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 June 29, 2004
Commission File No. 0-17072
WINDSWEPT ENVIRONMENTAL GROUP, INC.
(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
(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. [ ]
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. $646,000
Based upon the closing sale price as reported on the OTC Electronic Bulletin
Board of the NASD on August 30, 2004 ($.05 per share), the aggregate market
value of the Common Stock held by non-affiliates of the registrant was
approximately $807,000.
As of August 30, 2004, the issuer had 77,936,358 shares of Common Stock
outstanding.
DOCUMENTS INCORPORATED BY REFERENCE:
Portions of the definitive proxy statement expected to be filed and delivered to
stockholders in connection with the Annual Meeting of Stockholders to be held in
2004 are incorporated into Part III of this Form 10-K.
PART I
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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 that are based on the beliefs and current
expectations of and assumptions made by the Company's management.
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 to fund its
activities,
o the Company's ability to continue as a going concern,
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.
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("Spotless"), a Delaware corporation, pursuant to which the Company sold to
Windswept Acquisition Corporation ("Acquisition Corp."), a Delaware corporation
and a wholly-owned subsidiary of Spotless, 22,284,683 shares (the "Acquisition
Corp. Common Shares") of common stock, par value $.0001 per share ("Common
Stock"), and 9,346 shares of Series B Convertible Preferred Stock, par value
$.01 per share ("Series B Preferred"), for an aggregate subscription price of
$2,500,000 or $.07904 per share of Common Stock and $79.04 per share of Series B
Preferred. Each share of Series B Preferred had the equivalent voting power of
1,000 shares of Common Stock and 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
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o Commercial Drying
o Natural Resource/Wetlands Restoration/Wildlife Rehabilitation
o Forensic Investigation
o Asbestos Abatement
o Fire and Flood Restoration
o Demolition
o Lead Abatement
o Underground Storage Tank Removal
o Soil Remediation
o Oil Spill Response - Land and Marine
o Hazardous Waste/Biohazard Clean-up
o Chemical Spill Response
o Duct Cleaning
o Indoor Air Quality Investigation/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, 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 June 29, 2004, July 1, 2003 and July 2, 2002, revenues from
insurance customers represented approximately 38%, 20% and 9%, respectively, of
total revenues. During the fiscal years ended June 29, 2004, July 1, 2003 and
July 2, 2002, the Company recognized net sales to significant customers as set
forth below:
Major Customers June 29, July 1, July 2,
2004 2003 2002
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Customer A 4% 0% 34%
Customer B 0% 19% 0%
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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 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, 66 vehicles
(including vacuum trucks, earth moving equipment, supply trucks and drilling
vehicles) and 39 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 eight 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 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's marketing program, the activity of which has been reduced in light
of the Company's financial condition, has been directed toward establishing and
maintaining relationships with businesses that have ongoing needs for one or
more of the Company's services. The Company has strived 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
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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, to the extent practicable, 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 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
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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. OSROs are certified by the United States Coast
Guard and receive designations based upon level of capability. In the event of
an incident, the OSRO on standby must respond by being on site with containment
capability within two to six hours of notification.
Asbestos abatement firms are subject to federal, state and local regulators,
including the Occupational Safety and Health Administration ("OSHA"), the EPA
and the Department of Transportation ("DOT"). EPA regulations establish
standards for the control of asbestos fiber and airborne lead emissions into the
environment during removal and demolition projects. OSHA regulations establish
maximum airborne asbestos fiber, airborne lead and heavy metal exposure levels
applicable to asbestos and demolition employees and set standards for employee
protection during the demolition, removal or encapsulation of asbestos, as well
as storage, transportation and final disposition of asbestos and demolition
debris. DOT regulations, in addition to the regulations imposed by the Superfund
Act, cover the management of the transportation of asbestos and demolition
debris and establish certain certification labeling and packaging requirements.
Government regulations have heightened public awareness of the danger of
asbestos contamination, creating pressure on both private and public building
owners to abate this hazard, even in the absence of specific regulations
requiring corrective action.
In 1992, in an effort to protect families from exposure to the hazards of lead
based paint, Congress amended the Toxic Substances Control Act to add Title X,
titled "Lead Exposure Reduction." Since May 1993, OSHA has had standards for
lead exposure in the construction industry that requires testing before, during
and after construction or renovation. OSHA estimates that 1,000,000 workers fall
under its Lead Based Paint Hazard Reduction Act.
The Company's operations also are subject to other federal laws protecting the
environment, including the Clean Water Act and Toxic Substances Control Act. In
addition, many states also have enacted statutes regulating the handling of
hazardous substances, some of which are broader and more stringent than the
federal laws and regulations.
COMPLIANCE/HEALTH AND SAFETY
The Company regards compliance with applicable environmental regulations and the
health and safety of its workforce as critical components of its overall
operations. 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.
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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. As a result
of the foregoing and the Company's inability to obtain sufficient credit
enhancements, the Company's ability to obtain surety and performance bonds has
been limited, and this may have had an adverse impact on the Company's ability
to obtain some projects. No assurance can be given that the Company will be able
to obtain the surety or performance bonds required for all potential projects. A
continued failure of the Company to obtain these bonds could materially and
adversely affect certain components of the Company's operations.
EMPLOYEES/TECHNICAL STAFF
As of August 30, 2004, the Company employed a core group of approximately 78
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 46 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 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.
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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 June 29, 2004, July 1, 2003 and July 2,
2002:
Geographic Information
----------------------
United States Non-United States Consolidated Total
------------- ----------------- ------------------
Fiscal 2004 $19,143,717 $23,036 $19,166,753
Fiscal 2003 $17,370,931 $460,258 $17,831,189
Fiscal 2002 $32,903,740 $0 $32,903,740
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. The Company's audit committee
has directed management to implement a system by which backlog can be reliably
measured.
RISK FACTORS
The Company's operations, as well as an investment in its securities, involve
numerous risks and uncertainties. The reader should carefully consider the risk
factors discussed below and elsewhere in this Annual Report on Form 10-K before
making any investment decision involving the Company's securities.
Factors Affecting Future Operating Results
DUE TO THE NATURE OF THE COMPANY'S BUSINESS AND THE INTENSE REGULATORY CLIMATE
IN WHICH IT OPERATES, THE COMPANY'S SERVICES ARE SUBJECT TO EXTENSIVE FEDERAL,
STATE AND LOCAL LAWS AND REGULATIONS THAT ARE CONSTANTLY CHANGING. These
regulations impose stringent guidelines on companies that handle hazardous
materials as well as other companies involved in various aspects of the
environmental remediation services industry. Failure to comply with applicable
federal, state and local regulations could result in substantial costs to the
Company, the imposition of penalties or in claims not covered by insurance, any
of which could have a material adverse effect on the Company's business.
In addition to the burdens imposed on operations by various environmental
regulations, federal law imposes strict liability upon present and former owner
and operators of facilities that release hazardous substances into the
environment and the generators and transporters of such substances, as well as
persons arranging for the disposal of such substances. All such persons may be
liable for the costs of waste site investigation, waste site clean up, natural
resource damages and related penalties and fines. Such costs can be substantial.
THE COMPANY IS DEPENDENT ON THE INCURRENCE OF LARGE PROJECTS FROM A SMALL NUMBER
OF CUSTOMERS. Because of the nature of the Company's services, the Company must
generate most of its revenues from new customers. The Company cannot anticipate
whether it will be able to replace such revenues with revenues from new projects
in future periods. The inability of the Company to replace the revenues
generated as a result of large projects performed in the fiscal year ended July
2, 2002, particularly the catastrophe response projects in the vicinity of the
World Trade Center following the terrorist attack on September 11, 2001, which
accounted for approximately 52% of the Company's revenues during such fiscal
year, had a materially adverse impact on the Company in the fiscal years ended
July 1, 2003 and June 29, 2004.
9
ENVIRONMENTAL REMEDIATION OPERATIONS MAY EXPOSE THE COMPANY'S EMPLOYEES AND
OTHERS TO DANGEROUS AND POTENTIALLY TOXIC QUANTITIES OF HAZARDOUS PRODUCTS. Such
products can cause cancer and other debilitating diseases. Although the Company
takes extensive precautions to minimize worker exposure and has not experienced
any such claims from workers or others, there can be no assurance that, in the
future, it will avoid liability to persons who contract diseases that may be
related to such exposure. Such persons potentially include employees, persons
occupying or visiting facilities in which contaminants are being, or have been,
removed or stored, persons in surrounding areas, and persons engaged in the
transportation and disposal of waste material. In addition, the Company is
subject to general risks inherent in the construction industry. It may also be
exposed to liability from the acts of its subcontractors or other contractors on
a work site.
