UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB
Annual Report Pursuant to Section 13 or 15 (d)
of the Securities Exchange Act of 1934
For the Fiscal Year Ended April 30, 1997
Commission File No. 0-17072
WINDSWEPT ENVIRONMENTAL GROUP, INC.
(Formerly Comprehensive Environmental Systems, Inc.)
State of Delaware 11-2844247
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
100 Sweeneydale Avenue, Bay Shore, New York 11706
(Address of Principal Executive Offices) (Zip Code)
Issuer's telephone number: (516) 694-7060
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.0001 par value per share
----------------------------------------
(Title of Class)
Check whether the issuer (1) has filed all reports required to be filed by
Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the past 12
months (or for such shorter periods that the registrant was required to file
such reports), and (2) has been subject to such filing requirements for the past
90 days. Yes __X__ No ____
Check if there is no disclosure of any delinquent filers in response to Item 405
of Regulation S-B 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-KSB
or any amendments to this form 10-KSB. [ ]
The issuer's revenues for its most current fiscal year were $15,275,209.
As of August 31, 1997 the issuer had 10,062,349 common shares, $.0001 par value,
outstanding. Based upon the average bid and ask price on that date ($.56) the
aggregate market value of the voting stock held by non-affiliates of the
Registrant was approximately $5,612,515 (assuming solely for purposes of this
calculation that all directors and officers of the Registrant are "affiliates").
<PAGE>
PART 1
ITEM 1. DESCRIPTION OF BUSINESS
General
Windswept Environmental Group, Inc. ("Windswept" or "the Company") provides a
full array of emergency response and disaster recovery services to a broad range
of clients. The Company has environmental expertise in areas of wetlands
restoration, as well as wildlife and natural resources rehabilitation, hazardous
materials remediation, testing, toxicology, training, technical advisory and
site renovation. After three years of diligent effort by the Company's
Trade-Winds Environmental Restoration, Inc. ("Trade-Winds") subsidiary,
Windswept has assembled the resources, implementing a program of recruiting key
environmental professionals and community leaders, and investment in specialized
equipment, to become a leader in the expanding worldwide emergency services
market . Few, if any, competitors provide such a diversity of services within a
critical 24 hour standby, rapid response basis. Management believes that this
unique emergency capability has positioned the Company to be one of the fastest
growing full service environmental firms in the Northeast.
The Company was incorporated under the laws of the state of Delaware on March
21, 1986 under the name International Bankcard Services Corporation, which was
subsequently changed to Comprehensive Environmental Systems, Inc. On March 19,
1997, the Company's name was changed to its present name. In August 1997, the
Company consolidated its facilities and its principal executive offices into one
location at 100 Sweenydale Avenue, Bayshore, New York, 11706. The telephone
number is 516-694-7060.
In January 1996, Laboratories Testing Services, Inc. ("LTS"), a wholly-owned
subsidiary of the Company filed a bankruptcy petition in the United States
Bankruptcy Court in the Eastern District of New York. Concurrent with the
bankruptcy petition, the operations of LTS ceased. LTS is in the process of
liquidation through formal bankruptcy proceedings. Management does not
anticipate any significant impact to the Company's operations to the extent that
settled obligations exceed the liquidated assets.
On February 24, 1997, the Company acquired North Atlantic Laboratories, Inc.
("NAL"), a certified environmental training, laboratory testing and consulting
services company. The aggregate purchase price of approximately $1,800,000
consisted of $1,300,000 in Series A preferred stock, 200,000 restricted shares
of common stock valued at $156,000, 200,000 stock options valued at $100,000,
and $200,000 in cash, plus transaction costs of $43,853. The acquisition has
been accounted for as a purchase.
Prior Activities
Prior to the fiscal year ended April 30, 1994 the Company did not have
substantive, revenue generating, business operations. During the three years
ended April 30, 1996, the Company invested approximately $9.5 million,
represented by cash advances and purchases of equity securities of a variety of
companies and start-up businesses, many of which were unrelated to the Company's
current environmental remediation activities. Approximately $9.2 million of the
investments was ultimately deemed to be unrecoverable and has been charged to
results of operations through April 30, 1997.
1996 Restated Financial Results
In connection with the April 30, 1997 year end accounting closing and subsequent
analysis performed, it was determined that errors had been made with respect to
the determination of the carrying value of the deferred income tax asset as of
April 30, 1996 and April 30, 1995. In addition, compensation paid to a former
officer of the Company had been accounted for as a reduction of additional
paid-in capital during the year ended April 30, 1996. The accompanying
consolidated financial statements for the year ended April 30, 1996 have been
restated to correct such errors. See Note 20 to the Notes to Consolidated
Financial Statements.
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<PAGE>
ITEM 1. DESCRIPTION OF BUSINESS (CONT'D)
Management Changes
Principally resulting from disagreements among members of management concerning
the performance of investments previously made, the appropriate use of corporate
assets and the strategic direction of the Company, Michael O'Reilly was
appointed Chairman and Chief Executive Officer in September 1996. Simultaneous
with Mr. O'Reilly's appointment, the former Chairman and Chief Executive
Officer, the former Chief Operating Officer and the former Special Securities
Counsel to the Company resigned as officers and directors of the Company. See
Note 4 to the accompanying Consolidated Financial Statements.
Management Changes (continued)
Mr. O'Reilly had previously served as President of Trade-Winds, the Company's
principal operating subsidiary. Since September 1996, the Company has limited
the scope of its business activities principally to environmental services. The
Company also provides demolition, renovation and other general construction
services.
On August 1, 1997, Alan W. Schoenbart became the Company's Chief Financial
Officer.
Indictment and SEC Investigation
In October 1996, the United States Attorney for the Eastern District of New York
obtained a federal grand jury indictment against, among others, the Company's
former Chief Operating Officer, Leo Mangan, and former Special Securities
Counsel, James Nearen, on charges relating to violations of federal securities
laws, including fraudulent issuances of 700,000 shares of the Company's common
stock. Mr. Mangan and Mr. Nearen subsequently plead guilty to charges in the
Federal indictment. The U.S. Securities and Exchange Commission (the "SEC") and
the United States Attorney's Office have been investigating what role, if any,
other officers and directors, including the Company's current Chairman and Chief
Executive Officer, Michael O'Reilly, and its former Chief Financial Officer,
David Behanna, may have had in connection with such activities. The Company has
cooperated and continues to cooperate with the SEC and the United States
Attorney's Office. To date, no charges have been filed nor claims asserted
against the Company, Mr. O'Reilly, Mr. Behanna, or any other former officers or
directors as a result of the investigation.
NASDAQ De-Listing
On October 22, 1996, as a result of the indictment of the Company's former Chief
Operating Officer and Special Securities Counsel, the National Association of
Securities Dealers Automatic Quotation System ("NASDAQ") de-listed the Company's
common stock from trading on the "Small Cap" market. These individuals along
with Mr. Kessler, the former Chief Executive Officer, were the core management
team responsible for the primary business decisions and management of the
Company. The Company's common stock is currently traded on the Electronic
Bulletin Board of the National Association of Securities Dealers, Inc., under
the symbol "WEGI".
Forward-Looking Information
This report contains forward-looking statements and information that are based
on management's beliefs, as well as assumptions made by, and information
currently available to management. When used in this document, the words
anticipate, believe, estimate, expect and similar expressions are intended to
identify forward-looking statements. Such statements involve a number of risks
and uncertainties and, as such, may involve known and unknown risks,
uncertainties and other factors, which may cause actual results, performance or
achievements of the Company to be materially different from future results,
performance or achievements expressed or implied by such forward-looking
statements. Among the factors that could cause such differences are the
following: competition, need for additional capital, dependence upon key
personnel, availability of completion bonds, risk of nonpayment of accounts
receivable, and general economic conditions.
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<PAGE>
ITEM 1. DESCRIPTION OF BUSINESS (CONT'D)
Business of Issuer
Operations
In 1995 the Company began expanding its operations to provide a broad range of
environmental services through vertically integrated businesses in the service
areas described below:
o Emergency Response and Disaster Recovery
o Wildlife Rehabilitation and Wetland Restoration/ Natural Resource Response
o Forensic Investigation
o Asbestos Abatement/Demolition
o Lead Abatement
o Sandblasting for Removal of Hazardous Materials
o Underground Storage Tank Removal/Soil Remediation
o Oil Spill Response - Marine and Land
o Hazardous Waste Management/Chemical Response
o 24-hour Emergency Spill Response
o Environmental Duct Cleaning
o Fire Restoration
o Wetlands Restoration/Wildlife Rehabilitation
o Environmental Training including OSHA Safety and OPA '90
o General Construction
o Testing for Hazardous and Controlled Non-hazardous Waste
o Environmental Consulting Services
For the fiscal years ended April 30, 1997 and 1996, revenues derived from
asbestos abatement accounted for approximately 41% and 61%, respectively, of the
Company's total net revenues. Lead based paint removal and controlled
non-hazardous waste services represented approximately 16% and 14%,
respectively, of total net revenues for the fiscal year ended April 30, 1997.
Controlled non-hazardous waste services accounted for approximately 14% of total
revenues for the fiscal year ended April 30, 1996. All other services
individually accounted for less than 10% of net revenues for fiscal years 1997
and 1996. From fiscal 1996 to 1997, revenues from asbestos abatement increased
$290,000, or 5% and, controlled non-hazardous waste increased $924,000, or 72%.
Accordingly, revenue percentage declines are the result of the Company's
expansion into the other service areas, in accordance with managements plan to
make the Company less dependent on any single source of revenue.
The Company believes that its success depends in large part on customers'
confidence in the Company's ability to comply with Federal and State
environmental regulation and enforcement programs and to manage effectively the
risks involved in providing these services. As part of its commitment to
employee safety and quality customer services, the Company has an extensive
compliance program and a trained environmental, health and safety staff.
To maintain customers' confidence and to enhance its positions in the emergency
response and disaster recovery environmental services industry, the Company
strives to achieve internal growth by expanding services to its existing
customer base and by marketing itself as a multiple-service environmental
company with immediate response capabiliities. In addition, the Company attempts
to achieve external growth through strategic acquisitions. In June 1995, the
Company purchased a testing laboratory, New York Testing Laboratories Inc.
("NYTL"), that offers hazardous materials testing capabilities. In February
1997, the Company acquired NAL, an environmental training, laboratory testing
and consulting services company.
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<PAGE>
ITEM 1. DESCRIPTION OF BUSINESS (CONT'D)
Customers
The Company's sales efforts are directed toward establishing and maintaining
relationships with businesses which have ongoing requirements for one or more of
the Company's services. As a result of the synergy between the divisions of
Windswept, clients who begin by utilizing one division, often use other
divisions within the Company to ultimately serve all of their environmental
needs. The Company's customers include Fortune 500(TM) companies, industrial
concerns, oil companies, banks, school districts, state, local and county
governments, commercial building owners and real estate development concerns.
Management believes that the Company's diverse customer base, in terms of
number, industry, geographic location, and reputation, provide it with a
recurring stream of revenue. As a result of a strategy of diversification and
coordinating the Company's capabilities to provide comprehensive emergency
response services, the customer base has been greatly expanded to include those
entities who value immediate response, enhanced capabilities and customer
service over lower cost.
The Company estimates that in excess of 50% of its revenues are derived from
previously served customers with recurring needs for the Company's services.
During fiscal 1997 sales to a local municipality represented 16% of total net
revenues. During fiscal 1996 sales to two customers accounted for 21% and 13% of
the Company's sales, respectively. While the Company does have repeat business
with many of its customers, the level of business with a particular customer in
a succeeding season will not necessarily be commensurate with the prior year,
principally because of the project nature of the Company's services.
Accordingly, and because of the significant expansion of the Company's customer
base and services provided during fiscal 1997, the Company believes that the
loss of any single customer would not have a material adverse effect on the
Company's financial position and results of operations.
Marketing
The Company has an aggressive marketing program that is administered by a staff
of ten business development personnel, who were recruited by the Company for
their experience, reputation, and client base in respective areas of business.
Once they join the Company sales team, they are cross-trained by the Company's
technical development staff.
The Company's environmental services are principally marketed in the Northeast.
Business is obtained through client referral, client expansion, participants in
the Company's environmental training programs, referrals from architects,
engineers and general contractors 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. The Company's surveying and sampling of
materials services also provide opportunities to market and sell its other
environmental remediation services.
Emergency Response Capabilities
The Company is performing an increasing number of emergency environmental
remediation projects. The Company has specially trained emergency response teams
that respond to both hazardous and non-hazardous spills on land and water
environmental emergencies on a 24-hour basis. The following examples are types
of emergencies for which the Company is capable of conducting response and
remediation: explosions, fires, earthquakes, mudslides, hazardous spills,
transportation catastrophes, storms and floods.
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<PAGE>
ITEM 1. DESCRIPTION OF BUSINESS (CONT'D)
Emergency Response Capabilities (continued)
For spills on water, the Company's current fleet of seventeen spill response
boats are equipped with skimmer capabilities. The Company's staff includes US
Coast Guard ("Coast Guard') certified captains and professional divers
experienced in sunken boat retrievals. The Coast Guard maintains a spill
response list of companies that have passed rigorous testing qualifications. In
November 1996, the Company obtained a "Class E" marine oil spill response
designation from the Coast Guard. This designation, which is the highest
designation that can be obtained, allows the Company to respond to a variety of
high profile contamination containment spills, such as oil tanker disasters. As
of July 1997, the Company was one of approximately ten companies in the
Northeast with the "Class E" designation, and one of approximately one-hundred
in the United States, with these spill response capabilities.
The Company has the licensed personnel necessary for providing natural resource
wildlife recovery services which include rehabilitating wildlife contaminated by
oil spills. The Federal Oil Pollution Act of 1990 ("OPA '90") requires all
companies that transport or store petroleum products to retain an Oil Spill
Response Organization designated by the Coast Guard ("OSRO") and a natural
resources/ wildlife rehabilitator. The Company believes it is unique because it
has the capability of providing both of these services. (See "Governmental
Regulation" for more information on OPA '90).
For dry land liquid spills, the Company has the equipment capacity to move
100,000 gallons of environmental waste in any 24 hour period directly to a
disposal facility. This equipment has the capability of loading directly into
drums on site, roll-offs or transporting directly to a disposal facility. In
addition, one of Windswept's subsidiaries is a licensed waste hauler for the
State of New York. The Company is currently under contract with New York State
Department of Environmental Conservation for hazardous materials spill response
including; oil spill containment, as well surface and sub-surface investigation
and remediation.
Government Regulation
The following is an overview of pertinent industry regulations:
OPA'90 resulted from the Exxon Valdez oil spill and the subsequent damage to
Prince William Sound. The law requires all entities engaged in the transport and
storage of petroleum to maintain a written contingency plan. In addition, the
responsible party could be subject to Natural Resource Damage Assessments
('NRDA") for damage to surrounding wildlife and their habitats. Under the
contingency plan, the petroleum products storage or transportation company must
retain an OSRO and a natural resources/ wildlife rehabilitator. OSRO'S are
certified by the 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 hours of notification.
Windswept's Trade-Winds subsidiary, posesses the highest level of designation
for near coastal and inland waters, and has licensed wildlife rehabilitators in
senior level staff positions.
Asbestos abatement firms are subject to federal, state and local regulations,
including OSHA and EPA regulations for asbestos. 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". Lead poisoning is the number one
environmental hazard to children. Since May 1993, OSHA has had standards for
lead exposure in the construction industry that require testing before, during
and after construction or renovation. The Environmental Protection Agency
("EPA") estimates that 936,000 workers fall under OSHA's Lead Based Paint Hazard
Reduction Act.
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<PAGE>
ITEM 1. DESCRIPTION OF BUSINESS (CONT'D)
Compliance/Health and Safety
The Company regards compliance with applicable environmental regulations and the
health and safety of its workforce as critical components of its overall
operations.
A substantial portion of the Company's equipment is OSHA approved and is
operated pursuant to a strict written corporate health and safety plan.
Additionally, many members of its on-site work force are trained in all aspects
of OSHA requirements. This includes medical surveillance as required by these
regulations. All requisite health and safety programs are in place and comply
with the regulations in all material respects.
Additionally, each field worker must be examined by a physician and complete a
training and safety program conducted by the Company. Training topics include
the dangers of asbestos, methods for controlling friable Asbestos Containing
Material ("ACM"), approved work procedures and ACM transportation and handling
procedures. Employee's are also issued detailed training materials. The
Company's managers and field supervisors receive continuous training in various
abatement and remediation methods.
Among its many services, the Company provides a training program on lead hazards
in the 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
lead exposure; health effects of lead; personal protective equipment and the
medical surveillance required by OSHA; and engineering controls and lead removal
procedures.
Insurance and Surety Bonds
The Company maintains comprehensive general liability insurance written on an
occurrence basis with a large Best's rated + +15 carrier. The Company also
carries comprehensive auto, professional and pollution liability as well as
workers compensation and disability coverage. Basic limits of liability are
$1,000,000 with an umbrella coverage raising the limits to $10,000,000 in the
aggregate. In addition the Company carries all risk property insurance on all
furniture, fixtures, equipment, machinery and water craft. Due to favorable loss
experience, the Company's premium rates have remained stable.
Approximately 30% of the Company's remediation and abatement contracts require
performance and payment bonds. The continuance of relationships with its various
sureties and the issuance of bonds is dependent on the sureties continued
willingness to write bonds for asbestos abatement work, their assessment of the
Company's performance record and their view as to the credit worthiness of the
Company. At present, surety bonds for asbestos abatement contractors are
available only from a limited number of sureties. While the Company has no
reason to believe that it will not continue to be able to obtain required surety
bonds, any failure of the Company to obtain these bonds could materially and
adversely affect its ability to operate.
Permits and Licenses
Certain states require that asbestos and lead abatement firms be licensed.
Licensing requires that workers and supervisors receive training from state
certified organizations and pass required tests. The Company or its personnel,
maintains licenses in all locations for which it conducts any applicable
operations.
The Company may need additional licenses in areas into which it plans to expand
its operations. The type of licenses the Company possesses have inherent
reciprocity in most of the United States due to their adherence to federal
standards.
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<PAGE>
ITEM 1. DESCRIPTION OF BUSINESS (CONT'D)
Patents, Trademarks, Licenses and Copyrights
The Company does not hold any patents, registered trademarks, or trade names.
The Company has obtained common law copyrights for certain of its promotional
and employee training materials. During fiscal 1996, the Company acquired a
Professional Engineering license as part of the acquisition of NYTL. This
license was subsequently sold in fiscal 1997.
Competition
The Company believes that none of its competitors in the markets in which it
competes provide the full array of services that the Company provides as an
emergency response firm. The Company's Trade-Winds subsidiary is one of ten
OSRO's that possess the Coast Guard Level E - Near Coastal and Inland Waterway
certification in the Northeastern United States. Now, as a wildlife
rehabilitator, Trade-Winds is the only company in the Northeastern U.S. to
possess both of these critical oil spill response capabilities. To the best of
management's knowledge, only two companies on the east coast perform on-site
wildlife rehabilitation. As a result, the Company is gaining new business from
clients who were previously required to keep both an OSRO, and one of the two
wildlife rehabilitation concerns, on standby.
The Company competes with approximately ten environmental remediation companies
similiar in size or larger. Almost all of these companies are privately held.
The Company believes it offers a more comprehensive range of environmental
services than it competitors in the New York Tri-State area. The Company sets
itself apart from its field of competitors by providing services which are
unique to the geographic region that it serves, e.g., wetlands remediation,
wildlife rehabilitiation , and marine oil spill response. Furthermore the
Company's has two employees with environmental doctorates on staff, it's own
laboratories to examine controlled waste (which facilitates more rapid emergency
response), and a wide diversity of equipment.
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 raise capital to allow
it to hire talent, meet its ongoing obligations, and fuel growth.
Employees/Technical Staff
As of July 1997, the Company employed a core group of approximately 75 persons
including managers, project specialists, supervisors and field labor, executive
marketing and clerical personnel.
