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 1, 2003
Commission File No. 0-17072
WINDSWEPT ENVIRONMENTAL GROUP, INC.
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(exact name of Registrant as specified in its charter)
Delaware 11-2844247
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
100 Sweeneydale Avenue, Bay Shore, New York 11706
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(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
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(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
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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]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2). Yes No. X
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State the aggregate market value of the voting and non-voting common equity held
by non-affiliates computed by reference to the price at which the common equity
was last sold, or the average bid and asked price of such common equity, as of
the last business day of the registrant's most recently completed second
quarter. $2,744,000
Based upon the closing sale price as reported on the OTC Electronic Bulletin
Board of the NASD on September 2, 2003 ($.12 per share), the aggregate market
value of the Common Stock held by non-affiliates of the registrant was
approximately $1,937,000.
As of September 2, 2003, 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 2003 are
incorporated into Part III of this Form 10-K.
PART I
Introductory Comment - Forward Looking Statements
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Statements contained in this Annual Report on Form 10-K include "forward-looking
statements" within the meaning of Section 27A of the Securities Act and Section
21E of the Securities Exchange Act. Forward-looking statements involve known and
unknown risks, uncertainties and other factors which could cause the actual
results, performance and achievements, whether expressed or implied by such
forward-looking statements, not to occur or be realized. Such forward-looking
statements generally are based upon the Company's best estimates of future
results, performance or achievement, based upon current conditions and the most
recent results of operations. Forward-looking statements may be identified by
the use of forward-looking terminology such as "may," "will," "expect,"
"believe," "estimate," "anticipate," "continue" or similar terms, variations of
those terms or the negative of those terms. Potential risks and uncertainties
include, among other things, such factors as:
o the market acceptance and amount of sales of the Company's services,
o the Company's success in increasing revenues and reducing expenses,
o the frequency and magnitude of environmental disasters or disruptions
resulting in the need for the types of services the Company provides,
o the extent of the enactment, enforcement and strict interpretations of
laws relating to environmental remediation,
o the competitive environment within the industries in which the
Company operates,
o the Company's ability to raise additional capital,
o the Company's ability to attract and retain qualified personnel, and
o the other factors and information disclosed and discussed under the
"Risk Factors" section of Item 1 and in other sections of this Annual
Report on Form 10-K.
Investors should carefully consider such risks, uncertainties and other
information, disclosures and discussions which contain cautionary statements
identifying important factors that could cause actual results to differ
materially from those provided in the forward-looking statements. The Company
undertakes no obligation to publicly update or revise any forward-looking
statements, whether as a result of new information, future events or otherwise.
ITEM 1. DESCRIPTION OF BUSINESS
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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 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
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"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 July 2001, the Board of Directors voted to change the Company's 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, ($720,303)
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:
o Emergency Response and Catastrophe Restoration
o Site Restoration
o Mold Contamination Remediation
o Commercial Drying
o Natural Resource/Wetlands Restoration/Wildlife Rehabilitation
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o Forensic Investigation
o Asbestos Abatement
o Fire and Flood Restoration
o Demolition
o Lead Abatement
o Underground Storage Tank Removal
o Soil Remediation
o Oil Spill Response - Land and Marine
o Hazardous Waste/Biohazard Clean-up
o Chemical Spill Response
o Duct Cleaning
o Indoor Air Quality Investigation/Microbial Remediation
o Environmental and Health and Safety Training
o Environmental Testing
o 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 have included Fortune 500TM companies, insurance companies, industrial
concerns, construction companies, oil companies, utilities, 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, Allstate Insurance Company, the Bank of New York,
State Farm Insurance Company, Consolidated Edison, HSBC, and the New York State
Department of Environmental Conservation for services including hazardous
materials spill response, oil spill containment, and subsurface investigation
and site remediation.
Health professionals have been aware of the adverse health effects of exposure
to mold for decades, but the issue has gained increased public awareness in
recent years. Studies indicate that 50% of all homes contain mold and that the
dramatic increase in asthma over the past 20 years can be attributed to mold
exposure. The Company's current focus is on mold remediation in both commercial
and residential structures. The Company's experience includes identification and
development of remediation plans, detailing methods and performing microbial
(mold, fungus, etc.) abatement in commercial, residential, educational, medical
and industrial facilities. The activities include decontamination, application
of biocides and sealant, removal of building systems (drywall, carpet, etc.),
duct cleaning, and disposal of building furnishings.
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.
Insurance customers represent a substantial portion of the Company's target
market: those with recurring needs for emergency services. During the fiscal
years ended July 1, 2003 and July 2, 2002, the period from May 1, 2001 through
July 3, 2001 and the fiscal year ended April 30, 2001, revenues from insurance
customers represented approximately 20%, 9%, 8% and 12%, respectively, of total
revenues. During the fiscal years ended July 1, 2003 and July 2, 2002, the
period from May 1, 2001 through July 3, 2001 and the fiscal year ended April 30,
2001 the Company recognized net sales to significant customers as set forth
below:
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May 1,
2001
through
July 1, July 2, July 3, April 30,
Major Customers 2003 2002 2001 2001
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Customer A 0% 0% 13% 36%
Customer B 0% 34% 0% 0%
Customer C 0% 0% 5% 11%
Customer D 8% 7% 14% 5%
Customer E 19% 0% 0% 0%
While the Company intends to increase the amount of work performed for entities
other than these customers, it expects to continue to be dependent on 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 Dick Pacific Construction, Inc. (listed as "Customer E" in
the foregoing table), were not replaced by revenues generated by other
customers. See "Risk Factors".
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, 67 vehicles
(including vacuum trucks, earth moving equipment, supply trucks and drilling
vehicles) and 38 trailers equipped with various capabilities (such as a mobile
wildlife clinic).
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 WCD Tier 3 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 seven companies in the Northeastern United States with
this designation.
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
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opportunities through its marketing efforts; the quality, safety and timely
performance of its contracts; the accuracy of its bidding; its ability to hire
and train field operations and supervisory personnel; and the ability of the
Company to generate sufficient capital to hire and retain personnel with
requisite skills, meet its ongoing obligations, and fuel growth. See "Risk
Factors".
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, it can
service all of a client's environmental related construction and emergency
response needs.
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
statue governing hazardous waste generation, treatment, storage, and disposal.
RCRA, or EPA approved state programs, govern any waste handling activities of
substances classified as "hazardous." Moreover, facilities that treat, store or
dispose of hazardous waste must obtain a RCRA permit from the EPA, or equivalent
state agency, and must comply with certain operating, financial responsibility,
and site closure requirements. Wastes are generally hazardous if they (1) either
(a) are specifically included on a list of hazardous waste, or (b) exhibit
certain characteristics defined as hazardous, and (2) are not specifically
designated as non-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. Under RCRA, liability and stringent operating requirements may
be imposed on a person who is either a "generator" or a "transporter" of
hazardous waste, or an "owner" or "operator" of a waste treatment, storage, or
disposal facility.
UST legislation, in particular Subtitle I of RCRA, focuses on the regulation of
UST 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
that generate, transport, treat, store, or dispose of hazardous waste.
The Comprehensive Environmental Response Compensation and Liability Act of 1980
("Superfund Act"), authorizes the EPA to identify and clean-up sites where
hazardous waste treatment, storage, or disposal took place. The Superfund Act
also authorizes the EPA to recover the costs of such activities, as well as
damages to natural resources, from certain classes of persons specified as
liable under the statute. Liability under the Superfund Act does not depend upon
the existence or disposal of "hazardous waste" as defined by RCRA, but can be
based on the
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existence of any number of 700 "hazardous substances" listed by the EPA, many of
which can be found in household waste. The Superfund Act assigns joint and
several liability for cost of clean-up and damages to natural resources to any
person who, currently or at the time of disposal of a hazardous substance, by
contract, agreement, or otherwise, arranged for disposal or treatment, or
arranged with a transporter for transport of hazardous substances owned or
possessed by such person for disposal or treatment, and to any person who
accepts hazardous substances for transport to disposal or treatment facilities
or sites from which there is a release or threatened release of such hazardous
substances. Among other things, the Superfund Act authorizes the federal
government either to clean up these sites itself or to order persons responsible
for the situation to do so. The Superfund Act created a fund, financed primarily
from taxes on oil and certain chemicals, to be used by the federal government to
pay for these clean-up efforts. Where the federal government expends money for
remedial activities, it may seek reimbursement from the Potentially Responsible
Parties ("PRPs"). Many states have adopted their own statutes and regulations to
govern investigation and clean up of, and liability for, sites contaminated with
hazardous substances.
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
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
Superfund Act also authorizes the EPA to impose a lien in favor of the United
States upon all real property subject to, or affected by, a remedial action for
all costs that the party is liable. The Superfund Act provides a responsible
party with the right to bring a contribution action against other responsible
parties for their allocable share of investigative and remedial costs. The EPA
may also bring suit for treble damages from responsible parties who unreasonably
refuse to voluntarily participate in such a clean up or funding thereof.
The Oil Pollution Act of 1990, which resulted from the Exxon Valdez oil spill
and the subsequent damage to Prince William Sound, established a new liability
compensation scheme for oil spills from onshore and offshore facilities and
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
7
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. This includes medical surveillance as required by these regulations.
Management believes that all requisite health and safety programs are in place
and comply with the regulations in all material respects.