THE FAILURE TO OBTAIN AND MAINTAIN REQUIRED GOVERNMENTAL LICENSES, PERMITS AND
APPROVALS COULD HAVE A SUBSTANTIAL ADVERSE AFFECT ON THE COMPANY'S OPERATIONS.
The remediation industry is highly regulated. The Company is required to have
federal, state and local governmental licenses, permits and approvals for its
facilities and services. There can be no assurance as to the successful outcome
of any pending application or demonstration testing for any such license, permit
or approval. In addition, the Company's existing licenses, permits and approvals
are subject to revocation or modification under a variety of circumstances.
Failure to obtain timely, or to comply with the conditions of, applicable
licenses, permits or approvals could adversely affect the Company's business,
financial condition and results of operations. As the Company's business expands
and as new procedures and technologies are introduced, it may be required to
obtain additional operating licenses, permits or approvals. It may be required
to obtain additional operating licenses, permits or approvals if new
environmental legislation or regulations are enacted or promulgated or existing
legislation or regulations are amended, reinterpreted or enforced differently
than in the past. Any new requirements that raise compliance standards may
require the Company to modify its procedures and technologies to conform to more
stringent regulatory requirements. There can be no assurance that the Company
will be able to continue to comply with all of the environmental and other
regulatory requirements applicable to its business.
THE COMPANY IS DEPENDENT ON THE SUCCESSFUL DEVELOPMENTAL AND COMMERCIAL
ACCEPTANCE OF ITS PROCEDURES AND TECHNOLOGIES. The Company is constantly
developing, refining and implementing its procedures and technologies for
environmental remediation. Its operations and future growth are dependent, in
part, upon the acceptance and implementation of these procedures and
technologies. There can be no assurance that successful development of future
procedures and technologies will occur or, even if successfully developed, that
the Company will be able to successfully commercialize such procedures and
technologies. The successful commercialization of the Company's procedures and
technologies may depend in part on ongoing comparisons with other competing
procedures and technologies and more traditional treatment, storage and disposal
alternatives, as well as the continuing high cost and limited availability of
commercial disposal options. There can be no assurance that the Company's
procedures and technologies will prove to be commercially viable or
cost-effective or, if commercially viable and cost-effective, that the Company
will be successful in timely securing the requisite regulatory licenses, permits
and approvals for any such technologies or that such technologies will be
selected for use in future projects. The Company's inability to develop,
commercialize or secure the requisite licenses, permits and approvals for its
procedures and technologies on a timely basis could have a material adverse
effect on its business, financial condition and results of operations.
A SUBSTANTIAL PORTION OF THE COMPANY'S REVENUES IS GENERATED AS A RESULT OF
REQUIREMENTS ARISING UNDER FEDERAL AND STATE LAWS, REGULATIONS AND PROGRAMS
RELATED TO PROTECTION OF THE ENVIRONMENT. Environmental laws and regulations
are, and will continue to be, a principal factor affecting demand for the
Company's services. The level of enforcement activities by federal, state and
local environmental protection agencies and changes in such laws and regulations
also affect the demand for such services. If the requirements of compliance with
environmental laws and regulations were to be modified in the future, the demand
for the Company's services, and its business, financial condition and results of
operations, could be materially adversely affected.
THE COMPANY IS SUBJECT TO QUARTERLY FLUCTUATIONS IN OPERATING RESULTS. The
Company's revenue is dependent on its contracts and the timing and performance
requirements of each contract. Its revenue is also affected by the
timing of its clients' planned remediation activities and need for its services.
Due to this variation in demand, the Company's quarterly results fluctuate.
Accordingly, specific quarterly or interim results should not be considered
indicative of results to be expected for any future quarter or for the full
year. It is possible that in future quarters, the 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.
10
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 GROWTH. In the event that the Company pursues
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 the Company's current management and
systems will be adequate to address any future expansion of its business,
particularly in light of recent staff reductions. In such event, any inability
to manage the Company's growth or operations 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. 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 often
contracts with a limited number of customers that are involved in a wide range
of industries. A small number of customers may therefore be responsible for a
substantial portion of revenues at any time. While management assesses the
credit risk associated with each proposed customer prior to the execution of a
definitive contract, no assurances can be given that such assessments will be
correct and that the Company will not incur substantial, noncollectible accounts
receivable.
IN ORDER TO SUCCESSFULLY BID ON AND SECURE CONTRACTS TO PERFORM ENVIRONMENTAL
REMEDIATION SERVICES OF THE NATURE OFFERED BY THE COMPANY TO ITS CUSTOMERS, IT
OFTEN MUST PROVIDE SURETY BONDS WITH RESPECT TO EACH PROSPECTIVE AND, UPON
SUCCESSFUL BID, ACTUAL PROJECTS. The number and size of contracts that the
Company can perform is directly dependent upon its ability to obtain bonding.
This ability to obtain bonding, in turn, is dependent, in material part, upon
the Company's net worth and working capital. Currently, the Company does not
have the capacity to obtain the level of bonding necessary to obtain larger
projects. 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
11
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 OR DISPUTED CHANGE ORDERS 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 or change orders, could have a material
adverse effect on the Company and its operations. For example, a disputed change
order on a large contract has had a material adverse effect on the Company's
results of operations for the fiscal year ended June 29, 2004. There can be no
assurance that cost overruns or disputed change orders 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 of its operations or related to growth.
Spotless has indicated that, at the present time, it will not lend additional
funds to the Company outside the Accounts Receivable Finance Agreement.
Spotless' intention to provide funding to the Company is continually
reevaluated. There are no assurances that Spotless will provide lending in the
future. The Company's ability to borrow additional funds from lenders other than
Spotless is limited in light of the senior security interest that Spotless holds
securing its $5 million in debt from the Company. 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
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.
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 August 30, 2004, 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
12
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
$3,535,000 and $469,000 for the fiscal years ended June 29, 2004 and July 1,
2003, respectively. As of June 29, 2004, the Company had an accumulated deficit
of approximately $34,718,000. 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 in the fiscal year ended July 2, 2002, 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 $366,204 and is subject to a 4% annual escalation.
This facility houses all the operations of the Company, with the exception of a
satellite office in Florida. The Company holds a lease expiring in 2007 for a
satellite office in Ft. Lauderdale, Florida to enable it to procure projects in
that state. The lease provides for a current annual rent of $77,274.
Management considers the Company's facilities sufficient for its present and
currently anticipated future operations, and believes that these properties are
adequately covered by insurance.
ITEM 3. LEGAL PROCEEDINGS
- --------------------------
On August 5, 2004, Trade-Winds commenced an action in the New York State Supreme
Court, County of New York, claiming that Trade-Winds is entitled to
approximately $1,255,000 of contractual billings relating to a large roof tar
removal project.
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.
13
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
- -----------------------------------------------------------
None.
PART II
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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 bid prices, for the fiscal
years ended June 29, 2004 and July 1, 2003, 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 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
FISCAL YEAR ENDED JUNE 29, 2004
Quarter Ended HIGH LOW
------------- ---- ---
September 30, 2003 $.14 $.08
December 30, 2003 $.10 $.04
March 30, 2004 $.12 $.04
June 29, 2004 $.10 $.05
The Company had approximately 735 holders of record of shares of its common
stock as of August 30, 2004. There have been no dividends declared or paid on
the Common Stock during the fiscal years ended June 29, 2004, July 1, 2003 and
July 2, 2002 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 June 29, 2004.
Information required by this item regarding equity compensation plans is
addressed in Item 12, Part III of this report.
14
ITEM 6. SELECTED FINANCIAL DATA
- -------------------------------
Period from
Fiscal Year Fiscal Year Fiscal Year May 1, 2001
Ended Ended Ended through Fiscal Years Ended April 30,
----------------------------
June 29, 2004 July 1, 2003 July 2, 2002 July 3, 2001 2001 2000
----------------------------------------------------------------------------------------
Consolidated Operations Data:
Revenues $ 19,166,753 $ 17,831,189 $ 32,903,740 $ 2,322,511 $ 22,022,766 $ 12,845,165
Net income (loss) (3,535,334) (469,004) 3,494,867 (720,303) 1,065,877 (2,256,997)
Net income (loss) per common share-basic (.05) (0.01) 0.05 (0.02) 0.03 (.09)
Net income (loss) per common share-diluted $ (.05) $ (0.01) $ 0.04 $ (0.02) $ 0.01 $ (.09)
Weighted average common shares outstanding:
Basic 77,936,358 77,936,358 63,300,953 38,481,254 38,459,953 26,927,083
Diluted 77,936,358 77,936,358 85,455,580 38,481,254 76,244,295 26,927,083
Consolidated Balance Sheet Data:
Total assets $ 11,331,165 $ 11,054,263 $ 10,212,538 $ 8,192,568 $ 8,806,398 $ 6,699,204
Long-term debt and other liabilities 340,104 687,473 1,005,574 400,308 457,084 197,172
Convertible notes - - 100,000 2,780,000 2,780,000 2,780,000
Redeemable convertible preferred stock 1,300,000 1,300,000 1,300,000 1,300,000 1,300,000 1,300,000
Stockholders' equity $ (787,955) $ 2,825,379 $ 3,372,383 $ (2,487,156) $ (1,753,853) $ (2,744,980)
(deficit)
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.