Within the past year, the Company has added several acknowledged scientific and
community leaders to its staff. Not only is this indicative of Windswept's
increased expertise and authority, it also serves to enhance and protect the
Company's position in the industry. Windswept believes it has established a
level of credibility that has countered any adverse industry perception
engendered by past events. Among the new staff members are:
o Former Commissioner of Public Works for Suffolk County - Licensed
Professional Engineer,
o Former Director of the Lead Poisoning Prevention and Training Programs
for University of Massachusetts at Amherst and The Commonwealth of
Massachusetts - Ph.D in Toxicology,
o Certified Industrial Hygienist, Forensic Scientist and Toxicologist -
Ph.D in Toxicology, Board Certified Forensic Toxicologist,
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<PAGE>
ITEM 1. DESCRIPTION OF BUSINESS (CONT'D)
Employees/Technical Staff (continued)
o Marine Mammal Specialist and Marine Habitat Biologist - MS in Marine
Biology, and
o Wildlife Rehabilitation/ Natural Resource Conservation Specialist.
The Company signed a trade agreement effective June 1, 1996 through May 2000
with several local unions that supply labor for bonded contract work. Pursuant
to this contract, the Company now employs labor directly from the union on an
as-needed basis which could range from 75 to 200 laborers depending on the size
of each project. See Item 6, Management's Discussion and Analysis.
The Company attempts to provide year-round employment for its in-house hourly
asbestos field workers. The Company believes a stable work force results in
increased productivity at the work site and that its reputation for steady
employment permits it to pay reasonable hourly rates. The Company also believes
in promoting qualified field workers to supervisory positions and supervisors
into production management and other staff positions. The Company has never had
a work stoppage and believes that it has good employee relations.
ITEM 2. FACILITIES
All of the Company's facilities are leased. Lease terms range up to 5 years with
certain renewal options. Facilities as of July 31, 1997 include:
<TABLE>
<CAPTION>
Principal Approx. Type of Exp.
Location Use Sq. Ft. Const. Date
- -------- --- ------- ------ ----
<S> <C> <C> <C> <C>
72 Cabot St. Former
West Babylon, NY 11704 Headquarters, 20,000 Block May, 1998
Warehouse &
Offices
100 Sweeneydale Avenue. New Headquarters, 50,000 Block April, 2002
Bay Shore, NY 11706 Warehouse
& Offices
</TABLE>
In May 1997, the Company signed a five year lease with an option to buy the
50,000 square foot facility in Bay Shore, New York. This new location was
occupied on August 18, 1997 and houses all the operations of the Company in one
location. As such, all other locations will be unoccupied as of the moving date.
Management considers the Bay Shore facility sufficient for its present and
future operations.
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<PAGE>
ITEM 3. LEGAL PROCEEDINGS
Litigation
In October 1996, the United States Attorney for the Eastern District of New York
obtained a federal grand jury indictment against, among others, the Company's
former Chief Operating Officer, Leo Mangan, and the former Special Securities
Counsel, James Nearen, on charges that include violations of federal securities
law, including fraudulent issuances of 700,000 shares of the Company's common
stock. Mr. Mangan and Mr. Nearen both subsequently pleaded guilty to the charges
in the Federal indictment. The SEC has been investigating what role, if any,
other officers and directors, including the current Chairman and Chief Executive
Officer, Michael O'Reilly, and the former Chief Financial Officer, David
Behanna, may have had in connection with such activities. The Company has
cooperated and continues to cooperate with the SEC. To date, no charges have
been filed against the Company or any other member of management as a result of
the investigation. However, the SEC could seek an order enjoining the Company
from violating the securities laws.
Other Proceedings
In January 1996 Laboratory Testing Services, Inc. ("LTS"), a wholly-owned
subsidiary, filed a Chapter 11 petition in United States Bankruptcy Court in the
Eastern District of New York. LTS is in process of liquidation through formal
bankruptcy proceedings. Management does not expect any significant impairment of
capital to the extent that settled obligations exceed the liquidated assets of
LTS.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted to a vote of security holders during the fourth quarter
of 1997.
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<PAGE>
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's common stock was traded on the small cap market on the NASDAQ
until October 22, 1996 when the Company's stock was de-listed, and trading
commenced on the Electronic Bulletin Board of the NASDAQ market, under the
symbol "WEGI". The following table sets forth the range of quarterly high and
low sale (bid) prices, for the last two fiscal years, as provided by Standard &
Poor's ComStock. These quotations represent inter-dealer prices, do not reflect
retail mark-up, mark-down, or commission and may not represent actual
transactions.
Price Range of Common Stock
---------------------------
FISCAL 1997
Quarter Ended HIGH LOW
------------- ---- ---
July 31 $1.00 $ .63
October 31 1.00 .25
January 31 .94 .31
April 30 .88 .69
FISCAL 1996
Quarter Ended
-------------
July 31 3.69 1.00
October 31 3.50 1.88
January 31 2.19 1.00
April 30 1.31 .63
The Company has approximately 5,500 common shareholders of record at April 30,
1997. There have been no dividends declared or paid and the Company has no
current intentions to declare or pay dividends. The Company has no agreements
which restrict the Company's ability to pay dividends.
In connection with the Company's acquisition of NAL; in February 1997, the
Company issued 1,300,000 shares of Series A Redeemable Convertible Preferred
Stock and 200,000 shares of common stock and granted options to purchase 200,000
shares of common stock at $.78 per share expiring February 2002. In April 1997,
the Company issued $700,000 principal amount of unregistered 10% convertible
notes due 2002. See Item 1- General and Notes 10, 11 and 15 to the accompanying
Consolidated Financial Statements. All of the foregoing securities were
restricted as to their resale and were either sold solely to accredited
investors or offered and sold to persons under circumstances not involving a
public offering. Accordingly, the Company did not register such securities under
the Securities Act of 1933, as amended, in reliance upon the exemption provided
by Section 4 (2) of such Act.
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<PAGE>
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS
Management's discussion and analysis should be read in conjunction with the
accompanying consolidated financial statements and notes thereto. Amounts in
this discussion and analysis have been restated as disclosed in Note 20 of the
Notes to Consolidated Financial Statements.
Results of Operations
Years Ended April 30, 1997 and 1996
Net loss and loss per share for fiscal 1997 was $(4,613,750) and $(.51),
respectively. This compares to a net loss and loss per share of $(5,267,259) and
$(1.00), respectively, for fiscal 1996 (as restated).
Revenues for fiscal 1997 increased $5,368,548, or 54.2%, from $9,906,661 in
fiscal 1996 to $15,275,209 in fiscal 1997. The revenue increase was the result
of the continuing growth in abatement, remediation and testing operations as
well as expansion of the general construction division. For fiscal 1997,
environmental services (including abatement and remediation) and
renovation/construction (including demolition) accounted for approximately
$12,777,000, or 84%, and $2,498,000, or 16%, respectively, of total revenues. In
fiscal 1996, environmental services (including abatement and remediation) and
renovation/construction (including demolition) accounted for $9,329,000, or 94%,
and $577,000, or 6%, respectively of total revenues. Revenues for fiscal 1997
included revenues of NAL, of approximately $258,000 from the date of
acquisition, February 24, 1997.
Cost of revenues increased $5,174,483, or 70%, from $7,375,381 in fiscal 1996 to
$12,549,864 in fiscal 1997. As a percentage of revenues, such costs increased
from 74% to 82% from fiscal 1996 to fiscal 1997. Effective June 1996, the
Company signed a new union contract for its asbestos field labor. Certain jobs
in negotiation before and signed after June 1996, which required union laborers,
were to be exempt from the new union contract. However, due to unforeseen labor
costs associated with the union change, the Company was ultimately forced to pay
prevailing union wages in order to complete the work. Such additional labor
costs were not considered in total project costs and the customers were not
obligated to absorb this cost. Cost of revenues also increased due to normal
increases in direct field labor for environmental services and testing
operations, which are more labor intensive and result in lower profit margins.
Also, in certain instances, lower margin work was accepted in order to be
competitive in the market place, battle the adverse perception created by former
management, and rebuild a viable Company focused on operations. Management
estimates that the union contract matter added approximately $400,000 to cost of
revenues and that accepting lower profit margin work also reduced gross profit
by approximately $600,000. As a result, gross profit declined to 18% in fiscal
1997 from 26% in fiscal 1996.
Selling, general, and administrative expenses decreased by approximately
$112,000, or 2% from $5,398,133 in fiscal 1996 to $5,285,841 in fiscal 1997, and
constituted approximately 54% and 35% of revenues, respectively, in fiscal years
1996 and 1997. The decrease was primarily a result of certain private placement
commisions of approximately $432,000 paid to a former officer in fiscal 1996,
and reductions in promotion expenses from fiscal 1996 of approximately $243,000,
as well approximately $67,000 in health benefit savings from the Company
modifying its coverage and commensurate rate savings from servicing a larger
employee base. These decreases were offset by an increase in selling and
administrative salaries of approximately $345,000 in fiscal 1997 that were
necessary to expand the customer base and battle the adverse perception created
by former management,and being used against the Company by its competitors to
their advantage. Additional legal fees of approximately $195,000 in fiscal 1997
over fiscal 1996, related substantially to the Company's defense of a
shareholder action. The Company incurred additional internal labor and other
costs, approximately $25,000, with the document demands associated with the
on-going SEC investigation as well as the bankruptcy of LTS. The Company
expended approximately $40,000 for fees associated with a proxy for the 1997
annual shareholders meeting. In addition, the Company expended approximately
$25,000 associated with an updating of its accounting software.
-11-
<PAGE>
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS (CONT'D)
Special charges of $1,316,901 represents costs associated with the termination
of the former Chief Executive Officer, former Chief Operating Officer, and
former Special Securities Counsel in September 1996. These costs also include
legal and professional fees directly related to the terminations as well as
matters that resulted from the October 1996 indictments. See Note 4 to the
accompanying Consolidated Financial Statements.
In March 1997, management developed a plan to consolidate all of the Company's
operations in one facility in Bayshore, New York. In connection therewith, the
Company recorded facilities consolidation costs of $509,720 which include the
write-down of $459,720 for certain leasehold improvements at the Company's
current leased facilities vacated in early fiscal 1998. The additional $50,000
considers estimated lease termination costs for the unexpired lease obligation
at the old facilities. See Note 14 to the accompanying Consolidated Financial
Statements.
Interest expense increased from fiscal 1996 to fiscal 1997 by approximately
$128,000. This increase is primarily attributable to the convertible notes
issued in fiscal 1997, including accretion of interest on the discount related
to the convertible notes of approximately $81,000 as well as interest expense on
the convertible notes of $6,000. The balance of $41,000 results from additional
equipment financing obtained during fiscal 1997.
Loss on investments decreased by $2,019,841 from fiscal 1996 to fiscal 1997
because substantially all investments in non-marketable securities were written
off as of April 30, 1996. The write-offs of $298,000 in fiscal 1997 represent
the total remaining carrying value for all investments in non-marketable
securities.
Other, net increased by approximately $282,000 from fiscal 1996. This income
results primarily from a $200,000 gain from the sale of a professional
engineering license by the Company's subsidiary, NYTL, in fiscal 1997 for
$225,000.
Liquidity and Capital Resources
The Company has an accumulated deficit of $25,379,601 at April 30, 1997 and has
not generated positive cash flow from operations to date. The Company has
financed its operations to date primarily through issuances of debt and equity
securities. At April 30, 1997, the Company had $654,377 in cash and a working
capital deficit of $376,168. In addition, as of August 31, 1997 and April 30,
1997, the Company was in arrears with respect to certain payroll tax obligations
of approxinately $598,000 and $316,000, respectively.
In fiscal 1997, the Company undertook financing activities which provided it
with net proceeds of $1,988,413, comprised of $1,279,413 from equity private
placements, and $709,000 of net proceeds from the issuance of convertible debt
in April 1997.
Cash utilized in operations amounted to $1,147,930 in fiscal 1997 and $2,328,596
in fiscal 1996. Cash used for capital expenditures amounted to $465,266 in
fiscal 1997 and $1,549,608 for fiscal 1996. This decrease was due primarily to
the significance of purchases of field equipment in fiscal year 1996,
principally for the marine spill response division.
-12-
<PAGE>
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS (CONT'D)
Liquidity and Capital Resources Cont'd
In May 1997, the Company entered into a revolving bank credit facility to obtain
a revolving credit line of $1,500,000. Borrowings under the credit facility are
secured by certain of the Company's assets. Borrowings are limited to amounts
computed under a formula for eligible accounts receivable. In addition, the
Borrowings remain at a maximum of $750,000 until the receipt and satisfactory
review of the Company's audited financial statements for the fiscal year ended
April 30, 1997. The facility, which matures on May 1, 2000, bears interest at
the bank's prime rate plus a borrowing margin of 1.5% per annum. The Company was
in default of certain of the credit facility covenants at July 31, 1997. See
Note 20 to the accompanying Consolidated Financial Statements.
Subject to satisfying certain conditions the bank may make available to the
Company an additional $750,000 in secured debt financing. The Company believes
that, should this financing be made available, the Company would have adequate
capital resouces to meet its current cash requirements for a period of at least
twelve months. Management believes that should the bank not make available the
additional financing, there will be alternative debt and/or equity sources
available to the Company. The Company is currently engaged in various
discussions with potential investors regarding possible equity transactions.
Furthermore, the Company has been approached by other banks and commercial
lenders expressing interest in providing financial assistance to the Company. In
addition, the Company is striving to improve its gross margin and control its
selling, general, and administrative expenses. There can be no assurance,
however, that changes in the Company's plans or other events affecting the
Company's operations will not result in accelerated or unexpected cash
requirements, or that it will be successful in obtaining the additional
financing to meet its obligations as they become due. The Company's future cash
requirements will depend on numerous factors, including (i) the ability to
successfully bid on construction contracts (ii) the ability to generate positive
cash flow from operations (iii) general economic conditions, and (iv) those
other items outlined in the Item 1 "Forward-Looking Information".
Fiscal 1998 Outlook
The statements contained in this outlook are based on current expectations.
These statements are forward looking. See Item 1 "Forward-Looking Information".
Windswept expects continued strong demand for the Company's broad range of
services, which should continue the upward trend in revenue. The Company is
hopeful that the various "perception" problems plaguing the Company due to the
actions of former management will dissipate and allow the current management
team and Board of Directors to focus primarily on the daily operations and
building shareholder value. The Company's forward-looking strategy, beyond
seeking to continue the upward trend in revenues, includes improving the overall
margin on its projects through closer scrutiny of costs and changing the service
mix to provide higher margin services, and implementing a cost reduction program
to reduce its overall selling, general and administrative expenses. The Company
will also seek to increase its current debt financing and to raise equity
financing as necessary to support continued growth in the operations. Management
is also considering growth through strategic acquisitions that are complementary
to its present range of services.
-13-
<PAGE>
ITEM 7. FINANCIAL STATEMENTS
See item 13 herein.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
(i.) On September 26, 1996, the accounting firm of Capraro, Centrofranchi,
Kramer & Co., P.C. was not retained as the principal independent
accountant to audit the registrant's financial statements for the current
fiscal year. On that same date, the firm of Price Waterhouse LLP was
engaged as the new independent accountant for the registrant.
(ii.) The former independent accountant's report on the financial statements
for both of the past two fiscal years was modified as to uncertainty
related to various investments where the ultimate recovery of such
amounts was dependent upon the future value and the future performance of
the companies underlying those investments.
(iii) The decision to change independent accountants was approved by the board
of directors.
(iv) Through the date hereof, there were no disagreements with the former
independent accounting firm on any matter of accounting principles or
practices, financial statement disclosure or auditing scope or procedure.
-14-
<PAGE>
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE
WITH SECTION 16(a) OF THE EXCHANGE ACT
Directors of the Company hold office until the next annual meeting of
stockholders and until their successors have been elected and shall qualify, or
until their death, resignation or removal from office. The officers of the
Company are elected by the Board of Directors at the first meeting after each
annual meeting of the Company's stockholders, and hold office until their
successors are chosen and qualified, or until their death, resignation or
removal from office. The executive officers and directors of the Company are as
follows:
NAME AGE POSITIONS WITH THE COMPANY
- ---- --- --------------------------
Michael O'Reilly 47 Chairman of the Board, President, & Chief
Executive Officer
Alan Schoenbart 38 Chief Financial Officer
Anthony Towell 66 Director
Samuel Sadove 44 Director
JoAnn O'Reilly 45 Director
Michael O'Reilly has been Chairman of the Board of Directors, President and
Chief Executive Officer of the Company since September 1996. He has been the
President of Trade-Winds Environmental Restoration, Inc. since December 1993.
From January 1990 through November 1993, Mr. O'Reilly was Vice President of
North Shore Environmental Remediation, Inc., a provider of environmental
clean-up services, including asbestos and lead removal services.
Alan Schoenbart joined the Company in August 1997 as its Chief Financial
Officer. From 1995 until 1997 he had been Vice President of Finance and
Administration, Chief Financial Officer and Controller of Advanced Media Inc. a
public company engaged in interactive multimedia and internet electronic
commerce content solutions. Mr. Schoenbart was Controller for Good Times
Entertainment Companies, Inc., a private company engaged in the production and
distribution of home videos and software for mass merchant retail chains from
1993 to 1995 and spent approximately twelve years in public accounting,
primarily as a manager with KPMG Peat Marwick.
Anthony Towell has been a director of the Company since November 1996. For more
than five years he has been the Vice President of Finance, Treasurer, Chief
Financial Officer, Co-Chairman, and a Director of Eastco Industrial Safety
Corp., a public manufacturing company specializing in industrial safety. Since
July 1991, Mr. Towell was also a director of Ameridata Technologies, Inc., until
its recent sale to General Electric Capital, Inc. He had also been in the
petroleum business with the Royal Dutch Shell group since 1957. Mr. Towell is
also a director of NYTEST Environmental Inc.
-15-
<PAGE>
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE
WITH SECTION 16(a) OF THE EXCHANGE ACT (CONT'D)
Samuel Sadove is a marine biologist who since 1980 has been the director of the
Okeanos Ocean Research Foundation, Inc., an organization that he founded. He is
considered an expert on wildlife issues and environmental research including
ecology of marine systems. Mr. Sadove currently serves on numerous professional,
environmental and educational committees.
JoAnn O'Reilly is an environmentalist presently involved with Michael O'Reilly
in the United States Fish and Wildlife Services (USFWS) Captive Bred Wildlife
Program, specifically caring for listed endangered tortoise species under
special license. In addition, Ms. O'Reilly is a licensed cardiopulmonary
therapist and has been employed by a Long Island, N.Y. hospital since 1983. Ms.
O'Reilly is the wife of Mr. Michael O'Reilly.
Compliance with Section 16(a) of the Securities Exchange Act
Section 16(a) of the Exchange Act requires the Company's executive officers,
directors and persons who own mote than ten percent of a registered class of the
Company's equity securities ("Reporting Persons") to file reports of ownership
and changes in ownership on Forms 3, 4 and 5 with the Securities and Exchange
Commission (the "SEC") and the National Assocation of Securities Dealers (the
"NASD"). These Reporting Persons are required by SEC regulation to furnish the
Company with copies of all Forms 3, 4 and 5 they file with the SEC and NASD.
Based solely upon the Company's review of the copies of the forms it has
received, the Company believes that all Reporting Persons complied on a timely
basis with all filing requirements applicable to them with respect to
transactions during the fiscal 1997, except that Mr. Michael O' Reilly failed to
file on a timely basis Form 3, when Mr. O' Reilly became Chairman, President,
and Chief Executive Officer.
Audit Committee
The Board of Directors has a standing Audit Committee comprised of Messrs.
Towell and Sadove. The Audit Committee reviews the Company's internal controls
and the objectivity of its financial reporting and the scope and results of the
auditing engagement. The audit committee also reviews and approves relationships
and transactions. It meets with appropriate Company financial personnel and
independent public accountants in connection with these reviews. The auditors
have access to such committee at any time. The Audit Committee has recently been
formed and will hold its first meeting to review the results of the fiscal 1997
audit.