Among its many services, the Company provides training programs on environmental
and safety hazards in the environmental, industrial and construction industry
trades. The training program is designed for use by supervisors, foremen,
project safety and health trainers, construction workers and laborers. The
training program includes the following topics: sources of exposure; health
effects; personal protective equipment and the medical surveillance required by
OSHA; and engineering controls and remediation procedures.
INSURANCE AND SURETY BONDS
The Company maintains comprehensive general liability insurance written on an
occurrence basis. The Company also carries comprehensive auto, professional and
pollution liability as well as worker's compensation and disability coverage.
Basic limits of liability are $11,000,000. 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. There
have been events in the national economy that have adversely affected the major
insurance and surety companies. This has resulted in a tightening of the
insurance and bonding markets that has resulted in the costs increasing and the
availability of certain types of insurance and surety capacity either decreasing
or becoming non-existent.
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 September 2, 2003, the Company employed a core group of approximately 94
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 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 54 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 utilizes several local unions to 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.
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
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any applicable operations, the Company may need additional licenses or permits
in areas into which it plans to expand its operations. In addition, the Company
may be required to obtain additional permits or licenses if new environmental
legislation or regulations are enacted or existing legislation or regulations
are amended or enforced differently than in the past. There can be no assurance
that the Company will be able to continue to comply will all of the permit and
licensing requirements applicable to its business. The Company believes that the
types of licenses the Company possesses have reciprocity in most of the states
due to their adherence to Federal standards, but no assurances can be given in
that regard.
PATENTS, TRADEMARKS, LICENSES AND COPYRIGHTS
The Company does not own any patents or registered trademarks or trade names.
The Company has common law trademark protection for certain of its trade names
and service marks. The Company has copyrights for certain of its promotional and
employee training materials. The Company does not believe that intellectual
property is a competitive factor in its industry.
GEOGRAPHIC INFORMATION
Since all of the Company's operations are located in the United States of
America, the Company's geographic revenue information is based on the country in
which the sales originate. Following is a table that shows the origin of
revenues for the fiscal years ended July 1, 2003 and July 2, 2002, the period
from May 1, 2001 through July 3, 2001 and the fiscal year ended April 30, 2001:
Geographic Information
----------------------
United States Non-United States Consolidated Total
------------- ----------------- ------------------
Fiscal 2003 $17,370,931 $460,258 $17,831,189
Fiscal 2002 $32,903,740 $0 $32,903,740
Period from May 1, 2001
through July 3, 2001 $2,322,511 $0 $2,322,511
Fiscal 2001 $22,022,766 $0 $22,022,766
No geographical data is shown for long-lived assets, since the Company's
operations reside entirely in the United States.
BACKLOG
The Company does not have any measurable backlog.
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
9
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, had a materially adverse impact on the Company in the fiscal year ended
July 1, 2003 and may continue to do so.
ENVIRONMENTAL REMEDIATION OPERATIONS MAY EXPOSE THE COMPANY'S EMPLOYEES AND
OTHERS TO DANGEROUS AND POTENTIALLY TOXIC QUANTITIES OF HAZARDOUS PRODUCTS. Such
products can cause cancer and other debilitating diseases. Although the Company
takes extensive precautions to minimize worker exposure and has not experienced
any such claims from workers or others, there can be no assurance that, in the
future, it will avoid liability to persons who contract diseases that may be
related to such exposure. Such persons potentially include employees, persons
occupying or visiting facilities in which contaminants are being, or have been,
removed or stored, persons in surrounding areas, and persons engaged in the
transportation and disposal of waste material. In addition, the Company is
subject to general risks inherent in the construction industry. It may also be
exposed to liability from the acts of its subcontractors or other contractors on
a work site.
THE FAILURE TO OBTAIN AND MAINTAIN REQUIRED GOVERNMENTAL LICENSES, PERMITS AND
APPROVALS COULD HAVE A SUBSTANTIAL ADVERSE AFFECT ON THE COMPANY'S OPERATIONS.
The remediation industry is highly regulated. The Company is required to have
federal, state and local governmental licenses, permits and approvals for its
facilities and services. There can be no assurance as to the successful outcome
of any pending application or demonstration testing for any such license, permit
or approval. In addition, the Company's existing licenses, permits and approvals
are subject to revocation or modification under a variety of circumstances.
Failure to obtain timely, or to comply with the conditions of, applicable
licenses, permits or approvals could adversely affect the Company's business,
financial condition and results of operations. As the Company's business expands
and as new procedures and technologies are introduced, it may be required to
obtain additional operating licenses, permits or approvals. It may be required
to obtain additional operating licenses, permits or approvals if new
environmental legislation or regulations are enacted or promulgated or existing
legislation or regulations are amended, reinterpreted or enforced differently
than in the past. Any new requirements that raise compliance standards may
require the Company to modify its procedures and technologies to conform to more
stringent regulatory requirements. There can be no assurance that the Company
will be able to continue to comply with all of the environmental and other
regulatory requirements applicable to its business.
THE COMPANY IS DEPENDENT ON THE SUCCESSFUL DEVELOPMENTAL AND COMMERCIAL
ACCEPTANCE OF ITS PROCEDURES AND TECHNOLOGIES. The Company is constantly
developing, refining and implementing its procedures and technologies for
environmental remediation. Its operations and future growth are dependent, in
part, upon the acceptance and implementation of these procedures and
technologies. There can be no assurance that successful development of future
procedures and technologies will occur or, even if successfully developed, that
the Company will be able to successfully commercialize such procedures and
technologies. The successful commercialization of the Company's procedures and
technologies may depend in part on ongoing comparisons with other competing
procedures and technologies and more traditional treatment, storage and disposal
alternatives, as well as the continuing high cost and limited availability of
commercial disposal options. There can be no assurance that the Company's
procedures and technologies will prove to be commercially viable or
cost-effective or, if commercially viable and cost-effective, that the Company
will be successful in timely securing the requisite regulatory licenses, permits
and approvals for any such technologies or that such technologies will be
selected for use in future projects. The Company's inability to develop,
commercialize or secure the requisite licenses, permits and approvals for its
procedures and technologies on a timely basis could have a material adverse
effect on its business, financial condition and results of operations.
A SUBSTANTIAL PORTION OF THE COMPANY'S REVENUES IS GENERATED AS A RESULT OF
REQUIREMENTS ARISING UNDER FEDERAL AND STATE LAWS, REGULATIONS AND PROGRAMS
RELATED TO PROTECTION OF THE ENVIRONMENT. Environmental laws and regulations
are, and will continue to be, a principal factor affecting demand for the
Company's services. The level of enforcement activities by federal, state and
local environmental protection agencies and changes in such laws and regulations
also affect the demand for such services. If the requirements of compliance with
environmental laws and regulations were to be modified in the future, the demand
for the Company's services, and
10
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 Company's key equipment and
facilities were to be shut down for any appreciable period of time, either due
to equipment breakdown or as the result of regulatory action in response to an
alleged safety or other violation of the terms of the licenses under which the
Company operates, its business, financial condition and results of operations
could be materially adversely affected.
THE ENVIRONMENTAL REMEDIATION INDUSTRY IS HIGHLY COMPETITIVE AND THE COMPANY
FACES SUBSTANTIAL COMPETITION FROM OTHER COMPANIES. Many of the Company's
competitors have greater financial, managerial, technical and marketing
resources than the Company has. To the extent that competitors possess or
develop superior or more cost effective environmental remediation solutions or
field service capabilities, or otherwise possess or acquire competitive
advantages compared to the Company, its ability to compete effectively could be
materially adversely affected.
THE COMPANY'S FUTURE SUCCESS DEPENDS ON ITS CONTINUING ABILITY TO ATTRACT,
RETAIN AND MOTIVATE HIGHLY QUALIFIED MANAGERIAL, TECHNICAL AND MARKETING
PERSONNEL. The Company is highly dependent upon the continuing contributions of
key managerial, technical and marketing personnel. Employees may voluntarily
terminate their employment with the Company at any time, and competition for
qualified technical personnel, in particular, is intense. The loss of the
services of any of its key managerial, technical or marketing personnel,
especially Michael O'Reilly, its chief executive officer, could materially
adversely affect the Company's business, financial condition and results of
operations.
THE COMPANY SOMETIMES HAS A CONCENTRATION OF CREDIT RISK. The Company contracts
with a limited number of customers that are involved in a wide range of
industries. A small number of customers may therefore be responsible for a
substantial portion of revenues at any time. While management assesses the
credit risk associated with each proposed customer prior to the execution of a
definitive contract, no assurances can be given that such
11
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.
IF THE COMPANY'S INSURANCE COSTS INCREASE SIGNIFICANTLY, THESE INCREMENTAL COSTS
COULD NEGATIVELY AFFECT ITS FINANCIAL RESULTS. The costs related to obtaining
and maintaining workers compensation, professional and general liability
insurance and health insurance has been increasing. If the cost of carrying this
insurance continues to increase significantly, the Company will recognize an
associated increase in costs that may negatively impact its margins. This could
have an adverse impact on the Company's financial condition and the price of its
common stock.
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 or raise additional
capital to fund the capital needs related to its anticipated 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
- ------------------------------------------
ONE MAJOR STOCKHOLDER CONTROLS THE COMPANY. Currently, one major stockholder
owns an aggregate of 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 TO COMMON SHAREHOLDERS
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.