OVERVIEW
The Company, through its wholly-owned subsidiaries, 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, microbial remediation, testing, toxicology, training, wetlands
restoration, wildlife and natural resources rehabilitation, technical advisory,
restoration and site renovation services.
The Company's revenues are derived primarily from providing emergency response,
remediation and disaster restoration services, and its cost of revenues consists
primarily of labor and labor related costs, insurance, benefits
15
and job-related insurance, repairs, maintenance, equipment rental, materials and
supplies, disposal costs and depreciation of capital equipment. The Company's
selling, general, and administrative expenses primarily consist of expenses
related to provisions for doubtful accounts, legal fees, sales salaries,
marketing, consulting, insurance and travel and entertainment.
In April 2003, the Company commenced a remediation project in New York City for
a local utility to remove sediment from an oil storage tank. During the course
of the project, the sediment in the tank was found to be substantially different
than the sediment that the customer represented to be in the tank prior to the
inception of the project. The Company continued to work on the project so as not
to default on the terms which it understood to exist with the customer. The
additional costs incurred to remove this matter in the amount of approximately
$1,600,000 were billed to the customer. However, the collectibility of such
monies cannot be assured. Accordingly, the Company has not recognized the
revenue associated with this claim. The project has been substantially completed
and the customer has refused to acknowledge its liability for the additional
charges billed by the Company. The Company has retained legal counsel to review
its claim with the customer and believes that additional monies billed will be
collected. As of June 29, 2004, the Company has recognized revenue of
approximately $1,700,000 with respect to original scope of this project. As of
August 30, 2004, all amounts due under the original contract have been paid to
the Company. The Company believes that its claim for additional compensation has
legal merit and, if negotiations with the customer do not yield satisfactory
results, the Company intends to pursue legal action against the customer for the
additional costs incurred plus a reasonable profit margin.
The Company has encountered slow collections of certain of its accounts
receivable, and its liquidity has been severely adversely affected by its
unrecouped costs incurred in connection with the oil storage tank project.
Accordingly, the Company has needed to borrow increased amounts from Spotless.
As a result of the additional borrowings, the amount outstanding was $5,000,000
as of June 29, 2004. The Company has considered various alternatives to increase
its liquidity. In this connection, the Company increased its liquidity by
entering an Account Receivable Finance Agreement, dated as of February 5, 2004,
with Spotless pursuant to which Spotless has purchased certain of the Company's
accounts receivable without recourse for cash, subject to certain terms and
conditions. In the opinion of management, the Company expects to have sufficient
working capital to fund its current operations as long as it does not encounter
further difficulty collecting its accounts receivable or experience significant
growth. 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 in addition to the financing contemplated by the Account
Receivable Finance Agreement. Spotless is under no contractual obligation to
provide any funds, and it has indicated that, at the present time, it does not
intend to provide any additional debt or equity financing to the Company outside
the Account Receivable Finance Agreement. Currently, the Company has no credit
facility for additional borrowing.
ABILITY TO CONTINUE AS A GOING CONCERN.
The Company's accompanying consolidated financial statements have been prepared
assuming that it will continue as a going concern. They do not include any
adjustments that might result should the Company be unable to continue as a
going concern, and not assurance can be given that it will continue as a going
concern.
CRITICAL ACCOUNTING POLICIES
Management's discussion and analysis of its financial position and results of
operations are based upon the Company's audited consolidated financial
statements, which have been prepared in accordance with accounting principles
generally accepted in the United States of America. The preparation of these
audited consolidated financial statements requires management to make estimates
and judgments that affect the reported amounts of assets, liabilities, revenues
and expenses and related disclosure of contingent assets and liabilities. Actual
results could differ from those estimates. Management believes that the critical
accounting policies and areas that require the most significant judgments and
estimates to be used in the preparation of the audited consolidated financial
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
16
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
June 29, 2004. 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 June 29, 2004 Compared to Fiscal Year Ended July 1, 2003
- --------------------------------------------------------------------------
Revenues
- --------
Revenues increased to $19,166,753 in the fiscal year ended June 29, 2004
("fiscal 2004") compared to $17,831,189 in the fiscal year ended July 1, 2003
("fiscal 2003"). The increase of $1,335,564, or 7%, was primarily attributable
to increases of $1,200,000 related to a oil tank cleaning project, $1,033,702
related to emergency spill response, $1,582,097 related to insurance, $918,799
related to catastrophe response associated with Hurricane Isabel and $385,252
related to new operations in Florida. These increases were partially offset by
decreases of $3,486,469 related to a non-recurring mold remediation project in
Hawaii and $343,543 related to a non-recurring lead remediation project in New
York City.
Cost of Revenues/Gross Profit
- -----------------------------
Cost of revenues increased to $17,442,059, or 90% of total revenues, in fiscal
2004 compared to $14,314,519, or 80% of total revenues, in fiscal 2003. Gross
profit decreased $1,791,976 to $1,724,694, or 9% of total revenues, for fiscal
2004 from $3,516,670, or 20% of total revenues, for fiscal 2003. This decrease
in gross profit of $1,791,976, or 51%, was due primarily to cost overruns
incurred on an oil tank cleaning project (discussed in Part I , Item 3). Direct
field labor, including fringe and union benefits, subcontractor costs, disposal
costs, equipment rental and insurance costs increased $1,513,728, $490,210,
$471,624, $285,494 and $170,772, respectively, primarily as a result of the
increased revenue. In response to deteriorating cash flows, the Company reduced
its direct labor force. 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 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 decreased by $255,033, or 5%, to
$5,348,524 in fiscal 2004 from $5,603,557 in fiscal 2003 and constituted
approximately 28% and 31% of total revenues in fiscal 2004 and 2003,
respectively. The decrease was primarily attributable to decreases in legal
expenses and sales salaries of $441,477 and $178,963, respectively. The
decreases were partially offset by an increase in consulting expenses of
$341,386.
17
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 benefit related
to variable accounting treatment for these officer options decreased by $244,620
to a benefit of $348,626 in fiscal 2004 from a benefit of $593,246 in fiscal
2003. This was due to a decrease 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 increased by $852,272 in fiscal 2004 to $924,461 from $72,189
in fiscal 2003. The increase in interest expense was primarily attributable to
greater levels of debt and the discount recorded under the Accounts Receivable
Finance Agreement with Spotless.
(Benefit) Provision for Income Taxes
- ------------------------------------
The (benefit) provision for income taxes reflects an effective rate of (15)% and
(70)% in fiscal 2004 and 2003, 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 2004 were ($3,535,334) and ($.05), respectively. This compares to net
loss and basic net loss attributable to common stockholders per share for fiscal
2003 of (469,004) and ($.01), respectively. The changes are primarily
attributable to the factors described above.
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.
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
18
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.
(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.
19
LIQUIDITY AND CAPITAL RESOURCES
As of June 29, 2004, the Company had cash balances of $63,562, working capital
deficit of $(2,103,971) and stockholders' deficit of $(787,955). 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. In addition, the Company incurred net losses of $3,535,334 and
$469,004 for the fiscal years ended June 29, 2004 and July 1, 2003,
respectively.
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 its current operations as long as it does not encounter further difficulty
collecting its accounts receivable or experience significant growth. 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
in addition to the financing contemplated by the Account Receivable Finance
Agreement between the Company and Spotless dated February 5, 2004. Spotless is
under no contractual obligation to provide any funds, and it has indicated that,
at the present time, it does not intend to provide any additional debt or equity
financing to the Company outside the Account Receivable Finance Agreement. The
Company currently has no credit facility for additional borrowing. Under the
Account Receivable Finance Agreement, Spotless may, but is not obligated to,
purchase one or more of the Company's accounts receivable, that are approved by
Spotless, in its sole discretion, in respect of the particular debtor, invoices
and related credit. As part of the agreement, Spotless may purchase any accounts
receivable at a 15% discount to invoice prices, which the Company believes is at
least as favorable to it as would be available from an unaffiliated third-party,
based upon a good-faith estimate of an applicable discount negotiated at arm's
length, as may be adjusted by Spotless in its sole discretion. In this regards,
all of Spotless' purchases have been made at 15% discount except one made in
April 2004 for the amount of $711,450 in relation to an account receivable
balance of $1,028,194, which constituted a 31% discount. In addition, the
Company pays varying monthly discount fees on any purchased accounts receivable
based upon invoice prices. All discounts and fees under the Account Receivable
Finance Agreement are characterized as interest expense. As of June 29, 2004,
the Company has incurred approximately $765,000 of such discounts and fees.