-16-
<PAGE>
ITEM 10. EXECUTIVE COMPENSATION
The following table sets forth the compensation paid by the Company during the
last three fiscal years to the Company's Chief Executive Officer and President.
No other executive officer's compensation exceeded $100,000 for services in all
capacities.
<TABLE>
<CAPTION>
Name and Restricted Securities
Principal Fiscal Stock Underlying
Position(s) Year Salary($) Bonus($) Awards ($) Options
- ----------------- ------ --------- -------- ---------- -----------
<S> <C> <C> <C> <C> <C>
Michael O'Reilly 1997 $198,657 $215,000(3) $ 3,000(1) 2,400,000(2)
Chairman, Chief 1996 $156,000 $140,180 $ -0- 250,000
Executive Officer, 1995 $158,500 $ -0- $ -0- -0-
and President
</TABLE>
(1) Received in fiscal 1997 for fiscal 1996, 3,000 restricted shares valued at
$3,000, for director services.
(2) In connection with Mr. O'Reilly's becoming Chairman, President and Chief
Executive Officer of the Company, he was granted an option to purchase 2,000,000
shares of Common Stock at $.01 per share that becomes exercisable for five years
commencing the earlier of (i) the Company's termination without cause of Mr.
O'Reilly's employment as its Chief Executive Officer and (ii) the date of a
change of a majority of the Board of Directors, other than through action by the
Board in creating and filling vacancies, or a change of controlling stockholders
of the Company.
In October 1996, the new Chief Executive Officer was granted options to purchase
400,000 shares of common stock at an exercise price of $.53 per share, the fair
market value on the date of grant.
On December 2, 1996, Pursuant to a Board vote, all options previously issued
were repriced to $.375 per share, the fair market value of the Company's stock
on that date. As of July 31, 1997, no options issued under this plan have been
exercised.
(3) Trade-Winds had an employment agreement with its President, Michael O'Reilly
for five years expiring in December 1998 with annual base compensation of
$156,000 plus an incentive bonus based on 2% of gross revenues as well as
certain other fringe benefits. Mr O'Reilly's contract was renegotiated in
October 1996 upon his being elected as the Company's Chairman, President & Chief
Executive Officer. Terms of the agreement provide for a base salary of $200,000
plus a bonus of 2% of gross revenues to a maximum of 25% of pre-tax profit,
payable 50% in cash and 50% in restricted stock, as well as certain other fringe
benefits. Mr. O'Reilly was paid a bonus of $215,000 with respect to the 1997
fiscal year, based on the Company's revenues from January 1 to October 31, 1996
pursuant to his prior employment agreement with Trade-Winds.
-17-
<PAGE>
ITEM 10. EXECUTIVE COMPENSATION (CONT'D)
<TABLE>
<CAPTION>
Option/SAR Grants in Last Fiscal Year
-------------------------------------
Potential Realizable Value
at Assumed Annual Rates of
Stock Price Appreciation
Individual Grants for Option Term
- ----------------------------------------------------------------------------------- -------------------------------------
Number of % of total
Securities Options/SAR's
Underlying Granted to Exercise
Options/SAR's Employees in Price Expiration
Name Granted (#) Fiscal Year ($) Shares Date 0%($) 5% ($) 10% ($)
- ----------- ------------- ------------------ ---------- ---- ------ --------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Michael O'Reilly
Chairman, Chief
Executive Officer 2,000,000 (1) 57.2 .01 Undeterminable $1,125,000 (2) -- --
and President 400,000 11.4 .375 September, 2001 -- $191,444 $241,576
</TABLE>
<TABLE>
<CAPTION>
Aggregated Options/SAR Exercises in Last Fiscal Year and Fiscal Year End Option Values
Number of
securities Value of
underlying Unexercised
unexercised In-the-Money
options at Fiscal Options at Fiscal
Shares ac- Year-End (#) Year-End ($)
quired on Value Exercisable/ Exercisable/
Name Exercise (#) Realized ($) Unexercisable Unexercisable(3)
- ----- -------------- -------------- ------------- -------------
<S> <C> <C> <C> <C>
Michael O'Reilly
Chairman, Chief
Executive Officer
and President -0- -0- 650,000/ $284,375/
2,000,000 (1) $1,605,000
</TABLE>
(1) In connection with Mr. O'Reilly's becoming Chairman, President and Chief
Executive Officer of the Company, he was granted an option to purchase 2,000,000
shares of Common Stock at $.01 per share that becomes exercisable for five years
commencing the earlier of (i) the Company's termination without cause of Mr.
O'Reilly's employment as its Chief Executive Officer and (ii) the date of a
change of a majority of the Board of Directors, other than through action by the
Board in creating and filling vacancies, or a change of controlling stockholders
of the Company.
(2) The value is calculated based on the closing sale price of $.5625 for the
Common Stock on the date of grant, September 9, 1997.
(3) The value is calculated based on the aggregate amount of the excess of
$.8125 (the closing sale price per share for the Common Stock on April 30, 1997)
over the relevant exercise price(s).
-18-
<PAGE>
ITEM 10. EXECUTIVE COMPENSATION
Employment Agreements
Trade-Winds had an employment agreement with its President, Michael O'Reilly for
five years expiring in December 1998 with annual base compensation of $156,000
plus an incentive bonus based on 2% of gross revenues as well as certain other
fringe benefits. Mr O'Reilly's contract was renegotiated in October 1996 upon
his being elected as the Company's Chairman, President & Chief Executive
Officer. Terms of the current agreement provide for a base salary of $200,000
plus a bonus of 2% of gross revenues to a maximum of 25% of pre-tax profit,
payable 50% in cash and 50% in restricted stock, as well as certain other fringe
benefits.
Compensation of Directors
Directors presently receive the equivalent of $5,000 in restricted stock each
year as compensation for serving on the Board. In October 1996, non-qualified
options to purchase an aggregate of 300,000 shares of Common Stock at $.56 per
share (repriced in December 1996 to $.375 per share) were granted to
non-employee directors of the Company.
-19-
<PAGE>
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth, as of August 31, 1997, certain information
concerning the ownership of each class of the Company's Common Stock by (i) each
beneficial owner of 5% or more of the Company's Common Stock, based on reports
filed with the Securities and Exchange Commission; and (ii) each director and
officer named in the Summary Compensation Table and (iii) all executive officers
and directors of the Company as a group:
<TABLE>
<CAPTION>
Amount and Nature(1) of Percent of
Name and Addrerss (6) Principal Occupation Beneficial Ownership Class
- --------------------- -------------------- ----------------------------- -----
<S> <C> <C> <C>
Michael O'Reilly Chairman, Chief
Executive Officer &
President 664,000(2) 6.2
Anthony Towell Director 576,000(4) 5.4
Samuel Sadove Director 101,000(3) 1.0
JoAnn O'Reilly Director 51,000(5) *
Officers and Directors
As a Group (6 persons) 1,392,000(2,3,4,5) 13.1
</TABLE>
* Less than 1% of the issued and outstanding shares.
(1) Unless otherwise indicated, each person has the sole voting and sole
investment power with respect to the shares.
(2) Represents 14,000 shares (inclusive of 1,000 shares of Common stock received
for service on the Board of Directors in the first quarter of 1997) of Common
stock owned and 650,000 shares beneficially owned pursuant to currently
exerciseable options . Does not include 50,000 share of Common stock issuable
upon the exercise of options held by JoAnn O'Reilly, Mr. O'Reilly's wife, as to
which he disclaims beneficial ownership. Excludes a 2,000,000 share option not
yet vested and exerciseable only on the happening of future events.
(3) Represents 100,000 shares issuable upon currently exerciseable options.
Includes 1,000 shares of Common stock received for service on the Board of
Directors in the first quarter of 1997.
(4) Includes 25,000 shares owned and 150,000 shares beneficially owned pursuant
to currently exerciseable options. Also includes 400,000 shares issuable upon
conversion of the $100,000 demand note payable.Includes 1,000 shares of Common
stock received for service on the Board of Directors in the first quarter of
1997.
(5) Represents 50,000 shares issuable upon currently exerciseable options and
does not include (a) 10,000 shares of common stock owned by Michael O'Reilly,
Ms. O'Reilly's husband, or (b) 650,000 shares issuable upon currently
exerciseable options held by Mr. O'Reilly, as to all of which she disclaims
beneficial ownership. Includes 1,000 shares of Common stock received for service
on the Board of Directors in the first quarter of 1997.
(6) The address of each person is C/O Windswept Environmental Group Inc., 100
Sweeneydale Avenue, Bay Shore,New York 11706.
-20-
<PAGE>
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
During fiscal 1997, Anthony Towell, a director of the Company loaned the Company
$100,000 and was issued a 12% note convertible into 400,000 shares of the
Company's common stock. Mr. Towell is also an officer and director of Eastco
Industrial Safety Corp. which sold approximately $457,000 of material and
supplies to the Company that was used on remediation projects during fiscal
1997. See Note 12 in the accompanying Consolidated Financial Statements.
During fiscal 1997 and 1996, the Company's former Chief Operating Officer, Leo
Mangan was paid approximately $148,000 and $432,000, respectively, as fees for
assisting the Company in various capital raising transactions for which he
purportedly acted as finder. Payments for this service were made in addition to
his base compensation as Chief Operating Officer pursuant to an agreement
approved by the Company's Board of Directors.
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
a) Financial Statements.
b) Reports on Form 8-K
Incorporated by reference to filings dated September 26, 1996 and February
24, 1997.
c) Items Required by Item 601 of Regulation S-B
2.01 Merger Agreement and Certificate of Designations for North Atlantic
Laboratories, Inc.
3.01 Restated Certificate of Incorporation and Amendment to the Certificate
of Incorporation included as Exhibits 3.1 and 3.2, respectively, of
the Company's Registration Statement No. 33- 14370 N.Y. filed June 1,
1987and incorporated by reference thereto.
3.02 Restated By-Laws included as Exhibit 3.3 of the Company's Registration
Statement No. 33- 14370 N.Y. filed June 1, 1987 and incorporated by
reference thereto.
3.03 Restated Certificate of Incorporation and Amendment to the Certificate
of Incorporation filed March 6, 1995 included as Exhibit 3c. to the
Company's Form 10-KSB/A-4 filed July 14, 1997 and incorporated by
reference thereto.
3.04 Amended Certificate of Incorporation.
4.01 Specimen of Common Stock Purchase Warrant dated September 3, 1987
included as Exhibit 4.1 of the Company's Registration Statement No.
33-14370 of N.Y. filed June 1, 1987 and incorporated by reference
thereto.
4.02 Form of Warrant Agreement with American Stock Transfer Company dated
September 3, 1987 included as Exhibit 4.2 of the Company's
Registration Statement No. 33-14370 N.Y. filed June 1, 1987 and
incorporated by reference thereto.
4.03 Form of Underwriter's Unit Purchase Option granted to Data Securities,
Inc. dated September 3, 1987 included as Exhibit 4.3 of the Company's
Registration Statement No. 33-14370 N.Y. filed June 1, 1987 and
incorporated by reference thereto.
-21-
<PAGE>
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K (CONT'D)
4.04 Form of Convertible Note Agreement.
4.05 Option Certificate for 2,000,000 stock options with Mr. O'Reilly.
10.02 Employment Agreement between the Company and Michael O' Reilly
entered into as of November 1, 1996.
10.03 1997 Stock Grant and Option Plan included as Exhibit 4.1 of the
Company's Registration Statement No. 333-22491 filed February 27,
1997 and incorporated by reference thereto.
23 Consent of Independent Accountants
27 Financial Data Schedule.
-22-
<PAGE>
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 29, 1997
WINDSWEPT ENVIRONMENTAL GROUP, INC.
By: /s/ Michael O'Reilly
--------------------
MICHAEL O'REILLY, Chairman, President
and Chief Executive Officer
By: /s/ Alan W.Schoenbart
---------------------
ALAN W. SCHOENBART
Chief Financial Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf
of the registrant and in the capacities and on the dates indicated:
/s/ Michael O'Reilly
--------------------
MICHAEL O'REILLY, Director
/s/ Anthony Towell
------------------
ANTHONY TOWELL, Director
/s/ Samuel Sadove
-----------------
SAMUEL SADOVE, Director
/s/ Joann O'Reilly
------------------
JOANN O'REILLY, Director
-23-
<PAGE>
WINDSWEPT ENVIRONMENTAL GROUP, INC. AND SUBSIDIARIES
(Formerly Comprehensive Environmental Systems, Inc.)
TABLE OF CONTENTS
Page
Independent Auditors' Reports F-1,F-2
Consolidated Balance Sheet as of April 30, 1997 F-3
Consolidated Statements of Operations for the
years ended April 30, 1997 and 1996 F-4
Consolidated Statements of Stockholders' Equity for the
years ended April 30, 1997 and 1996 F-5
Consolidated Statements of Cash Flows for the
years ended April 30, 1997 and 1996 F-6
Notes to Consolidated Financial Statements F-7 - F20
<PAGE>
Report of Independent Accountants
To the Board of Directors and
Stockholders of Windswept Environmental Group, Inc.
In our opinion, the accompanying consolidated balance sheet and the related
consolidated statements of operations, of changes in stockholders' equity and of
cash flows, after giving retroactive effect to the adjustment described in Note
20, present fairly, in all material respects, the financial position of
Windswept Environmental Group, Inc. and its subsidiaries (the "Company") at
April 30,1997 and the results of their operations and their cash flows for the
year then ended in conformity with generally accepted accounting principles.
These financial statements are the responsibility of the Company's management;
our responsibility is to express an opinion on these financial statements based
on our audit. We conducted our audit of these statements in accordance with
generally accepted auditing standards which require that we plan and perform the
audit to obtain reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by
management and evaluating the overall financial statement presentation. We
believe that our audit provides a reasonable basis for the opinion expressed
above.
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed in Note 3 to the
consolidated financial statements, the Company has incurred recurring losses
from operations, has a working capital deficiency, and is in arrears with
respect to certain of its obligations, including payroll taxes. These factors
raise substantial doubt about the Company's ability to continue as a going
concern. Management's plans in regard to these matters are also described in
Note 3. The consolidated financial statements do not include any adjustments
that might result from the outcome of this uncertainty.
Price Waterhouse LLP
Melville, New York
September 29,1997
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors and
Stockholders of Windswept Environmental Group, Inc.
We have audited the accompanying consolidated statements of operations, of
stockholders' equity and of cash flows for the year ended April 30, 1996 of
Windswept Environmental Group, Inc. (formerly Comprehensive Environmental
Systems, Inc.) and Subsidiaries. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audit.
We conducted our audit of these statements in accordance with generally accepted
auditing standards. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. 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 audit provides a reasonable basis for the
opinion.
In our opinion, the consolidated financial statements referred to above, after
the restatement described in Note 20, present fairly, in all material respects,
the results of its operations and its cash flows of Windswept Environmental
Group, Inc. and Subsidiaries for the year ended April 30, 1996 in conformity
with generally accepted accounting principles.
As more fully explained in Note 5, the accompanying consolidated balance sheet
includes certain investments at a net carrying value of $628,000. The ultimate
recovery of such amounts is primarily dependent upon the future value and future
performance of the companies underlying these investments, which is not
determinable at this time.
As more fully described in Note 20 to the consolidated financial statements, the
Company has restated the consolidated statements of operations, of stockholders'
equity and of cash flows for the year ended April 30, 1996 for corrections
relating to deferred income taxes and costs which were previously charged to
additional paid-in capital.
Capraro, Centofranchi, Kramer & Co., P.C.
South Huntington, New York
August 8, 1996,
except for Note 20, as to which dates are
December 5, 1996 and September 29, 1997
F-2
<PAGE>
WINDSWEPT ENVIRONMENTAL GROUP, INC. AND SUBSIDIARIES
(Formerly Comprehensive Environmental Systems, Inc.)
CONSOLIDATED BALANCE SHEET
APRIL 30, 1997
ASSETS
CURRENT ASSETS
Cash $ 654,377
Accounts receivable, net of allowance for
doubtful accounts of $200,000 2,195,284
Inventories 158,714
Prepaid expenses and other current assets 516,878
------------
Total current assets 3,525,253
PROPERTY AND EQUIPMENT, net 2,841,783
OTHER ASSETS
Goodwill, net 1,529,320
Note receivable, net of current portion 200,282
Other assets 288,752
------------
TOTAL ASSETS $ 8,385,390
============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable and accrued expenses $ 2,592,473
Payroll taxes payable 347,404
Current portion of long-term debt 765,432
Obligations of unconsolidated subsidiary, net 196,112
------------
Total current liabilities 3,901,421
OTHER LIABILITIES
Convertible notes 800,000
Long-term debt, net of current portion 454,560
------------
TOTAL LIABILITIES 5,155,981
COMMITMENTS AND CONTINGENCIES
SERIES A REDEEMABLE CONVERTIBLE PREFERRED STOCK
par value $.01; 1,300,000 shares issued and outstanding 1,300,000
STOCKHOLDERS' EQUITY
Preferred stock, $.01 par value,
10,000,000 shares authorized; 1,300,000
Series A redeemable convertible shares issued and
outstanding --
Common stock, $.0001 par value,
50,000,000 shares authorized;
9,786,074 shares issued, 9,766,074 outstanding 979
Additional paid-in capital 27,318,031
Treasury stock, 20,000 shares at cost (10,000)
Accumulated deficit (25,379,601)
------------
Total stockholders' equity 1,929,409
------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 8,385,390
============
See accompanying notes to consolidated financial statements.
F-3
<PAGE>
WINDSWEPT ENVIRONMENTAL GROUP, INC. AND SUBSIDIARIES
(Formerly Comprehensive Environmental Systems, Inc.)
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED APRIL 30, 1997 and 1996
1997 1996
------------ ------------
(Restated - Note 20)
Revenues, net $ 15,275,209 $ 9,906,661
Cost of revenues 12,549,864 7,375,381
------------ ------------
Gross profit 2,725,345 2,531,280
Selling, general and administrative expenses 5,285,841 5,398,133
Special charges (Note 4) 1,316,901 --
Facility consolidation (Note 14) 509,720 --
------------ ------------
7,112,462 5,398,133
------------ ------------
Loss from operations (4,387,117) (2,866,853)
------------ ------------
Other income (expense):
Interest expense (178,615) (50,629)
Loss on investments (Note 5) (298,000) (2,317,841)
Other, net 249,982 (31,936)
------------ ------------
Total other expense (226,633) (2,400,406)
------------ ------------
Net loss $ (4,613,750) $ (5,267,259)
============ ============
Net loss per common share $ (.51) $ (1.00)
============ ============
Weighted average number of
common shares outstanding: 9,026,797 5,232,783
============ ============
See accompanying notes to consolidated financial statements.