12
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 2, 2003, 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 losses could adversely affect the market
value of the Common Stock. The Company incurred net losses of approximately
$469,000 for the fiscal year ended July 1, 2003 and $720,000 for the period from
May 1, 2001 through July 3, 2001. As of July 1, 2003, the Company had an
accumulated deficit of approximately $31,182,000. 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 $3,495,000 and approximately $1,066,000 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 price of the Common Stock could be subject to
wide fluctuations in the future as well in response to a variety of events or
factors, some of which may be beyond its control. These could include, without
limitation:
o future announcements of new competing technologies and procedures;
o changing policies and regulations of the federal state, and local
governments;
o fluctuations in the Company's financial results;
o liquidity of the market for the Company's securities;
o public perception of the Company and its entry into new markets; and
o general conditions in the Company's industry and the economy.
THE COMPANY'S CHARTER CONTAINS AUTHORIZED, UNISSUED PREFERRED STOCK THAT MAY
INHIBIT A CHANGE OF CONTROL OF THE COMPANY UNDER CIRCUMSTANCES THAT COULD
OTHERWISE GIVE ITS STOCKHOLDERS THE OPPORTUNITY TO REALIZE A PREMIUM OVER
PREVAILING MARKET PRICES OF THE COMPANY'S SECURITIES. The Company's Restated
Certificate of Incorporation, as amended (the "Certificate of Incorporation"),
and By-Laws contain provisions that could make it more difficult for a third
party to acquire the Company under circumstances that could give stockholders an
opportunity to realize a premium over then-prevailing market prices of its
securities. The Company's Certificate of Incorporation authorizes the Company's
Board of Directors to issue preferred stock without stockholder approval and
upon terms as the Board may determine. The rights of holders of common stock are
subject to, and may be adversely affected by, the rights of future holders of
preferred stock. Section 203 of the Delaware General Corporation Law makes it
more difficult for an "interested stockholder" (generally, a 15% stockholder) to
effect various business combinations with a corporation for a three-year period
after the stockholder becomes an "interested stockholder." In general, these
provisions may discourage a third party from attempting to acquire the Company
and, therefore, may inhibit a change of control of the Company.
ITEM 2. DESCRIPTION OF PROPERTY
- --------------------------------
The Company holds a 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 $352,120 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 $1,150, 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.
13
ITEM 3. LEGAL PROCEEDINGS
- --------------------------
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 settled this dispute in fiscal 2003 for approximately
$500,000. Such settlement is included in accrued expenses and is expected to be
paid in fiscal 2004.
The Company is a party to other litigation matters and claims that 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
PART II
-------
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
- ------------------------------------------------------------------------------
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 years ended July 1, 2003 and July 2, 2002, as provided by Standard
and Poor's ComStock. These quotations represent inter-dealer prices, do not
reflect retail markup, markdown, or commission and may not represent actual
transactions.
Price Range of Common Stock
---------------------------
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
FISCAL YEAR ENDED JULY 1, 2003
Quarter Ended HIGH LOW
------------- ---- ---
October 1, 2002 $.20 $.12
December 31, 2002 $.19 $.13
April 1, 2003 $.17 $.12
July 1, 2003 $.16 $.12
The Company had approximately 728 holders of record of shares of its common
stock as of September 2, 2003. There have been no dividends declared or paid on
the Common Stock during the fiscal years ended July 1, 2003 and July 2, 2002,
the period from May 1, 2001 through July 3, 2001 or in the fiscal year ended
April 30, 2001 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.
There were no sales or issuances of the Company's unregistered equity securities
occurring during the fiscal year ended July 1, 2003, except to the extent
previously disclosed in the Company's Quarterly Reports on Form 10-Q.
14
Information required by this item regarding equity compensation plans is
addressed in Item 12, Part III of this report.
ITEM 6. SELECTED FINANCIAL DATA
- -------------------------------
Period from
May 1, 2001
Fiscal Year Fiscal Year through Fiscal Years Ended April 30,
Ended Ended through ---------------------------------------------
July 1, 2003 July 2, 2002 July 3, 2001 2001 2000 1999
-----------------------------------------------------------------------------------------
Consolidated Operations Data:
Revenues $17,831,189 $32,903,740 $2,322,511 $22,022,766 $ 12,845,165 $13,926,812
Net income (loss) (469,004) 3,494,867 (720,303) 1,065,877 (2,256,997) (1,307,476)
Net income (loss) per common share-basic (0.01) 0.05 (0.02) 0.03 (0.09) (0.11)
Net income (loss) per common share-diluted $ (0.01) $ 0.04 $ (0.02) $ 0.01 $ (0.09) $ (0.11)
Weighted average common shares outstanding:
Basic 77,936,358 63,300,953 38,481,254 38,459,953 26,927,083 13,064,314
Diluted 77,936,358 85,455,580 38,481,254 76,244,295 26,927,083 13,064,314
Consolidated Balance Sheet
Data:
Total assets $11,054,263 $10,212,538 $ 8,192,568 $8,806,398 $ 6,699,204 $ 5,745,122
Long-term debt and other liabilities 687,473 1,005,574 400,308 457,084 197,172 198,732
Convertible notes - 100,000 2,780,000 2,780,000 2,780,000 790,000
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) $ 2,825,379 $ 3,372,383 $ (2,487,156) $(1,753,853) $ (2,744,980) $(3,347,257)
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 external factors could cause future results to differ
materially from historical trends. These external factors are more fully
discussed in "Item 1, Description of Business - Risk Factors" in this Annual
Report on Form 10-K.
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
15
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 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 may 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 history of losses, the Company has
recorded a full valuation allowance against its net deferred tax assets as of
July 1, 2003. The Company currently provides for income taxes only to the extent
that it expects to pay cash taxes on 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 1, 2003 Compared to Fiscal Year Ended July 2, 2002
- -------------------------------------------------------------------------
Revenues
- --------
Revenues decreased to $17,831,189 in the fiscal year ended July 1, 2003 ("fiscal
2003") compared to $32,903,740 in the fiscal year ended July 2, 2002 ("fiscal
2002"). This decrease of $15,072,551, or 45.8%, was primarily the result of
revenue decreases in the Company's Trade-Winds subsidiary of $14,664,269 to
$17,567,411 in fiscal 2003 from $32,231,680 in fiscal 2002. In addition,
revenues in the Company's NAL subsidiary decreased $408,282, or 60.8%, to
$263,778 in fiscal 2003 from $672,060 in fiscal 2002.
The decrease in Trade-Winds revenue of $14,664,269 was primarily attributable to
decreases of $17,002,928 related to non-recurring catastrophe response projects
performed in the vicinity of the World Trade Center, 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, marine spill response services of $864,407 and decreases in training
related revenue of $110,000. The decreases were partially offset by increases of
$3,486,469 related to a large non-recurring mold remediation project in Hawaii,
$1,100,000 related to an asbestos project in New York City, $841,380 for various
services performed for a utility, $795,000 related to insurance, $460,558
related to a commercial drying project in Mexico and $343,543 related to a lead
remediation project in New York City. The decrease in NAL revenues of $408,282
is primarily attributable to the planned downsizing of NAL in order that
management could better focus on Trade-Winds business.
16
Cost of Revenues/Gross Profit
- -----------------------------
Cost of revenues decreased to $14,314,519, or 80.3% of total revenues, in fiscal
2003 compared to $20,755,677, or 63.1% of total revenues, in fiscal 2002. Gross
profit decreased $8,631,393 to $3,516,670, or 19.7% of total revenues, for the
fiscal year ended July 1, 2003 from $12,148,063, or 36.9% of total revenues, for
the fiscal year ended July 2, 2002. This decrease in gross margin of $8,631,393,
or 71.1%, was due primarily to the absence of higher margin remediation work in
the vicinity of the World Trade Center that the Company was unable to replace
with other projects. Decreasing revenues and the absence of large projects
causes the Company's margins to erode. Direct field labor, union benefits,
equipment rental, workers compensation insurance and disposal costs decreased
$4,015,708, $541,675, $377,346, $619,137 and $168,317, respectively, primarily
as a result of the absence of the World Trade Center work. In addition, project
manager salaries decreased $184,212 due to a decrease in the number of those
employees. These decreases were partially offset by increases in subcontractor
costs and other job related costs of $214,726 and $259,117, respectively. In
response to lower revenues, the Company reduced its direct labor force in
February 2003. This reduction produced cost savings of approximately $228,000 in
fiscal 2003. 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 costs, repairs, maintenance and rental
of job equipment, job materials and supplies, testing and sampling, and
transportation, disposal, and depreciation of capital equipment.
Selling, General and Administrative Expenses
- --------------------------------------------
Selling, general and administrative expenses increased by $257,163, or 4.8%, to
$5,603,557 in fiscal 2003 from $5,346,394 in fiscal 2002 and constituted
approximately 31.4% and 16.2% of total revenues in fiscal 2003 and 2002,
respectively. The increase was primarily attributable to increases in legal
expenses, sales salaries and travel and entertainment of $390,443, $285,732 and
$134,606, respectively. The increases were partially offset by a decrease in the
provision for doubtful accounts and advertising expenses of $216,882 and
$169,163, respectively.
The increase in legal expenses of $390,443 was primarily due to the settlement
of outstanding litigation involving a class action suit (See Part I, Item 3).