Further, the Company (a) manages any accounts receivable that it sells to
Spotless while remitting to Spotless any proceeds received and (b) bears any
related litigation costs.
As of June 29, 2004, Spotless had purchased an aggregate amount of the Company's
accounts receivable equaling $4,018,941 for an aggregate purchase price of
$3,253,585. As of September 24, 2004, the last accounts receivable purchase
made, Spotless had purchased an aggregate amount of the Company's accounts
receivable equaling $4,991,252 for an aggregate purchase price of $4,080,050.
As of June 29, 2004, the Company owed Spotless $5,000,000 on short-term loans to
fund working capital. During fiscal 2004, 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 $3,300,000 from Spotless. During
fiscal 2004, the Company did not make any repayments to Spotless. All current
borrowings from Spotless bear interest at the London Interbank Offering Rate
("LIBOR") plus 1 percent (2.6% and 2.1% at June 29, 2004 and July 1, 2003,
respectively) and are secured by all of the Company's assets. As of June 29,
2004, interest of $129,266 was accrued and unpaid on these borrowings. On
September 10, 2004, the Company repaid accrued interest to Spotless through
August 24, 2004 of approximately $151,000.
In fiscal 2003, the Company repaid $100,000 of a convertible note held by a
director of the Company.
During fiscal 2003, in order to address the Company's cash flow and operational
concerns, the Company borrowed $2,325,000 from Spotless. During fiscal 2003, the
Company repaid $825,000 to Spotless.
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.
20
Net cash used in operating activities was ($2,343,180) in fiscal 2004, as
compared to net cash provided by (used in) operating activities of ($317,504)
and $2,521,922 in fiscal 2003 and 2002, respectively. Accounts receivable
increased $1,057,539, or 17%, to $7,341,946 in fiscal 2004, reflecting
processing delays in the Company's invoicing of its customers. Accounts
receivable decreased $1,275,628, or 25%, 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%, 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 payable and accrued expenses
increased by $691,007, or 26%, as a result of increased revenues and slower
payments to vendors. Such slow payment resulted from the delays in invoicing
discussed above and the resulting deterioration of cash receipts. Accounts
payable and accrued expenses decreased by $119,145, or 4%, 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 $856,217, $1,914,576 and $688,073 in fiscal
2004, 2003 and 2002, 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.
Financing activities for fiscal 2004, fiscal 2003 and fiscal 2002 provided
(used) net cash of $3,132,863, $1,962,497 and ($1,757,902), respectively. In
fiscal 2004, fiscal 2003 and fiscal 2002, these amounts include proceeds from
short-term notes from Spotless of $3,300,000, $2,325,000 and $1,750,000 offset
by repayments of short-term notes to Spotless of $0, $825,000 and $2,750,000,
respectively. In addition, in fiscal 2004, fiscal 2003 and fiscal 2002, proceeds
from long-term debt was $320,124, $844,209 and $137,965, respectively, offset by
repayments of long-term debt of $448,260, $203,712 and $84,549 in fiscal 2004,
fiscal 2003 and fiscal 2002, respectively. In fiscal 2003 and fiscal 2002, the
Company repaid convertible notes of $100,000 and $680,000. In fiscal 2004,
fiscal 2003 and fiscal 2002, the Company paid dividends on preferred stock of
$39,000, $78,000 and $214,500, respectively. In fiscal 2002, the Company
received proceeds from the exercise of stock options of $83,182.
Management believes the Company will require positive cash flow from operations
to meet its working capital needs over the next twelve months unless the Company
increases its borrowings from Spotless, obtains debt or equity financing from a
third party or is able to sufficiently utilize its Accounts Receivable Finance
Agreement with Spotless. In the event that positive cash flow from operations is
not generated, the Company may be required to seek additional financing, from
Spotless or otherwise, to meet its working capital needs. Management continues
to pursue additional funding sources, but has been unable to attract debt or
equity capital on terms more favorable than those available from Spotless. So
long as the Company has sufficient working capital, it anticipates continued
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 or that it will have sufficient working capital. The Company is
striving to improve its gross margin and control its selling, general and
administrative expenses. In this regard, in recent months the Company has
reduced its expenses, including those relating to marketing, at an annualized
rate of approximately $2 million. 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: (a) the
ability to obtain environmental or related construction contracts, (b) the
ability to generate positive cash flow from operations, and the extent thereof,
(c) the ability to raise additional capital or obtain additional financing, and
(d) economic conditions.
The table below summarizes contractual obligations and commitments as of June
29, 2004:
Total 1 Year 2-3 Years 4-5 Years Thereafter
Operating Leases $1,281,007 $443,478 $ 837,529 $ 0 $0
Long-term Debt 647,328 307,224 289,254 50,850 0
---------- -------- ----------- --------- --
Total $1,928,335 $750,702 $ 1,126,783 $ 50,850 $0
========== ======== =========== ========= ==
21
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.
EFFECT OF INFLATION
Inflation has not had a material impact on the Company's operations during
fiscal 2004, fiscal 2003 and fiscal 2002.
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 June 29, 2004, such shares and vested options to purchase shares
aggregated 8,313,642 shares. Each $.01 increase or decrease in market price of
the Company's stock impacts earnings by approximately $83,000.
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% (2.6% at June 29, 2004).
At June 29, 2004, total debt owed to Spotless was $5,000,000 with additional
accrued interest of $129,266. Assuming variable rate debt at June 29, 2004, a
one-point change in interest rates would impact annual net interest payments by
approximately $50,000. 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
---- ----
Report of Independent Registered Public Accounting Firm 27
Consolidated Balance Sheets as of June 29, 2004 and July 1, 2003 28
Consolidated Statements of Operations for the fiscal years ended
June 29, 2004, July 1, 2003 and July 2, 2002 29
Consolidated Statements of Stockholders' Equity for the fiscal
years ended June 29, 2004, July 1, 2003 and July 2, 2002 30
Consolidated Statements of Cash Flows for the fiscal years ended
June 29, 2004, July 1, 2003 and July 2, 2002 31
Notes to Consolidated Financial Statements 32 to 46
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
- ------------------------------------------------------------------------
None.
ITEM 9A. CONTROLS AND PROCEDURES
- ---------------------------------
As of the end of the period covered by this annual report, the Company carried
out an evaluation under the supervision
22
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 Rules 13a-15(e) and 15(d)-15(e). Based upon that evaluation, the
Chief Executive Officer and Chief Financial Officer concluded that the Company's
disclosure controls and procedures are effective. The design of any system of
controls is based in part 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.
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 expected to be filed within 120 days
after the end of the Company's most recent fiscal year for the Annual Meeting of
Stockholders to be held in 2004 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 expected to be filed within
120 days after the end of the Company's most recent fiscal year for the Annual
Meeting of Stockholders to be held in 2004 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 expected to be
filed within 120 days after the end of the Company's most recent fiscal year for
the Annual Meeting of Stockholders to be held in 2004 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 expected to be filed
within 120 days after the end of the Company's most recent fiscal year for the
Annual Meeting of Stockholders to be held in 2004 is incorporated herein by
reference.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
- ------------------------------------------------
The information under the caption "Principal Accountant Fees and Services" in
the Company's definitive Proxy Statement expected to be filed within 120 days
after the end of the Company's most recent fiscal year for the Annual Meeting of
Stockholders to be held in 2004 is incorporated herein by reference.
PART IV
-------
ITEM 15. EXHIBITS AND REPORTS ON FORM 8-K
- ------------------------------------------
(a) 1 and 2. Consolidated Financial Statements and Financial Schedules. The
consolidated financial statements and financial statement schedules
listed on the table of contents to consolidated financial statements on
page 25 are filed as part of this Form 10-K.
(b) Reports on Form 8-K. None.
(c) Exhibits
23
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 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).
10.02 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).
10.03 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).
10.04 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).
10.05 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).
10.06 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).
10.07 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).
10.08 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).
10.09 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).
10.10 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).