F-4
<PAGE>
WINDSWEPT ENVIRONMENTAL GROUP, INC. AND SUBSIDIARIES
(Formerly Comprehensive Environmental Systems, Inc.)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED APRIL 30, 1997 AND 1996
<TABLE>
<CAPTION>
Common Stock Additional
Number Par Paid-in Treasury
shares value Capital Stock
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Balance at April 30, 1995 2,044,283 $ 204 $ 20,896,147 $ --
Net proceeds from private placements
of common stock 3,690,750 369 3,603,524 --
Acquisition of New York Testing
Laboratories, Inc. and Subsidiary 45,000 5 67,495 --
Issuance of common stock for services 297,333 30 502,220
Purchase of treasury shares (100,000) -- -- (88,000)
Issuance of common stock to settle
legal claim 90,000 9 89,991 --
Issuance of treasury stock to settle
legal claims 30,000 -- -- 30,000
Stock subscription receivable -- -- -- --
Net loss -- -- -- --
------------ ------------ ------------ ------------
Balance at April 30, 1996 6,097,366 $ 617 $ 25,159,377 $ (58,000)
Net proceeds from private placements
of common stock 2,600,000 260 1,232,165 --
Issuance of common stock for services 690,873 69 479,073 --
Issuance of stock and options in
connection with acquisition of North
Atlantic Laboratories, Inc. 252,835 25 299,828 --
Issuance of treasury stock 70,000 -- -- 58,000
Return of common stock as
part of legal settlement (20,000) -- -- (10,000)
Collection of stock subscription
receivable -- -- -- --
Options issued to placement agent -- -- 31,250 --
Issuance of common stock for
partial payment of management
termination costs 75,000 8 34,992 --
Accretion of discount on convertible notes -- -- 81,346 --
Net loss -- -- -- --
------------ ------------ ------------ ------------
Balance at April 30, 1997 9,766,074 $ 979 $ 27,318,031 $ (10,000)
============ ============ ============ ============
<CAPTION>
Stock
Subscription Accumulated
Receivable Deficit Total
------------ ------------ ------------
(Restated - Note 20)
<S> <C> <C> <C>
Balance at April 30, 1995 $ -- $(15,498,592) $ 5,397,759
Net proceeds from private placements
of common stock -- -- 3,603,893
Acquisition of New York Testing
Laboratories, Inc. and Subsidiary -- -- 67,500
Issuance of common stock for services
Purchase of treasury shares -- -- (88,000)
Issuance of common stock to settle
legal claim -- -- 90,000
Issuance of treasury stock to settle
legal claims -- -- 30,000
Stock subscription receivable (46,988) -- (46,988)
Net loss -- (5,267,259) (5,267,259)
------------ ------------ ------------
Balance at April 30, 1996 $ (46,988) $(20,765,851) $ 4,289,155
Net proceeds from private placements
of common stock -- -- 1,232,425
Issuance of common stock for services -- -- 479,142
Issuance of stock and options in
connection with acquisition of North
Atlantic Laboratories, Inc. -- -- 299,853
Issuance of treasury stock -- -- 58,000
Return of common stock as
part of legal settlement -- -- (10,000)
Collection of stock subscription
receivable 46,988 -- 46,988
Options issued to placement agent -- -- 31,250
Issuance of common stock for
partial payment of management
termination costs -- -- 35,000
Accretion of discount on convertible notes -- -- 81,346
Net loss -- (4,613,750) (4,613,750)
------------ ------------ ------------
Balance at April 30, 1997 $ -- $(25,379,601) $ 1,929,409
============ ============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE>
WINDSWEPT ENVIRONMENTAL GROUP, INC. AND SUBSIDIARIES
(Formerly Comprehensive Environmental Systems, Inc.)
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED APRIL 30, 1997 AND 1996
<TABLE>
<CAPTION>
1997 1996
----------- -----------
(Restated - Note 20)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $(4,613,750) $(5,267,259)
Adjustments to reconcile net loss to net cash
used by operating activities:
Depreciation and amortization 777,554 445,998
Loss on investments 298,000 2,317,841
Loss on abandonment/disposal of fixed assets 463,013 66,739
Common stock issued for services or for
settlement of litigation 538,999 622,250
Other, net 69,075 21,515
Changes in assets and liabilities, net of effects of
acquisition of business
Accounts receivable 70,209 (234,086)
Inventories 106,351 (32,456)
Prepaid expenses and other (306,442) (79,204)
Other assets (63,970) (45,641)
Accounts payable and accrued expenses 1,394,218 (246,468)
Payroll taxes payable 118,813 102,175
----------- -----------
Net cash used by operating activities (1,147,930) (2,328,596)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of property and equipment, net (465,266) (1,549,608)
Repayment of advances and deposits to joint venture and
investments -- 455,758
Purchases of investments -- (100,000)
Collection of notes receivable 41,105 50,000
Decrease in security deposits 8,835 --
Acquisition of business, net of cash received (89,377) (97,126)
----------- -----------
Net cash used by investing activities (504,703) (1,240,976)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Net proceeds from issuance of common stock 1,279,413 3,456,905
Proceeds from debt financing 1,350,381 (75,000)
Debt issuance costs (142,406) --
Principal payments of long-term debt (313,311) (239,423)
Deposit held for stock placement (150,000) 150,000
Payment to acquire treasury stock -- (88,000)
----------- -----------
Net cash provided by financing activities 2,024,077 3,204,482
----------- -----------
NET INCREASE (DECREASE) IN CASH 371,444 (365,090)
CASH, BEGINNING OF YEAR 282,933 648,023
----------- -----------
CASH, END OF YEAR $ 654,377 $ 282,933
=========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE>
WINDSWEPT ENVIRONMENTAL GROUP, INC. AND SUBSIDIARIES
(Formerly Comprehensive Environmental Systems, Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED APRIL 30,1997 and 1996
1. DESCRIPTION OF BUSINESS ACTIVITIES AND SIGNIFICANT DEVELOPMENTS
Windswept Environmental Group, Inc., formerly Comprehensive Environmental
Systems, Inc. (the "Company") provides a broad range of environmental
services through vertically integrated businesses in the areas of hazardous
waste remediation, asbestos removal, lead clean-up, emergency spill
response and laboratory testing and training. 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 New York metropolitian area.
Prior to the fiscal year ended April 30, 1994 the Company did not have
substantive, revenue generating, business operations. During fiscal 1994
and through April 30, 1996, the Company invested approximately $9.5 million
represented by cash advances and purchases of equity securities of a
variety of companies and start-up businesses, many of which were unrelated
to the Company's current environmental remediation activities.
Approximately $9.2 million of the investments were ultimately deemed to be
unrecoverable and have been charged to results of operations through April
30, 1997.
Principally as a result of disagreements among members of management and
the Board of Directors concerning the performance of investments previously
made, the appropriate use of corporate assets and the strategic direction
of the Company, a new Chairman and Chief Executive Officer was appointed in
September 1996. Simultaneous with the appointment, the former Chairman and
Chief Executive Officer, the former Chief Operating Officer and the former
Special Securities Counsel to the Company were terminated. The former
Chairman and Chief Executive Officer, the former Chief Operating Officer
and the former Special Securities Counsel also resigned from the Company's
Board of Directors. See further discussion concerning the termination of
certain members of management in Note 4.
The new Chairman and Chief Executive Officer previously served as President
of Trade-Winds Environmental Restoration, Inc., the Company's principal
operating subsidiary. Since September 1996, the Company has limited the
scope of the Company's business activities to environmental services and
certain general construction services.
In October 1996, the United States Attorney for the Eastern District of New
York obtained a federal grand jury indictment against, among others, the
former Chief Operating Officer and the former Special Securities Counsel on
charges including violations of federal securities laws, including
fraudulent issuances of 700,000 shares of the Company's common stock during
the fiscal year ended April 30, 1995. The former Chief Operating Officer
and the former Special Securities Counsel both subsequently pleaded guilty
to the charges in the Federal indictment. The U.S. Securities and Exchange
Commission (the "SEC") has been investigating what role, if any, other
officers and directors, including the current Chairman and Chief Executive
Officer and the former Chief Financial Officer, may have had in connection
with such activities. The Company has cooperated and continues to cooperate
with the SEC by providing documents in response to subpoenas issued to it.
To date, no charges have been filed nor claims asserted against the
Company, it's CEO, or former CFO, as a result of the investigation. The
Company has previously restated its financial statements for fiscal years
1995 and 1996 to give effect to the information which arose from these
investigations.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The accompanying consolidated financial statements include the accounts of
Windswept Environmental Group, Inc. and its subsidiaries, except for a
wholly-owned laboratory testing subsidiary which is in process of
liquidation through formal bankruptcy proceedings, and is accounted for by
the equity method. All intercompany accounts and transactions have been
eliminated in consolidation.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
F-7
<PAGE>
WINDSWEPT ENVIRONMENTAL GROUP, INC. AND SUBSIDIARIES
(Formerly Comprehensive Environmental Systems, Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED APRIL 30, 1997 and 1996
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONT'D)
Revenue Recognition
The majority of the Company's revenue is derived from the provision of
services over periods of less than one month. In such instances, revenue is
recognized at the completion of the related contracts.
Revenue from construction contracts, which 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 and estimated profitability,
including those arising from 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.
Inventories
Inventories consist of materials and supplies utilized on the Company's
remediation projects and are recorded at the lower of cost (first-in,
first-out) or market.
Property and Equipment
Property and equipment is stated at cost. Depreciation is provided by the
straight-line method over the estimated useful lives of the assets.
Goodwill
Goodwill represents the excess of cost over the fair value of net assets
acquired and is being amortized on a straight-line basis over the period of
expected benefit of ten years. The Company assesses the recoverability of
the goodwill by determining whether the carrying value of the asset will be
recovered through an analysis of projected undiscounted operating cash
flows of the acquired business.
Investments
Investments in privately-held companies, or investments in companies
without a readily determinable value are carried at historical cost,
reduced by, if necessary, a valuation allowance to estimated net realizable
value where the decline in value from historical cost is determined to be
other than temporary.
Loss Per Share
The computation of loss per common share is based on the weighted average
number of outstanding common stock and common stock equivalents outstanding
during the period. The stock options issued under the stock option plan
were not included in common stock equivalents as they were anti-dilutive.
As of April 30, 1997 and 1996 there was no difference between primary loss
per share and fully diluted loss per share.
Income Taxes
The accompanying consolidated financial statements have been prepared in
conformity with the Statement of Financial Accounting Stardards No. 109,
"Accounting for Income Taxes" ("SFAS 109"). In accordance with SFAS 109,
deferred taxes are provided based on the temporary differences between the
financial statement carrying amounts and the tax basis of assets and
liabilities. Deferred taxes are measured using the enacted tax rates
expected to apply when temporary differences are settled or realized.
F-8
<PAGE>
WINDSWEPT ENVIRONMENTAL GROUP, INC. AND SUBSIDIARIES
(Formerly Comprehensive Environmental Systems, Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED APRIL 30, 1997 AND 1996
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONT'D)
Income Taxes (cont'd)
The Company files a consolidated Federal tax return. Accordingly, Federal
income taxes are provided on the taxable income of the consolidated group.
State income taxes are provided on a separate company basis, if and when
taxable income, after utilizing available carryforward losses, exceeds
certain levels.
Debt Issuance Costs
The costs related to the issuance of the 10% convertible notes have been
capitalized and are included in other assets. Debt issue costs are
amortized to interest expense using the effective interest method over the
term of the related debt. Amortization of debt issuance costs was $2,894
during the year ended April 30, 1997.
Stock Option Plans
In October 1995, the Financial Accounting Standards Board issued Financial
Accounting Standard No.123, "Accounting for Stock-Based Compensation" (SFAS
123), effective for the Company's fiscal year beginning 1996. SFAS 123
establishes a fair value-based method of accounting for stock compensation
plans. The Company has chosen to adopt the disclosure requirements of SFAS
123, and continue to record stock compensation in accordance with
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees" (APB 25). Under APB 25, charges are made to earnings in
accounting for stock options granted to employees when the option exercise
prices are below the fair market value of common stock at the grant date.
Fair Value of Financial Instruments
As of April 30, 1997 the carrying value of cash, accounts receivable,
accounts payable, accrued expenses, notes payable and current maturities of
long-term debt approximated fair value because of their short maturity.
As of April 30, 1997 the carrying amount of long-term debt and redeemable
convertible preferred stock, are also assumed to approximate their fair
values, due to the proximity of the financing to the end of the fiscal
year.
New Accounting Pronouncement
In February 1997, the Financial Accounting Standards Board issued statement
of Financial Accounting Standards No. 128, "Earnings per Share" ("FAS 128")
which requires presentation of basic earnings per share ("Basic EPS") and
diluted earnings per share ("Diluted EPS"). Basic EPS is computed by
dividing income available to common stockholders by the weighted-average
number of common shares outstanding during the period. Diluted EPS gives
effect to all dilutive potential common shares outstanding during the
period. The computation of Diluted EPS does not assume conversion, exercise
or contingent exercise of securities that would have an antidilutive effect
on earnings. The statement is effective for both interim and annual periods
ending after December 15, 1997. The effect on the Company's earnings per
share resulting from the adoption of FAS 128 in not expected to be
significant.
Reclassifications
Certain amounts included in the prior years' consolidated financial
statements have been reclassified to conform with the current year's
presentation.
F-9
<PAGE>
WINDSWEPT ENVIRONMENTAL GROUP, INC. AND SUBSIDIARIES
(Formerly Comprehensive Environmental Systems, Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED APRIL 30, 1997 AND 1996
3. LIQUIDITY AND BUSINESS RISKS
As of April 30, 1997 the Company has an accumulated deficit of $25,379,601
and has not generated positive cash flow from operations to date. The
Company has financed its operations to date primarily through issuances of
debt and equity securities. At April 30, 1997, the Company had $654,377 in
cash, and a working capital deficit of $376,168. In addition, as of August
31, 1997 and April 30, 1997, the Company was in arrears with respect to
certain payroll tax obligations of approxinately $598,000 and $316,000,
respectively.
The Company is currently negotiating with the tax authorities regarding the
late payment of the required withholding taxes. No assurance can be given
that the Company will be able to reach an agreement with the tax
authorities, that the tax authorities will not immediately seek payment of
the taxes, or that the tax authorities will not commence an action or file
a lien against the Company in order to recover the taxes.
In May 1997, the Company entered into a revolving bank credit facility to
obtain a revolving credit line of $1,500,000, secured by certain of the
Company's assets. Borrowings remain at a maximum of $750,000 until the
receipt and satisfactory review of the Company's audited financial
statements for the fiscal year ended April 30, 1997.The Company was in
default of certain of the credit facility covenants at July 31, 1997.
Subject to satisfying certain conditions the bank may make available to the
Company an additional $750,000 in secured debt financing. The Company
believes that, should this financing be made available, the Company would
have adequate capital resouces to meet its current cash requirements for a
period of at least twelve months. Management believes that should the bank
not make available the additional financing, there will be alternative debt
and/or equity sources available to the Company. The Company is currently
engaged in various discussions with potential investors regarding possible
equity transactions. Furthermore, the Company has been approached by other
banks and commercial lenders expressing interest in providing financial
assistance to the Company. In addition, the Company is striving to improve
its gross margin and control its selling, general, and administrative
expenses. There can be no assurance, however, that changes in the Company's
plans or other events affecting the Company's operations will not result in
accelerated or unexpected cash requirements, or that it will be successful
in obtaining the additional financing to meet its obligations as they
become due. The Company's future cash requirements will depend on numerous
factors, including, but no limited to: (i) the ability to successfully bid
on construction contracts (ii) the ability to generate positive cash flow
from operations, and (iii) general economic conditions.
4. SPECIAL CHARGES
In connection with the termination of officers described in Note 1, in
September 1996, the Company entered into separate termination agreements
with the former Chief Executive Officer ("CEO"), Chief Operating Officer
("COO") and Special Securites Counsel ("SSC") to the Company. These
agreements called for pay-outs of existing compensation arrangements plus
additional benefits in the form of transferring an investment in
non-marketable securities of $330,000, issuing stock options and other
miscellaneous benefits. Included in Special Charges on the Consolidated
Statement of Operation are the termination costs related to the former CEO
and SSC for $199,217 and $35,000, respectively. Also included in Special
Charges are amounts actually paid ($195,976), the value of the
non-marketable securities ($330,000) transferred to the former COO, and
$556,708 of legal and professional fees incurred in connection with the
terminations and the subequent matters relating to the indictment. When the
Company learned of the indictment of the former COO and SSC in October 1996
on charges of stock fraud and manipulation, the Company immediately ceased
making payments to the former COO. The Company has not accrued for the
unpaid balance of the termination agreement with the former COO totaling
approximately $636,000 based on the recent guilty pleas to the charges of,
amongst others, stock fraud and manipulation in violation of the federal
securities laws. All stock options held by the former COO were either
surrendered or expired in connection with his termination.
F-10
<PAGE>
WINDSWEPT ENVIRONMENTAL GROUP, INC. AND SUBSIDIARIES
(Formerly Comprehensive Environmental Systems, Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED APRIL 30, 1997 and 1996
5. INVESTMENTS
The net carrying value of investments in non-marketable securities as of
April 30, 1997 and 1996 was as follows:
1997 1996
---------- --------
Sovereign Fidelity, Ltd. $ -- $100,000
Pilot Transport, Inc. -- --
ICIS Management Group Inc. (formerly
Alter Sales Co., Inc.) -- 528,000
---------- --------
$ -- $628,000
========== ========
During the year ended April 30, 1997 the Company recorded a loss on
investments in non-marketable securities of $298,000. In September 1996,
the Company transferred its investment in 881,000 shares of ICIS Management
Group, Inc. to its former Chief Operating Officer in connection with his
termination. The Company recorded a loss on the investment of $198,000
based on an estimate of its fair value prior to the transfer of the
investment, and a $330,000 special charge related to the value of the
investments transfered. See Note 4. In addition, the Company wrote off
$100,000 of the balance of its investment in Sovereign for which it
determined to be impaired.
During the year ended April 30, 1996 the Company recorded a charge of
$1,600,000 to write down its original investment in Sovereign Fidelity
("Sovereign") based on evaluation of its fair value. Similiarly, the
Company also wrote off $717,841 of its investment in Pilot Transport, Inc.
("Pilot") after ascertaining that Pilot was non-operational and the
underlying assets of Pilot were of nominal value.
6. NOTE RECEIVABLE
In June 1993, a subsidiary of the Company entered into a joint operating
agreement with Spartan Dismantling Corp.("Spartan") (as amended March 1994)
for the transfer and disposal of asbestos. The agreement called for Spartan
and its management to provide the physical facility and operational support
for an asbestos transfer station pursuant to a Department of Environmental
Conservation 360 permit. The Company provided marketing, management and
working capital to support the growth of the business from inception. In
addition, the Company had advanced funds of approximately $2,190,000 to
support the joint operations through April 30, 1995. In March, 1995, the
President of Spartan, who was also a Director of the Company, resigned and
assumed total control of the joint venture. As a result, the Company
commenced an arbitration action in August 1995 against this individual and
Spartan for damages and recovery of net advances and accumulated profit.
The action alleged breach of contract, fiduciary responsibility and other
claims against Spartan and its President, who was a member of the Company's
Board of Directors from June 1993 through March 1995. The Company's claim
for net advances and accumulated profits of approximately $2,800,000 was
settled in October 1996 for $300,000 and the return of 20,000 shares of the
Company's common stock. The settlement note is collateralized by a first
mortgage position on real property located in Brooklyn, NY at the Spartan
facility. The Company received a $25,000 down payment and a $275,000 note
receivable, payable in $6,022 monthly increments through June 2001. At
April 30, 1997, the balance of the note receivable was $253,772, of which
$53,490 is included in prepaid expenses and other current assets.
F-11
<PAGE>
WINDSWEPT ENVIRONMENTAL GROUP, INC. AND SUBSIDIARIES
(Formerly Comprehensive Environmental Systems, Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED APRIL 30, 1997 and 1996
7. PROPERTY AND EQUIPMENT
Major classes of property and equipment at April 30, 1997 consist of the
following:
Estimated useful
life
----------------
Machinery and equipment 5-10 $2,974,411
Office furniture and equipment 3-7 154,315
Transportation equipment 3-5 832,623
Warehouse fixtures 10 31,587
----------
3,992,936
Less: accumulated depreciation and amortization 1,151,153
----------
$2,841,783
==========
The Company is obligated under various capital leases for machinery and
equipment that expire at various dates through 2001. The carrying amount of
machinery and equipment under capital leases included in property and
equipment was as follows at April 30, 1997:
Machinery and equipment $78,544
Less: accumulated amortization 16,781
----------
$61,763
==========
Depreciation expense for the years ended April 30, 1997 and 1996 was
$634,569 and $435,462, respectively.
8. GOODWILL
Goodwill at April 30, 1997 was as follows:
North Atlantic Other
Laboratories Inc Acquisitions Total
---------------- ------------ -----------
Fair value of assets acquired $ 232,335 $ 77,600 $ 309,935
Cash acquired 110,623 -- 110,623
----------- ----------- -----------
Net assets acquired 342,958 77,600 420,558
----------- ----------- -----------
Cash paid (200,000) (107,126) (307,126)
Issuance of preferred stock (1,300,000) -- (1,300,000)
Issuance of common stock (156,000) (117,500) (273,500)
Issuance of stock options (100,000) -- (100,000)
Transaction costs (43,853) -- (43,853)
----------- ----------- -----------
Purchase price (1,799,853) (224,626) (2,024,479)
----------- ----------- -----------
Goodwill 1,456,895 147,026 1,603,921
Less: accumulated amortization 22,615 51,986 74,601
----------- ----------- -----------
$ 1,434,280 $ 95,040 $ 1,529,320
=========== =========== ===========
Amortization expense was $58,745 and $10,536 in 1997 and 1996, respectively.