The increase in sales salaries and the related travel and entertainment of
$285,732 and $134,606, respectively, was due to the implementation of an
aggressive marketing strategy that called for increasing the number of sales
personnel and increasing attendance at trade shows and conferences.
Expense (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 expense related
to variable accounting treatment for officer options decreased by $1,149,058 to
a benefit of $593,246 in fiscal 2003 from an expense of $555,812 in fiscal 2002.
This was due to a decrease in the market price of the Company's Common Stock and
an increase in the number of options outstanding that are vested. 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 $151,057, or 67.7%, in fiscal 2003 to $72,189 from
$223,246 in fiscal 2002. The decrease in interest expense was primarily
attributable to lower levels of debt and reductions in the LIBOR rate.
17
(Benefit) Provision for Income Taxes
- ------------------------------------
The (benefit) provision for income taxes reflects an effective rate of (69.6)%
and 42.1% in fiscal 2003 and 2002, 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 (Loss) Income
- -----------------
Net (loss) and basic net (loss) attributable to common stockholders per share
for fiscal 2003 were ($469,004) and ($.01), respectively. This compares to net
income and basic net income attributable to common stockholders per share of
$3,494,867 and $.05, respectively, for fiscal 2002. The changes are primarily
attributable to the factors described above.
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.
Cost of Revenues/Gross Profit
- -----------------------------
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 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.
18
Selling, General and Administrative Expenses
- --------------------------------------------
Selling, general and administrative expenses for fiscal 2002 increased by
$880,342, or 19.7%, 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, or 34.1%, 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. The changes are primarily
attributable to the factors described above.
LIQUIDITY AND CAPITAL RESOURCES
As of July 1, 2003, the Company had cash balances of $130,096, working capital
of $2,217,290 and stockholders' equity of $2,825,379. At 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 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.
Net cash used in operating activities was ($317,504) in fiscal 2003, as compared
to net cash provided by (used in) operating activities of $2,521,922 and
($136,364) in fiscal 2002 and 2001, respectively. Accounts receivable decreased
$1,275,628, or 25.4%, to $6,284,407 in fiscal 2003, reflecting the collection of
balances from the prior year's activities in the vicinity of the World Trade
Center and a reduction in sales volume. Accounts receivable increased
$2,275,940, or 37.0%, to $8,428,232 in fiscal 2002, reflecting the increase in
sales volume attributable to work performed in the vicinity of the World Trade
Center. 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
19
payable and accrued expenses decreased by $119,145, or 4.3%, to $2,681,022 in
fiscal 2003 primarily as a result of reduced sales volume. Accounts payable and
accrued expenses 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.
Investing activities used cash of $1,914,576, $688,073 and $381,729 in fiscal
2003, 2002 and 2001, respectively, principally for the purchase of property and
equipment. Purchases of property and equipment increased in fiscal 2003 due to
the purchase of commercial drying equipment enabling the Company to market such
services. During the 2001 transition period, the Company received $249,878 for
the sale of substantially all of the assets of an unprofitable subsidiary.
Financing activities for fiscal 2003, fiscal 2002 and fiscal 2001 provided
(used) net cash of $1,962,497, ($1,757,902) and $317,621, respectively. In
fiscal 2003, fiscal 2002 and fiscal 2001, these amounts include proceeds from
short-term notes from Spotless of $2,325,000, $1,750,000 and $1,450,000 offset
by repayments of short-term notes to Spotless of $825,000, $2,750,000 and
$1,000,000, respectively. In addition, in fiscal 2003 and fiscal 2002, proceeds
from long-term debt was $844,209 and $137,965, respectively, offset by
repayments of long-term debt of $203,712 and $84,549 in fiscal 2003 and fiscal
2002, respectively. In fiscal 2003 and fiscal 2002, the Company repaid
convertible notes of $100,000 and $680,000 and paid dividends on preferred stock
of $78,000 and $214,500, respectively. In fiscal 2002 and fiscal 2001 the
Company received proceeds from the exercise of stock options of $83,182 and
$3,250, respectively.
As of July 1, 2003, the Company owed Spotless $1,700,000 in short-term loans to
fund working capital. Between July 2, 2003 and September 23, 2003, the Company
borrowed an additional $1,835,000 from Spotless for working capital needs that
increased the total outstanding borrowings from Spotless to $3,535,000. 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 1, 2003, interest of $26,336 was accrued and unpaid on these borrowings.
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.
The table below summarizes contractual obligations and commitments as of July 1,
2003:
Total 1 Year 2-3 Years 4-5 Years Thereafter
Operating Leases $1,427,063 $352,120 $747,056 $327,887 $0
Long-term Debt 775,465 436,617 241,387 97,461 0
------- ------- ------- ------ - -
Total $2,202,528 $788,737 $988,443 $425,348 $0
========== ======== ======== ======== ==
OFF-BALANCE SHEET ARRANGEMENTS
The Company does not have any off-balance sheet arrangements.
RELATED PARTY TRANSACTIONS
See Note 14 to the consolidated financial statements included in this Annual
Report on Form 10-K.
20
EFFECT OF INFLATION
Inflation has not had a material impact on the Company's operations during
fiscal 2003, fiscal 2002, the 2001 transition period, or during fiscal 2001.
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 1, 2003, such shares and vested options to purchase shares
aggregated 8,813,642 shares. Each $.01 increase or decrease in market price of
the Company's stock impacts earnings by approximately $88,000.
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% (2.1% at July 1, 2003). At
July 1, 2003, total debt owed to Spotless was $1,700,000 with additional accrued
interest of $26,336. Assuming variable rate debt at July 1, 2003, a one-point
change in interest rates would impact annual net interest payments by
approximately $17,000. 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 following Item 15.
Item Page
---- ----
Independent Auditors' Report 26
Consolidated Balance Sheets as of July 1, 2003 and July 2, 2002 27
Consolidated Statements of Operations for the fiscal years ended
July 1, 2003 and July 2, 2002, the period from May 1, 2001
through July 3, 2001, and the fiscal year ended April 30, 2001 28
Consolidated Statements of Stockholders' Equity for the fiscal
years ended July 1, 2003 and July 2, 2002, the period from
May 1, 2001 through July 3, 2001 and the fiscal year ended
April 30, 2001 29
Consolidated Statements of Cash Flows for the fiscal years ended
July 1, 2003 and July 2, 2002, the period from May 1, 2001
through July 3, 2001 and the fiscal year ended April 30, 2001 30
Notes to Consolidated Financial Statements 31 to 47
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
- ------------------------------------------------------------------------
None.
ITEM 9A. CONTROLS AND PROCEDURES
- ---------------------------------
Within the 90 days prior to the date of this report, the Company carried out an
evaluation under the supervision and with the participation of its management,
including its Chief Executive Officer and Chief Financial Officer, of the
effectiveness of the design and operation of its disclosure controls and
procedures pursuant to Securities Exchange Act Rule 13a-14. Based upon that
evaluation, the Chief Executive Officer and Chief Financial Officer concluded
that the Company's disclosure controls and procedures are effective in timely
alerting them to material information relating to the company required to be
included in its periodic SEC Filings. The design of any system of controls is
based in part
21
upon certain assumptions about the likelihood of future events, and there
can be no assurance that any design will succeed in achieving its stated goals
under all potential future conditions, regardless of how remote. There were no
significant changes in the company's internal controls or in other factors that
could significantly affect these controls subsequent to the date of their
evaluation.
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 2003 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 2003 is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
- ------------------------------------------------------------------------
The information under the caption "Security Ownership and Equity Compensation
Plan Information" in the Company's definitive Proxy Statement for the Annual
Meeting of Stockholders to be held in 2003 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 2003 is incorporated herein by reference.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
- ------------------------------------------------
AUDIT FEES
Deloitte & Touche LLP provided audit services for us for the fiscal years ended
July 1, 2003 and July 2, 2002. The aggregate fees billed by Deloitte & Touche
LLP for the audit of our annual financial statements and review of financial
statements included in our Form 10-Qs were $142,508 and $131,999 for fiscal
years ended July 1, 2003 and July 2, 2002, respectively.
AUDIT-RELATED FEES
The aggregate fees billed in each of the fiscal years ended July 1, 2003 and
July 2, 2002 for assurance and related services by Deloitte & Touche LLP, that
are reasonably related to the audit or review of the Company's financial
statements and that were not covered in the Audit Fees disclosure above, were $0
and $0, respectively.
TAX FEES
There were no fees billed for the fiscal years ended July 1, 2003 and July 2,
2002 for any professional tax advice or tax planning services rendered by
Deloitte & Touche LLP.
ALL OTHER FEES
There were no fees billed for the fiscal years ended July 1, 2003 and July 2,
2002 for professional services rendered by Deloitte & Touche LLP for all other
services not disclosed above.
22
AUDIT COMMITTEE PRE-APPROVAL
Our Audit Committee pre-approved our engagement of Deloitte & Touche LLP to act
as our independent auditor for the fiscal years ended July 2, 2002 and July 1,
2003. Our Audit Committee pre-approved Deloitte & Touche LLP to provide the
audit and audit related services described above, which represented 100% of the
total fees we paid Deloitte & Touche LLP for the fiscal years ended July 1, 2003
and July 2, 2002. Our independent auditors performed all work only with its full
time permanent employees.