10.11 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).
24
10.12 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).
10.13 Account Receivable Finance Agreement, dated February 5, 2004, by and
among the Company, Trade-Winds Environmental Restoration, Inc. and
Spotless Plastics (USA) Inc. (Incorporated by reference to Exhibit 10.1
of the Company's Quarter Report on Form 10-Q for the quarter ended
December 30, 2003, filed with the SEC on February 10, 2004).
21.01 Subsidiaries of the Company.
23.01 Consent of Independent Registered Public Accounting Firm
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 and Chief Financial Officer of
the Company pursuant to 18 U.S.C. Section 1350.
25
WINDSWEPT ENVIRONMENTAL GROUP, INC.
TABLE OF CONTENTS
Page
----------
Report of Independent Registered Public Accounting Firm 27
Consolidated Balance Sheets as of June 29, 2004 and July 1, 2003 28
Consolidated Statements of Operations for the fiscal years ended
June 29, 2004, July 1, 2003 and July 2, 2002 29
Consolidated Statements of Stockholders' Equity for the fiscal
years ended June 29, 2004, July 1, 2003 And July 2, 2002 30
Consolidated Statements of Cash Flows for the fiscal years ended
June 29, 2004, July 1, 2003 and July 2, 2002 31
Notes to Consolidated Financial Statements 32 to 46
26
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
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 June 29, 2004
and July 1, 2003, and the related consolidated statements of operations,
stockholders' equity and cash flows for the fiscal years ended June 29, 2004,
July 1, 2003 and July 2, 2002. 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 standards of the Public Company
Accounting Oversight Board (United States). 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 June 29, 2004 and
July 1, 2003, and the results of their operations and their cash flows for the
fiscal years ended June 29, 2004, July 1, 2003 and July 2, 2002, in conformity
with accounting principles generally accepted in the United States of America.
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed in Note 1 to the
consolidated financial statements, the Company has incurred recurring losses
from operations, has a working capital deficit and a stockholders' deficit, and
is experiencing difficulty in generating sufficient cash flow to meet its
obligations and sustain its operations, which raises substantial doubt about the
Company's ability to continue as a going concern. Management's plans in regard
to these matters are also described in Note 3. The consolidated financial
statements do not include any adjustments that might result from the outcome of
this uncertainty.
/s/ Deloitte & Touche LLP
Jericho, New York
September 24, 2004
27
WINDSWEPT ENVIRONMENTAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
June 29, July 1,
2004 2003
------------ ------------
ASSETS:
CURRENT ASSETS:
Cash $ 63,562 $ 130,096
Accounts receivable, net of allowance for doubtful accounts of $689,140
and $402,804, respectively 6,652,806 5,881,603
Inventory 151,270 215,466
Costs and estimated earnings in excess of billings on uncompleted contracts 608,047 871,753
Prepaid expenses and other current assets 257,565 279,597
Refundable income taxes 641,795 1,080,186
------------ ------------
Total current assets 8,375,045 8,458,701
PROPERTY AND EQUIPMENT, net of accumulated depreciation and amortization of
$5,707,705 and $5,111,516, respectively 2,757,463 2,497,435
OTHER ASSETS 198,657 98,127
------------ ------------
TOTAL $11,331,165 $11,054,263
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT):
CURRENT LIABILITIES:
Accounts payable $ 2,309,328 $ 1,487,683
Accrued expenses 1,101,701 1,193,339
Short-term notes payable to related party 5,000,000 1,700,000
Billings in excess of costs and estimated earnings on uncompleted contracts 239,511 299,427
Accrued payroll and related fringe benefits 924,725 659,659
Current maturities of long-term debt 307,224 436,617
Income taxes payable 129,435 -
Other current liabilities 467,092 464,686
------------ ------------
Total current liabilities 10,479,016 6,241,411
------------ ------------
LONG-TERM DEBT 340,104 338,848
------------ ------------
COMMITMENTS AND CONTINGENCIES (Notes 11 and 15)
REDEEMABLE COMMON STOCK - 348,625
------------ ------------
SERIES A REDEEMABLE CONVERTIBLE PREFERRED STOCK, $.01 par value;
1,300,000 shares authorized and outstanding, respectively 1,300,000 1,300,000
------------ ------------
STOCKHOLDERS' EQUITY (DEFICIT):
Series B preferred stock, $.01 par value; 50,000 shares authorized; 0 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 June 29, 2004 and July 1, 2003 7,794 7,794
Additional paid-in capital 33,922,017 34,000,017
Accumulated deficit (34,717,766) (31,182,432)
------------ ------------
Total stockholders' equity (deficit) (787,955) 2,825,379
------------ ------------
TOTAL $11,331,165 $11,054,263
============ ============
See notes to consolidated financial statements.
28
WINDSWEPT ENVIRONMENTAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE FISCAL YEARS ENDED JUNE 29, 2004, JULY 1, 2003 AND JULY 2, 2002
June 29, July 1, July 2,
2004 2003 2002
-------------- -------------- --------------
Revenues $ 19,166,753 $ 17,831,189 $ 32,903,740
Cost of revenues 17,442,059 14,314,519 20,755,677
-------------- -------------- --------------
Gross margin 1,724,694 3,516,670 12,148,063
-------------- -------------- --------------
Operating expenses (income):
Selling, general and administrative expenses 5,348,524 5,603,557 5,346,394
(Benefit) expense related to variable
accounting treatment for officer options and
for officer options and
redeemable common stock (348,626) (593,246) 555,812
-------------- -------------- --------------
Total operating expenses 4,999,898 5,010,311 5,902,206
-------------- -------------- --------------
(Loss) income from operations (3,275,204) (1,493,641) 6,245,857
-------------- -------------- --------------
Other expense (income):
Interest expense 924,461 72,189 223,246
Other income, net (29,386) (23,040) (14,576)
-------------- -------------- --------------
Total other expense (income) 895,075 49,149 208,670
-------------- -------------- --------------
(Loss) income before (benefit) provision for income
taxes (4,170,279) (1,542,790) 6,037,187
(Benefit) provision for income taxes (634,945) (1,073,768) 2,542,320
-------------- -------------- --------------
Net (loss) income (3,535,334) (469,004) 3,494,867
Dividends on preferred stock 78,000 78,000 468,719
-------------- -------------- --------------
Net (loss) income attributable to common
shareholders $ (3,613,334) $ (547,004) $ 3,026,148
============== ============== ==============
Basic and diluted net (loss) income per common share:
Basic $(.05) $(.01) $.05
====== ====== =====
Diluted $(.05) $(.01) $.04
====== ====== =====
Weighted average number of common shares outstanding:
Basic 77,936,358 77,936,358 63,300,953
========== ========== ===========
Diluted 77,936,358 77,936,358 85,455,580
========== ========== ===========
See notes to consolidated financial statements.
29
WINDSWEPT ENVIRONMENTAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE FISCAL YEARS ENDED JUNE 29, 2004, JULY 1, 2003 AND JULY 2, 2002
Preferred Stock Common Stock
--------------- ------------
Number Additional
of Par Number of Par Paid-in Accumulated
Shares Value Shares Value Capital Deficit Total
------ ----- ------ ----- ------- ------- -----
Balance at July 4, 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
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
Dividends on Series A preferred stock - - - - (78,000) - (78,000)
Net loss and comprehensive loss - - - - - (3,535,334) (3,535,334)
------- ------ ----------- ------- ------------ ------------- ------------
Balance at June 29, 2004 - $ - 77,936,358 $7,794 $33,922,017 $(34,717,766) $ (787,955)
======= ====== =========== ======= ============ ============= ============
- -
See notes to consolidated financial statements.
