of this action be sealed.
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 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 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 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 statements.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
- -----------------------------------------------------------
None
13
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 closing sale prices, for
the fiscal year ended July 2, 2002, the period from May 1, 2001 through July 3,
2001 and for the fiscal years ended April 30, 2001 and 2000, 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 YEAR ENDED APRIL 30, 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 YEAR ENDED APRIL 30, 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
TRANSITION PERIOD FROM MAY 1, 2001 THROUGH JULY 3, 2001
May 1, 2001
through HIGH LOW
---- ---
July 3, 2001 $.21 $.16
FISCAL YEAR ENDED JULY 2, 2002
Quarter Ended HIGH LOW
------------- ---- ---
October 2, 2001 $.29 $.16
January 1, 2002 .57 .24
April 2, 2002 .44 .23
July 2, 2002 $.29 $.19
The Company had approximately 722 common stockholders of record as of September
10, 2002. There have been no dividends declared or paid on the Common Stock
during the fiscal year ended July 2, 2002, the period from May 1, 2001 through
July 3, 2001 or in the fiscal years ended April 30, 2001 and 2000 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.
(b) Recent Sales of Unregistered Securities
There were no sales or issuances of the Company's unregistered equity securities
occurring during the fiscal year ended July 2, 2002, except to the extent
previously disclosed in the Company's Quarterly Reports on Form 10-Q.
14
ITEM 6. SELECTED FINANCIAL DATA
- -------------------------------
Period from
Fiscal Year May 1, 2001 Fiscal Years Ended April 30,
Ended through ----------------------------------------------------------
July 2, 2002 July 3, 2001 2001 2000 1999 1998
---------------------------------------------------------------------------------------
Consolidated Operations Data:
Revenues $32,903,740 $ 2,322,511 $22,022,766 $12,845,165 $ 13,926,812 $ 11,968,774
Net income (loss) 3,494,867 (720,303) 1,065,877 (2,256,997) (1,307,476) (5,609,795)
Net income (loss) per common
share-basic 0.05 (0.02) 0.03 (0.09) (0.11) (0.55)
Net income (loss) per common $ 0.04 $ (0.02) $ 0.01 $ (0.09) $ (0.11) $ (0.55)
share-diluted
Weighted average common shares outstanding:
Basic 63,300,953 38,481,254 38,459,953 26,927,083 13,064,314 10,404,111
Diluted 85,455,580 38,481,254 76,244,295 26,927,083 13,064,314 10,404,111
Consolidated Balance Sheet
Data:
Total assets $10,212,538 $ 8,192,568 $ 8,806,398 $ 6,699,204 $ 5,745,122 $ 6,354,689
Long-term debt and other 1,005,574 400,308 457,084 197,172 198,732 264,604
Convertible notes 100,000 2,780,000 2,780,000 2,780,000 790,000 800,000
Redeemable convertible preferred stock 1,300,000 1,300,000 1,300,000 1,300,000 1,300,000 1,300,000
Stockholders' equity (deficit) $ 3,372,383 $(2,487,156) $(1,753,853) $(2,744,980) $ (3,347,257) $ (2,936,730)
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, as more fully discussed in "Part I - Introductory
Comment - Forward Looking Statements" in this Annual Report on Form 10-K.
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.
CRITICAL ACCOUNTING POLICIES
Management's discussion and analysis of its financial position and results of
operations are based upon the Company's audited consolidated financial
statements, which have been prepared in accordance with accounting principles
generally accepted in the United States of America. The preparation of these
audited consolidated financial statements requires management to make estimates
and judgments that affect the reported amounts of assets, liabilities, revenues
and expenses and related disclosure of contingent assets and liabilities. Actual
results could differ from those estimates. Management believes that the critical
accounting policies and areas that require the most significant judgments and
estimates to be used in the preparation of the audited consolidated financial
15
statements are accounting for contracts, allowance for doubtful accounts and the
valuation allowance related to deferred tax assets.
Contract Accounting - 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.
Allowance for Doubtful Accounts - The Company maintains an allowance for
doubtful trade accounts receivable for estimated losses resulting from the
inability of its customers to make required payments. In determining
collectibility, the Company reviews available customer financial information
including public filings and credit reports and will also consult legal counsel
to assist in determining collectibility. When it is deemed probable that a
specific customer account is uncollectible, that balance is included in the
reserve calculation. Actual results could differ from these estimates under
different assumptions.
Deferred Tax Asset Valuation Allowance - The Company records a valuation
allowance to reduce its deferred tax assets to the amount that is more likely
than not to be realized. Due to the Company's prior history of losses, the
Company has recorded a full valuation allowance against its net deferred tax
assets as of July 2, 2002. The Company currently provides for income taxes only
to the extent that it expects to pay cash taxes for current income. Should the
Company be profitable in the future at levels which cause management to conclude
that is more likely than not that it will realize all or a portion of the
deferred tax assets, the Company would record the estimated net realizable value
of the deferred tax assets at that time and would then provide for income taxes
at its combined federal and state effective rates.
RESULTS OF OPERATIONS
Fiscal Year Ended July 2, 2002 Compared to Fiscal Year Ended April 30, 2001
- ---------------------------------------------------------------------------
Revenues
- --------
Revenues increased to $32,903,740 in the fiscal year ended July 2, 2002 ("fiscal
2002") compared to $22,022,766 in the fiscal year ended April 30, 2001 ("fiscal
2001"). This increase of $10,880,974, or 49.4%, was primarily the result of
revenue increases in the Company's Trade-Winds subsidiary of $11,791,033 to
$32,231,680 in fiscal 2002 from $20,440,647 in fiscal 2001. This increase was
partially offset by revenue decreases in the Company's NAL subsidiary of
$173,550 to $672,060 in fiscal 2002 from $845,610 in fiscal 2001. In addition,
revenues decreased by $736,509 due to the discontinuance of unprofitable
operations of another of the Company's subsidiaries.
The increase in Trade-Winds revenue of $11,791,033 was primarily attributable to
catastrophe response projects in the vicinity of the World Trade Center
terrorist attack that accounted for revenues of $17,002,928, remediation
services of $1,820,158 performed at the site of a chemical explosion, mold
remediation services of $1,801,428 performed in Houston, Texas as a result of
tropical storm flooding and increases in emergency spill response and insurance
related projects of $582,917 and $349,073, respectively. Due to the nature of
the Company's business, it cannot anticipate whether it will be able to replace
revenues from large projects with revenues from new projects in future periods.
The increases were partially offset by decreases of $7,511,729 in a large
non-recurring mold remediation project, environmental remediation projects of
$1,508,966, oil tank projects of $470,269 and hazardous waste disposal services
of $205,651. The decrease in NAL revenues of $173,550 is primarily attributable
to the loss of key management and other personnel.
Gross Profit/Cost of Revenues
- -----------------------------
Cost of revenues increased to $20,755,677 in fiscal 2002 compared to $15,336,191
in fiscal 2001. This increase of $5,419,486, or 35.3%, was primarily the result
of the costs incurred on catastrophe response projects in the vicinity of the
World Trade Center. Direct field labor, other job related costs, union benefits,
equipment rental, workers
16
compensation insurance, subcontractor costs and disposal costs increased
$2,634,137, $712,490, $547,272, $408,263, $375,647, $257,236 and $176,054,
respectively, as a result of the World Trade Center work. In addition, project
manager salaries increased $640,735 due to an increase in the number and
compensation of those employees. These increases were partially offset by a
decrease in materials and supplies of $364,143. 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 63.1% in fiscal 2002 as
compared to 69.6% in fiscal 2001. Accordingly, gross profit as a percentage of
revenues increased to 36.9% in fiscal 2002 from 30.4% in fiscal 2001. Gross
profit in fiscal 2002 was positively impacted by the World Trade Center projects
that generated gross profits of $10,202,000 or 40.0% that was partially offset
by the increase in project manager salaries.
Selling, General and Administrative Expenses
- --------------------------------------------
Selling, general and administrative expenses for fiscal 2002 increased by
$880,342 to $5,346,394 in fiscal 2002 from $4,466,052 in fiscal 2001 and
constituted approximately 16.2% and 20.3% of revenues in fiscal 2002 and 2001,
respectively. The increase was primarily attributable to increases in the
provision for doubtful accounts, marketing expenses, office salaries, sales
salaries and officer salaries of $390,438, $338,129, $66,429, $56,608 and
$56,221, respectively. The increases were partially offset by a decrease in
legal fees, depreciation and bank charges of $120,091, $25,753 and $25,614,
respectively.