F-12
<PAGE>
WINDSWEPT ENVIRONMENTAL GROUP,INC. AND SUBSIDIARIES
(Formerly Comprehensive Environmental Systems, Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED APRIL 30, 1997 and 1996
9. OBLIGATION OF UNCONSOLIDATED SUBSIDIARY, NET
In January 1996, Laboratory Testing Services, Inc. (LTS), a wholly-owned
subsidiary of the Company filed a bankruptcy petition in the United States
Bankruptcy Court in the Eastern District of New York. Concurrent with the
bankruptcy petition, the operations of LTS were ceased. The court appointed
bankruptcy trustee has been liquidating the assets of LTS to satisfy LTS's
corporate obligations. The Company's investment in this unconsolidated
subsidiary represents the estimated liability related to the liquidation.
10 DEBT AND LEASE OBLIGATIONS
Convertible notes at April 30, 1997 are as follows:
10% convertible notes, due March 2002 $700,000
12% convertible notes, related party, due December 1999 100,000
--------
$800,000
========
In March 1997, the Company completed a private offering of 10% convertible
notes to a group of accredited investors. The Company received gross
proceeds of $700,000 and incurred direct issuance costs of $173,656 related
to the sale of the notes. The 10% convertible notes are payable in full in
March 2002 . Interest is payable semi-annually. The notes may be converted,
at the option of the holder, at any time prior to maturity at a conversion
price of $.50 per share.
The holders of a majority of the convertible notes has a one-time right to
demand that the Company register the 1,400,000 shares of common stock
issuable upon conversion of the notes. The Company has reserved 1,400,000
shares of the common stock issuable upon conversion.
The Company has accounted for the difference in the market price of its
common stock at the date of closing, $.8125, versus the $.50 conversion
price, as additional value accreting to the holders of the convertible
notes. Consequently, the Company is recording additional interest expense
on the convertible notes of $437,500 (1,400,000 shares at $.3125). The
additional interest expense is being recorded on a pro-rata basis from the
date of issuance of the notes, March 11, 1997, through September 15, 1997
(the earliest possible conversion date). Additional interest of $81,346 was
recorded during the year ended April 30, 1997.
In October 1996, the $100,000, 12% convertible note was issued to an
outside director of the Company for cash. This note is convertible at the
option of the holder at $.25 per share upon demand (equivalent to the fair
value of the common stock at the date of issuance). The 12% convertible
notes are payable in full in December 1999.
Long-term debt at April 30, 1997 is as follows:
Vehicle installment notes with finance company, payable
monthly with interest rates ranging from
8.45% to 12.25%, with terms expiring through January 2002 $ 291,112
Equipment notes, payable monthly with interest rates
ranging from 6.78% to 12%, expiring through January 1999 277,797
Insurance premium financing, payable monthly with interest
rates ranging from 10.1% to 15%, expiring through December 1997 348,724
Litigation settlement, 10%, due September 1998 135,443
Management termination obligation (Note 4), 10%,
due September 1998 26,014
Capital lease obligations 61,954
Note payable, other, 10%, due September 1998 78,948
----------
1,219,992
Less: current portion 765,432
----------
$ 454,560
==========
F-13
<PAGE>
WINDSWEPT ENVIRONMENTAL GROUP,INC. AND SUBSIDIARIES
(Formerly Comprehensive Environmental Systems, Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED APRIL 30, 1997 and 1996
10. DEBT AND LEASE OBLIGATIONS (CONT'D)
The vehicle installment and equipment notes are secured by the underlying
vehicle and equipment.
In a civil action which was commenced in August 1995 in United States
District Court, the Company and various current and prior officers and
directors were named in a lawsuit brought by a group of shareholders. The
lawsuit alleged misrepresentations made by the former COO and
non-disclosure in public filings of various Reg-S and S-8 stock issuances
made by the Company from August through October 1994. The Company settled
this lawsuit in May 1997 for $150,000, ($135,443 represents discounted
value) net of $300,000 insurance proceeds, with monthly payments of $6,250.
In the event the Company defaults (as defined) on any of their payments,
they will be required to pay $700,000 less the amounts already paid under
the settlement.
Aggregate maturities of long-term debt for each of the five years following
April 30, 1997, are as follows:
Year Ending
April 30,
-----------
1998 $ 765,432
1999 284,232
2000 86,742
2001 52,432
2002 31,154
----------
$ 1,219,992
==========
Future minimum lease payments under noncancellable operating leases for
office space and equipment and the present value of future minimum lease
payments as of April 30, 1997 are as follows:
Year Ending Capital Operating
April 30, Leases Leases
----------- --------- ------------
1998 $34,311 $ 331,960
1999 29,778 337,363
2000 16,178 348,863
2001 -- 323,425
2002 -- 323,399
--------- ------------
Total minimum lease payments $80,267 $1,665,010
============
Less: amount representing
Interest at rates approximately 21% 18,313
----------
Present value of minimum
capitalized lease payment 61,954
Current portion 23,357
----------
Long-term capitalized
lease obligations $38,597
==========
Total rental expense under cancelable and noncancellable operating leases
was $209,754 and $108,167 for the years ended April 30,1997 and 1996,
respectively.
11. REDEEMABLE CONVERTIBLE PREFERRED STOCK
In connection with the acquisition of North Atlantic Laboratories, Inc.
("NAL") in February 1997, the Company issued 1,300,000 shares of Redeemable
Convertible Preferred Stock ("RCPS") having a liquidation value of $1 per
share plus accumulated dividends. The dividend rate is 6%, but may vary
from quarter to quarter if the inflation rate (as defined) plus 2 1/2% is
higher. After February 1999, the RCPS holders can convert their preferred
shares in common at a ratio of one share of preferred to one share of
common stock.
F-14
<PAGE>
WINDSWEPT ENVIRONMENTAL GROUP, INC. AND SUBSIDIARIES
(Formerly Comprehensive Environmental Systems, Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED APRIL 30, 1997 AND 1996
11. REDEEMABLE CONVERTIBLE PREFERRED STOCK (CONT'D)
Commencing the earlier of March 1998 or the date of the Company's annual
meeting of stockholders held in 1998, the holders of the RCPS will have the
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 on a one-for-ten basis until February 1999 and on a share for share
basis thereafter.
The Company shall not, without first obtaining the approval of at least a
majority of the holders of the RCPS (i) alter or change the rights,
preferences privileges or restrictions of shares of Cumulative Preferred
Stock, (ii) increase the authorized number of shares or adjust the par
value of Cumulative Preferred Stock, (iii) issue any shares of captial
stock ranking senior as to dividends or rights upon liquidation or
dissolution to the Cumulative Preferred Stock or (iv) issue any common
stock at a price below the conversion price, as defined, to any officer,
director or 10% shareholder.
12. RELATED PARTY TRANSACTIONS
During the fiscal years ended April 30, 1997 and 1996, the former Chief
Operating Officer of the Company received $148,000 and $432,000,
respectively, as fees for assisting the Company in various capital raising
transactions.
During fiscal 1997, a director of the Company loaned the Company $100,000
in the form of a convertible note (See Note 10). This director is also an
officer and director of a company which sold approximately $457,000 of
material and supplies to the Company which was used on remediation projects
during fiscal 1997, of which approximately $116,000 is included in accounts
payable and accrued expenses as of April 30, 1997.
13. MAJOR CUSTOMERS
During fiscal 1997, one customer accounted for approximately 16% of the
Company's sales. During fiscal 1996 two customers accounted for 21% and 13%
of the Company's sales, respectively.
14. FACILITY CONSOLIDATION
In March 1997, management developed a plan to exit its several existing
leased facilities and to consolidate operations in a single new location.
In May 1997, the Company entered into a five year sublease agreement with
an option to buy a 50,000 square foot facility in Bay Shore, New York. The
new location was occupied on August 18, 1997 and houses all the operations
of the Company. As such all other locations will be vacated. In accordance
with the exit plan, the Company recorded a charge of $459,720 to write down
the carrying value of its existing leaseholds and recorded a provision of
$50,000 for costs associated with the termination of its existing leases
for warehouse and office facilities.
15. STOCK ISSUANCES
During the year ended April 30, 1997, the Company issued 2,600,000 shares
of common stock in several private placements for gross proceeds of
$1,942,425. Direct expenses of $710,000 were paid out of these proceeds. In
September 1996, the Company issued 75,000 shares of common stock valued at
$35,000 related to the termination of the former Special Securities Counsel
to the Company. The Company also issued 690,873 shares of common stock
valued at $479,142 as consideration for various services provided during
fiscal 1997. In connection with the acquisition of NAL, the Company issued,
200,000 restricted common shares and 200,000 stock options in February 1997
valued at $156,000 and $100,000, respectively, and 52,835 restricted common
shares valued at $43,853 for legal services performed.
F-15
<PAGE>
WINDSWEPT ENVIRONMENTAL GROUP, INC. AND SUBSIDIARIES
(Formerly Comprehensive Environmental Systems, Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED APRIL 30, 1997 AND 1996
15. STOCK ISSUANCES (CONT'D)
During the year ended April 30, 1996, the Company issued 3,690,750 shares
of common stock in several private placements for gross proceeds of
approximately $3,699,500. Direct expenses of approximately $96,000 were
paid out of these proceeds. The Company also issued 297,333 shares of
common stock, valued at $502,250 in connection with various professional
and consulting fees. In connection with the acquisition of New York Testing
Laboratories, Inc ("NYTL"), the Company issued 45,000 shares of common
stock valued a $67,500. In addition, the Company issued 120,000 shares of
common stock having a fair value of $120,000 consideration in connection
with the settlement of a legal claim.
16. STOCK OPTIONS
At April 30, 1997, the Company had a fixed stock-based compensation plan.
The Company has also issued options pursuant to informal plan parameters,
i.e., without a written plan document. In each case, the exercise price of
each option equals the market price of the Company's stock on the date of
the grant.
Effective January 21, 1995, the Company's adopted a stock option plan which
provides for the granting of 1,000,000 non-qualified or incentive stock
options to officers and key employees. Non-qualified options to purchase
700,000 shares were granted effective May 26, 1995 at an exercise price of
$1.50 per share. Up to 50% of said options were exercisable after six
months from the date of grant and the balance after one year. An option to
purchase 100,000 shares previously granted to the former Chief Executive
Officer was cancelled upon his termination in September 1996. In October
1996, the new Chief Executive Officer was granted options to purchase
400,000 shares of common stock at an exercise price of $.53 per share, the
fair market value on the date of grant. As of July 31, 1997, no options
issued under this plan have been exercised.
On September 26, 1996, non-qualified stock options to purchase an aggregate
of 300,000 shares of common stock were granted to non-employee directors of
the Company at $.56 per share, the fair market value on the date of grant
(repriced in Decmeber 1996 to $.375 per share). The options vest
immediately and expire September 26, 2001.
On December 2, 1996, pursuant to a Board vote, all options previously
issued were repriced to $.375 per share, the fair market value of the
Company's stock on that date.
On December 2, 1996, the Company granted 703,520 non-qualified stock
options to employees to purchase shares of the Company's common stock at an
exercise price of $.375 per share, the fair market value on the date of the
grant. The options may be exercised in full after December 2, 1998 and
expire on December 2, 2001.
On February 28, 1997, the Company granted 119,532 non-qualified stock
options to emplyees to purchase shares of the Company's common stock at an
exercise price of $.84 per share, the fair market value on the date of
grant. The options may be exercised in full after February 28, 1999 and
expire February 28, 2002.
On February 7, 1997, the Company's shareholders approved the Company's 1997
Employee Stock Grant and Option Plan (the "1997 Plan"). The 1997 Plan
allows for a maximum of 500,000 shares of common stock to be available with
respect to the grants of awards under the plan.
As of April 1, 1997, 26,025 non-qualified stock options previously issued
to employees on December 2, 1992 and February 28, 1997 were forfeited as a
result of employee terminations.
The Company applies APB Opinion No. 25 and related interpretations in
accounting for its plans. Accordingly, no compensation cost has been
recognized for its fixed stock option plan. If the Company had elected to
recognize compensation expense based upon the fair value at the grant date
for awards under these plans consistent with the methodology prescribed by
SFAS 123, the Company's net loss and net loss per share would be
$4,906,898, or $.54 in 1997 and $5,370,159,
F-16
<PAGE>
WINDSWEPT ENVIRONMENTAL GROUP, INC. AND SUBSIDIARIES
(Formerly Comprehensive Environmental Systems, Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED APRIL 30, 1997 AND 1996
16. STOCK OPTIONS (CONT'D)
or $1.03 in 1996, respectively. These pro forma amounts may not be
representative of future disclosures since the estimated fair value of
stock options is amortized to expense over the vesting period for purposes
of future pro forma disclosures, and additional options may be granted in
future years. The fair value of these options was estimated at the date of
grant using the Black-Scholes option-pricing model with the following
weighted average assumptions for both 1997 and 1996; expected volatility of
100%, expected life of 5 years, and no dividend yield. The weighted average
risk free interest rate was 6.5% for 1997 and 1996.
A summary of the status of the Company's stock option plans as of April 30,
1997 and 1996 are presented below:
Range of
No. of Option Prices
Options Per share
---------- -------------
Outstanding at May 1, 1995 -- $ --
Granted 700,000 $1.50
---------- -----
Outstanding at April 30, 1996 700,000 $1.50
Granted 1,523,052 $.38 -.84
Canceled (350,000) $1.50
Forfeited (26,025) $.38-.84
---------- --------
Outstanding at April 30, 1997 1,847,027 $.38-.84
========== ========
Options exerciseable at April 30, 1996 350,000 $1.50
========== =====
Options exerciseable at April 30, 1997 1,050,000 $.38-$.84
========== =========
<TABLE>
<CAPTION>
Number Weighted-Avg. Number
Range of Outstanding Remaining Weighted-Avg Exercisable Weighted-Avg.
Exercise Prices At 4/30/97 Contractual Life (years) Exercise Price At 4/30/97 Exercise Price
- --------------- ----------- ------------------------ -------------- ----------- --------------
<S> <C> <C> <C> <C> <C>
$ .38 1,734,827 4.6 $ 0.38 1,050,000 $ 0.38
$ .84 112,200 4.8 $ 0.84 -0- $ --
</TABLE>
Effective March 10, 1995, the former Chief Operating Officer of the Company
was granted a non-qualified option to purchase 2,000,000 shares of the
Company's common stock at an exercise price of $.01 per share. This option
vests and was only exerciseable during the five (5) year period commencing
upon the occurrence of i) the termination of the officer, ii.) upon his
death, or (ii) a change in control, as defined, which shall be deemed to
include a material change of the officers of the Company. This option was
cancelled and reissued under revised terms in September 1996 to the new
Chief Executive Officer, as described below, in consideration for his
taking operational control of the Company and structuring new management.
No amounts have been charged to compensation expense in the accompanying
statements of operations for the years ended April 30, 1997 and 1996
related to this option.
F-17
<PAGE>
WINDSWEPT ENVIRONMENTAL GROUP, INC. AND SUBSIDIARIES
(Formerly Comprehensive Environmental Systems, Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED APRIL 30, 1997 AND 1996
16. STOCK OPTIONS (CONT'D)
In September 1996, in connection with the Company's appointment of a new
Chairman, President and Chief Executive Officer of the Company, he was
granted an option to purchase 2,000,000 shares of Common Stock at $.01 per
share that becomes exercisable for five years commencing the earlier of (i)
the Company's termination without cause of employment as its Chief
Executive Officer and (ii) the date of a change of a majority of the Board
of Directors, other than through action by the Board in creating and
filling vacancies, or a change of controlling stockholders of the Company.
On February 24, 1997, and in connection with the NAL acquisition, the
Company granted the former owners of NAL non-qualified options to purchase
200,000 shares of the Company's stock at an exercise price of $.78 per
share, the then fair market value of the Company's stock. These options
were vested at the date of grant and expire February 23, 2002.
In April 1997, and in connection with the convertible debt offering, the
Company granted the placement agent non-qualified options to purchase
100,000 shares of the Company's stock at an execise price of $.50 per
share. These options were vested at the date of grant and expire April
1999.
17. INCOME TAXES
No provision for income taxes was recorded during the years ended April 30,
1997 and 1996 due to net losses being incurred. (See Note 20 regarding
restatement of 1996 consolidated financial statements). At April 30, 1997,
the Company has net operating loss carryforwards for tax purposes of
approximately $17,000,000 which expire through 2012.
The Company's effective tax rate in 1997 and 1996 differs from the federal
statutory rate as a result of a full valuation allowance being provided
against gross deferred tax assets.
Deferred tax assets consist of the following components at April 30:
1996
1997 (restated)
------------ ------------
Net operating loss carryforwards $ 7,176,000 $ 5,620,000
Losses on investments 2,559,000 2,517,000
Other, net 347,000 83,000
------------ ------------
10,082,000 8,220,000
Less: Valuation allowance (10,082,000) (8,220,000)
------------ ------------
Net deferred tax asset $ -- $ --
============ ============
At April 30, 1997 and 1996, the Company has provided a full valuation
allowance against the gross deferred tax asset since, in management's
judgement, it is more likely than not, such benefits will not be realized.
As a result of changes in stock ownership, a significant portion of the net
operating loss carryforwards are subject to substantial restriction with
regard to annual utilization.
F-18
<PAGE>
WINDSWEPT ENVIRONMENTAL GROUP, INC. AND SUBSIDIARIES
(Formerly Comprehensive Environmental Systems, Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED APRIL 30, 1997 AND 1996
18. SUPPLEMENTAL CASH FLOW INFORMATION
Cash payments during the years ended April 30, 1997 and 1996 included
interest of $93,145 and $50,629.
In 1997 and 1996, non-cash investing activities included the acquisitions
of NAL.and NYTL, respectively. Assets acquired, liabilities assumed, and
consideration paid for acquisitions are detailed in Note 8.
In addition, non-cash investing activities included the acquisition of
property and equipment in exchange for vehicle installment notes and
equipment notes of $372,789 in 1997 and $232,366 in 1996.
In 1997 non-cash financing activities included the issuance of 100,000
stock options to the placement agent for the 10% convertible notes. The
value of these options, $31,250 is included in debt issuance costs. In
addition, non-cash financing activities included the repayment of a note
payable with treasury stock of $33,143.
19. COMMITMENTS AND CONTINGENCIES
Litigation
In October 1996, the United States Attorney for the Eastern District of New
York obtained a federal grand jury indictment against, among others, the
former Chief Operating Officer and the former Special Securities Counsel on
charges including violations of federal securities law, including
fraudulent issuances of 700,000 shares of the Company's common stock. The
former Chief Operating Officer and the former Special Securitites Counsel
both subsequently pleaded guilty to the charges in the Federal indictment.
The SEC has been investigating what role,if any, other officers and
directors, including the current Chairman and Chief Executive Officer and
the former Chief Financial Officer, may have had in connection with such
activities. The Company has cooperated and continues to cooperate with the
SEC by providing documents in response to subpoenas issued to it. To date,
no charges have been filed against the Company, it's CEO, or it's former
CFO, as a result of the investigation. However, the SEC could seek an order
enjoining the Company from violating the securities laws.
The Company is party to other litigation matters and claims which are
normal in the course of its operations, and while the results of litigation
and claims cannot be predicted with certainty, management believes, based
on advice of counsel, the final outcome of such matters will not have a
materially adverse effect on the consolidated financial position, results
of operations and cash flows of the Company.
Employment Agreements
In October 1996 the Company renogotiated an existing employment agreement
with its new Chairman and Chief Executive Officer. Terms of the revised
agreement which expires in December 1998, provide for a base salary of
$200,000 plus a bonus of 2% of gross revenues to a maximum of 25% of
pre-tax profit, payable 50% in cash and 50% in restricted stock.