30
WINDSWEPT ENVIRONMENTAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE FISCAL YEARS ENDED JUNE 29, 2004, JULY 1, 2003 AND JULY 2, 2002
Fiscal Year Fiscal Year Fiscal Year
Ended June 29, To July 1, Ended July
2004 2003 2002
------------ ------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss) income $(3,535,334) (469,004) 3,494,867
Adjustments to reconcile net (loss) income to net cash (used in) provided by
operating activities:
Depreciation and amortization 596,189 561,510 672,054
Provision for doubtful accounts, net 286,336 (506,225) 338,620
Compensation (benefit) related to officer options and redeemable common stock (348,625) (593,246) 555,812
Changes in operating assets and liabilities:
Accounts receivable (1,057,539) 2,143,825 (2,275,940)
Inventory 64,196 81,008 (88,410)
Costs and estimated earnings in excess of billings on uncompleted contracts 263,706 (370,329) 185,104
Prepaid expenses and other current assets 22,032 (135,323) (22,102)
Other assets (100,530) 108,988 (65,275)
Accounts payable and accrued expenses 691,007 (119,145) 301,190
Accrued payroll and related fringe benefits 265,066 108,568 (17,650)
Income taxes payable 567,826 (1,531,006) (53,355)
Other current liabilities 2,406 296,699 (170,885)
Billings in excess of costs and estimated earnings on uncompleted contracts (59,916) 106,176 (332,108)
------------ ------------ ------------
NET CASH (USED IN) PROVIDED BY OPERATING ACTIVITIES (2,343,180) (317,504) 2,521,922
------------ ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (856,217) (1,914,576) (688,073)
------------ ------------ ------------
NET CASH USED IN INVESTING ACTIVITIES (856,217) (1,914,576) (688,073)
------------ ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments of long-term debt (448,261) (203,712) (84,549)
Proceeds from long-term debt 320,124 844,209 137,965
Repayment of short-term notes payable to a related party - (825,000) (2,750,000)
Proceeds from short-term notes payable to a related party 3,300,000 2,325,000 1,750,000
Payment of convertible notes - (100,000) (680,000)
Dividends paid on preferred stock (39,000) (78,000) (214,500)
Proceeds from exercise of stock options - - 83,182
------------ ------------ ------------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES 3,132,863 1,962,497 (1,757,902)
------------ ------------ ------------
NET (DECREASE) INCREASE IN CASH (66,534) (269,583) 75,947
CASH - BEGINNING OF PERIOD 130,096 399,679 323,732
------------ ------------ ------------
CASH - END OF PERIOD 63,562 130,096 399,679
============ ============ ============
Cash paid during the period for:
Interest $ 45,146 $ 39,405 $ 274,129
============= ============ ============
Taxes $ - $ 230,596 $ 2,589,958
============= ============ ============
See notes to consolidated financial statements.
31
WINDSWEPT ENVIRONMENTAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NATURE OF BUSINESS
Windswept Environmental Group, Inc. and its subsidiaries (the
"Company") provides a broad range of environmental services through
vertically integrated businesses in the areas of hazardous waste
remediation, asbestos removal, mold 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 and Going Concern Considerations
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.
The accompanying consolidated financial statements have been prepared
assuming that the Company will continue as a going concern. The Company
has incurred recurring losses from operations, has a working capital
deficit and a stockholders' deficit, and is experiencing difficulty in
generating sufficient cash flow to meet its obligations and sustain its
operations, which raises substantial doubt about the Company's ability
to continue as a going concern. Management's plans in regard to these
matters are also described in Note 3. The consolidated financial
statements do not include any adjustments that might result from the
outcome of this uncertainty.
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.
32
INVENTORY
Inventory consists entirely of finished goods (materials and supplies
utilized on the Company's remediation projects) and is recorded at the
lower of cost (first-in, first-out) or market.
PROPERTY AND EQUIPMENT
Property and equipment, consisting of machinery and equipment, office
furniture and equipment, trucks and vehicles, and leasehold
improvements, are stated at cost. Depreciation is recorded on the
straight-line method over the estimated useful lives of the assets.
Leasehold improvements are amortized over the lesser of the term of the
related lease or the estimated useful lives of the improvements. The
estimated useful lives of the related assets are generally three to
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 June 29, 2004, July 1, 2003 and July 2,
2002.
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 June 29, 2004, July 1, 2003 and July 2, 2002 was as
follows:
Fiscal Year Fiscal Year Fiscal Year
Ended Ended Ended
June 29, July 1, July 2,
2004 2003 2002
-------------- -------------- --------------
Balance, beginning of period $ 402,804 $ 909,029 $ 570,409
Charged to costs and expenses 323,384 303,972 686,296
Deductions (52,777) (868,197) (351,823)
Recoveries 15,729 58,000 4,147
-------------- -------------- --------------
Balance, end of period $ 689,140 $ 402,804 $ 909,029
============== ============== ==============
(LOSS) INCOME PER SHARE
The basic net (loss) income per share is computed using weighted
average number of common shares outstanding for the applicable period.
The diluted net (loss) income 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
33
Accounting Standards ("SFAS") No. 148, "Accounting for Stock-Based
Compensation-Transition and Disclosure - an amendment of FASB Statement
No. 123 ("SFAS 148"). SFAS 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 123 prospective method of transition in
fiscal years beginning after December 15, 2003. In addition, SFAS 148
amends the disclosure requirements of SFAS 123 to require prominent
disclosures in both annual and interim financial 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 148 improves the prominence and clarity of the pro
forma disclosures required by SFAS 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 adopted the
disclosure requirements of SFAS 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
123, "Accounting for Stock-Based Compensation," to stock-based employee
compensation for the fiscal years ended June 29, 2004, July 1, 2003 and
July 2, 2002:
Fiscal Year Fiscal Year Fiscal Year
Ended Ended Ended
June 29, July 1, July 2,
2004 2003 2002
-------------- -------------- --------------
Net (loss) income attributable to
common shareholders, as
reported $ (3,613,334) $ (547,004) $ 3,026,148
Less: Stock-based employee
compensation cost determined
under the fair value method,
net of related tax effects (140,119) (239,121) (271,401)
-------------- -------------- --------------
Pro forma net (loss) income
attributable to common
shareholders $ (3,753,453) $ (786,125) $ 2,754,747
============== ============== ==============
Net (loss) income per share:
Basic - as reported $(.05) $(.01) $.05
====== ====== ====
Basic - pro forma $(.05) $(.01) $.04
====== ====== ====
Diluted - as reported $(.05) $(.01) $.04
====== ====== ====
Diluted - pro forma $(.05) $(.01) $.03
====== ====== ====
The weighted average fair value of options granted during the fiscal
years ended June 29, 2004, July 1, 2003 and July 2, 2002 is estimated
at $.22, $.14 and $.17, respectively, on the date of the grant.
34
The fair value of these options was estimated using the Black-Scholes
option pricing model with the following weighted average assumptions:
Fiscal Year Fiscal Year Fiscal Year
Ended Ended Ended
June 29, July 1, July 2,
2004 2003 2002
-------------- -------------- --------------
Risk free rate 3.3% 3.3% 4.5%
Dividend yield - - -
Volatility 149% 133% 146%
Expected Option Life 5 years 5 years 5 years
FAIR VALUE OF FINANCIAL INSTRUMENTS
As of June 29, 2004, 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 $.05 at June
29, 2004, and the conversion provisions of the underlying instrument,
the fair value of the Series A Redeemable Preferred Stock was $65,000.
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.
FISCAL YEAR
The Company has 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.
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 had a liquidation
preference of $79.04, was initially convertible into 1,000 shares of
Common Stock, par value $.0001 per share, of the Company (the "Common
Stock") (subject to adjustment) and was 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.
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
35
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 June 29, 2004, the Company had cash balances of $63,562, working
capital deficit of $(2,103,971) and stockholders' deficit of
$(787,955). 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.
In addition, the Company incurred net losses of $3,535,334 and $469,004
for the fiscal years ended June 29, 2004 and July 1, 2003, respectively
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 its current operations as long
as it does not encounter further difficulty collecting its accounts
receivable or experience significant growth. 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 in addition to the financing contemplated by the Account
Receivable Finance Agreement between the Company and Spotless
dated as of February 5, 2004. Spotless is under no contractual
obligation to provide any funds, and it has indicated that, at the
present time, it does not intend to provide any additional debt or
equity financing to the Company outside the Account Receivable Finance
Agreement. The Company currently has no credit facility for additional
borrowing. Under the Account Receivable Finance Agreement, Spotless
may, but is not obligated to, purchase one or more of the Company's
accounts receivable, that are approved by Spotless, in its sole
discretion, in respect of the particular debtor, invoices and related
credit. As part of the agreement, Spotless may purchase any accounts
receivable at a 15% discount to invoice prices, which the Company
believes is at least as favorable to it as would be available from an
unaffiliated third-party, based upon a good-faith estimate of an
applicable discount negotiated at arm's length, as may be adjusted by
Spotless in its sole discretion. In this regards, all of Spotless'
purchases have been made at a 15% discount except one made in April
2004 for the amount of $711,450 in relation to an account receivable
balance of $1,028,194, which constituted a 31% discount. In addition,
the Company pays varying monthly discount fees on any purchased
accounts receivable based upon invoice prices. All discounts and fees
under the Account Receivable Finance Agreement are characterized as
interest expense. As of June 29, 2004, the Company has incurred
approximately $765,000 of such discounts and fees. Further, the Company
(a) manages any accounts receivable that it sells to Spotless while
remitting to Spotless any proceeds received and (b) bears any related
litigation costs.