Expense Related to Variable Accounting Treatment for Officer Options
- --------------------------------------------------------------------
Under the terms of an 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. The expense related
to variable accounting treatment for officer options increased by $227,732 to
$555,812 in fiscal 2002 from $328,080 in fiscal 2001. This was due to a change
in the market price of the Company's Common Stock. 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 benefit.
Interest Expense
- ----------------
Interest expense decreased by $115,769 in fiscal 2002 to $223,246 from $339,015
in fiscal 2001. The decrease in interest expense was primarily attributable to
lower levels of debt and reductions in the LIBOR rate.
Provision for Income Taxes
- --------------------------
The provision for income taxes reflects an effective rate of 42.1% and 33.9% in
fiscal 2002 and 2001, respectively. The book benefit for taxable losses
generated in prior periods 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 2002 were $3,494,867 and $.05, respectively. This compares to net
income and basic net income attributable to common stockholders per share of
$1,065,877 and $.03, respectively for fiscal 2001.
Period from May 1, 2001 Through July 3, 2001 Compared to Period from May 1, 2000
Through June 30, 2000
- --------------------------------------------------------------------------------
On July 27, 2001, the Board of Directors voted to change the Company's fiscal
year to a 52-53 week fiscal year ending on the Tuesday nearest June 30. Each
fiscal year shall generally be comprised of four 13-week quarters, each
containing two four-week months followed by one five-week month.
17
Unaudited consolidated statement of operations data for the period from May 1,
2000 through June 30, 2000 is as follows:
Revenues $2,003,331
Gross Profit $ 256,794
Provision for income taxes $ -
Net loss $ (653,344)
Net loss per share $ (.02)
Revenues
- --------
Revenues increased to $2,322,511 in the period from May 1, 2001 through July 3,
2001 (the "2001 transition period") compared to $2,003,331 in the period from
May 1, 2000 through June 30, 2000 (unaudited) (the "2000 transition period").
This increase of $319,180, or 15.9%, was primarily the result of revenue
increases in the Company's Trade-Winds subsidiary of $491,174 to $2,211,276 in
the 2001 transition period from $1,720,102 in the 2000 transition period. This
increase was partially offset by revenue decreases of $121,104 to $25,613 in the
2001 transition period from $146,717 in the 2000 transition period resulting
from the discontinuance of unprofitable operations in another of the Company's
subsidiaries.
The increase in Trade-Winds revenue of $491,174 in the 2001 transition period
was primarily attributable to a large mold remediation project that accounted
for revenues of approximately $308,000 and a pond rehabilitation project that
accounted for revenues of approximately $166,000.
Gross Profit (Loss)/Cost of Revenues
- ------------------------------------
Cost of revenues increased to $2,414,195 in the 2001 transition period compared
to $1,746,537 in the 2000 transition period. This increase of $667,658, or
38.2%, was primarily the result of the costs incurred on a pond rehabilitation
project of approximately $343,000, increased field labor costs of approximately
$200,000, due to projects nearing completion at July 3, 2001, increases in
equipment rental costs of approximately $90,000 and increased project manager
salaries of approximately $74,000, due to an increase in the number of project
managers. These increases were partially offset by a decrease in subcontracting
costs of approximately $39,000. 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 104% in the 2001 transition
period as compared to 87.2% in the 2000 transition period. Accordingly, gross
profit as a percentage of revenues decreased to (4.0)% in the 2001 transition
period from 12.8% in the 2000 transition period. The gross loss in the 2001
transition period was primarily attributable to revenue levels that were
insufficient to cover the Company's fixed costs.
Selling, General and Administrative Expenses
- --------------------------------------------
Selling, general and administrative expenses for the 2001 transition period
increased by $118,067 to $780,381 in the 2001 transition period from $662,314 in
the 2000 transition period and constituted approximately 33.6% and 33.1% of
revenues in the 2001 and 2000 transition periods, respectively. The increase was
primarily attributable to an increase in the provision for doubtful accounts of
approximately $189,000 that was partially offset by a decrease in marketing
expenses of approximately $54,000.
Benefit Related to Variable Accounting Treatment for Officer Options
- --------------------------------------------------------------------
Under the terms of an 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. The benefit related
to variable accounting treatment for officer options increased by $264,522 to
($44,189) in the 2001 transition period from $220,333 in the 2000 transition
period. This was due to a change in the market price of the Company's Common
Stock. 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 benefit.
18
Interest Expense
- ----------------
Interest expense decreased by $16,068 in the 2001 transition period to $46,686
from $62,754 in the 2000 transition period. The decrease in interest expense was
primarily attributable to lower levels of debt and reductions in the LIBOR rate.
Other Income
- ------------
Other income increased $118,996 to $154,259 in the 2001 transition period from
$35,263 in the 2000 transition period. The increase was primarily attributable a
gain on the sale of substantially all of an unprofitable subsidiary's fixed
assets in the 2001 transition period.
Provision for Income Taxes
- --------------------------
No income taxes were provided in either the 2001 or 2000 transition periods due
to the incurrence of taxable losses. The book benefit for taxable losses
generated in both periods 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 Loss
- --------
Net loss and basic and diluted net loss attributable to common stockholders per
share for the 2001 transition period were ($720,303) and ($.02), respectively.
This compares to a net loss and basic and diluted net loss attributable to
common stockholders per share of ($653,344) and ($.02), respectively for the
2000 transition period.
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 the
fiscal year ended April 30, 2000 ("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 $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 a subsidiary
of the Company 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.
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 a subsidiary's 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.
19
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, 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 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.
LIQUIDITY AND CAPITAL RESOURCES
As of July 2, 2002, the Company had cash balances of $399,679, working capital
of $4,326,473 and stockholders' equity of $3,372,383. Historically, the Company
has financed its operations to date primarily through issuance of debt and
equity securities, through short-term borrowings from its majority shareholder,
Spotless and through cash generated from operations. In the opinion of
management, the Company expects to have sufficient working capital
20
to fund current operations. However, market conditions and their effect on
the Company's liquidity may restrict the Company's use of cash. In the event
that sufficient positive cash flow from operations is not generated, the Company
may need to seek additional financing from Spotless, although Spotless is under
no legal obligation to provide such funds. The Company currently has no credit
facility for additional borrowing.
After the terrorist attack on the World Trade Center on September 11, 2001, the
demand for the Company's emergency and catastrophe response services increased
dramatically. As a result of that increased demand, the Company recorded
revenues of approximately $17,003,000 for remediation services related to the
attack from September 13, 2001 through July 2, 2002. Approximately $15,200,000
of this revenue has been collected by July 2, 2002. Due to the nature of the
Company's business, it cannot anticipate whether it will be able to replace such
revenues with revenues from new projects in future periods.
As of July 2, 2002, the Company owed Spotless $200,000 on short-term loans to
fund working capital. During fiscal 2002, in order to address the Company's cash
flow and operational concerns and to fund the increased payroll that resulted
from the greater level of work related to the World Trade Center attack, the
Company borrowed $1,750,000 from Spotless. During fiscal 2002, primarily as a
result of cash collected from the World Trade Center projects, the Company
repaid $2,750,000 to Spotless. All current borrowings from Spotless bear
interest at the London Interbank Offering Rate ("LIBOR") plus 1 percent and are
secured by all of the Company's assets. As of July 2, 2002, interest of $647 was
accrued on these borrowings.
On March 15, 2002, the Company repaid $680,000 principal amount of 10%
convertible notes upon their maturity. The repayment was funded through cash
generated from operations and did not require any borrowings. Subsequent to July
2, 2002, the Company repaid $50,000 of a convertible note held by a director of
the Company.
During fiscal 2001, in order to address the Company's cash flow and operational
concerns, the Company borrowed and repaid an additional $1,000,000 from
Spotless. Subsequently in fiscal 2001, the Company also borrowed an additional
$450,000 from Spotless pursuant to 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.
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.
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.
Cash Flow
- ---------
Net cash provided by operating activities was $2,521,922 in fiscal 2002, as
compared to net cash used in operating activities of ($136,364) and ($1,902,538)
in fiscal 2001 and 2000, respectively. Accounts receivable increased $2,275,940
or 37.0% to $8,428,232 in fiscal 2002, reflecting the increase in sales relative
to the projects performed in the vicinity of the World Trade Center attack.