ITEM 15. 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 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).
10.02 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).
10.03 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).
10.04 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).
10.05 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).
10.06 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).
10.07 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).
10.08 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).
23
10.09 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).
10.10 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).
10.11 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).
10.12 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).
10.13 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).
10.14 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).
10.15 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).
10.16 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).
10.17 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).
10.18 Stipulation of Settlement of action entitled Nicolai Grib and Vladislav
Kazarov v. Trade-Winds Environmental Restoration, Inc. and Gulf
Insurance. (Incorporated by reference to Exhibit 10.1 of the Company's
Quarterly Report on Form 10-Q for the fiscal quarter ended April 1,
2003).
21.01 Subsidiaries of the Company.
23.01 Consent of Deloitte & Touche LLP.
31.1 Certification of Chief Executive Officer of the Company pursuant to
Sarbanes-Oxley Section 302(a).
31.2 Certification of Chief Financial Officer of the Company pursuant to
Sarbanes-Oxley Section 302(a).
32.1 Certification of Chief Executive Officer of the Company pursuant to
18 U.S.C. Section 1350.
32.2 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.
24
WINDSWEPT ENVIRONMENTAL GROUP, INC.
TABLE OF CONTENTS
Page
----------
Independent Auditors' Report 26
Consolidated Balance Sheets as of July 1, 2003 and July 2, 2002 27
Consolidated Statements of Operations for the fiscal years ended
July 1, 2003 and July 2, 2002, the period from May 1, 2001
through July 3, 2001 and the fiscal year ended April 30, 2001 28
Consolidated Statements of Stockholders' Equity for the fiscal
years ended July 1, 2003 and July 2, 2002, the period from
May 1, 2001 through July 3, 2001 and the fiscal year ended
April 30, 2001 29
Consolidated Statements of Cash Flows for the fiscal years ended
July 1, 2003 and July 2, 2002, the period from May 1, 2001
through July 3, 2001 and the fiscal year ended April 30, 2001 30
Notes to Consolidated Financial Statements 31 to 47
25
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 1, 2003
and July 2, 2002, and the related consolidated statements of operations,
stockholders' equity and cash flows for the fiscal years ended July 3, 2003 and
July 2, 2002, the period from May 1, 2001 through July 3, 2001 and the fiscal
year ended April 30, 2001. 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 1, 2003 and
July 2, 2002, and the results of their operations and their cash flows for the
fiscal years ended July 1, 2003 and July 2, 2002, the period from May 1, 2001
through July 3, 2001 and the fiscal year ended April 30, 2001, in conformity
with accounting principles generally accepted in the United States of America.
/s/ Deloitte & Touche, LLP
Jericho, New York
September 23, 2003
26
WINDSWEPT ENVIRONMENTAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
July 1, July 2,
2003 2002
------------ ------------
ASSETS:
CURRENT ASSETS:
Cash $ 130,096 $ 399,679
Accounts receivable, net of allowance for doubtful accounts of $402,804 and $909,029,
respectively 5,881,603 7,519,203
Inventory 215,466 296,474
Costs and estimated earnings in excess of billings on uncompleted contracts 871,753 501,424
Prepaid expenses and other current assets 279,597 144,274
Refundable income taxes 1,080,186 -
------------ ------------
Total current assets 8,458,701 8,861,054
PROPERTY AND EQUIPMENT, net of accumulated depreciation and amortization of $5,111,516 and
$4,550,006, respectively 2,497,435 1,144,369
OTHER ASSETS 98,127 207,115
------------ ------------
TOTAL $11,054,263 $10,212,538
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY:
CURRENT LIABILITIES:
Accounts payable $ 1,487,683 $ 1,060,074
Accrued expenses 1,193,339 1,740,093
Short-term notes payable to related party 1,700,000 200,000
Billings in excess of costs and estimated earnings on uncompleted contracts 299,427 193,251
Accrued payroll and related fringe benefits 659,659 551,091
Current maturities of long-term debt 436,617 71,265
Current portion of convertible notes to related party - 100,000
Income taxes payable - 450,820
Other current liabilities 464,686 167,987
------------ ------------
Total current liabilities 6,241,411 4,534,581
------------ ------------
LONG-TERM DEBT 338,848 63,703
------------ ------------
COMMITMENTS AND CONTINGENCIES (Notes 11 and 15)
REDEEMABLE COMMON STOCK 348,625 941,871
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:
Series B preferred stock, $.01 par value; 50,000 shares authorized; 0 shares outstanding - -
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 shares
outstanding at July 1, 2003 and July 2, 2002 7,794 7,794
Additional paid-in capital 34,000,017 34,078,017
Accumulated deficit (31,182,432) (30,713,428)
------------ ------------
Total stockholders' equity 2,825,379 3,372,383
------------ ------------
TOTAL $11,054,263 $10,212,538
============ ============
See notes to consolidated financial statements.
27
WINDSWEPT ENVIRONMENTAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE FISCAL YEARS ENDED JULY 1, 2003 AND JULY 2, 2002,
THE PERIOD FROM MAY 1, 2001 THROUGH JULY 3, 2001 AND THE FISCAL YEAR
ENDED APRIL 30, 2001
July 1, July 2, May 1, 2001 to April 30,
2003 2002 July 3, 2001 2001
-------------- -------------- -------------- --------------
Revenues $ 17,831,189 $ 32,903,740 $ 2,322,511 $ 22,022,766
Cost of revenues 14,314,519 20,755,677 2,414,195 15,336,191
-------------- -------------- -------------- --------------
Gross margin 3,516,670 12,148,063 (91,684) 6,686,575
-------------- -------------- -------------- --------------
Operating expenses (income):
Selling, general and administrative expenses 5,603,557 5,346,394 780,381 4,466,052
Expense (benefit) related to variable
accounting treatment for officer options (593,246) 555,812 (44,189) 328,080
-------------- -------------- -------------- --------------
Total operating expenses 5,010,311 5,902,206 736,192 4,794,132
-------------- -------------- -------------- --------------
Income (loss) from operations (1,493,641) 6,245,857 (827,876) 1,892,443
-------------- -------------- -------------- --------------
Other expense (income):
Interest expense 72,189 223,246 46,686 339,015
Other income, net (23,040) (14,576) (154,259) (58,449)
-------------- -------------- -------------- --------------
Total other expense (income) 49,149 208,670 (107,573) 280,566
-------------- -------------- -------------- --------------
Income (loss) before (benefit) provision for income
taxes (1,542,790) 6,037,187 (720,303) 1,611,877
(Benefit) provision for income taxes (1,073,786) 2,542,320 - 546,000
-------------- -------------- -------------- --------------
Net income (loss) (469,004) 3,494,867 (720,303) 1,065,877
Dividends on Preferred Stock 78,000 468,719 13,000 78,000
-------------- -------------- -------------- --------------
Net income (loss) attributable to common
Shareholders $ (547,004) $ 3,026,148 $ (733,303) $ 987,877
============== ============== ============== ==============
Basic and diluted net income (loss) per
common share:
Basic $(.01) $.05 $(.02) $.03
====== ==== ====== ====
Diluted $(.01) $.04 $(.02) $.01
====== ==== ====== ====
Weighted average number of common shares
outstanding:
Basic 77,936,358 63,300,953 38,481,254 38,459,953
========== ========== ========== ==========
Diluted 77,936,358 85,455,580 38,481,254 76,244,295
========== ========== ========== ==========
See notes to consolidated financial statements.
28
WINDSWEPT ENVIRONMENTAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE FISCAL YEARS ENDED JULY 1, 2003 AND JULY 2, 2002, THE PERIOD
FROM MAY 1, 2001 THROUGH JULY 3, 2001 AND THE FISCAL YEAR
ENDED APRIL 30, 2001
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, 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
Dividends on Series A preferred stock - - - - (78,000) - (78,000)
Net loss and comprehensive loss - - - - - (469,004) (469,004)
------ ----- ---------- ------ ------------ ------------- ------------
Balance at July 1, 2003 - - 77,936,358 $7,794 $34,000,017 $(31,182,432) $ 2,825,379
====== ===== ========== ====== ============ ============= ============
See notes to consolidated financial statements.