As of June 29, 2004, Spotless had purchased an aggregate amount of the
Company's accounts receivable
36
equaling $4,018,941 for an aggregate purchase price of $3,253,585. As
of September 24, 2004, the last accounts receivable purchase made,
Spotless had purchased an aggregate amount of the Company's accounts
receivable equaling $4,991,252 for an aggregate purchase price of
$4,080,050.
As of June 29, 2004, the Company owed Spotless $5,000,000 on short-term
loans to fund working capital. During fiscal 2004, 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
$3,300,000 from Spotless. During fiscal 2004, the Company did not make
any repayments to Spotless. All current borrowings from Spotless bear
interest at the London Interbank Offering Rate ("LIBOR") plus 1 percent
and are secured by all of the Company's assets. As of June 29, 2004,
interest of $129,266 was accrued and unpaid on these borrowings. On
September 10, 2004, the Company repaid accrued interest to Spotless
through August 24, 2004 of approximately $151,000.
In fiscal 2003, the Company repaid $100,000 of a convertible note held
by a director of the Company.
During fiscal 2003, in order to address the Company's cash flow and
operational concerns, the Company borrowed $2,325,000 from Spotless.
During fiscal 2003, the Company repaid $825,000 to Spotless.
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.
Management believes the Company will require positive cash flow from
operations to meet its working capital needs over the next twelve
months unless the Company increases its borrowings from Spotless,
obtains debt or equity financing from a third party or is able to
sufficiently utilize its Accounts Receivable Finance Agreement with
Spotless. In the event that positive cash flow from operations is not
generated, the Company may be required to seek additional financing,
from Spotless or otherwise, to meet its working capital needs.
Management continues to pursue additional funding sources, but has been
unable to attract debt or equity capital on terms more favorable than
those available from Spotless. So long as the Company has sufficient
working capital, it anticipates continued 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 or that it will have sufficient working capital. The Company
is striving to improve its gross margin and control its selling,
general and administrative expenses. In this regard, in recent months
the Company has reduced its expenses, including those related to
marketing, at an annualized rate of approximately $2 million. 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:
(a) the ability to obtain environmental or related construction
contracts, (b) the ability to generate positive cash flow from
operations, and the extent thereof, (c) the ability to raise additional
capital or obtain additional financing, and (d) economic conditions.
37
4. PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
June 29, July 1,
2004 2003
-------------- --------------
Machinery and equipment $ 5,386,673 $ 4,851,497
Office furniture and equipment 509,052 503,184
Vehicles 2,029,084 1,713,911
Leasehold improvements 540,359 540,359
-------------- --------------
8,465,168 7,608,951
Less: accumulated depreciation and amortization 5,707,705 5,111,516
-------------- --------------
$ 2,757,463 $ 2,497,435
5. ACCRUED EXPENSES
Accrued expenses consist of the following:
June 29, July 1,
2004 2003
-------------- --------------
Litigation reserves $ 75,000 $ 544,304
Other 1,026,701 649,035
-------------- --------------
$ 1,101,701 $ 1,193,339
============== ==============
6. LONG-TERM DEBT
Long-term debt consists of various notes payable relating to the
purchase of vehicles and equipment with interest rates ranging from 0%
to 12.25%. The notes payable are secured by the underlying vehicles and
equipment with a net carrying value of $1,025,442 at June 29, 2004.
Repayments of long-term debt as of June 29, 2004 are as follows:
Fiscal Years Ending
------------------------------------
June 28, 2005 $307,224
June 27, 2006 160,089
July 3, 2007 129,165
July 1, 2008 46,847
June 30, 2009 4,003
----------
$ 647,328
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. 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 March 2002, the remaining
10% convertible notes were fully repaid.
38
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 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 June 29, 2004 and July 1, 2003, 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 an initial term of five years, which has
been automatically extended for an additional year, 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
39
shares of the Company's common stock held by Michael O'Reilly
immediately vested.
The Company recorded compensation expense (benefit) of ($348,626),
($593,246) and $555,812 relating to the O'Reilly Shares in the fiscal
years ended June 29, 2004, July 1, 2003 and July 2, 2002, respectively.
10. INCOME TAXES
The (benefit) provision for income taxes for the fiscal years ended
June 29, 2004, July 1, 2003 and July 2, 2002 consists of the following:
Fiscal Year Fiscal Year Fiscal Year
Ended Ended Ended
June 29, July 1, July 2,
2004 2003 2002
-------------- -------------- --------------
Current:
Federal $ (648,645) $ (1,080,186) $ 1,794,453
State 13,700 6,400 747,867
-------------- -------------- --------------
(634,945) (1,073,786) 2,542,320
-------------- -------------- --------------
Deferred:
Federal - - -
State - - -
-------------- -------------- --------------
- - -
-------------- -------------- --------------
$ (634,945) $ (1,073,786) $ 2,542,320
============== ============== ==============
The benefit for income taxes for the fiscal years ended June 29, 2004
and July 1, 2003 represents the federal tax refund resulting from the
carry back of the net loss incurred in each fiscal year net of state
tax expense. At June 29, 2004, the Company has net operating loss
carryforwards for tax purposes of approximately $3,251,000 that expire
at various dates through 2024. As a result of a change in the Company's
ownership, approximately $1,158,000 of these 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 June 29,
2004, July 1, 2003 and July 2, 2002 differs from the federal statutory
rate as a result of the following:
Fiscal Year Fiscal Year Fiscal Year
Ended Ended Ended
June 29, July 1, July 2,
2004 2003 2002
-------------- -------------- ---------------
Statutory United
States federal tax rate (34.0)% (34.0)% 34.0%
State income taxes, net
of federal benefit .2% .2% 8.3%
Utilization of federal
and state net operating
loss carryforwards 0.0% 0.0% (3.6)%
Valuation allowance 18.3% (40.0)% 5.0%
Other .3% 4.2% (1.6)%
-------------- -------------- ---------------
(15.2)% (69.6)% 42.1%
============== ============== ===============
40
Deferred tax assets consist of the following components at June 29,
2004 and July 1, 2003:
2004 2003
---- ----
Net operating loss and credit carryforwards $1,712,000 $ 614,000
Reserves 281,000 128,000
Deferred compensation - 139,000
Depreciation (281,000) (217,000)
Other, net 64,000 60,000
----------- -----------
1,776,000 724,000
Less: Valuation allowance 1,776,000 724,000
----------- -----------
Net deferred tax asset $ - $ -
=========== ===========
At June 29, 2004 and July 1, 2003, 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 June 29, 2004 are as follows:
Fiscal Years Ending,
------------------------------------------
June 28, 2005 $ 443,478
June 27, 2006 458,126
July 3, 2007 379,403
----------
Total future minimum lease payments $1,281,007
==========
Total rental expense was $434,790, $357,510 and $329,680, for the
fiscal years ended June 29, 2004, July 1, 2003 and July 2, 2002,
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 years ended June 29, 2004 and July 1, 2003, 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 June 29, 2004, 1,600,000 shares of common stock were reserved for
issuance upon the exercise of options then outstanding and 6,400,000
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
June 29, 2004, 8,801,618 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
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
41
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 June 29, 2004, July 1, 2003 and July 2, 2002
is presented below:
Employees Weighted Weighted
and Average Non- Average
Directors Exercise Employee Exercise
Options Price Options Price
Outstanding at July 4, 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
Granted 650,000 $.22 - -
Forfeited (2,175,000) $.26 (30,000) $.41
Exercised - - - -
----------- ----------
Outstanding at June 29, 2004 10,296,618 $.14 - -
=========== ==========
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
=========== ==== ====== ====
Options exercisable at June 29, 2004 10,296,618 $.14 - $ -
=========== ==== ====== ====
Weighted
Number Average
Outstanding Remaining Number
Exercise at June 29, Contractual Exercisable at
Price 2004 Life (years) June 29, 2004
----- ---- ------------ --------------
$.01 2,000,000 .33 2,000,000
$.079 5,486,309 5.25 5,486,309
$08 200,000 4.46 200,000
$.1094 100,000 1.33 100,000
$.16 600,000 2.74 600,000
$.17 400,000 2.10 400,000
$.19 650,000 2.19 650,000
$.22 200,000 3.49 200,000
$.23 250,000 2.24 250,000
$.3125 50,000 .16 50,000
$.34 250,000 4.13 250,000
$.3438 110,309 .05 110,309
------ ---------- ---- ----------
10,296,618 10,296,618
========== ==========
14. RELATED PARTY TRANSACTIONS
During the fiscal year ended June 29, 2004, the Company borrowed
$3,300,000 from Spotless for working capital requirements and to fund
losses. 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. During the fiscal year ended July 2,
2002, the Company borrowed $1,750,000 from Spotless for working
42
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. The Company repaid
$825,000 to Spotless in the fiscal year ended July 1, 2003.