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
21
increased $1,339,313 or 57.0% to $3,688,511 in fiscal 2000, reflecting an
increase in sales during the fourth quarter of fiscal 2000. Accounts payable and
accrued expenses (excluding accrued preferred dividends) increased by $301,190
or 10.1% to $3,268,618 in fiscal 2002 primarily as a result of the additional
expenses incurred on the World Trade Center projects. Accounts payable and
accrued expenses decreased 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 Transaction.
Cash used for capital expenditures was $688,073, $381,729 and $275,417 in fiscal
2002, 2001 and 2000, respectively. During the 2001 transition period, the
Company received $249,878 for the sale of substantially all of the assets of an
unprofitable subsidiary.
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. During
the 2001 transition period, the Company borrowed $250,000 from Spotless for
working capital requirements. During fiscal 2002, in order to address cash flow
and operational concerns and to fund the increased payroll that resulted from
the greater level of work related to the World Trade Center attack, the Company
borrowed $1,750,000 from Spotless. During fiscal 2002, primarily as a result of
cash collected from the World Trade Center projects, the Company repaid
$2,750,000 to Spotless. A $200,000 balance in loans from Spotless was
outstanding as of July 2, 2002. In July 2002, the Company borrowed and
subsequently repaid an additional $125,000 from Spotless for working capital
requirements. On March 15, 2002, the Company repaid $680,000 principal amount of
10% convertible notes upon their maturity. In addition, during fiscal 2002, the
Company paid $214,500 of dividends on Series A Preferred Stock. These payments
were funded through cash generated from operations and did not require any
borrowings. In fiscal 2000, the Company received proceeds of $142,350 from the
sale of Common Stock. The Company received $83,182, $3,250 and $7,500 in
proceeds from the exercise of common stock options in fiscal 2002, 2001 and
2000, respectively.
The table below summarizes aggregate maturities of future minimum lease payments
under noncancelable operating leases as of July 2, 2002:
Total 1 Year 2-3 Years 4-5 Years Thereafter
Operating Leases $1,765,639 $338,576 $718,324 $708,739 $0
EFFECT OF INFLATION
Inflation has not had a material impact on the Company's operations during
fiscal 2002, the 2001 transition period, or during fiscal 2001 and 2000.
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, 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 July 2, 2002, such shares and vested options to purchase shares
aggregated 8,122,071 shares. Each $.01 increase or decrease in market price of
the Company's stock impacts earnings by approximately $81,000.
22
INTEREST RATE SENSITIVITY - The Company's exposure to market risk for changes in
interest rate primarily relates to its debt obligation to Spotless. The interest
rate on the borrowings from Spotless is LIBOR plus 1%. At July 2, 2002, total
debt owed to Spotless was $200,000 with additional accrued interest of $647.
Assuming variable rate debt at July 2, 2002, a one-point change in interest
rates would impact annual net interest payments by approximately $2,000. 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' Report 27
Consolidated Balance Sheets as of July 2, 2002 and July 3, 2001 28
Consolidated Statements of Operations for the fiscal year ended
July 2, 2002, the period from May 1, 2001 through July 3, 2001,
and the fiscal years ended April 30, 2001 and 2000 29
Consolidated Statements of Stockholders' Equity for the fiscal year
ended July 2, 2002, the period from May 1, 2001 through
July 3, 2001 and the fiscal years ended April 30, 2001 and 2000 30
Consolidated Statements of Cash Flows for the fiscal years ended
July 2, 2002, the period from May 1, 2001 through July 3, 2001
and the fiscal years ended April 30, 2001 and 2000 31
Notes to Consolidated Financial Statements 32 to 47
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
- ------------------------------------------------------------------------
None.
PART III
--------
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
- ------------------------------------------------------------
The information under the captions "Director - Nominees", "Principal Occupations
of Directors and Executive Officers", "Directors' Compensation", "Board Meetings
and Committees" and "Section 16(a) Beneficial Ownership Reporting Compliance" in
the Company's definitive Proxy Statement for the Annual Meeting of Stockholders
to be held in 2002 is incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
- --------------------------------
The information under the captions "Executive Compensation", "Option/Stock
Appreciation Rights ("SAR") Grants in Last Fiscal Year", "Aggregated Options/SAR
Exercises in Last Fiscal Year and Fiscal Year-End Option Values", "Employment
Agreements", "Compensation Committee Interlocks and Insider Participation",
"Compensation Committee Report on Executive Compensation" and "Performance
Graph" in the Company's definitive Proxy Statement for the Annual Meeting of
Stockholders to be held in 2002 is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
- ------------------------------------------------------------------------
The information under the captions "Security Ownership" and "Equity Compensation
Plan Information" in the Company's definitive Proxy Statement for the Annual
Meeting of Stockholders to be held in 2002 is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
- --------------------------------------------------------
The information under the caption "Certain Relationships and Related
Transactions" in the Company's definitive Proxy Statement for the Annual Meeting
of Stockholders to be held in 2002 is incorporated herein by reference.
23
ITEM 14. 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. (Incorporated by reference to exhibit 10.04 of the
Company's Annual Report on Form 10-KSB for the fiscal year ended April
30, 2000, filed with the SEC on August 14, 2000).
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 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).
10.07 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).
10.08 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).
10.09 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).
10.10 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).
24
10.11 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).
10.12 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).
10.13 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).
10.14 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).
10.15 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).
10.16 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).
10.17 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).
10.18 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).
10.19 Form of Amendment No. 1 dated November 16, 2001 to Security Agreement
dated October 29, 1999 between each of the Company, Trade-Winds
Environmental Restoration, Inc., North Atlantic Laboratories, Inc. and
New York Testing Laboratories, Inc. and Spotless Plastics (USA), Inc.
(Incorporated by reference to Exhibit 10.1 of the Company's Quarterly
Report on Form 10-Q for the quarter ended January 1, 2002, filed with
the SEC on February 13, 2002).
10.20 Promissory Note dated November 16, 2001 issued by the Company in favor
of 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 January 1, 2002, filed with the SEC on February 13, 2002).
21.01 Subsidiaries of the Company.
23.01 Consent of Deloitte & Touche LLP.
99.1 Certification of Chief Executive Officer of the Company pursuant to
18 U.S.C. Section 1350.
99.1 Certification of Chief Financial Officer of the Company pursuant to
18 U.S.C. Section 1350.
(b) There were no reports on Form 8-K filed during the last quarter
covered by this Annual Report on Form 10-K.
25
WINDSWEPT ENVIRONMENTAL GROUP, INC.
TABLE OF CONTENTS
Page
--------
Independent Auditors' Report 27
Consolidated Balance Sheets as of July 2, 2002 and July 3, 2001 28
Consolidated Statements of Operations for the fiscal years ended
July 2, 2002, the period from May 1, 2001 through July 3, 2001
and the fiscal years ended April 30, 2001 and 2000 29
Consolidated Statements of Stockholders' Equity for the fiscal
year ended July 2, 2002, the period from May 1, 2001 through
July 3, 2001 and the fiscal years ended April 30, 2001 and 2000 30
Consolidated Statements of Cash Flows for the fiscal year ended
July 2, 2002, the period from May 1, 2001 through July 3, 2001
and the fiscal years ended April 30, 2001 and 2000 31
Notes to Consolidated Financial Statements 32 to 47
26
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and
Stockholders of Windswept Environmental Group, Inc.
Bay Shore, New York
We have audited the accompanying consolidated balance sheets of Windswept
Environmental Group, Inc. and subsidiaries (the "Company") as of July 2, 2002
and July 3, 2001, and the related consolidated statements of operations,
stockholders' equity and cash flows for the fiscal year ended July 2, 2002, the
period from May 1, 2001 through July 3, 2001 and the fiscal years ended April
30, 2001 and 2000. 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. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of the Company as of July 2, 2002 and
July 3, 2001, and the results of their operations and their cash flows for the
fiscal year ended July 2, 2002, the period from May 1, 2001 through July 3, 2001
and the fiscal years ended April 30, 2001 and 2000, in conformity with
accounting principles generally accepted in the United States of America.