F-19
<PAGE>
WINDSWEPT ENVIRONMENTAL GROUP, INC. AND SUBSIDIARIES
(Formerly Comprehensive Environmental Systems, Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED APRIL 30, 1997 AND 1996
20. RESTATEMENT OF CONSOLIDATED FINANCIAL STATEMENTS AND FOURTH QUARTER
ADJUSTMENTS
In connection with the April 30, 1997 year end accounting closing and
subsequent analysis performed, it was determined that errors had been made
with respect to the determination of the carrying value of the deferred
income tax asset as of April 30, 1996 and April 30, 1995. In addition,
compensation paid to a former officer of the Company had been accounted for
as a reduction of additional paid-in capital during the year ended April
30,1996. The accompanying consolidated financial statements have been
restated to correct the errors, resulting in the following changes to
accumulated deficit as of April 30, 1996 and the related consolidated
statements of operations for the year then ended.
<TABLE>
<CAPTION>
Accumulated Net Loss
Deficit Loss Per Share
------------ ------------ ---------
<S> <C> <C> <C>
As previously reported $(17,749,851) $ (4,033,792) $(0.77)
Overstatement of deferred income tax asset as of April
30, 1995 (1,782,533) -- --
Overstatement of additional paid-in capital and
understatement of compensation expense as of and for
the year ended April 30, 1996 (432,000) (432,000) (0.08)
Overstatement of deferred income tax asset and income
tax benefit as of and for the year ended April 30, 1996 (801,467) (801,467) (0.15)
------------ ------------ -------
As adjusted $(20,765,851) $ (5,267,259) $(1.00)
============ ============ =======
</TABLE>
During the fourth quarter of the year ended April 30, 1997, the Company
made the following adjustments ($000's omitted) detailed below:
Totals
Compensation previously charged to ---------
additional paid-in capital $ (148)
Provisions to adjust assets to net realizable
value (498)
Accruals of losses on contracts and various
selling, general and administrative expenses (508)
Reversal of revenue recognized (120)
Write-down of leasehold improvements and
other facility consolidation costs (510)
Other (240)
---------
Total adjustments $ (2,024)
=========
Certain of these adjustments relate to previously reported results for the
first, second, and third quarters of fiscal 1997 which the Company has
restated on Form 10-QSB/A.
F-20
<PAGE>
WINDSWEPT ENVIRONMENTAL GROUP, INC. AND SUBSIDIARIES
(Formerly Comprehensive Environmental Systems, Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED APRIL 30, 1997 AND 1996
21. SUBSEQUENT EVENTS
Secured Revolving Credit Facility
In May 1997, the Company executed a revolving bank credit facility (the
"Facility") which provides for borrowings of up to $1,500,000 secured by
all of the Company's assets not previously pledged under a debt or lease
obligation. The Facility bears interest at the bank's prime rate plus
$1.5%. The Facility expires May 1, 2000.
Borrowings shall be limited to the lesser of $1.5 million less reserves
determined by the bank or 80% of the Company's eligible receivables, as
defined. Said reserves will remain at a minimum $750,000 pending the
satisfactory review by the bank of the Company's audited financial
statements for the fiscal year ended April 30, 1997.
The Facility requires certain minimum tangible net worth, working capital,
and other restrictive covenants. The Company was in default of certain of
these covenants at July 31, 1997.
Employment Agreement
Effective June 2, 1997, pursuant to a three-year employment agreement
ending May 31, 2000, the Company hired a Vice President of New Business and
Public Relations ("VP"). In connection therewith, the VP shall attend
functions and develop new business and shall also aid and supervise in the
preparation of forms and other matters involving the use of his
professional engineers license. Under the agreement, there will be an
annual salary of $175,000 per annum. The Company also issued 100,000 shares
of its common stock in conjunction with the agreement and is obligated to
issue an additional 100,000 shares on the first anniversary of the
agreement. The Company has also agreed to provide term life insurance in
the amount of $500,000, and to maintain professional liability insurance in
the minimum sum of $1,000,000 covering errors and omissions.
F-21
ARTICLE I
MERGER ................................. 3
1.1. ...................................................................... 3
ARTICLE II
CERTIFICATE OF INCORPORATION ...................... 4
2.1. ...................................................................... 4
2.2. ...................................................................... 5
2.3. ...................................................................... 5
ARTICLE III
CONVERSION OF SHARES .......................... 5
3.1 ....................................................................... 5
3.2 ....................................................................... 5
3.3 ....................................................................... 5
ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF THE COMPANY AND
THE CONTROLLING SHAREHOLDERS ...................... 6
4.1. Corporate Organization; Etc .......................................... 7
4.2. Capitalization of the Company ........................................ 7
4.3. Subsidiaries and Affiliates .......................................... 7
4.4. Authorization, Etc ................................................... 8
4.5. No Violation ......................................................... 8
4.6. Financial Statements ................................................. 9
4.7. No Undisclosed Liabilities; Etc ...................................... 9
4.8. Accounts Receivable .................................................. 9
4.9. Interim Operations ................................................... 10
4.10.Title to Properties; Encumbrances .................................... 10
4.11 ...................................................................... 10
4.13.Leases ............................................................... 11
4.14.Bank Accounts ........................................................ 12
4.15.Taxes ................................................................ 12
4.16.Contracts and Commitments ............................................ 13
4.17.Customers ............................................................ 14
4.18.Insurance ............................................................ 14
4.19.Fringe Benefit Plans ................................................. 15
4.20.Litigation ........................................................... 15
4.21.Consents and Approvals ............................................... 15
4.22.Compliance with Law .................................................. 16
4.23.Personnel; Insider Interests ......................................... 16
4.24.Disclosure ........................................................... 16
<PAGE>
ARTICLE V
REPRESENTATIONS AND WARRANTIES OF CES AND MERGER SUB ........ 17
ARTICLE VI
COVENANTS ............................. 20
6.1 ....................................................................... 20
6.2 ....................................................................... 20
ARTICLE VII
CONDITIONS TO THE PARTIES' OBLIGATIONS TO CLOSE .......... 21
ARTICLE VIII ............................ 24
........................................................................ 27
ARTICLE X
AMENDMENTS ............................. 31
<PAGE>
DRAFT 2/21/97
PLAN AND AGREEMENT OF MERGER
PLAN AND AGREEMENT OF MERGER ("Agreement") made this ___ day of February,
1997, among COMPREHENSIVE ENVIRONMENTAL SYSTEMS, INC., a Delaware corporation
("CES"), NAL MERGER CORP., a Delaware corporation and a wholly-owned subsidiary
of CES ("Merger Sub"), NORTH ATLANTIC LABORATORIES, INC. a New York corporation
(the "Company" or the "Surviving Corporation"), and the shareholders of the
Company listed on Exhibit A hereto (collectively, the "Shareholders").
WHEREAS, the parties to this Agreement desire to effect the merger of
Merger Sub with and into the Company upon the terms and subject to the
conditions herein set forth and in accordance with the laws of the States of New
York and Delaware.
NOW, THEREFORE, the parties hereto agree as follows:
ARTICLE I
MERGER
1.1. Merger. On the Effective Date (as hereinafter defined), Merger Sub
shall be merged with and into the Company (the "Merger"), which shall be the
Surviving Corporation. The corporate existence of the Company, with all its
purposes, powers and objects, shall continue unaffected and unimpaired by the
Merger and, as the Surviving Corporation, shall be governed by the laws of the
State of New York and succeed to all rights, assets, liabilities and obligations
of Merger Sub in accordance with the New York Business Corporation Law and the
Delaware General Corporation Law. The separate existence and corporate
organization of Merger Sub shall thereupon cease and the Company and Merger Sub
shall be a single corporation.
1.2. Closing; Effective Date.
(a) Consummation of the Merger shall be effected as soon as is practicable
following the execution hereof. The closing of the transactions contemplated by
this Agreement (the "Closing") shall be held at such place as the parties may
agree upon. The date of the Closing is herein called the "Closing Date."
(b) As promptly as practicable after the Closing, the Company and Merger
Sub shall duly file such documents as are required by the New York Business
Corporation Law and the Delaware General Corporation Law with the proper
governmental authorities. The Merger shall be deemed effective upon the later to
occur of the filings required to be made to effect the Merger with the Secretary
of State of New York and the Secretary of State of
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Delaware. The date on which the Merger becomes effective (which may be the
Closing Date) is the "Effective Date".
ARTICLE II
CERTIFICATE OF INCORPORATION;
BY-LAWS; BOARD OF DIRECTORS; OFFICERS
2.1. Certificate of Incorporation. The Certificate of Incorporation of the
Company as in effect immediately prior to the Effective Date shall be, and may
be separately certified as, the Certificate of Incorporation of the Surviving
Corporation until amended in accordance with applicable law.
2.2. By-Laws. The By-laws of the Company as in effect on the Effective Date
shall be the By-laws of the Surviving Corporation until the same shall
thereafter be altered, amended or repealed in accordance with applicable laws or
such By-laws.
2.3. Directors and Officers. The directors and officers of the Surviving
Corporation at the Effective Date shall be the individuals designated by CES at
the Closing.
ARTICLE III
CONVERSION OF SHARES
On the Effective Date:
3.1. Merger Sub Stock. Each share of capital stock of Merger Sub then
issued and outstanding (the "Merger Sub Stock") shall thereupon be converted
into Two Hundred (200) Common Shares of the Company ("Company Common Shares")
and the certificate evidencing CES' ownership of the Merger Sub Stock shall
thereafter evidence the right to receive, upon surrender thereof to the Company,
duly endorsed in blank, a certificate from the Company registered in the name of
CES evidencing such Company Common Shares.
3.2. Company Common Shares. All Company Common Shares outstanding and owned
by the Shareholders immediately prior to the merger shall thereupon in the
aggregate be converted into the Merger Consideration (defined below), and the
certificates evidencing the Shareholders' ownership of such shares shall
thereafter collectively evidence the right to receive the Merger Consideration
upon surrender of such certificates to the Company duly endorsed in blank by the
respective Shareholders.
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3.3. Merger Consideration.
(a) The "Merger Consideration" shall consist of the following:
(i) Two Hundred Thousand Dollars ($200,000) in cash;
(ii) One Million Three Hundred Thousand (1,300,000) newly-issued
shares of Series A Convertible Preferred Stock of CES, having the
terms and provisions set forth in the Certificate of Designations of
Series A Convertible Preferred Stock annexed hereto as Exhibit B (the
"Preferred Stock");
(iii) options (the "Options") to purchase up to 200,000 shares of
common stock of CES ("CES Common Stock") granted pursuant to an
agreement in the form of Exhibit C hereto;
(iv) Two Hundred Thousand (200,000) shares of CES Common Stock.
(b) The Merger Consideration shall be allocated among and
delivered to the Shareholders in accordance with the instructions of
the Shareholders provided in a writing (the "Allocations and Payment
Instructions") received by CES no later than two (2) business days
prior to the Closing Date. The Allocations and Payment Instructions
shall be deemed to conclusively evidence the agreement of Shareholders
with respect to the matters set forth therein.
ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF THE COMPANY AND
THE CONTROLLING SHAREHOLDERS
The Company and Kevin J. Phillips and Gary A. Molnar (the "Controlling
Shareholders") jointly and severally represent and warrant to CES and Merger Sub
as follows:
4.1. Corporate Organization; Etc. The Company is a corporation duly
organized, validly existing and in good standing under the laws of the State of
New York, has full corporate power and authority to carry on its business as it
is now being conducted and to own the properties and assets it now owns and is
duly qualified or licensed to do business as a foreign corporation in good
standing in all jurisdictions in which such qualification is required. The
copies of the Certificate of Incorporation and By-laws of the Company heretofore
delivered to Merger Sub and CES are complete and correct copies of such
instruments as presently in effect.
4.2. Capitalization of the Company. As of the date hereof, the authorized
capital stock of the Company consists of One Thousand (1,000) shares of Common
Stock, no par value per share, all of which shares are issued outstanding and
owned by the Shareholders, respectively,
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as set forth in Exhibit A hereto. All issued and outstanding shares of capital
stock of the Company are duly and validly issued, fully paid and nonassessable.
There are no outstanding (i) securities convertible into or exchangeable for any
shares of capital stock of the Company, (ii) options, warrants or other rights
to purchase or subscribe for capital stock of the Company or securities
convertible into or exchangeable for capital stock of the Company; or (iii)
contracts, commitments, agreements, understandings or arrangements of any kind
relating to the issuance of any capital stock of the Company, any such
convertible or exchangeable securities or any such options, warrants or rights.
4.3. Subsidiaries and Affiliates. The Company neither owns, directly or
indirectly, any capital stock or other equity securities of, nor has any direct
or indirect equity or ownership interest in, any other entity or business.
4.4. Authorization, Etc. The Company has full corporate power and authority
to enter into this Agreement and to carry out the transactions contemplated
hereby. The Company's Board of Directors and the Shareholders have taken all
action required by law, the Company's Certificate of Incorporation and By-laws
or otherwise to authorize the execution and delivery of this Agreement and the
consummation of the transactions contemplated hereby. This Agreement is a valid
and binding agreement of each of the Company and the Shareholders, enforceable
against each of them in accordance with its terms, except that (i) such
enforcement may be subject to bankruptcy, insolvency, reorganization, moratorium
or other similar laws now or hereafter in effect relating to creditors' rights
generally, and (ii) the remedy of specific performance and injunctive and other
forms of equitable relief may be subject to equitable defenses and to the
discretion of the court before which any proceeding therefor may be brought.
4.5. No Violation. Neither the execution and delivery of this Agreement nor
the consummation of the transactions contemplated hereby will violate any
provision of the Certificate of Incorporation or By-laws of the Company or
violate, be in conflict with or constitute a default (or an event which, with
notice or lapse of time or both, would constitute a default) under, or result in
the termination of, or accelerate the performance required by, or cause the
acceleration of the maturity of any debt or obligation pursuant to, or result in
the creation or imposition of any security interest, lien or other encumbrance
upon any property or assets of the Company under, any Authorization (as defined)
held by the Company or any agreement or commitment to which the Company is a
party or by which the Company is bound, or to which the assets or property of
the Company is subject, or violates any Authorization held by the Company, any
statute or law, or any judgment, decree, order, regulation or rule of any court
or governmental authority.
4.6. Financial Statements. The Company has heretofore delivered to Merger
Sub and CES: (i) a summary balance sheet (cash basis) of the Company as at
December 31 in each of the years 1994 and 1995 and summary statements of income
(cash basis) for each of the years then ended, and (ii) a statement of assets,
liabilities and equity (cash basis) of the Company as at
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September 30, 1996, compiled by Weintraub and Traub (the "Balance Sheet"), and
comparative statements of revenues, expenses and retained earnings (cash basis)
for the nine months and three months ended September 30, 1996 and 1995,
respectively, compiled by Weintraub & Traub. Such balance sheets are materially
true, complete and accurate and fairly present the assets, liabilities and
equity of the Company on a cash basis as at the respective dates thereof, and
such statements of income are materially true, complete and accurate and fairly
present the results of operations on a cash basis for the periods therein
referred to.
4.7. No Undisclosed Liabilities; Etc. As of [ ], 1997, the
Company did not have any liabilities or obligations of any nature (absolute,
accrued, contingent or otherwise) which were not fully disclosed in Schedule 4.7
to this Agreement or which, in the aggregate, do not exceed [$ ];
provided, that with respect to the accounts payable of the Company the
representation and warranty contained herein is made to the best knowledge of
the Controlling Shareholders.
4.8. Accounts Receivable. To the best knowledge of the Controlling
Shareholders, Schedule 4.8 sets forth a correct and complete list of the
accounts receivable of the Company as of [ ], 1997. To the best
knowledge of the Controlling Shareholders, all such accounts receivable of the
Company represent, and all accounts receivable created prior to the Closing will
represent, services actually rendered in the ordinary course of business and
will be collectible net of any reserves shown on Schedule 4.8., without any
set-off, within [ ] days after the date on which it became due and payable.
4.9. Interim Operations. Since the date of the Balance Sheet, the business
of the Company has been conducted only in the ordinary and usual course
consistent with past practice. There has not been any material adverse changes
in the assets, liabilities or results of operations of the Company, and no
distributions of cash or other assets of the Company have been made to the
Shareholders, as Shareholders of the Company, exceeding [$ ]. The
Company is not aware of any circumstances which may cause it to suffer any
material adverse change in its business, operations or prospects.
4.10. Title to Properties; Encumbrances. Schedule 4.10 to this Agreement
sets forth the tangible personal property owned by the Company having a value of
more than $10,000 and the book value thereof as of January 1, 1997. The Company
has good, valid and marketable title to all the properties and assets which it
purports to own (tangible and intangible), including, without limitation, all
the properties and assets reflected in the Balance Sheet. The rights, properties
and other assets presently owned, leased or licensed by the Company and
described elsewhere in this Agreement include all rights, properties and other
assets necessary to permit the Company to conduct its business in all material
respects in the same manner as its business has been conducted prior to the date
hereof.
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4.11. Intellectual Property. The Company owns, or is licensed or otherwise
has the full and exclusive right to use, all trademarks, trade names,
copyrights, technology, know-how and other intellectual property of any kind
(collectively, "Intellectual Property") used in or necessary for the conduct of
its business as heretofore conducted. The consummation of the transactions
contemplated hereby will not alter or impair any rights of the Company to use
the Intellectual Property. No claims have been asserted by any person to the use
of any of the Intellectual Property or challenging or questioning the validity
or effectiveness of any license or agreement relating thereto, and the Company
does not know of any valid basis for any such claim. The use of the Intellectual
Property by the Company does not infringe on the rights of any person.
4.12. Licenses, Approvals and Permits. The Company has all licenses,
approvals and permits necessary for the conduct of its business, including, but
not limited to, all approvals required to operate an asbestos testing and
training facility in New York State (collectively, "Authorizations"). The
Company is in compliance, in all material respects, with the terms and
conditions of all Authorizations and no violation of, or non-compliance with,
any Authorization has occurred that could have a material adverse affect on the
assets, business or prospects of the Company. No claim has been made by any
governmental authority to the effect that any other Authorization is necessary
for the conduct of the Company's business as it is currently being conducted.
4.13. Leases. Schedule 4.13 contains an accurate list of all leases
pursuant to which the Company leases real or personal property, correct and
complete copies of which have been provided to CES. Except as set forth in
Schedule 4.13, (i) each such lease is valid, binding and enforceable in
accordance with its terms, and is in full force and effect, (ii) there are no
existing defaults by the Company thereunder, (iii) no event of default has
occurred which (whether with or without notice, lapse of time or the happening
or occurrence of any other event) would constitute a default thereunder; and
(iv) no consent to the consummation of the transactions contemplated by this
Agreement is required under such leases.
4.14. Bank Accounts. Schedule 4.14 sets forth the names and locations of
all banks, trust companies, savings and loan associations and other financial
institutions at which the Company maintains safe deposit boxes or accounts of
any nature and the names of all persons authorized to draw thereon, make
withdrawals therefrom or have access thereto.
4.15. Taxes. The Company has duly filed all tax reports and returns
required to be filed by it and has duly paid all taxes and other charges due or
claimed to be due from it by Federal, state, local or foreign taxing authorities
(including without limitation, those due in respect of its properties, income,
franchises, licenses, sales or payrolls); and there are no tax liens upon any
property or assets of the Company except liens for current taxes not yet due.
The Federal income tax returns of the Company are not currently being examined
by the Internal Revenue Service. All deficiencies asserted as a result of any
prior examination of the Company's Federal income tax returns have been paid. No
state of facts exists or has existed which would constitute grounds
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for the assessment of any tax liability with respect to the periods which have
not been audited by the Internal Revenue Service. There are no outstanding
agreements or waivers extending the statutory period of limitations applicable
to any Federal income tax return for any period. Correct and complete copies of
all income tax returns for the Company in respect of all years not barred by the
statute of limitations have heretofore been delivered by the Company to CES. The
Company has not, with regard to any assets or property held, acquired or to be
acquired by it, filed a consent to the application of Section 341(f)(2) of the
Internal Revenue Code of 1986, as amended (the "Code"). The Company elected (and
such election was granted by the Internal Revenue Service and the State of New
York taxing authorities effective the taxable year in which the Company
commenced operations) to be taxed as a small business corporation under Sections
1361 through 1379 of the Code and the corresponding New York State tax statute
and is entitled to similar tax treatment for State of New York income tax
purposes and has no liability for Federal or State of New York income tax.