29
WINDSWEPT ENVIRONMENTAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE FISCAL YEARS ENDED JULY 1, 2003 AND JULY 2, 2002, THE PERIOD
FROM MAY 1, 2001 THROUGH JULY 3, 2001 AND THE FISCAL YEAR ENDED APRIL 30, 2001
Fiscal Year Fiscal Year May 1, 2001 Fiscal Year
Ended July 1, Ended July 2, to July 3, Ended April 30,
2003 2002 2001 2001
------------ ------------ ------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ (469,004) $ 3,494,867 $ (720,303) $ 1,065,877
Adjustments to reconcile net income (loss) to net cash (used in)
provided by operating activities:
Depreciation and amortization 561,510 672,054 121,111 796,526
Provision for doubtful accounts, net 361,972 338,620 188,952 115,415
Gain on sale of fixed assets - - (154,261) -
Compensation (benefit) related to officer options and
redeemable common stock (593,246) 555,812 (44,189) 328,080
Changes in operating assets and liabilities:
Accounts receivable 1,275,628 (2,275,940) (231,799) (2,164,282)
Inventory 81,008 (88,410) (68,248) 28,335
Costs and estimated earnings in excess of billings on
uncompleted contracts (370,329) 185,104 121,868 (741,715)
Prepaid expenses and other current assets (135,323) (22,102) 14,061 (849)
Other assets 108,988 (65,275) 6,772 40,633
Accounts payable and accrued expenses (119,145) 301,190 (47,665) (40,006)
Accrued payroll and related fringe benefits 108,568 (17,650) 81,085 (173,612)
Income taxes payable (1,531,006) (53,355) (199,648) 536,678
Other current liabilities 296,699 (170,885) (12,546) (51,201)
Billings in excess of costs and estimated earnings in
uncompleted contracts 106,176 (332,108) 182,896 123,757
------------ ------------ ------------ ------------
NET CASH (USED IN) PROVIDED BY OPERATING ACTIVITIES (317,504) 2,521,922 (761,914) (136,364)
------------ ------------ ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (1,914,576) (688,073) (16,344) (381,729)
Sale of property and equipment - - 249,878 -
------------ ------------ ------------ ------------
NET CASH (USED IN) PROVIDED BY INVESTING ACTIVITIES (1,914,576) (688,073) 233,534 (381,729)
------------ ------------ ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments of long-term debt (203,712) (84,549) (13,976) (135,629)
Proceeds from long-term debt 844,209 137,965 - -
Repayment of short-term notes payable (825,000) (2,750,000) - (1,000,000)
Proceeds from short-term notes payable 2,325,000 1,750,000 250,000 1,450,000
Payment of convertible notes (100,000) (680,000) - -
Dividends paid on preferred stock (78,000) (214,500) - -
Proceeds from exercise of stock options - 83,182 - 3,250
------------ ------------ ------------ ------------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES 1,962,497 (1,757,902) 236,024 317,621
------------ ------------ ------------ ------------
NET (DECREASE) INCREASE IN CASH (269,583) 75,947 (292,356) (200,472)
CASH - BEGINNING OF PERIOD 399,679 323,732 616,088 816,560
------------ ------------ ------------ ------------
CASH - END OF PERIOD $ 130,096 $ 399,679 $ 323,732 $ 616,088
============ ============ ============ ============
Cash paid during the period for:
Interest $ 39,405 $274,129 $2,504 $138,125
======== ======== ====== ========
Taxes $230,596 $ 2,589,958 $ 200,000 $20,494
======== =========== =========== =======
See notes to consolidated financial statements.
30
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 remediation, 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.
RECLASSIFICATIONS
Certain prior year amounts have been reclassified to conform to the
manner of presentation in the current year.
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
31
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 seven 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 years ended July 1, 2003 and July 2,
2002, the period May 1, 2001 through July 3, 2001 and the fiscal year
ended April 30, 2001.
ALLOWANCE FOR DOUBTFUL ACCOUNTS
The Company establishes an allowance for accounts receivable based upon
factors such as the credit risk of specific customers, historical
trends and other information.
The activity within the allowance for doubtful accounts for the fiscal
years ended July 1, 2003 and July 2, 2002, the period from May 1, 2001
through July 3, 2001 and the fiscal year ended April 30, 2001 was as
follows:
Fiscal Year Fiscal Year Period from Fiscal Year
Ended Ended May 1, 2001 Ended
July 1, July 2, through July April 30,
2003 2002 3, 2001 2001
-------------- -------------- -------------- --------------
Balance, beginning of period $ 909,029 $ 570,409 $ 381,457 $ 266,042
Charged to costs and expenses 303,972 686,296 200,038 295,858
Deductions (868,197) (351,823) (16,205) (217,320)
Recoveries 58,000 4,147 5,119 36,877
---------- ---------- ---------- ----------
Balance, end of period $ 402,804 $ 909,029 $ 570,409 $ 381,457
========== ========== ========== ==========
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 income 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.
STOCK-BASED COMPENSATION
In December 2002, the Financial Accounting Standards Board ("FASB")
issued Statement of Financial Accounting Standards ("SFAS)" No. 148,
"Accounting for Stock-Based Compensation-Transition and Disclosure - an
amendment of FASB Statement No. 123 (" SFAS 148") SFAS No. 148 amends
SFAS No. 123, "Accounting for Stock-Based Compensation" ("SFAS 123"),
to provide alternative methods of transition for a voluntary change to
the fair value based method of accounting for stock-based employee
compensation and does not permit the use of the original SFAS No. 123
prospective method of transition in fiscal years beginning after
December 15, 2003. In addition, SFAS No. 148 amends the disclosure
requirements of SFAS No. 123 to require prominent disclosures in both
annual and interim financial
32
statements about the method of accounting for stock-based employee
compensation and the effect of the method used on reported results,
regardless of whether, when, or how an entity adopts the preferable,
fair value based method of accounting. SFAS No. 148 improves the
prominence and clarity of the pro forma disclosures required
by SFAS No. 123 by prescribing a specific tabular format and
by requiring disclosure in the "Summary of Significant Accounting
Policies" or its equivalent and improves the timeliness of those
disclosures by requiring their inclusion in financial reports for
interim periods. The Company has adopted the disclosure requirements of
SFAS No. 148 for the fiscal year ended July 1, 2003. The Company will
continue to account for stock-based employee compensation under APB
Opinion No. 25 and its related interpretations.
The following table illustrates the effect on net (loss) income
attributable to common shareholders and net (loss) income per share if
the Company had applied the fair value recognition provisions of SFAS
No. 123, "Accounting for Stock-Based Compensation," to stock-based
employee compensation for the fiscal years ended July 1, 2003 and July
2, 2002, the period from May 1, 2001 through July 3, 2001 and the
fiscal year ended April 30, 2001:
Period from
Fiscal Year Fiscal Year May 1, Fiscal Year
Ended Ended 2001 Ended
July 1, July 2, through July April 30,
2003 2002 3, 2001 2001
-------------- -------------- -------------- --------------
Net (loss) income attributable to
common shareholders, as
reported $ (547,004) $ 3,026,148 $ (733,303) $ 987,877
Less: Stock-based employee
compensation cost determined
under the fair value method,
net of related tax effects (239,121) (271,401) (41,458) (312,383)
-------------- -------------- -------------- --------------
Pro forma net (loss) income
attributable to common
shareholders $ (786,125) $ 2,754,747 $ (774,761) $ 675,494
============== ============== ============== =============
Net (loss) income per share:
Basic - as reported $(.01) $.05 $(.02) $.03
====== ==== ====== ====
Basic - pro forma $(.01) $.04 $(.02) $.02
====== ==== ====== ====
Diluted - as reported $(.01) $.04 $(.02) $.01
====== ==== ====== ====
Diluted - pro forma $(.01) $.03 $(.02) $.01
====== ==== ====== ====
The weighted average fair value of options granted during the fiscal
years ended July 1, 2003 and July 2, 2002, the period from May 1, 2001
to July 3, 2001, and the fiscal year ended April 30, 2001 is estimated
at $.14, $.17, $.11 and $.11, respectively, on the date of the grant.
The fair value of these options was estimated using the Black-Scholes
option pricing model with the following weighted average assumptions:
Period from
Fiscal Year Fiscal Year May 1, Fiscal Year
Ended Ended 2001 Ended
July 1, July 2, through July April 30,
2003 2002 3, 2001 2001
-------------- -------------- -------------- --------------
Risk free rate 3.3% 4.5% 5.8% 5.8%
Dividend yield - - - -
Volatility 133% 146% 173% 173%
Expected Option Life 5 years 5 years 5 years 5 years
33
FAIR VALUE OF FINANCIAL INSTRUMENTS
As of July 1, 2003, 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 $.12 at July 1,
2003, and the conversion provisions of the underlying instrument, the
fair value of the Series A Redeemable Preferred Stock was $156,000. 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 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. The adoption of SFAS No. 142 did not have a material impact
on the Company's consolidated 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 did not have a material impact on the Company's
consolidated 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 did not
have a material impact on the Company's consolidated 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 fiscal year ended July 1, 2003. All other provisions
are required to be adopted after May 15, 2002. The adoption of SFAS No.
145 did not have a material impact on the Company's consolidated
financial statements.
34
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 did not
have a material impact on the Company's consolidated financial
statements.
In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement
133 on Derivative Instruments and Hedging Activities." SFAS No. 149
amends and clarifies accounting for derivative instruments, including
certain derivative instruments embedded in other contracts, and for
hedging activities under SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." SFAS No. 149 is generally
effective for derivative instruments, including derivative instruments
embedded in certain contracts, entered into or modified after June 30,
2003 and for hedging relationships designated after June 30, 2003. The
adoption of SFAS No. 149 did not have a material effect on the
Company's consolidated financial statements.
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and
Equity." SFAS No. 150 establishes standards for how to classify and
measure certain financial instruments with characteristics of both
liabilities and equity. The Statement is effective for financial
instruments entered into or modified after May 31, 2003. The adoption
of SFAS No. 150 did not have a material effect on the Company's
consolidated financial statements.
CHANGE IN FISCAL YEAR
On July 27, 2001, the Board of Directors voted to change the Company's
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.
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.
35
In addition, the Company and its wholly-owned subsidiaries, Trade-Winds
Environmental Restoration, Inc. and North Atlantic Laboratories, Inc.,
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 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 1, 2003, the Company had cash balances of $130,096, working
capital of $2,217,290 and stockholders' equity of $2,825,379.