/s/ Deloitte & Touche, LLP
Jericho, New York
August 13, 2002
27
WINDSWEPT ENVIRONMENTAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
July 2, July 3,
2002 2001
-------------- -------------
ASSETS:
CURRENT ASSETS:
Cash $ 399,679 $ 323,732
Accounts receivable, net of allowance for doubtful accounts of $909,029 and $570,409,
respectively 7,519,203 5,581,883
Inventory 296,474 208,064
Costs and estimated earnings in excess of billings on uncompleted contracts 501,424 686,528
Prepaid expenses and other current assets 144,274 122,172
------------ ------------
Total current assets 8,861,054 6,922,379
PROPERTY AND EQUIPMENT, net of accumulated depreciation and amortization of $4,550,006 and
$3,887,920, respectively 1,144,369 1,118,382
OTHER ASSETS 207,115 151,807
------------ ------------
TOTAL $10,212,538 $ 8,192,568
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT):
CURRENT LIABILITIES:
Accounts payable $ 1,060,074 $ 1,150,987
Accrued expenses 1,740,093 1,816,441
Short-term notes payable 200,000 1,200,000
Billings in excess of costs and estimated earnings on uncompleted contracts 193,251 525,359
Accrued payroll and related fringe benefits 551,091 568,741
Current portion of convertible notes 100,000 780,000
Income taxes payable 450,820 531,714
Other current liabilities 239,252 406,174
------------ ------------
Total current liabilities 4,534,581 6,979,416
------------ ------------
CONVERTIBLE NOTES - 2,000,000
------------ ------------
LONG-TERM DEBT 63,703 14,250
------------ ------------
COMMITMENTS AND CONTINGENCIES (Notes 11 and 15)
REDEEMABLE COMMON STOCK 941,871 386,058
------------ ------------
SERIES A REDEEMABLE CONVERTIBLE PREFERRED STOCK, $.01 par value;
1,300,000 shares authorized and outstanding, respectively 1,300,000 1,300,000
------------ ------------
STOCKHOLDERS' EQUITY (DEFICIT):
Series B preferred stock - $.01 par value; 50,000 shares authorized; 0 and 9,346 shares
outstanding, respectively - 93
Nondesignated preferred stock, no par value; 8,650,000 shares authorized; 0 shares outstanding - -
Common stock, $.0001 par value; 150,000,000 shares authorized; 77,936,358 and 38,481,254 shares
outstanding, respectively 7,794 3,848
Additional paid-in capital 34,078,017 31,717,198
Accumulated deficit (30,713,428) (34,208,295)
------------ ------------
Total stockholders' equity (deficit) 3,372,383 (2,487,156)
------------ ------------
TOTAL $10,212,538 $ 8,192,568
============ ============
See notes to consolidated financial statements.
28
WINDSWEPT ENVIRONMENTAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE FISCAL YEAR ENDED JULY 2,2002, THE PERIOD FROM MAY 1, 2001 THROUGH
JULY 3, 2001 AND THE FISCAL YEARS ENDED APRIL 30, 2001 AND 2000
July 2, May 1, 2001 to April 30, April 30,
2002 July 3, 2001 2001 2000
-------------- ---------------- -------------- ---------------
Revenues $32,903,740 $ 2,322,511 $22,022,766 $12,845,165
Cost of revenues 20,755,677 2,414,195 15,336,191 10,179,948
------------ ------------ ------------ ------------
Gross margin 12,148,063 (91,684) 6,686,575 2,665,217
------------ ------------ ------------ ------------
Operating expenses (income):
Selling, general and administrative expenses 5,346,394 780,381 4,466,052 4,127,561
Expense (benefit) related to variable
accounting treatment for officer 555,812 (44,189) 328,080 102,167
------------ ------------ ------------ ------------
Total operating expenses 5,902,206 736,192 4,794,132 4,229,728
------------ ------------ ------------ ------------
Income (loss) from operations 6,245,857 (827,876) 1,892,443 (1,564,511)
------------ ------------ ------------ ------------
Other expense (income):
Interest expense 223,246 46,686 339,015 710,973
Other income, net (14,576) (154,259) (58,449) (118,487)
------------ ------------ ------------ ------------
Total other expense (income) 208,670 (107,573) 280,566 592,486
------------ ------------ ------------ ------------
Income (loss) before provision for income
taxes and extraordinary item 6,037,187 (720,303) 1,611,877 (2,156,997)
Provision for income taxes 2,542,320 - 546,000 -
------------ ------------ ------------ ------------
Net income (loss) before extraordinary item 3,494,867 (720,303) 1,065,877 (2,156,997)
Extraordinary item - loss on
extinguishment of debt - - - 100,000
------------ ------------ ------------ ------------
Net income (loss) 3,494,867 (720,303) 1,065,877 (2,256,997)
Dividends on Preferred Stock 468,719 13,000 78,000 78,000
------------ ------------ ------------ ------------
Net income (loss) attributable to common
shareholders $ 3,026,148 $ (733,303) $ 987,877 $(2,334,997)
============ ============ ============ ============
Basic and diluted net income (loss) per
common share:
Basic:
Before extraordinary item $.05 $(.02) $.03 $(.09)
Extraordinary item - - - -
----- ------ ----- ------
Basic net income (loss) per common
share $.05 $(.02) $.03 $(.09)
===== ====== ===== ======
Diluted:
Before extraordinary item $.04 $(.02) $.01 $(.09)
Extraordinary item - - - -
----- ------ ----- ------
Diluted net income (loss) per common
share $.04 $(.02) $.01 $(.09)
===== ====== ===== ======
Weighted average number of common shares
outstanding:
Basic 63,300,953 38,481,254 38,459,953 26,927,083
============ ============ ============ ============
Diluted 85,455,580 38,481,254 76,244,295 26,927,083
============ ============ ============ ============
See notes to consolidated financial statements.
29
WINDSWEPT ENVIRONMENTAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE FISCAL YEAR ENDED JULY 2, 2002, THE PERIOD FROM MAY 1, 2001 THROUGH
JULY 3, 2001 AND THE FISCAL YEARS ENDED APRIL 30, 2001 AND 2000
Preferred Stock Common Stock
--------------- ------------
Number Additional
of Par Number of Par Paid-in Accumulated
Shares Value Shares Value Capital Deficit Total
------ ----- ------ ----- ------- ------- -----
Balance at May 1, 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
Note conversion - - 20,000 2 9,998 - 10,000
Issuance of common stock for services - - 863,450 86 201,723 - 201,809
Exercise of stock options - - 20,000 2 7,498 - 7,500
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
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 income - - - - - 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)
Dividends on preferred stock - - - - (13,000) - (13,000)
Net loss and comprehensive loss - - - - - (720,303) (720,303)
------- ------- ----------- ------ ------------ ------------- ------------
Balance at July 3, 2001 9,346 93 38,481,254 3,848 31,717,198 (34,208,295) (2,487,156)
Exercise of stock options - including tax
benefit of $27,539 - - 404,680 40 110,681 - 110,721
Dividends on Series A preferred stock - - - - (78,000) - (78,000)
Conversion of Series B preferred stock (9,346) (93) 10,495,174 1,050 (957) - -
Conversion of convertible note and related
accrued and unpaid interest - - 28,555,250 2,856 2,329,095 - 2,331,951
Net income and comprehensive income - - - - - 3,494,867 3,494,867
------- ------- ----------- ------ ------------ ------------- ------------
Balance at July 2, 2002 - $ - 77,936,358 $7,794 $34,078,017 $(30,713,428) $ 3,372,383
======= ======= =========== ======= ============ ============= ============
See notes to consolidated financial statements.