4.16. Contracts and Commitments. To the best knowledge of the Controlling
Shareholders, the Company has provided CES with correct and complete copies (or,
if oral, a written description) of all material contracts and commitments to
which the Company is a party or by which it or its assets or properties is
bound. Except as set forth in Schedule 4.16:
(a) There are no outstanding sales contracts, commitments or proposals
of the Company which continue for a period of more than 12 months or will
result in any material loss to the Company upon completion or performance
thereof, nor are there any outstanding contracts, bids or proposals to
provide services quoting prices which will not result in a normal profit;
(b) The Company does not have any outstanding contracts with officers,
employees, agents, consultants, advisors, salesmen or sales
representatives, that are not cancelable by it on notice of not longer than
30 days without liability, penalty or premium or any agreement or
arrangement providing for severance or termination payment liabilities or
obligations or the payment of any bonus or commission based on sales or
earnings;
(c) The Company does not have any collective bargaining or union
contracts or agreements;
(d) The Company is not restricted by any agreement from carrying on
its business anywhere in the world;
(e) The Company does not have any debt obligation for borrowed money,
including guarantees of or agreements to acquire any such debt obligation
of others;
(f) The Company does not have any outstanding loan to any person; and
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(g) The Company does not have any power of attorney outstanding or any
obligations or liabilities (whether absolute, accrued, contingent or
otherwise) as guarantor, surety, co-signer, endorser, co-maker, indemnitor
or otherwise in respect of the obligation of any person, corporation,
partnership, joint venture, association, organization or other entity.
4.17. Customers. To the best knowledge of the Controlling Shareholders,
except to the extent set forth in Schedule 4.17, there has not been any material
adverse change during the last six months in the business relationship of the
Company with any of the ten largest customers of the Company in terms of
revenues received by the Company in 1996.
4.18. Insurance. The Company maintains insurance of such types and in such
amounts as are sufficient for compliance with all requirements of law and of all
agreements to which the Company is a party and for providing adequate insurance
coverage for the assets and operations of the Company; all such policies are
valid and in full force and effect, all premiums with respect thereto covering
all periods up to and including the date of the Closing have been paid; and no
notice of cancellation or termination has been received with respect to any such
policy. None of such policies will in any way be affected by, or terminate or
lapse by reason of, the transactions contemplated by this Agreement. The Company
has not been refused any insurance with respect to its assets or operations, nor
has its coverage been limited by any insurance carrier to which it has applied
for any such insurance or with which it has carried insurance during the last
five years.
4.19. Fringe Benefit Plans. Except as set forth in Schedule 4.19, the
Company does not have any bonus, deferred compensation, pension, profit-sharing,
retirement, stock purchase, stock option or any other fringe benefit plan,
arrangement or practice, whether formal or informal.
4.20. Litigation. There is no action, suit, inquiry, order, judgment,
proceeding or investigation by or before any court or governmental or other
regulatory or administrative agency or commission pending or, to the best
knowledge of the Company and the Shareholders, threatened against or involving
the Company, or which questions or challenges the validity of this Agreement or
any action taken or to be taken by the Company or any Shareholder pursuant to
this Agreement or in connection with the transactions contemplated hereby; nor
is there any valid basis for any such action, proceeding or investigation. The
Company is not subject to any judgment, order or decree entered in any lawsuit
or proceeding.
4.21. Consents and Approvals. Other than as set forth in this Agreement and
the Schedules hereto, no consent, approval or authorization of, or declaration,
filing or registration with, any person, including, but not limited to, any
governmental or regulatory authority or agency, whether Federal, state or local,
is required in connection with the execution, delivery and performance of this
Agreement by the Company or the consummation by it of the transactions
contemplated hereby.
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4.22. Compliance with Law. The operations of the Company have been
conducted in accordance, in all material respects, with all applicable laws,
regulations and other requirements of all national governmental authorities and
of all states, municipalities and other political subdivisions and agencies
thereof having jurisdiction over the Company (collectively, "Laws"). Neither the
Company nor any Shareholder has received any notification of any asserted
present or past failure by the Company to comply with such laws, rules or
regulations.
4.23. Personnel; Insider Interests. Except as set forth in Schedule 4.23,
no officer or director of the Company has any material interest in any property,
real or personal, tangible or intangible, including Intellectual Property, used
in or pertaining to the business of the Company.
4.24. Disclosure. No representations or warranties by the Company or the
Shareholders in this Agreement and no statement contained in any document
certificate, or other writing furnished or to be furnished by the Company to CES
or any of its agents or representatives pursuant to the provisions hereof or in
connection with the transactions contemplated hereby, contains or will contain
any untrue statement of material fact or omits or will omit to state any
material fact necessary, in light of the circumstances under which it was made,
in order to make the statements herein or therein not misleading.
ARTICLE V
SEVERAL REPRESENTATIONS, WARRANTIES AND
AGREEMENTS OF THE SHAREHOLDERS
Each of the Shareholders hereby severally represents, warrants and agrees
as follows:
5.1. Title to Shares. Immediately prior to the merger, he will be the
lawful owner of, with good and marketable title to, the number of Company Common
Shares set forth opposite his name in Exhibit A hereto, free and clear of all
liens, security interests, claims, pledges and other encumbrances of every kind.
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5.2. Restricted Securities
(a) He understands that none of the Preferred Stock, CES Common Stock
and Options to be issued and delivered at the Closing or a part of the
Merger Consolidation and the shares of CES Common Stock issuable upon
conversion of the Preferred Stock and exercise of the Options
(collectively, the "Securities"), has been registered under the Securities
Act of 1933, as amended (the "Securities Act"), or any state securities
laws in reliance on exemptions for private offerings. The Securities cannot
be resold or otherwise disposed of unless they are subsequently registered
under the Securities Act and applicable state securities laws or an
exemption from registration is available and all certificate(s)
representing shares of Preferred Stock and CES Common Stock will bear a
restrictive legend to such effect. The Securities will not be, and such
Shareholder will have no rights to require that the Securities be,
registered under the Securities Act or any state securities laws. If a
Shareholder is acquiring any shares of Preferred Stock, he hereby agrees
that he will not dispose of any portion of such shares until the second
anniversary of the Closing Date.
(b) He, alone, or together with his representatives, if any, have
sufficient knowledge and experience in financial and business matters,
including investments in securities that are restricted as to their
transferability, to enable him to evaluate the risks and merits of an
investment in the Securities. He is relying solely upon his own counsel,
accountant and/or business advisor(s) concerning the legal, tax, business
and related aspects and consequences of the Merger. Neither CES nor the
Surviving Corporation shall have any liability of any kind for the effect
of such aspects or consequences on any of the Shareholders.
(c) All documents, records and other materials pertaining to an
investment in CES which were requested by him have been made available or
delivered to him including, but not limited to, CES's Annual Report on Form
10-KSB/A-3 for the fiscal year ended April 30, 1996, Quarterly Report on
Form 10-QSB/A-1 for the Quarter ended July 31, 1996 and Quarterly Report on
Form 10-QSB for the Quarter ended October 31, 1996.
(d) He has had an opportunity to ask questions of and receive answers
from representatives of CES concerning the terms and conditions of the
Merger and the financial condition and prospects of CES and to obtain any
additional information necessary to evaluate the Merger.
(e) The portion of the Securities acquired by him will be acquired
solely for his own account for investment and not with a view to or for the
resale, assignment, distribution, subdivision or fractionalization thereof.
No other person has a direct or indirect beneficial interest in the
Securities.
5.3. Shareholder Tax Compliance. He has duly filed all Federal, state,
local and other tax returns required to be filed by him as a shareholder of the
Company, has reported thereon all
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income required to be reported by him as a result of the Company's operations
and has paid all taxes and other charges due and claimed to be due by Federal,
state, local and other taxing authorities. Subject to Section 7.4 below, he will
properly file such other personal tax returns required to be filed, report
therein all income required to be reported as a result of the operations of the
Company through the Closing Date and pay all the Federal, state and local taxes
required to be paid pursuant to such returns.
ARTICLE VI
REPRESENTATIONS AND WARRANTIES OF CES AND MERGER SUB
CES and Merger Sub jointly and severally represent and warrant to the
Company and the Shareholders as follows:
6.1. Corporate Organization; Etc. Each of CES and Merger Sub is a
corporation duly organized, validly existing and in good standing under the laws
of the State of Delaware, has full corporate power and authority to carry on its
business as it is now being conducted and to own the properties and assets it
now owns and is duly qualified or licensed to do business as a foreign
corporation in good standing in all jurisdictions in which such qualification is
required. The copies of the Certificates of Incorporation and By-laws of CES and
Merger Sub heretofore delivered to the Company are complete and correct copies
of such instruments as presently in effect.
6.2. Capitalization.
(a) As of the date hereof, the authorized capital stock of Merger Sub
consists of Two Hundred (200) shares of Common Stock, no par value per
share, all of which are issued outstanding and owned by CES. All such
issued and outstanding shares are duly and validly issued, fully paid and
nonassessable. There are no outstanding (i) securities convertible into or
exchangeable for any shares of capital stock of Merger Sub, (ii) options,
warrants or other rights to purchase or subscribe for capital stock of
Merger Sub or securities convertible into or exchangeable for capital stock
of Merger Sub, or (iii) contracts, commitments, agreements, understandings
or arrangements of any kind relating to the issuance of any capital stock
of Merger Sub, any such convertible or exchangeable securities or any such
options, warrants or rights.
(b) As of the date hereof, the authorized capital stock of CES
consists of Fifty Million (50,000,000) shares of Common Stock, par value
$.0001 per share, _____ of which are issued and outstanding, and Ten
Million (10,000,000) shares of Preferred Stock, par value $.01 per share,
none of which are issued or outstanding. All issued and outstanding shares
of CES Common Stock are duly and validly issued, fully paid and
non-assessable. When the shares of
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Preferred Stock and CES Common Stock to be issued as a part of the Merger
Consideration and any CES Common Stock issuable upon conversion of the Preferred
Stock or exercise of the Options are issued and delivered as contemplated by
this Agreement or upon such conversion or exercise in accordance with the terms
of the governing instruments, they will be legally and validly issued and fully
paid and non-assessable.
6.3. Authorization, Etc. Each of CES and Merger Sub has full corporate
power and authority to enter into this Agreement and to carry out the
transactions contemplated hereby. The Boards of Directors of CES and Merger Sub
and CES, as the sole stockholder of Merger Sub have taken all action required by
law, the Certificates of Incorporation and By-Laws of CES and Merger Sub or
otherwise to authorize the execution and delivery of this Agreement and the
consummation of the transactions contemplated hereby. This Agreement is a valid
and binding agreement of each of CES and Merger Sub, enforceable against each of
them in accordance with its terms, except that (i) such enforcement may be
subject to bankruptcy, insolvency, reorganization, moratorium or other similar
laws now or hereafter in effect relating to creditors' rights generally, and
(ii) the remedy of specific performance and injunctive and other forms of
equitable relief may be subject to equitable defenses and to the discretion of
the court before which any proceeding therefor may be brought.
6.4. No Violation. Neither the execution and delivery of this Agreement nor
the consummation of the transactions contemplated hereby will violate any
provision of the Certificate of Incorporation or By-laws of CES or Merger Sub or
violate, be in conflict with or constitute a default (or an event which, with
notice or lapse of time or both, would constitute a default) under, or result in
the termination of, or accelerate the performance required by, or cause the
acceleration of the maturity of any debt or obligation pursuant to, or result in
the creation or imposition of any security interest, lien or other encumbrance
upon any property or assets of CES or Merger Sub under, any agreement or
commitment to which CES or Merger Sub is a party or by which CES or Merger Sub
is bound, or to which the property of CES or Merger Sub is subject, or violate
any statute or law or any judgment, decree, order, regulation or rule of any
court or governmental authority.
6.5. Consents and Approvals. Other than as set forth in this Agreement and
the Schedules hereto, no consent, approval or authorization of, or declaration,
filing or registration with, any person including, but not limited to, any
governmental or regulatory authority or agency, whether Federal, state or local,
is required in connection with the execution, delivery and performance of this
Agreement by CES and Merger Sub or the consummation by them of the transactions
contemplated hereby.
6.6. Tax Treatment. CES and Merger Sub shall treat the Merger consistent
with the provisions of Section 368(a)(2)(E) of the Code.
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6.7 SEC Reports. CES has filed all required forms, reports and documents
with the Securities Exchange Commission ("SEC") since January 1, 1995
(collectively, the "SEC Reports"), all of which have complied in all material
respects with all applicable requirements of the Securities Act and the
Securities Exchange Act of 1934, as amended (the "Exchange Act"). CES has
previously delivered to the Company and the Shareholders, in the form filed with
the SEC, true and complete copies of its Annual Report on Form 10-KSB/A-3 for
the fiscal year ended April 30, 1996, Quarterly Report on Form 10-Q on Form
10-QSB/A-1 for the fiscal quarter ended July 31, 1996 and Quarterly Report on
Form 10-QSB for the fiscal quarter ended October 31, 1996. As of their
respective dates, none of such reports, including, without limitation, any
financial statements or schedules included or incorporated by reference therein,
contained any untrue statement of a material fact or omitted to state a material
fact required to be stated or incorporated by reference therein or necessary in
order to make the statements therein, in light of the circumstances under which
they were made, not misleading. The audited consolidated financial statements
and unaudited consolidated interim financial statements of CES and its
subsidiaries included or incorporated by reference in such reports have been
prepared in accordance with generally accepted accounting principles applied on
a consistent basis during the periods involved (except as may be indicated in
the notes thereto), and fairly represent the consolidated assets, liabilities
and financial position of CES and its consolidated subsidiaries as of the dates
thereof and the consolidated results of their operations and changes in
financial position for the periods then ended (subject, in the case of any
unaudited interim financial statements, to normal year-end adjustments).
6.8 Absence of Certain Changes. Except as set forth or otherwise reflected
in the SEC Reports, since January 1, 1995, CES and its subsidiaries have
conducted their respective businesses only in the ordinary and usual course and
there has not occurred (i) any material adverse change in business, operations
or financial condition of CES and its subsidiaries, taken as a whole; (ii) any
damage destruction or loss, whether covered by insurance or not, which has a
material adverse effect on the business, operations or financial condition of
CES and its subsidiaries, taken as a whole; (iii) any declaration, setting aside
or payment of any dividend or other distribution (whether in cash, stock or
property) with respect to the voting equity interest of CES or of any of its
subsidiaries; or (iv) any change by CES or any of its subsidiaries in accounting
principles or methods, except insofar as may be required by a change in
generally accepted accounting principles.
6.9 No Untrue Representation or Warranty. No representation or warranty
contained in this Agreement or any attachment, statement, schedule, exhibit,
certificate or instrument furnished or to be furnished to the Company and/or the
Shareholders by CES pursuant hereto, or in connection with the transactions
contemplated hereby, contains any untrue statement or a material fact or omits
to state any material fact necessary to make the statements contained herein or
therein not misleading.
13
<PAGE>
ARTICLE VII
COVENANTS
7.1. Investigation. CES, the Shareholders and the Company agree that CES's
representatives may, prior to the Closing Date, make such investigation of the
assets and business of the Company, including the confirmation of cash, accounts
receivable and liabilities, as it deems necessary or advisable, but such
investigation shall not limit or otherwise affect the Company's representations
and warranties hereunder. The Company agrees to permit CES' representatives to
have full access to the Company's premises and to all the books and records of
the Company, and the officers of the Company will furnish to CES such financial
and operating data and other information with respect to the business and
properties of the Company as CES shall from time to time reasonably request. In
the event of the termination of this Agreement, CES will deliver to the Company
all documents, work papers and other material obtained by CES or on its behalf
from the Company relating to the business and assets of the Company, whether so
obtained before or after the execution hereof, and will use its best efforts to
have any information so obtained kept confidential and not used in any way
detrimental to the Company or its Shareholders.
7.2. Conduct of Company Business. The Company and Shareholders agree that
prior to the Closing Date the Company will:
(a) operate its business only in the ordinary course of business
consistent with past practice, including with respect to employee
compensation;
(b) comply with all Laws applicable to it and to the conduct of its
business;
(c) not materially encumber any asset or enter into any material
transaction or make any material commitment relating to the assets and
business of the Company otherwise than in the ordinary course of its
business in accordance with past practice, without first obtaining the
written consent of CES;
(d) not make any distributions of cash or other assets to the
Shareholders, as shareholders of the Company;
(e) shall not issue any shares of its capital stock, or securities
convertible into or exchangeable for shares of its capital stock, or any
warrants, options or other rights to purchase shares of its capital stock;
and
(f) use its best efforts to obtain all consents or approvals required
to be obtained by the Company in order to consummate the Merger.
14
<PAGE>
7.3. Interim Interest. From and after the date of this Agreement until the
original issue date of the Preferred Stock (which shall be the Effective Date),
CES shall pay to the Controlling Shareholders interest ("Interim Interest") on
the aggregate stated value of the Preferred Stock at the rate of six percent
(6%) per year, such Interim Interest to be allocated between the controlling
Shareholders in accordance with their proportionate interests in the Preferred
Stock; provided, that the amount of the Interim Interest to accrue and be paid
pursuant hereto shall not exceed $1,500.
7.4. Tax Reimbursement. CES and Merger Sub shall prepare and file with the
IRS all income tax returns required to be filed as a result of the Company's
operations conducted from January 1, 1997 through the Closing Date. No later
than Ninety (90) days after such income tax returns are filed with the IRS, the
Company shall distribute to each Shareholder cash in an amount equal to
thirty-five percent (35%) of the income to be reported by them as Shareholders
of the Company under Section 1366 of the Code to the extent resulting from the
operations of the Company for such period, excluding any income resulting from
the consummation of the transactions contemplated hereunder and the receipt of
the Merger Consideration (the "Tax Reimbursement"). The amount payable by the
Company for the Tax Reimbursement to each Shareholder shall not exceed $10,000.
ARTICLE VIII
CONDITIONS TO THE PARTIES' OBLIGATIONS TO CLOSE
8.1. Conditions to the Company's and the Shareholders' Obligations. The
obligations of the Company and the Shareholders to consummate the Merger are
subject to the satisfaction, on the Closing Date, of the following conditions:
(a) CES and Merger Sub shall have furnished the Company and
Shareholders with:
(i) copies of the Certificates of Incorporation of CES and Merger
Sub, certified to by the Delaware Secretary of State;
(ii) copies of the By-laws of CES and Merger Sub, certified to by
each of their respective Secretaries as being in full force and
effect;
(iii) certified copies of resolution(s) duly adopted by each of
the Boards of Directors of CES and Merger Sub approving this Agreement
and the transactions contemplated hereby;
(iv) a certified copy of resolution(s) duly adopted by CES as the
sole stockholder of Merger Sub approving this Agreement and the
transactions contemplated hereby.
15
<PAGE>
(v) a favorable opinion of Fischbein o Badillo o Wagner o
Harding, special counsel for CES and Merger Sub, dated the Closing
Date and in form and substance reasonably satisfactory to the Company,
the Shareholders and their respective counsel, to the effect that:
A. Each of CES and Merger Sub is a corporation duly
organized, validly existing and in good standing under the laws
of the State of Delaware.
B. Each of CES and Merger Sub has the corporate power and
authority to carry on its business as presently conducted and to
enter into and perform its obligations under this Agreement. The
execution, delivery and performance of this Agreement have been
duly authorized by all requisite corporate action and this
Agreement has been duly executed and delivered by each of CES and
Merger Sub.
C. The execution and delivery of this Agreement and the
performance by each of CES and Merger Sub of the terms of this
Agreement do not conflict with or result in a violation of the
Certificate of Incorporation of By-laws of CES or Merger Sub, or
any agreement, instrument, order, judgment or decree known to
such counsel to which CES or Merger Sub is a party or is subject.