Historically, the Company has financed its operations 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.
As of July 1, 2003, the Company owed Spotless $1,700,000 on short-term
loans to fund working capital. During fiscal 2003, in order to address
the Company's cash flow and operational concerns, to fund purchases of
certain equipment and to fund operating losses, the Company borrowed
$2,325,000 from Spotless. During fiscal 2003, the Company repaid
$825,000 to Spotless. Between July 2, 2003 and September 23, 2003, the
Company borrowed an additional $1,835,000 from Spotless for working
capital needs that increased total outstanding borrowings from Spotless
to $3,535,000. 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 1, 2003, interest of
$26,336 was accrued and unpaid on these borrowings.
In fiscal 2003, the Company repaid $100,000 of a convertible note held
by a director of the Company.
36
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.
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.
During fiscal 2001, in order to address the Company's cash flow and
operational concerns, the Company borrowed $1,450,000 from Spotless
pursuant to an existing short-term note payable and repaid $1,000,000
to Spotless.
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.
4. PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
July 1, July 2,
2003 2002
-------------- --------------
Machinery and equipment $ 4,851,497 $ 3,455,404
Office furniture and equipment 503,184 379,309
Vehicles 1,713,911 1,327,976
Leasehold improvements 540,359 531,686
-------------- --------------
7,608,951 5,694,375
Less: accumulated depreciation and amortization 5,111,516 4,550,006
-------------- --------------
$ 2,497,435 $ 1,144,369
============== ==============
5. ACCRUED EXPENSES
Accrued expenses consist of the following:
July 1, July 2,
2003 2002
-------------- --------------
Workers compensation premiums and insurance adjustments $ 232,379 $ 822,273
Interest 26,336 11,754
Litigation reserves 544,304 312,151
Other 390,320 593,915
-------------- --------------
$ 1,193,339 $ 1,740,093
============== ==============
37
6. LONG-TERM DEBT
Long-term debt consists of the following:
July 1, July 2,
2003 2002
-------------- --------------
Notes payable related to the purchase of vehicles and equipment $ 775,465 $ 109,163
Obligation under capital lease - 25,805
-------------- --------------
775,465 134,968
Less: current portion 436,617 71,265
-------------- --------------
Long-term debt $ 338,848 $ 63,703
============== ==============
The notes payable are secured by the underlying vehicles and equipment.
Repayments of long-term debt as of July 1, 2003 are as follows:
Fiscal Years Ending
------------------------------------
June 29, 2004 $436,617
June 28, 2005 179,306
June 27, 2006 62,081
July 3, 2007 60,094
July 1, 2008 37,367
--------
$775,465
========
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
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 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. In fiscal 2003, the Company repaid such note and
related interest in full.
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. The RCPS is subject to
redemption, in whole or in part, at the option of the Company, for a
redemption price per share equal to the higher of (a) $1.00, plus any
accrued and unpaid
38
dividends, or (b) the market price of one share of the Company's
Common Stock (the "Redemption Price"). The RCPS is also subject
to redemption, in whole or in part, at the option of the
holders thereof, upon six months' notice at any time after February
2007, for a redemption price per share equal to the Redemption Price.
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 at July 1, 2003 and July 2, 2002, 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 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 ($593,246), $555,812, ($44,189) and $328,080 of
compensation expense (benefit) relating to the O'Reilly Shares in the
fiscal years ended July 1, 2003 and July 2, 2002, the period from May
1, 2001 through July 3, 2001 and the fiscal year ended April 30, 2001,
respectively.
39
10. INCOME TAXES
The provision (benefit) for income taxes for the fiscal years ended
July 1, 2003 and July 2, 2002, the period from May 1, 2001 through July
3, 2001 and the fiscal year ended April 30, 2001 consists of the
following:
Period from
Fiscal Year Fiscal Year May 1,2001 Fiscal Year
Ended Ended through Ended
July 1, 2003 July 2, 2002 July 3, 2001 April 30, 2001
-------------- -------------- -------------- --------------
Current:
Federal $ (1,080,186) $ 1,794,453 $ - $ 385,000
State 6,400 747,867 - 161,000
-------------- -------------- -------------- --------------
(1,073,786) 2,542,320 - 546,000
-------------- -------------- -------------- --------------
-
Deferred:
Federal - - - -
State - - - -
-------------- -------------- -------------- --------------
- - - -
$ (1,073,786) $ 2,542,320 $ - $ 546,000
============== ============== ============== ==============
The benefit for income taxes for the fiscal year ended July 1, 2003
represents the federal tax refund resulting from the carry back of the
net loss incurred in the fiscal year net of state tax expense. No
provision for income taxes was recorded for the period from May 1, 2001
through July 3, 2001 due to net losses incurred. At July 1, 2003, the
Company has net operating loss carryforwards for tax purposes of
approximately $1,090,000 that expire at various dates through 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.
The Company's effective tax rate for the fiscal years ended July 1,
2003 and July 2, 2002, the period from May 1, 2001 through July 3,
2001and the fiscal year ended April 30, 2001 differs from the federal
statutory rate as a result of the following:
Period from
Fiscal Year Fiscal Yeer May 2, 2001 Fiscal Year
Ended Ended through Ended
July 1, 2003 July 2, 2002 July 3, 2001 April 30, 2001
-------------- -------------- -------------- --------------
Statutory United
States federal tax rate (34.0)% 34.0% (34.0)% 34.0%
State income taxes, net
of federal benefit 0.0% 8.3% 0.0% 8.2%
Utilization of federal
and state net operating
loss carryforwards 0.0% (3.6)% 0.0% 0.0%
Valuation allowance (39.8)% 5.0% 31.5% (8.4)%
Other 4.2% (1.6)% 2.5% 0.1%
(69.6)% 42.1% 0.0% 33.9%
======= ===== ===== ======
40
Deferred tax assets consist of the following components at July 1, 2003
and July 2, 2002:
2003 2002
---- ----
Net operating loss carryforwards $ 371,000 $ 382,000
Reserves 128,000 480,000
Deferred compensation 139,000 397,000
Depreciation (217,000) 35,000
Other, net 60,000 51,000
---------- ----------
481,000 1,345,000
Less: Valuation allowance 481,000 1,345,000
---------- ----------
Net deferred tax asset $ - $ -
========== ==========
At July 1, 2003 and July 2, 2002, 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 1, 2003 are as follows:
Fiscal Years Ending,
------------------------------------------
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 $1,427,063
==========
Total rental expense was $357,510, $329,680, $33,659 and $353,236 for
the fiscal years ended July 1, 2003 and July 2, 2002, the period from
May 1, 2001 through July 3, 2001 and the fiscal year ended April 30,
2001, respectively.
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 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 July 1, 2003 and the period from May 1,
2001 through July 3, 2001, the Company did not issue any shares of
common or preferred stock.
All of the foregoing stock issuances were valued at fair market value
at the time of issuance.
13. STOCK OPTIONS
As of July 1, 2003, 2,000,000 shares of common stock were reserved for
issuance upon the exercise of options then outstanding and 6,000,000
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 1, 2003, 10,051,618 shares of common stock were reserved for
issuance upon the exercise of options and warrants then outstanding
that were not covered under the Company's three stock option plans.
Options which are designated as "incentive stock options" under the
41
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.
The summary of the status of the Company's outstanding stock options
for the fiscal years ended July 1, 2003 and July 2, 2002, the period
from May 1, 2001 through July 3, 2001 and the fiscal year ended April
30, 2001 is presented below:
Employees Weighted Weighted
and Average Non- Average
Directors Exercise Employee Exercise
Options Price Options Price
------- ----- ------- -----
Outstanding at May 1, 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
Granted 300,000 $.16 - -
Forfeited (1,420,059) $.21 (18,100) $.01
Exercised - - - -
------------ ---------
- -
Outstanding at July 1, 2003 11,821,618 $.12 30,000 $.41
============ =========
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
============ ==== ========= ====
Options exercisable at July 1, 2003 11,821,618 $.12 30,000 $.41
============ ==== ========= ====
42
Weighted
Average
Number Remaining Number
Exercise Outstanding Contractual Exercisable at
Price at July 1, 2003 Life (years) July 1, 2003
----- --------------- ------------ ------------
$.01 2,000,000 1.33 2,000,000
$.079 5,486,309 6.26 5,486,309
$.1094 100,000 2.33 100,000
$.16 600,000 3.74 600,000
$.17 400,000 3.11 400,000
$.1875 750,000 .99 750,000
$.19 650,000 3.20 650,000
$.203 150,000 .75 150,000
$.22 375,000 .36 375,000
$.23 250,000 3.24 250,000
$.3125 50,000 1.16 50,000
$.34 850,000 .13 850,000
$.3438 110,309 1.05 110,309
$.40 50,000 .25 50,000
--------- ----------
11,821,618 11,821,618
========== ==========
14. RELATED PARTY TRANSACTIONS
During the fiscal year ended July 1, 2003, the Company borrowed
$2,325,000 from Spotless for working capital requirements and to fund
certain fixed asset purchases. The Company repaid $825,000 to Spotless
in the fiscal year ended July 1, 2003. Between July 2, 2003 and
September 23, 2003, the Company borrowed an additional $1,835,000 from
Spotless for working capital.
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.