30
WINDSWEPT ENVIRONMENTAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE FISCAL YEAR ENDED JULY 2, 2002, THE PERIOD FROM MAY 1, 2001 THROUGH
JULY 3, 2001 AND THE FISCAL YEARS
ENDED APRIL 30, 2001 AND 2000
Fiscal Year May 1, 2001 Fiscal Year Fiscal Year
Ended July 2, to July 3, Ended April 30, Ended April 30,
2002 2001 2001 2000
------------- ------------ --------------- ---------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 3,494,867 $ (720,303) $ 1,065,877 $ (2,256,997)
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Depreciation and amortization 672,054 121,111 796,526 868,412
Provision for doubtful accounts, net 338,620 188,952 115,415 208,342
Gain on sale of fixed assets - (154,261) - -
Compensation related to officer options and redeemable
common stock 555,812 (44,189) 328,080 102,167
Issuance of common stock for dividends and related interest
on redeemable preferred stock - - - 70,536
Issuance of common stock and stock options for services and
compensation - - - 206,888
Changes in operating assets and liabilities:
Accounts receivable (2,275,940) (231,799) (2,164,282) (1,339,313)
Due from officer - - - 100,000
Inventory (88,410) (68,248) 28,335 (38,531)
Costs and estimated earnings in excess of billings on
uncompleted contracts 185,104 121,868 (741,715) 6,171
Prepaid and other current assets (22,102) 14,061 (849) 49,392
Other assets (65,275) 6,772 40,633 237,085
Accounts payable and accrued expenses 301,190 (47,665) (40,006) (425,325)
Payroll and related fringe benefits (17,650) 81,085 (173,612) (10,309)
Income taxes payable (53,355) (199,648) 536,678 191,439
Other current liabilities (170,885) (12,546) (51,201) 50,651
Billings in excess of costs and estimated earnings in
uncompleted contracts (332,108) 182,896 123,757 76,854
------------ ----------- ------------ --------------
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES 2,521,922 (761,914) (136,364) (1,902,538)
------------ ----------- ------------ --------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (688,073) (16,344) (381,729) (275,417)
Sale of property and equipment - 249,878 - -
------------ ----------- ------------ --------------
NET CASH (USED IN) PROVIDED BY INVESTING ACTIVITIES (688,073) 233,534 (381,729) (275,417)
------------ ----------- ------------ --------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments of long-term debt (84,549) (13,976) (135,629) (1,080,780)
Proceeds from long-term debt 137,965 - - 79,704
Repayment of revolving bank line - - - (1,200,596)
Proceeds from private placements of stock - - - 2,642,351
Proceeds from convertible note to related party - - - 2,000,000
Repayment of short-term notes payable (2,750,000) - - -
Proceeds from short-term notes payable 1,750,000 250,000 450,000 500,000
Payment of convertible notes (680,000) - - -
Dividends paid on preferred stock (214,500) - - -
Proceeds from exercise of stock options 83,182 - 3,250 7,500
------------ ----------- ------------ --------------
NET CASH (USED IN) PROVIDED BY FINANCING ACTIVITIES (1,757,902) 236,024 317,621 2,948,179
------------ ----------- ------------ --------------
NET INCREASE (DECREASE) IN CASH 75,947 (292,356) (200,472) 770,224
CASH - BEGINNING OF PERIOD 323,732 616,088 816,560 46,336
------------ ----------- ------------ --------------
CASH - END OF PERIOD $ 399,679 $ 323,732 $ 616,088 $ 816,560
============ =========== ============ ==============
Cash paid during the period for:
Interest $ 274,129 $ 2,504 $ 138,125 $ 752,424
============ =========== ============ ==============
Taxes $ 2,589,958 $ 200,000 $ 20,494 $ -
============ =========== ============ ==============
See notes to consolidated financial statements.
31
WINDSWEPT ENVIRONMENTAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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. The Company's operations
are conducted in a single business segment - environmental services.
BASIS OF PRESENTATION
The accompanying consolidated financial statements include the accounts
of Windswept Environmental Group, Inc. and its subsidiaries. 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.
INVENTORY
Inventory consists entirely of finished goods (materials and supplies
utilized on the Company's remediation projects) and is 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. Long-lived assets, such as property and equipment, are reviewed
for impairment when events or changes in circumstances indicate that
the carrying amount of the assets may not be reasonable through the
estimated future cash flows from the use of the assets. Impairment is
measured at fair value. There were no impairment charges for the fiscal
year ended
32
July 2, 2002, the period May 1, 2001 through July 3, 2001 and the
fiscal years ended April 30, 2001 and 2000.
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
year ended July 2, 2002, the period from May 1, 2001 through July 3,
2001 and the fiscal years ended April 30, 2001 and 2000 was as follows:
Fiscal Year Period from Fiscal Year Fiscal Year
Ended May 1, 2001 Ended Ended
July 2, through July April 30, April 30,
2002 3, 2001 2001 2000
-------------- ---------------- ------------- -------------
Balance, beginning of period $ 570,409 $ 381,457 $ 266,042 $ 100,000
Charged to costs and expenses 686,296 200,038 295,858 166,253
Deductions (351,823) (16,205) (217,320) (211)
Recoveries 4,147 5,119 36,877 -
---------- ---------- ---------- ----------
Balance, end of period $ 909,029 $ 570,409 $ 381,457 $ 266,042
========== ========== ========== ==========
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.
FAIR VALUE OF FINANCIAL INSTRUMENTS
As of July 2, 2002, the carrying value of cash, accounts receivable,
accounts payable and notes 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 $.20 at July 2,
2002, and the conversion provisions of the underlying instrument, the
fair value of the Convertible Note was $139,496 and the fair value of
the Series A Redeemable Preferred Stock was $260,000. 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.
NEW ACCOUNTING PRONOUNCEMENTS
In June 2001, the Financial Accounting Standards Board ("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
33
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
losses for goodwill and certain intangible assets that arise due 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.
In August 2001, the FASB issued SFAS No. 143, "Accounting for Asset
Retirement Obligations". The standard requires entities to record the
fair value of a liability for an asset retirement obligation in the
period in which it is incurred. When the liability is initially
recorded, the entity capitalizes a cost by increasing the carrying
amount of the related long-lived asset. Over time, the liability is
accreted to its present value each period, and the capitalized cost is
depreciated over the useful life of the related asset. Upon settlement
of the liability, an entity either settles the obligation for its
recorded amount or incurs a gain or loss upon settlement. The standard
is effective for fiscal years beginning after June 15, 2002. The
adoption of SFAS 143 is not expected to have a material impact on the
Company's financial statements.
In October 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets". SFAS No. 144 replaces
SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and
for Long-Lived Assets to Be Disposed Of." SFAS No. 144 requires that
long-lived assets be measured at the lower of carrying amount or fair
value less cost to sell, whether reported in continuing operations or
in discontinued operations. Therefore, discontinued operations will no
longer be measured at net realizable value or include amounts for
operating losses that have not yet occurred. SFAS No. 144 also broadens
the reporting of discontinued operations to include all components of
an entity with operations that can be distinguished from the rest of
the entity and that will be eliminated from the ongoing operations of
the entity in a disposal transaction. The provisions of SFAS No. 144
are effective for financial statements issued for fiscal years
beginning after December 15, 2001. The adoption of SFAS 144 is not
expected to have a material impact on the Company's financial
statements.
In April 2002, the FASB issued SFAS No. 145, "Recission of FASB
Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and
Technical Corrections" ("SFAS 145"). SFAS 145 rescinds SFAS 4,
"Reporting Gains and Losses from Extinguishment of Debt", and an
amendment of that Statement, SFAS 64, "Extinguishments of Debt Made to
Satisfy Sinking-Fund Requirements". SFAS 145 also rescinds SFAS 44,
"Accounting for Intangible Assets of Motor Carriers". SFAS 145 amends
SFAS 13, "Accounting for Leases", to eliminate an inconsistency between
the required accounting for sale-leaseback transactions and the
required accounting for certain lease modifications that have economic
effects that are similar to sale-leaseback transactions. SFAS 145 also
amends other existing authoritative pronouncements to make various
technical corrections, clarify meanings, or describe their
applicability under changed conditions. Certain provisions of this
statement related to the classification of gains and losses from the
extinguishment of debt are required to be adopted by the Company
beginning with the year ended July 1, 2003. All other provisions are
required to be adopted after May 15, 2002 and early application is
encouraged. The adoption of SFAS No. 145 is not expected to have a
material impact on the Company's financial statements.
In July 2002, the FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities" ("SFAS 146"). SFAS 146
addresses financial accounting and reporting for costs associated with
exit or disposal activities and nullifies EITF Issue No. 94-3,
"Liability Recognition for Certain Employee Termination Benefits and
Other Costs to Exit an Activity (Including Certain Costs Incurred in a
Restructuring"). SFAS 146 requires recognition of a liability for a
cost associated with an exit or disposal activity when the liability is
incurred, as opposed to when the entity commits to an exit plan under
EITF 94-3. This statement is effective for exit or disposal activities
initiated after December 31, 2002. The adoption of SFAS 146 is not
expected to have a material impact on the Company's financial
statements.
CHANGE IN FISCAL YEAR
On July 27, 2001, the Board of Directors voted to change the Company's
fiscal year to a 52-53 week fiscal year ending on the Tuesday nearest
June 30. Each fiscal year shall generally be comprised of four 13-week
quarters, each containing two four-week months followed by one
five-week month.
34
Unaudited consolidated statement of operations data for the period from
May 1, 2000 through June 30, 2000 is as follows:
Revenues $2,003,331
Gross Profit $ 256,794
Provision for income taxes $ -
Net loss $ (653,344)
Net loss per share $ (.02)
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"), 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, 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 had the equivalent voting power of 1,000 shares of
Common Stock. Each share of Series B Preferred was convertible into
1,000 shares of Common Stock.