The Company has increased its liquidity by entering into an Account
Receivable Finance Agreement dated as of February 5, 2004 with Spotless
pursuant to which Spotless may purchase certain of the Company's
accounts receivable without recourse for cash, subject to certain terms
and conditions. The Company accounts for its transfers of accounts
receivable to Spotless as sales under Statement of Financial Standards
No. 140, "Accounting for Transfers and Servicing of Financial Assets
and Extinguishments of Liabilities." Under the Account Receivable
Finance Agreement, Spotless may, but is not obligated to, purchase one
or more of the Company's accounts receivable, that are approved by
Spotless, in its sole discretion, in respect of the particular debtor,
invoices and related credit. As part of the agreement, Spotless may
purchase any accounts receivable at a 15% discount to invoice prices,
which the Company believes is at least as favorable to it as would be
available from an unaffiliated third-party, based upon a good-faith
estimate of an applicable discount negotiated at arm's length, as may
be adjusted by Spotless in its sole discretion. In addition, the
Company pays varying monthly discount fees on any purchased accounts
receivable based upon invoice prices. All discounts and fees under the
Account Receivable Finance Agreement are characterized as interest
expense in the consolidated statements of operations. Further, the
Company (a) manages any accounts receivable that it sells to Spotless
while remitting to Spotless any proceeds received and (b) bears any
related litigation costs. For the fiscal year ended June 29, 2004, the
Company sold approximately $4,018,941 of accounts receivable to
Spotless and incurred approximately $765,000 of discounts and fees
associated with these sales.
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 $5,000,000 in loans from Spotless outstanding as of June 29,
2004. All borrowings bear interest at LIBOR plus 1 percent (2.6% and
2.1% at June 29, 2004 and July 1, 2003, respectively) and are due on
demand. Interest expense related to this note was $103,113, $28,419 and
$37,667 for the fiscal years ended June 29, 2004, July 1, 2003 and July
2, 2002, respectively. As of June 29, 2004 and July 1, 2003, interest
of $129,266 and $26,336, respectively, was accrued and unpaid on these
borrowings.
During the fiscal years ended June 29, 2004, July 1, 2003 and July 2,
2002, Spotless charged the Company an administrative fee of $131,556,
$101,256 and $150,628, respectively, of which $144,443 remains unpaid
and included in accrued expenses as of June 29, 2004.
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 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 June 29, 2004,
July 1, 2003 and July 2, 2002, the Company paid $39,000, $78,000 and
$214,500, 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.
43
The Company paid a former outside director $24,385, $46,926 and $43,741
for consulting services in the fiscal years ended June 29, 2004, July
1, 2003 and July 2, 2002, respectively.
15. CONTINGENCIES
LITIGATION AND DISPUTES
On August 5, 2004, Trade-Winds commenced an action in the New York
State Supreme Court, County of New York, claiming that Trade-Winds is
entitled to approximately $1,255,000 of contractual billings relating
to a large roof tar removal project.
In April 2003, the Company commenced a remediation project in New York
City for a local utility to remove sediment from an oil storage tank.
During the course of the project, the sediment in the tank was found to
be substantially different than the sediment that the customer
represented to be in the tank prior to the inception of the project.
The Company continued to work on the project so as not to default on
the terms which it understood to exist with the customer. The
additional costs incurred to remove this matter in the amount of
approximately $1,600,000 were billed to the customer. However, the
collectibility of such monies cannot be assured. Accordingly, the
Company has not recognized the revenue associated with this claim. The
project has been substantially completed and the customer has refused
to acknowledge its liability for the additional charges billed by the
Company. The Company has retained legal counsel to review its claim
with the customer and believes that additional monies billed will be
collected. As of June 29, 2004, the Company has recognized revenue of
approximately $1,700,000 with respect to original scope of this
project. As of August 30, 2004, all amounts due under the original
contract have been paid to the Company. The Company believes that its
claim for additional compensation has legal merit and, if negotiations
with the customer do not yield satisfactory results, the Company
intends to pursue legal action against the customer for the additional
costs incurred plus a reasonable profit margin.
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 June 29, 2004, July 1, 2003 and July 2,
2002 the Company recognized net sales to significant customers as set
forth below:
June 29, July 1, July 2,
Major Customers 2004 2003 2002
-------------------------- ---------- ---------- -----------
Customer A 4% 0% 34%
Customer B 0% 19% 0%
The Company is not dependent upon its relationship with any customer in
the fiscal year ended June 29, 2004. 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 were not replaced
by revenues generated by other customers.
At June 29, 2004, 19 percent of the Company's accounts receivable
related to one customer. At July 1, 2003, 17 percent and 11 percent,
respectively, of the Company's accounts receivable related to two
customers.
During the fiscal year ended June 29, 2004, the Company had sales of
approximately $23,000 to a customer outside the United States. 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,
44
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.
17. NET (LOSS) INCOME PER SHARE
The following table sets forth the computation of the basic and diluted
net (loss) income per share for the fiscal years ended June 29, 2004,
July 1, 2003 and July 2, 2002:
Fiscal Year Fiscal Year Fiscal Year
Ended Ended Ended
June 29, July 1, July 2,
2004 2003 2002
-------------- -------------- --------------
Numerator:
Net (loss) income attributable
to common shareholders $ (3,613,334) $ (547,004) $ 3,026,148
Add interest and amortization
on convertible notes, net of
tax - - 35,377
-------------- -------------- --------------
$ (3,613,334) $ (547,004) $ 3,061,525
============== ============== ==============
Denominator:
Share reconciliation:
Shares used for basic
(loss) income per share 77,936,358 77,936,358 63,300,953
Effect of dilutive items:
Stock options - - 6,908,459
Convertible securities - - 15,246,168
-------------- -------------- --------------
Shares used for dilutive
(loss) income per share 77,936,358 77,936,358 85,455,580
============== ============== ===============
Net (loss) income per share:
Basic $(.05) $(.01) $.05
====== ====== ====
Diluted $(.05) $(.01) $.04
====== ====== ====
The diluted net loss per share for the fiscal years ended June 29, 2004
and July 11, 2003 excludes 10,296,618 and 11,851,618 shares issuable
upon the exercise of stock options and 1,300,000 and 1,300,000 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.
45
18. UNAUDITED QUARTERLY DATA
Summarized unaudited quarterly financial data for the fiscal years
ended June 29, 2004 and July 1, 2003 are as follows:
Fiscal Year Ended June 29, 2004
------------------------------- First Second Third Fourth
Quarter Quarter Quarter Quarter
-------------- -------------- -------------- --------------
Revenues $ 5,259,926 $ 6,523,473 $ 3,026,183 $ 4,357,171
Net income (loss) $ 209,151 $ 462,437 $ (2,567,984) $ (1,638,938)
Net income (loss) attributable to
common shareholders $ 189,651 $ 442,937 $ (2,587,484) $ (1,658,438)
Net income (loss) per common
share - basic $.00 $.01 $(.03) $(.02)
Net income (loss) per common
share - diluted $.00 $.01 $(.03) $(.02)
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)
46
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 27, 2004
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 27, 2004 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 27, 2004 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/ Peter A. Wilson
PETER A. WILSON, Chairman
By: /s/ Dr.Kevin Phillips
DR. KEVIN PHILLIPS, Director
By: /s/ Anthony Towell
ANTHONY TOWELL, Director
By:
BRIAN S. BLYTHE, Director
47
By: /s/ Ronald B. Evans
RONALD B. EVANS, Director
By: /s/ John J. Bongiorno
JOHN J. BONGIORNO, Director
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 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).
10.02 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).
10.03 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).
10.04 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).
10.05 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).
10.06 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).
10.07 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).
10.08 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).
10.09 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).
49
10.10 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).
10.11 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).
10.12 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).
10.13 Account Receivable Finance Agreement, dated February 5, 2004, by and
among the Company, Trade-Winds Environmental Restoration, Inc. and
Spotless Plastics (USA) Inc. (Incorporated by reference to Exhibit 10.1
of the Company's Quarter Report on Form 10-Q for the quarter ended
December 30, 2003, filed with the SEC on February 10, 2004).
21.01 Subsidiaries of the Company.
23.02 Consent of Independent Registered Public Accounting Firm.
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 and Chief Financial Officer
of the Company pursuant to 18 U.S.C. Section 1350.
50