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 $1,700,000 in loans from Spotless outstanding as of July 1,
2003. All borrowings bear interest at LIBOR plus 1 percent (2.1% and
2.9% at July 1, 2003 and July 2, 2003, respectively). Interest expense
related to this note was $28,419 and $37,667 for the fiscal years ended
July 1, 2003 and July 2, 2002, respectively. As of July 1, 2003 and
July 2, 2002, interest of $26,336 and $647, respectively, was accrued
and unpaid on these borrowings.
During the fiscal years ended July 1, 2003 and July 2, 2002, Spotless
charged the Company an administrative fee of $101,256 and $50,628,
respectively, of which $50,628 remains unpaid and included in accounts
payable as of July 1, 2003.
On December 16, 1998, the Company entered into an operating lease
arrangement with Michael O'Reilly, the Company's chief executive
officer. Under the arrangement that expired in December 2002 and has
continued on a month-to-month basis thereafter, the Company leases a
forty-two foot custom Topaz boat
43
for monthly rental payments of $5,000. 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 years ended July 1, 2003
and July 2, 2002, the Company paid $78,000 and $233,156, respectively,
of dividends and accrued interest to the RCPS holders.
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. In fiscal 2003, the
Company repaid such note and related interest in full.
The Company paid an outside director $46,926, $43,741, $6,443 and
$40,477 for consulting services in the fiscal years ended July 1, 2003
and July 2, 2002, the period from May 1, 2001 through July 3, 2001 and
the fiscal year ended April 30, 2001, respectively.
15. CONTINGENCIES
LITIGATION
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 settled
this dispute in fiscal 2003 for approximately $500,000. Such settlement
is included in accrued expenses and is expected to be paid in fiscal
2004.
The Company is a party to other litigation matters and claims that 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.
16. MAJOR CUSTOMERS, GEOGRAPHIC INFORMATION AND CREDIT CONCENTRATIONS
During the fiscal years ended July 1, 2003 and July 2, 2002, the period
from May 1, 2001 through July 3, 2001 and the fiscal year ended April
30, 2001 the Company recognized net sales to significant customers as
set forth below:
May 1,
2001
through
July 1, July 2, July 3, April 30,
Major Customers 2003 2002 2001 2001
-------------------------- ----------- ---------- ---------- -----------
Customer A 0% 0% 13% 36%
Customer B 0% 34% 0% 0%
Customer C 0% 0% 5% 11%
Customer D 8% 7% 14% 5%
Customer E 19% 0% 0% 0%
The Company is dependent upon its relationship and contract with one
customer that accounted for approximately 19% of its revenues in the
fiscal year ended July 1, 2003. While the Company intends to increase
the amount of work performed for entities other than this one customer,
it expects to continue to be
44
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 Dick Pacific Construction Company (listed
as "Customer E" in the foregoing table), were not replaced by revenues
generated by other customers.
At July 1, 2003, 17 percent and 11 percent, respectively, of the
Company's accounts receivable related to two customers. At July 2,
2002, 17 percent, 16 percent and 13 percent, respectively, of the
Company's accounts receivable related to three customers.
During the fiscal year ended July 1, 2003, the Company had sales of
approximately $460,000 to a customer outside the United States. During
the fiscal year ended July 2, 2002, the period from May 1, 2001 through
July 3, 2001 and for the fiscal year ended April 30, 2001, all of the
Company's sales were to customers located in the United States. All of
the Company's long-lived assets reside entirely in the United States.
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.
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 years ended July 1, 2003 and
July 2, 2002, the period from May 1, 2001 through July 3, 2001 and the
fiscal year ended April 30, 2001:
Period
From
May 1,
Fiscal Year Fiscal Year 2001 Fiscal Year
Ended Ended through Ended
July 1, July 2, July 3, April 30,
2003 2002 2001 2001
-------------- -------------- -------------- --------------
Numerator:
Net income (loss) attributable
to common shareholders $ (547,004) $ 3,026,148 $ (733,303) $ 987,877
Add interest and amortization
on convertible notes, net of
tax - 35,377 - 120,924
-------------- -------------- -------------- --------------
$ (547,004) $ 3,061,525 $ (733,303) $ 1,108,801
============== ============= ============== ==============
Denominator:
Share reconciliation:
Shares used for basic
income (loss) per share 77,936,358 63,300,953 38,481,254 38,459,953
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 77,936,358 85,455,580 38,481,254 76,244,295
============== ============== ============== ==============
Net income (loss) per share:
Basic $(.01) $.05 $(.02) $.03
====== ==== ====== ====
Diluted $(.01) $.04 $(.02) $.01
====== ==== ====== ====
The diluted net loss per share for the fiscal year ended July 1, 2003
and for the period from May 1, 2001 through July 3, 2001 excludes
11,851,618 and 13,412,499 shares issuable upon the exercise of stock
options and 1,300,000 and 40,010,403 shares issuable upon the
conversion of convertible securities, respectively. These shares are
excluded due to their antidilutive effect as a result of the Company's
net loss attributable to common shareholders during these periods.
46
18. UNAUDITED QUARTERLY DATA
Summarized unaudited quarterly financial data for the fiscal years
ended July 1, 2003 and July 2, 2002 are as follows:
Fiscal Year Ended July 1, 2003
------------------------------ First Second Third Fourth
Quarter Quarter Quarter Quarter
-------------- -------------- -------------- --------------
Revenues $ 4,592,976 $ 5,864,047 $ 3,648,548 $ 3,725,618
Net income (loss) $ 103,947 $ (183,151) $ (399,465) $ 9,665
Net income (loss) attributable to
common shareholders $ 84,447 $ (202,651) $ (418,965) $ (9,835)
Net income (loss) per common
share - basic $.00 $(.00) $(.01) $(.00)
Net income (loss) per common
share - diluted $.00 $(.00) $(.01) $(.00)
Fiscal Year Ended July 1, 2003
------------------------------ First Second Third Fourth
Quarter Quarter Quarter Quarter
-------------- -------------- -------------- --------------
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
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, 2003
WINDSWEPT ENVIRONMENTAL GROUP, INC.
By: /s/ Michael O'Reilly
MICHAEL O'REILLY, President and Chief Executive
Officer
POWER OF ATTORNEY
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, 2003 by the
following persons in the capacities indicated. Each person whose signature
appears below constitutes and appoints Michael O'Reilly and Charles L. Kelly,
Jr., with full power of substitution, his true and lawful attorney-in-fact and
agent to do any and all acts and things in his name and on his behalf in his
capacities indicated below which he may deem necessary or advisable to enable
Windswept Environmental Group, Inc. to comply with the Securities Exchange Act
of 1934, as amended, and any rules, regulations and requirements of the
Securities and Exchange Commission, in connection with this Annual Report on
Form 10-K, including specifically, but not limited to, power and authority to
sign for him in his name in the capacities stated below, any and all amendments
thereto, granting unto said attorney-in-fact and agent, full power and authority
to do and perform each and every act and thing requisite and necessary to be
done in such connection, as fully to all intents and purposes as he/her might or
could do in person, hereby ratifying and confirming all that said
attorney-in-fact and agent, or his substitute or substitutes, may lawfully do or
cause to be done by virtue thereof.
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, 2003 by the
following persons, in the capacities indicated.
By: /s/ Michael O'Reilly
MICHAEL O'REILLY, President, Chief Executive
Officer and Director (Principal Executive
Officer)
By: /s/ Charles L. Kelly, Jr.
CHARLES L. KELLY, Jr.,
Chief Financial Officer and Director
(Principal Financial Officer)
By: /s/ Joseph Murphy
JOSEPH MURPHY, Vice President - Finance &
Administration (Principal Accounting Officer)
By: /s/ Samuel Sadove
SAMUEL SADOVE, Director
By: /s/ Peter A. Wilson
PETER A. WILSON, Chairman
By: /s/ Dr. Kevin Phillips
DR. KEVIN PHILLIPS, Director
By: /s/ Anthony Towell
ANTHONY TOWELL, Director
48
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
49
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 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).
10.02 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).
10.03 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).
10.04 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).
10.05 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).
10.06 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).
10.07 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).
10.08 Amended and Restated Employment Agreement dated October 29, 1999
between the Company and Michael O'Reilly. (Incorporated by reference to
Exhibit 10.4 of the Company's Current Report on Form 8-K (Date of
Report: October 29, 1999) filed with the SEC on November 12, 1999).
10.09 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).
50
10.10 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).
10.11 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).
10.12 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).
10.13 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).
10.14 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).
10.15 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).
10.16 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).
10.17 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).
10.18 Stipulation of Settlement of action entitled Nicolai Grib and Vladislav
Kazarov v. Trade-Winds Environmental Restoration, Inc. and Gulf
Insurance. (Incorporated by reference to Exhibit 10.1 of the Company's
Quarterly Report on Form 10-Q for the fiscal quarter ended April 1,
2003).
21.01 Subsidiaries of the Company.
23.02 Consent of Deloitte & Touche LLP.
31.2 Certification of Chief Executive Officer of the Company pursuant to
Sarbanes-Oxley Section 302(a).
31.2 Certification of Chief Financial Officer of the Company pursuant to
Sarbanes-Oxley Section 302(a).
32.2 Certification of Chief Executive Officer of the Company pursuant to
18 U.S.C. Section 1350.
32.2 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.
51