In addition, the Company, Trade-Winds and NAL, 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 was evidenced by a secured convertible promissory note, dated
October 29, 1999 (the "Note"). Outstanding principal under the Note
bore interest at a rate equal to the London Interbank Offering Rate
("LIBOR") plus an additional 1% and was payable monthly. The Note had a
maturity date of October 29, 2004, unless Spotless elected to defer
repayment until October 29, 2005. The outstanding principal amount and
all accrued and unpaid interest under the Note was 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. The
transaction with Spotless described above is hereafter referred to as
the "Spotless Transaction".
On November 16, 2001, Acquisition Corp. exercised its right to convert
all 9,346 shares of the Company's Series B preferred stock. As a result
of such conversion and in accordance with the terms of the Company's
Series B preferred stock, Acquisition Corp. was issued 10,495,174
shares of the Company's common stock. Such amount included 9,346,000
shares as a result of the 1,000:1 conversion ratio, and an additional
1,149,174 shares that were calculated based upon a formula that takes
into consideration the value of the Series B preferred stock on the
date of issuance and the number days elapsed from the date of the
issuance of the Series B preferred stock through the conversion date.
The issuance of the additional shares of common stock was recorded as a
dividend of $390,719. The dividend represents the difference between
the fair market value of the Company's common stock issued on November
16, 2001 and the fair market value of the Company's common stock at the
date the Series B preferred stock was issued.
On November 16, 2001, Spotless exercised its right to convert all
principal and accrued and unpaid interest on the $2,000,000 Note. As a
result of the conversion of the Note and accrued and unpaid interest,
the Company issued 28,555,250 shares of its common stock to Acquisition
Corp. in full satisfaction of the Note
35
and the related accrued and unpaid interest.
After giving effect to these conversions, Spotless currently
beneficially owns 61,335,107 shares, or approximately 79%, of the
Company's issued and outstanding shares of common stock.
3. LIQUIDITY AND BUSINESS RISKS
As of July 2, 2002, the Company had cash balances of $399,679, working
capital of $4,326,473 and stockholders' equity of $3,372,383.
Historically, the Company has financed its operations to date primarily
through issuance of debt and equity securities, through short-term
borrowings from its majority shareholder, Spotless, and through cash
generated from operations. In the opinion of management, the Company
expects to have sufficient working capital to fund current operations.
However, market conditions and their effect on the Company's liquidity
may restrict the Company's use of cash. In the event that sufficient
positive cash flow from operations is not generated, the Company may
need to seek additional financing from Spotless, although Spotless is
under no legal obligation to provide such funds. The Company currently
has no credit facility for additional borrowing.
After the terrorist attack on the World Trade Center on September 11,
2001, the demand for the Company's emergency and catastrophe response
services increased dramatically. As a result of that increased demand,
the Company recorded revenues of approximately $17,003,000 for
remediation services related to the attack from September 13, 2001
through July 2, 2002. Approximately $15,200,000 of this revenue has
been collected by July 2, 2002. Due to the nature of the Company's
business, it cannot anticipate whether it will be able to replace such
revenues with revenues from new projects in future periods.
As of July 2, 2002, the Company owed Spotless $200,000 on short-term
notes payable to fund working capital. During fiscal 2002, in order to
address the Company's cash flow and operational concerns and to fund
the increased payroll that resulted from the greater level of work
related to the World Trade Center attack, the Company borrowed
$1,750,000 from Spotless. During fiscal 2002, primarily as a result of
cash collected from the World Trade Center projects, the Company repaid
$2,750,000 to Spotless. All current borrowings from Spotless bear
interest at LIBOR plus 1 percent and are secured by all of the
Company's assets. As of July 2, 2002, interest of $647 was accrued on
these borrowings.
On March 15, 2002, the Company repaid $680,000 principal amount of 10%
convertible notes upon their maturity. The repayment was funded through
cash generated from operations and did not require any borrowings.
Subsequent to July 2, 2002, the Company repaid $50,000 of a convertible
note held by a director of the Company.
During fiscal 2001, in order to address the Company's cash flow and
operational concerns, the Company borrowed and repaid an additional
$1,000,000 from Spotless. Subsequently in fiscal 2001, the Company also
borrowed an additional $450,000 from Spotless pursuant to 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.
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.
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
36
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.
4. PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
July 2, July 3,
2002 2001
------------- ------------
Machinery and equipment $3,455,404 $3,015,803
Office furniture and equipment 379,309 321,589
Vehicles 1,327,976 1,142,628
Leasehold improvements 531,686 526,282
---------- ----------
5,694,375 5,006,302
Less: accumulated depreciation and amortization 4,550,006 3,887,920
---------- ----------
$1,144,369 $1,118,382
========== ==========
5. ACCRUED EXPENSES
Accrued expenses consist of the following:
July 2, July 3,
2002 2001
------------- -------------
Workers compensation premiums and insurance adjustments $ 822,273 $ 676,433
Interest and preferred stock dividends 11,754 525,903
Litigation reserves 312,151 310,417
Other 593,915 303,688
---------- ----------
$1,740,093 $1,816,441
========== ==========
6. LONG-TERM DEBT
Long-term debt consists of the following:
July 2, July 3,
2002 2001
------------- -------------
Notes payable related to the purchase of vehicles and equipment $ 109,163 $ 30,798
Obligation under capital lease 25,805 50,754
---------- ----------
134,968 81,552
Less: current portion 71,265 67,302
---------- ----------
Long term debt $ 63,703 $ 14,250
========== ==========
The notes payable and obligation under capital lease are secured by
the underlying vehicles and equipment.
Repayments of long-term debt as of July 2, 2002 are as follows:
Fiscal Years Ending
------------------------------------
July 1, 2003 $ 71,265
June 29, 2004 47,522
June 28, 2005 16,181
--------
$134,968
========
37
7. CONVERTIBLE NOTES
On October 29, 1999, in connection with the sale of controlling
interest of the Company, 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 bore interest at a rate
equal to LIBOR plus 1 percent. The Note had a maturity date of October
29, 2004, and was convertible into either 25,304,352 shares of Common
Stock or 25,305 shares of Series B Preferred. On November 16, 2001,
Spotless exercised its right to convert all principal and accrued and
unpaid interest on the Note. As a result of the conversion of the Note
and accrued and unpaid interest, the Company issued 28,555,250 shares
of its common stock to Acquisition Corp. in full satisfaction of the
Note and the related accrued and unpaid interest.
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
were fully repaid in March 2002. 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 July 2, 2002, an aggregate of 697,480 shares of
Common Stock are issuable upon conversion of the principal and accrued
and unpaid interest of this convertible promissory note. The Company
included accrued and unpaid interest of $4,622 and $75,484 in accrued
expenses as of July 2, 2002 and July 3, 2001, respectively. Subsequent
to July 2, 2002, the Company repaid $50,000 of such notes.
8. 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 currently redeemable by the Company.
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 has one vote per share.
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
was $1,300,000 and $1,448,671 at July 2, 2002 and July 3, 2001,
respectively.
9. 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 $285,000 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
38
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 result of the conversion of the
Note, options to purchase 2,811,575 shares of the Company's common
stock held by Michael O'Reilly immediately vested.
The Company recorded $555,812, ($44,189), $328,080 and $102,167 of
compensation expense (benefit) relating to the redeemable common stock
in the fiscal year ended July 2, 2002, the period from May 1, 2001
through July 3, 2001 and the fiscal years ended April 30, 2001 and
2000, respectively.
10. INCOME TAXES
The provision for income taxes for the fiscal year ended July 2, 2002,
the period from May 1, 2001 through July 3, 2001 and the fiscal years
ended April 30, 2001 and 2000 consists of the following:
Period from
Fiscal Year May 1, 2001 Fiscal Year Fiscal Year
Ended through Ended April Ended April
July 2, 2002 July 3, 2001 30, 2001 30, 2000
------------- ------------- ------------- --------------
Current:
Federal $1,794,453 $ - $385,000 $ -
State 747,867 - 161,000 -
---------- --------- -------- ---------
2,542,320 - 546,000 -
---------- --------- -------- ---------
Deferred:
Federal - - - -
State - - - -
---------- --------- -------- ---------
- - - -
---------- --------- -------- ---------
$2,542,320 $ - $546,000 $ -
=========== ========= ======== =========
No provision for income taxes was recorded for the period from May 1,
2001 through July 3, 2001 and the fiscal year ended April 30, 2000 due
to net losses incurred. At July 2, 2002, the Company has net operating
loss carryforwards for tax purposes of approximately $1,124,000 that
expire in 2020. As a result of a change in the Company's ownership, the
net operating loss carryforwards are subject to an annual usage
limitation of approximately $68,000.
39
The Company's effective tax rate for the fiscal year ended July 2,
2002, the period from May 1, 2001 through July 3, 2001and the fiscal
years ended April 30, 2001 and 2000 differs from the federal statutory
rate as a result of the following:
Period
from May
Fiscal Year 1, 2001 Fiscal Year Fiscal Year
Ended through Ended Ended
July 2, July 3, April 30, April 30,
2002 2001 2001 2000
--------------- ------------- ------------- --------------
Statutory United
States federal tax rate 34.0% (34.0)% 34.0 % 34.0 %
State income taxes, net
of federal benefit 8.3% 0.0% 8.2 % 0.0 %
Utilization of federal
and state net operating
loss carryforwards (3.6)% 0.0% 0.0% 0.0%
Valuation allowance 5.0% 31.5% (8.4)% (34.0)%
Other (1.6)% 2.5% 0.1% 0.0%
------ ------ ------ -------
42.1% 0.0% 33.9% 0.0%
====== ====== ====== =======
Deferred tax assets consist of the following components at July 2, 2002
and July 3, 2001:
2002 2001
---- ----
Net operating loss carryforwards $ 382,000 $ 594,000
Reserves 480,000 358,000
Deferred compensation 397,000 163,000
Other, net 86,000 141,000
---------- ----------
1,345,000 1,256,000
Less: Valuation allowance 1,345,000 1,256,000
---------- ---------
Net deferred tax asset $ - $ -
========== =========
At July 2, 2002 and July 3, 2001, 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.
11. COMMITMENTS
Future minimum lease payments under a noncancellable operating lease
for office space as of July 2, 2002 are as follows:
Fiscal Years Ending,
------------------------------------------
July 1, 2003 $ 338,576
June 29, 2004 352,120
June 28, 2005 366,204
June 27, 2006 380,852
July 3, 2007 327,887
----------
Total future minimum lease payments $1,765,639
==========
Total rental expense was $329,680, $33,659, $353,236 and $358,477 for
the fiscal year ended July 2, 2002, the period from May 1, 2001 through
July 3, 2001 and the fiscal years ended April 30, 2001 and 2000,
respectively.
On October 29, 1999, the Company entered into the Employment Agreement
with Michael O'Reilly (See Note 9).
40
12. STOCK ISSUANCES
During the fiscal year ended July 2, 2002, the Company issued shares of
common stock in the following transactions: (i) 28,555,250 shares
valued at $2,331,951 as a result of Spotless' conversion of the Note
and accrued and unpaid interest, (ii) 10,495,174 shares as a result of
Spotless' conversion of Series B Preferred Stock and (iii) 404,680
shares upon the exercise of stock options with an aggregate exercise
price of $83,182.
During the period from May 1, 2001 through July 3, 2001, the Company
did not issue any shares of common or preferred stock.
During the fiscal year ended April 30, 2001, the Company issued 25,000
shares of common stock upon the exercise of stock options with an
aggregate exercise price of $3,250.
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 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 valued at
$738,619.
All of the foregoing stock issuances were valued at fair market value
at the time of issuance.
13. STOCK OPTIONS
As of July 2, 2002, 1,700,000 shares of common stock were reserved for
issuance upon the exercise of options then outstanding and 3,608,230
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. As of
July 2, 2002, 11,241,677 shares of common stock were reserved for
issuance upon the exercise of options then outstanding that were not
covered under the Company's three stock option plans. 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 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.
41
The summary of the status of the Company's outstanding stock options
for the fiscal year ended July 2, 2002, the period from May 1, 2001
through July 3, 2001 and the fiscal years ended April 30, 2001 and 2000
is presented below:
Employees Weighted Weighted
and Average Non- Average
Directors Exercise Employee Exercise
Options Price Options Price
Outstanding at May 1, 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 and
July 3, 2001 13,164,399 $.13 248,100 $.21
Granted 1,600,000 $.19 - -
Forfeited (1,418,042) $.22 (200,000) -
Exercised (404,680) $.21 - -
----------- ---------- ----
Outstanding at July 2, 2002 12,941,677 $.13 48,100 $.21
=========== ========== ====
Options exercisable at April 30, 2000 7,067,781 $.19 48,100 $.21
=========== ==== ========== ====
Options exercisable at April 30, 2001 8,409,352 $.16 48,100 $.21
=========== ==== ========== ====
Options exercisable at July 3, 2001 8,409,352 $.16 48,100 $.21
=========== ==== ========== ====
Options exercisable at July 2, 2002 12,050,106 $.13 48,100 $.21
=========== ==== ========== ====
Weighted
Average
Number Remaining Number
Exercise Outstanding Contractual Exercisable at
Price at July 2, 2002 Life (years) July 2, 2002
----- --------------- ------------ ------------
$.01 2,000,000 2.33 2,000,000
$.079 5,486,309 4.85 4,594,738
$.1094 100,000 3.33 100,000
$.13 235,000 .70 235,000
$.16 300,000 4.02 300,000
$.17 400,000 4.10 400,000
$.1875 750,000 1.99 750,000
$.19 650,000 4.19 650,000
$.203 150,000 1.75 150,000
$.22 1,560,059 .70 1,560,059
$.23 250,000 4.24 250,000
$.3125 50,000 2.15 50,000
$.34 850,000 1.13 850,000
$.3438 110,309 2.05 110,309
$.40 50,000 1.25 50,000
---------- ----------
12,941,677 12,050,106
========== ==========
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
42
net income (loss) per share would be $2,044,889, $(893,065), $(34,465)
and $(2,971,722), or $.02, $(.02), $0.0 and $(.11) per basic common
share for the fiscal year ended July 2, 2002, the period from May 1,
2001 through July 3, 2001 and the fiscal years ended April 30, 2001 and
2000, 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 weighted average fair value of options granted during the fiscal
year ended July 2, 2002, the period from May 1, 2001 to July 3, 2001,
and the fiscal years ended April 30, 2001 and 2000 is estimated at
$.17, $.11, $.11 and $.51, respectively, on the date of the grant.
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: expected volatility of 146%, no dividend
yield, an expected life of two to five years for all options and a
weighted average risk free interest rate of 4.53 percent.
14. RELATED PARTY TRANSACTIONS
In the fiscal year ended April 30, 2000, the Company amended Michael
O'Reilly's Employment Agreement.
On October 29, 1999, the Company consummated an equity and refinancing
transaction with Spotless.
During the fiscal year ended July 2, 2002, the Company borrowed
$1,750,000 from Spotless for working capital requirements and to fund
the additional payroll required to service the World Trade Center
related work. As a result of cash collected related to that work, the
Company repaid $2,750,000 to Spotless during the fiscal year ended July
2, 2002.
During the period from May 1, 2001 through July 3, 2001, the Company
borrowed $250,000 from Spotless for working capital requirements.
During the fiscal year ended April 30, 2001, the Company borrowed
$1,450,000 from Spotless for working capital requirements. The Company
repaid $1,000,000 plus interest to Spotless in the fiscal year ended
April 30, 2001.
During the fiscal year ended April 30, 2000, the Company borrowed
$500,000 from Spotless for working capital requirements.
On November 16, 2001, the Company issued a promissory note in favor of
Spotless with an original principal amount of $1,700,000, relating to
previously borrowed funds, and amended its security agreement with
Spotless, originally dated October 29, 1999, to secure such amounts
under the promissory note with all of the Company's assets. There was a
balance of $200,000 in loans from Spotless outstanding as of July 2,
2002. All borrowings bear interest at LIBOR plus 1 percent. As of July
2, 2002 and July 3, 2001, interest of $647 and $27,479, respectively,
was accrued on these borrowings.
During fiscal year ended July 2, 2002, Spotless charged the Company an
administrative fee of $50,628 of which $8,438 remains unpaid and
included in accrued expenses as of July 2, 2002.
On December 16, 1998, the Company entered into an operating lease
arrangement with Michael O'Reilly. Under the arrangement that expires
in December 2002, the Company leases a forty-two foot custom Topaz boat
for a period of one year for annual rental payments of $60,000. The
leasing arrangement was necessitated by a Marine Assistance Contract
that expired on December 31, 2000, although the arrangement continues
to provide the Company with its largest floating vessel capable of
handling specialty equipment and facilitating an offshore support crew.
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 additional 650,000 shares of RCPS to a
partner of such director. During the fiscal year ended July 2, 2002,
43
the Company paid $233,156 of dividends and accrued interest to the RCPS
holders. As of July 2, 2002 and July 3, 2001, dividends and accrued
interest of $0 and $148,671, respectively, was included in accrued
expenses.
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. During the fiscal year ended July 2, 2002, the Company
paid $92,010 of interest on this convertible note. As of July 2, 2002,
an aggregate of 697,480 shares of Common Stock were issuable upon
conversion of the principal and accrued and unpaid interest of this
convertible promissory note. The Company has included accrued and
unpaid interest of $4,622 and $75,484 in accrued expenses as of July 2,
2002 and July 3, 2001, respectively. Subsequent to July 2, 2002, the
Company repaid $50,000 of such note.
The Company paid an outside director $43,741, $6,443, $40,477 and
$42,400 for consulting services in the fiscal year ended July 2, 2002,
the period from May 1, 2001 through July 3, 2001 and the fiscal years
ended April 30, 2001 and 2000, respectively.
15. CONTINGENCIES
LITIGATION
On October 12, 2001, Trade-Winds commenced an action in the New York
State Supreme Court, County of New York, claiming that Trade-Winds is
entitled to approximately $1,060,000 of contractual billings relating
to a large mold remediation project. In addition to denying an
obligation to pay the amount claimed, the defendants have asserted a
counterclaim against Trade-Winds for $389,439. The parties engaged in
court-ordered mediation without successful resolution and are currently
engaged in discovery. The court has ordered that the record of this
action be sealed.
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
statements.
44
16. MAJOR CUSTOMERS AND CREDIT CONCENTRATIONS
During the fiscal year ended July 2, 2002, the period from May 1, 2001
through July 3, 2001 and the fiscal years ended April 30, 2001 and 2000
the Company recognized net sales to significant customers as set forth
below:
May 1,
2001
through
July 2, July 3, April 30, April 30,
Major Customers 2002 2001 2001 2000
-------------------------- ----------- ---------- ---------- -----------
Customer A 0% 13% 36% 0%
Customer B 34% 0% 0% 0%
Customer C 0% 5% 11% 15%
Customer D 7% 14% 5% 12%
At July 2, 2002, 17 percent, 16 percent and 13 percent, respectively,
of the Company's accounts receivable related to three customers. At
July 3, 2001, 22 percent, 11 percent, 11 percent and 9 percent,
respectively, of the Company's accounts receivable related to four
customers.
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 41% of its revenues in the
fiscal year ended July 2, 2002. 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.
45
17. NET INCOME (LOSS) PER SHARE
The following table sets forth the computation of the basic and diluted
net income (loss) per share for the fiscal year ended July 2, 2002, the
period from May 1, 2001 through July 3, 2001 and the fiscal years ended
April 30, 2001 and 2000:
Period
From
May 1,
Fiscal Year 2001 Fiscal Year Fiscal Year
Ended through Ended Ended
July 2, July 3, April 30, April 30,
2002 2001 2001 2000
-------------- ------------- -------------- --------------
Numerator:
Net income (loss) attributable
to common shareholders $3,026,148 $(733,303) $987,877 $(2,334,997)
Add interest and amortization
on convertible notes, net of
tax 35,377 - 120,924 -
-------------- ------------ -------------- ------------
$3,061,525 $(733,303) $1,108,801 $(2,334,997)
============== ============ ============== ============
Denominator:
Share reconciliation:
Shares used for basic
income (loss) per share 63,300,953 38,481,254 38,459,953 26,927,083
Effect of dilutive items:
Stock options 6,908,459 - 2,467,323 -
Convertible securities 15,246,168 - 35,317,019 -
-------------- ------------ -------------- ------------
Shares used for dilutive
income (loss) per share 85,455,580 38,481,254 76,244,295 26,927,083
============== ============ ============== ============
Net income (loss) per share:
Basic $.05 $(.02) $.03 $(.09)
==== ====== ==== ======
Diluted $.04 $(.02) $.01 $(.09)
==== ====== ==== ======
46
18. UNAUDITED QUARTERLY DATA
Summarized unaudited quarterly financial data for the fiscal years
ended July 2, 2002 and April 30, 2001 are as follows:
Fiscal Year Ended July 2, 2002 First Second Third Fourth
- ------------------------------ Quarter Quarter Quarter Quarter
------------ -------------- -------------- -------------
Total revenues $7,735,074 $13,000,553 $ 5,823,792 $ 6,344,321
Net income $ 763,153 $ 1,009,104 $ 759,524 $ 963,086
Net income attributable to
common shareholders $ 743,653 $ 598,885 $ 740,024 $ 943,586
Net income per common
share - basic $.02 $.01 $.01 $.01
Net income per common
share - diluted $.01 $.01 $.01 $.01
Fiscal Year Ended April 30, 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) $ (597,403) $ (42,593) $ 1,206,127 $ 499,746
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
47
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: September 23, 2002
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 September 23, 2002 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:
--------------------------------------------
PETER A. WILSON, Chairman
By: /s/ Kevin Phillips
--------------------------------------------
DR. KEVIN PHILLIPS, Director
By: /s/ Anthony Towell
--------------------------------------------
ANTHONY TOWELL, Director
By: /s/ Brian S. Blythe
--------------------------------------------
BRIAN S. BLYTHE, Director
By: /s/ Ronald B.Evans
--------------------------------------------
RONALD B. EVANS, Director
By: /s/ John J. Bongiorno
--------------------------------------------
JOHN J. BONGIORNO, Director
48
CERTIFICATION
I, Michael O'Reilly, President and Chief Executive Officer of Windswept
Environmental Group, Inc., certify that:
1. I have reviewed this annual report on Form 10-K of Windswept
Environmental Group, Inc.;
2. Based on my knowledge, this annual report does not contain any
untrue statement of a material fact or omit to state a
material fact necessary to make the statements made, in light
of the circumstances under which such statements were made,
not misleading with respect to the period covered by this
annual report; and
3. Based on my knowledge, the financial statements, and other
financial information included in this annual report, fairly
present in all material respects the financial condition,
results of operations and cash flows of the registrant as of,
and for, the periods presented in this annual report.
/s/ Michael O'Reilly
Date: September 23, 2002 -------------------------------------
Michael O'Reilly
President and Chief Executive Officer
49
CERTIFICATION
I, Charles L. Kelly, Jr., Chief Financial Officer of Windswept
Environmental Group, Inc., certify that:
1. I have reviewed this annual report on Form 10-K of Windswept
Environmental Group, Inc.;
2. Based on my knowledge, this annual report does not contain any
untrue statement of a material fact or omit to state a
material fact necessary to make the statements made, in light
of the circumstances under which such statements were made,
not misleading with respect to the period covered by this
annual report; and
3. Based on my knowledge, the financial statements, and other
financial information included in this annual report, fairly
present in all material respects the financial condition,
results of operations and cash flows of the registrant as of,
and for, the periods presented in this annual report.
/s/ Charles L. Kelly, Jr.
Date: September 23, 2002 -------------------------------------
Charles L. Kelly, Jr.
Chief Financial Officer
50
EXHIBIT INDEX
Exhibit
Number Description
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. (Incorporated by reference to exhibit 10.04 of the
Company's Annual Report on Form 10-KSB for the fiscal year ended April
30, 2000, filed with the SEC on August 14, 2000).
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 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).
10.07 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).
10.08 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).
10.09 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).
10.10 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-
51
K (Date of Report: October 29, 1999) filed with the SEC on November
12, 1999).
10.11 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).
10.12 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).
10.13 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).
10.14 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).
10.15 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).
10.16 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).
10.17 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).
10.18 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).
10.19 Form of Amendment No. 1 dated November 16, 2001 to Security Agreement
dated October 29, 1999 between each of the Company, Trade-Winds
Environmental Restoration, Inc., North Atlantic Laboratories, Inc. and
New York Testing Laboratories, Inc. and Spotless Plastics (USA), Inc.
(Incorporated by reference to Exhibit 10.1 of the Company's Quarterly
Report on Form 10-Q for the quarter ended January 1, 2002, filed with
the SEC on February 13, 2002).
10.20 Promissory Note dated November 16, 2001 issued by the Company in favor
of 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 January 1, 2002, filed with the SEC on February 13, 2002).
21.01 Subsidiaries of the Company.
23.01 Consent of Deloitte & Touche LLP.
99.1 Certification of Chief Executive Officer of the Company pursuant to
18 U.S.C. Section 1350.
99.2 Certification of Chief Financial Officer of the Company pursuant to
18 U.S.C. Section 1350.
52