D. This Agreement is a valid and binding agreement of each
of CES and Merger Sub, enforceable against each of CES and Merger
Sub in accordance with its terms, subject to customary
qualifications regarding bankruptcy and equitable remedies.
E. When the shares of Preferred Stock, Options and CES
Common Stock to be issued as a part of the Merger Consideration
and any shares of CES Common Stock issuable upon conversion of
the Preferred Stock or exercise of the Options are issued and
delivered as contemplated by this Agreement or upon such
conversion or exercise in accordance with the terms of the
governing instruments, they will be legally and validly issued
and fully paid and non-assessable.
In rendering such opinion, counsel for CES and Merger Sub may rely as to
matters of fact upon certificates of any officer or officers of CES and Merger
Sub and of public officials and public records.
(b) CES and merger Sub shall have complied with all covenants and
agreements required to be complied with by them hereunder on or prior to
the Closing Date and the representations and warranties of CES and Merger
Sub contained in this Agreement or in any Schedule or certificate delivered
to the Company and Shareholders pursuant hereto shall be true on and as of
the Closing Date with the same force and effect as though such
representations and warranties had been made on and as of such date, except
for:
16
<PAGE>
(i) changes in the ordinary course of business or as contemplated
by this Agreement; and
(ii) changes consented to by the Company and the Shareholders,
and the Company,
and the Shareholders shall have received at the a Closing certificate to such
effects dated the Closing Date and executed on behalf of CES by the President or
Vice President of CES and on behalf of Merger Sub by the President or Vice
President of Merger Sub.
8.2. Conditions to CES's and Merger Sub's Obligations. The obligations of
CES and Merger Sub to consummate the Merger are subject to the satisfaction, on
the Closing Date of the following conditions:
(a) The Company and the Shareholders shall have furnished CES and
Merger Sub with:
(i) a copy of the Company's Certificate of Incorporation,
certified to by the New York Secretary of State;
(ii) a copy of the Company's By-laws, certified to by the
Company's Secretary as being in full force and effect;
(iii) certified copies of resolutions duly adopted by the Board
of Directors and Shareholders of the Company approving this Agreement
and the transactions contemplated hereby;
(iv) a favorable opinion, dated the Closing Date, of Howard P.
Fritz, Esq., counsel for the Company and the Controlling Shareholders,
in form and substance reasonably satisfactory to CES, Merger Sub and
their counsel, to the effect that:
A. The Company is a corporation duly organized, validly
existing and in good standing under the laws of the State of New
York.
B. The Company has the corporate power and authority to
carry on its business as presently conducted and to enter into
and perform its obligations under this Agreement. The execution,
delivery and performance of this Agreement have been duly
authorized by all requisite corporate action and this Agreement
has been duly executed and delivered by the Company and the
Shareholders.
C. The execution and delivery of this Agreement and the
performance by the Company and each of the Shareholders of the
terms of this Agreement do
17
<PAGE>
not conflict with or result in a violation of the Certificate of
Incorporation of By-laws of the Company, or any agreement,
instrument, order, judgment or decree known to such counsel to
which the Company or any of the Shareholders is a party or is
subject.
D. This Agreement is a valid and binding agreement of the
Company and each of the Shareholders, enforceable against the
Company and each of the Shareholders in accordance with its
terms, subject to customary qualifications regarding bankruptcy
and equitable remedies.
In rendering such opinion, counsel for the Company and the Controlling
Shareholders may rely as to matters of fact upon certificates of any officer or
officers of the Company, the Shareholders and of public officials and public
records.
(b) The Company shall have complied with all covenants and agreements
required to be complied with by it hereunder on or prior to the Closing
Date and the representations and warranties of the Shareholders and the
Company contained in this Agreement shall be true on and as of the Closing
Date with the same force and effect as though such representations and
warranties had been made on and as of such date, regardless of the date as
of which the information in this Agreement is given except for:
(i) changes in the ordinary course of business or as contemplated
by this Agreement; and
(ii) changes consented to by CES and Merger Sub, and CES and
Merger Sub shall have received at the Closing a certificate to such
effect, dated the Closing Date and executed on behalf of the Company
by the President or any Vice President of the Company.
(c) The Surviving Corporation shall possess all Authorizations
required to carry on the business of the Company as conducted on the date
hereof.
18
<PAGE>
(d) All "blue-sky" filings and permits required to carry out the
transactions contemplated by this Agreement shall have been made or
received.
(e) The North Atlantic Laboratories, Inc. Principal Officers and
Shareholders Agreement, dated December 22, 1992, by and among the
Shareholders shall have been terminated without liability to, or any
payment thereunder by, the Company, except as expressly permitted by this
Agreement.
ARTICLE IX
INDEMNIFICATION
9.1. Indemnification by The Controlling Shareholders. From and after the
Closing, the Controlling Shareholders shall jointly and severally indemnify and
hold harmless CES and the Surviving Corporation from and against any and all
losses, liabilities, damages, demands, claims, suits, actions, judgments, costs
and expenses (including, without limitation, reasonable attorney's fees)
(collectively "Losses") incurred or suffered by CES or the Surviving Corporation
and their respective officers, directors, employees, agents and representatives
arising out of, resulting from, or relating to (a) any breach of any of the
representations or warranties made by the Controlling Shareholders in this
Agreement, (b) any breach by the Company of any of the representations and
warranties made by the Company in this Agreement, (c) any failure by either
Controlling Shareholder or the Company to perform any of its covenants or
agreements contained in this Agreement, or (d) any claim relating to the
allocation and payment of the Merger Consideration among the Shareholders made
in accordance with the instructions set forth in the Allocations and Payment
Instructions.
9.2 Indemnification by CES. CES and the Surviving Corporation shall
indemnify and hold harmless each Shareholder from and against any and all Losses
(as defined in Section 9.1) incurred or suffered by the Shareholders arising out
of, resulting from, or relating to (a) any breach of any of the representations
or warranties made by CES and Merger Sub in this Agreement, or (b) any failure
by CES to perform any of its covenants or agreements contained in this
Agreement.
9.3 Procedure.
(a) In the event that any party hereto shall sustain or incur any
Losses in respect of which indemnification may be sought by such party
pursuant to this Article IX, the party seeking such indemnification (the
"Indemnitee") shall assert a claim for indemnification by giving written
notice thereof (the "Notice") to the party (or parties) providing
indemnification (the "Indemnitor") and shall thereafter keep the Indemnitor
reasonably informed with respect thereto; provided, that failure of the
Indemnitee to give the Indemnitor prompt notice as provided herein shall
not relieve the Indemnitor of any of its obligations hereunder, except to
the extent that the
19
<PAGE>
Indemnitor is materially prejudiced by such failure. In case any third
party claim is brought against any Indemnitee, the Indemnitor shall be
entitled to assume the defense thereof, by written notice to the Indemnitee
of its intention to do so within 30 days after receipt of the Notice, in
which event the Indemnitor shall assume all past and future responsibility
for such claim, including reimbursing the Indemnitee for all prior
reasonable legal expenses in connection therewith. If the indemnitor shall
assume the defense of such claim, it shall not settle such claim unless
such settlement includes as an unconditional term thereof the giving by the
claimant or the plaintiff of a release of the Indemnitee, satisfactory to
the Indemnitee, from all liability with respect to such claim. As long as
the Indemnitor is contesting any such claim in good faith and on a timely
basis, the Indemnitee shall not pay or settle any such defense of any claim
as provided in this subsection, the Indemnitee shall be permitted to join
in the defense of such claim and to employ counsel at its own expense;
provided, however, that if the defendants in any action shall include both
an Indemnitor and any Indemnitee, and such Indemnitee shall have reasonably
concluded that counsel selected by Indemnitor has a conflict of interest
because of the availability of different or additional defenses to such
Indemnitee, such Indemnitee shall have the right to select separate counsel
to participate in the defense of such action on its behalf, at the expense
of the Indemnitor.
(b) If the Indemnitor shall fail to notify the Indemnitee of its
desire to assume the defense of any such claim within the prescribed period
of time, or shall notify the Indemnitee that it will not assume the defense
of any such claim, then the Indemnitee may assume the defense of any such
claim, in which event it may do so in such manner as it may deem
appropriate, and the Indemnitor shall be bound by any determinations made
in any litigation with respect to such claim or any settlement thereof
effected by the Indemnitee; provided, that any such determination or
settlement shall not affect the right of the Indemnitor to dispute the
Indemnitee's claim for indemnification. The failure of the Indemnitor to
assume the defense of any claim shall not be deemed a concession that it is
required to indemnify the Indemnitee for the subject matter of such claim.
The Indemnitor shall be permitted to join in the defense of such claim and
to employ counsel at its own expense.
(c) Amounts payable by the Indemnitor to the Indemnitee in respect of
any Losses for which such party is entitled to indemnification hereunder
shall be payable by the Indemnitor as incurred by the Indemnitee.
9.4 Limitation on Liability. Notwithstanding anything to the contrary set
forth herein: (i) no party shall be entitled to indemnification hereunder with
respect to a claim (or, if more than one claim is asserted, with respect to all
claims) unless the aggregate amount of Losses with respect to such claim or
claims exceeds $5,000; and (ii) in no event shall either Controlling Shareholder
be held liable hereunder for Losses in excess of their aggregate allocated
portion of the Merger Consideration, such allocated portion being conclusively
determined as set forth in the Allocations and Payment Instructions. For
purposes of this Section 9.4, the Preferred Stock shall be valued at its stated
value.
20
<PAGE>
ARTICLE X
MISCELLANEOUS
10.1. Survival of Representations and Warranties. All of the
representations and warranties included herein, and in all instruments or other
documents delivered pursuant hereto, shall survive the Effective Date until the
date 24 months following the Closing Date and shall thereupon expire together
with any right to indemnification in respect thereof (except to the extent a
written notice asserting a claim for breach of any such representation or
warranty shall have been given prior to such date to the party which made such
representation or warranty).
10.2. Brokers. Each of the parties hereto represents and warrants that he
or it has not retained or dealt with, and has no obligation to, any broker or
finder in connection with the Merger.
10.3. Notices. Any notices or other communications, including a change in
address to which they are to be sent, required or permitted hereunder shall be
given in writing and shall be deemed received (i) when delivered personally or
(ii) the next day following the date when sent by Federal Express or similar
overnight service or (iii) when confirmed if sent by facsimile transmission or
(iv) if sent by mail, on the third day following the date when deposited in the
United States mail, registered or certified mail, postage prepaid, addressed as
follows:
To the Company:
North Atlantic Laboratories, Inc.
909 Marconi Avenue
Ronkonkoma, New York 11779
Attention: President
Facsimile: (516) 737-3379
To the Controlling Shareholders:
at their respective addresses set forth in Exhibit A.
In each case, with a copy to:
Howard Fritz, Esq.
15 Roslyn Road
Mineola, New York 11501
Facsimile: (516) 294-1335
21
<PAGE>
To the Non-Controlling Shareholders:
at their respective addresses set forth on Exhibit A.
Copy to:
To CES and Merger Sub:
Comprehensive Environmental Systems, Inc.
72-B Cabot Street
West Babylon, New York 11704
Attention: President
Facsimile: (516) 694-7087
Copy to:
Fischbein o Badillo o Wagner o Harding
909 Third Avenue
New York, New York 10022
Attention: Joseph D. Alperin, Esq.
Facsimile: (212) 644-7485
10.4. Successors and Assigns. This Agreement shall be binding upon and
shall inure to the benefit of the parties hereto and their respective successors
and assigns; provided, that this Agreement may not be assigned by any party
without the consent of the other parties.
10.5. Counterparts. This Agreement may be executed in counterparts which
together shall constitute one and the same instrument.
10.6. Further Assurances. Each of the parties hereto hereby covenants and
agrees to take all such further actions and to execute, deliver and cause to be
filed with the proper governmental authorities all such further documents,
instruments and certificates, as are reasonably determined by CES and/or the
Company to be necessary, desirable or appropriate to consummate the transactions
contemplated hereby.
10.7. Waiver of Compliance. Any failure of a party to this Agreement to
comply with any provision herein may be expressly waived in writing by the other
party or parties adversely affected by such non-compliance but such waiver or
failure to insist upon strict compliance with such provision shall not operate
as a waiver of, or estoppel with respect to, any subsequent or other failure.
22
<PAGE>
10.8. Expenses. Whether or not the Merger shall be consummated, the
Shareholders agree that all fees and expenses incurred by the Company or any of
the Controlling Shareholders in connection with this Agreement shall be borne by
the Controlling Shareholders if the merger is consummated and that CES and
Merger Sub shall have no obligation therefor in any event. CES and Merger Sub
agree that all fees and expenses incurred by them in connection with this
Agreement shall be borne by CES, including in each case, without limitation, all
fees of counsel and accountants.
10.9. Publicity. None of the parties to this Agreement shall make or issue,
or cause to be made or issued, any announcement or written statement concerning
this Agreement or the transactions contemplated hereby for dissemination to the
general public without the prior consent of the other party. This provision
shall not apply, however, to any announcement or written statement required to
be made by law or the regulations of any Federal or state governmental agency,
including the Securities and Exchange Commission.
10.10. Governing Law. This Agreement and the legal relations among the
parties hereto shall be governed by and construed in accordance with the laws of
the State of New York, without regard to principles of conflicts of law.
10.11. Counterparts. This Agreement may be executed in two or more
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.
10.12. Headings. The headings of the Articles and Sections of this
Agreement are inserted for convenience only and shall not constitute a part
hereof or affect in any way the meaning or interpretation of this Agreement.
10.13. Entire Agreement. This Agreement, including the Exhibits and
Schedules hereto, and the other documents and certificates delivered pursuant to
the terms hereof, set forth the entire agreement and understanding of the
parties hereto in respect of the subject matter contained herein, and supersede
all prior agreements, promises, covenants, arrangements, communications,
representations or warranties, whether oral or written, by any party hereto or
any employee agent or representative of any such party.
10.14. Third Parties. Except as specifically set forth or referred to
herein, nothing herein expressed or implied is intended or shall be construed to
confer upon or give to any person or entity other than the parties hereto and
their permitted successors or assigns, any rights or remedies under or by reason
of this Agreement.
[SIGNATURE PAGE FOLLOWS]
23
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed as of the day and year first above written.
COMPREHENSIVE ENVIRONMENTAL
SYSTEMS, INC.
By:
----------------------------
Title: President
NAL MERGER CORP.
By:
----------------------------
Title: President
NORTH ATLANTIC LABORATORIES, INC.
By:
----------------------------
Title: President
THE SHAREHOLDERS:
----------------------------
Kevin J. Phillips
----------------------------
Gary A. Molnar
----------------------------
Charles Erlanger
----------------------------
Glenn Neuschnerder
24
CERTIFICATE OF AMENDMENT
TO
CERTIFICATE OF INCORPORATION
OF
COMPREHENSIVE ENVIRONMENTAL SYSTEMS, INC.
It is hereby certified that:
1. The name of the corporation (hereinafter called the "Corporation") is
COMPREHENSIVE ENVIRONMENTAL SYSTEMS, INC.
2. The Certificate of Incorporation of the Corporation is hereby amended by
striking out Article FIRST thereof and by substituting in lieu of said Article
FIRST the following new Article:
FIRST: The name of the corporation (hereinafter called the "corporation")
is Windswept Environmental Group, Inc.
3. The Amendment of the Certificate of Incorporation herein certified has
been duly adopted in accordance with the provisions of Section 242 of the
General Corporation Law of the State of Delaware.
Signed and attested to on
March l9, 1997
/s/ Michael O'Reilly
----------------------------------
Michael O'Reilly, President and
Chief Executive Officer
Attest:
/s/ David Behanna
- -------------------------------------
David Behanna
Chief Financial Officer
This Note and the shares of common stock purchasable upon exercise of the
conversion rights contained in this Note (collectively, the "Securities") have
not been registered under the Securities Act of 1933 (the "Act"). The Securities
may not be sold, assigned, pledged, transferred or otherwise disposed of in the
absence of such registration unless in the opinion of counsel satisfactory to
the Company (defined below), an exemption from such registration under the Act
is applicable to such proposed sale, assignment, pledge, transfer or other
disposition. Furthermore, an optional conversion of this Note may not be made
unless, in the opinion of counsel satisfactory to the Company, such conversion
is exempt from registration under the Act.
WINDSWEPT ENVIRONMENTAL GROUP, INC.
Convertible Note
Due March 15, 2002
No .............
$ .............. April , 1997
WINDSWEPT ENVIRONMENTAL GROUP, INC., a corporation duly organized and
existing under the laws of the State of Delaware, currently having its principal
office at 72-B Cabot Street, West Babylon, New York 11704 (the "Company") for
value received hereby promises to pay to
on March 15, 2002, the principal amount of
(or so much thereof as shall not have been repaid) at the office or agency of
the Company in the City of West Babylon, State of New York, and to pay interest
at the rate of 10% per annum (computed on the basis of a 360-day year of twelve
30 day months) at said office or agency, on the unpaid portion of said principal
amount from the date of this Note, semi-annually on the 15th day of September
and the 15th day of March in each year, subject to Section 2.3(b) hereof.
<PAGE>
ARTICLE 1
The Notes; Exchanges and Prepayments
1.1 Notes. This Note is one of an authorized issue of Convertible Notes due
March 15, 2002 (collectively, the "Notes" and each, a "Note"), each in the
denomination of $10,000 or a multiple thereof, issued by the Company in an
aggregate original principal amount of a minimum of $200,000 and a maximum of
$700,000, maturing on March 15, 2002, and bearing interest payable at the same
rate and on the same dates as the interest on the principal amount of this Note.
This Note is one of the Notes referred to in that certain Subscription Agreement
between the Company and the holder to whom this Note was originally issued (the
"Agreement"). This Note is entitled to the benefits of the Agreement and, with
respect to the registration, issuance and resale of the securities acquired upon
conversion of this Note, is also subject to the obligations imposed by the
Agreement.
1.2 Loss, Theft, Destruction of Notes. Upon receipt of evidence
satisfactory to the Company of the loss, theft, destruction or mutilation of
this Note and, in the case of any such loss, theft or destruction, upon receipt
of indemnity reasonably satisfactory to the Company, or, in the case of any such
mutilation, upon surrender or cancellation of this Note, the Company will make
and deliver, in lieu of such lost, stolen, destroyed or mutilated Note, a new
Note of like tenor and unpaid principal amount and dated as of the date to which
interest has been paid on the unpaid principal amount of the Note so lost,
stolen, destroyed or mutilated, or, if no interest shall have been paid thereon,
then dated as of the date of the Note so lost, stolen, destroyed or mutilated.
1.3 Optional Prepayments. The Company, at its election, upon notice given
as provided in Section 1.4 below, may prepay the outstanding Notes at any time
or from time to time, in whole or in part, at the principal amount so to be
prepaid, together with accrued interest thereon to the date of such prepayment,
and without premium.
1.4 Notice of Prepayments; Right to Convert in Lieu of Accepting
Prepayments. In the case of each prepayment of the Notes, notice thereof shall
be given to the holders of all outstanding Notes not less than 45 nor more than
60 days prior to the date fixed for such prepayment, which notice shall specify
the date fixed for such prepayment and the Section of this Note pursuant to
which such prepayment is to be made.
Upon notice of any prepayment being given there shall become due and
payable, at the principal office of the Company, on the date specified in such
notice, the principal amount of this Note, or portion thereof, designated for
prepayment, with interest accrued on such principal amount, or portion thereof,
to the date fixed for such prepayment; provided, however, that, without limiting
the generality of any provision of Article 2 below, upon notice of any
prepayment pursuant to this Section 1.4, the holder of this Note may, subject to
compliance with
- 2 -
<PAGE>
applicable securities laws, elect to refuse any part or all of such prepayment
by converting (in accordance with Article 2 below), on or prior to the close of
business on the fifth business day next preceding the date fixed for such
prepayment, the principal amount of this Note equal to the amount of the payment
of principal so refused, and in such case, the rights of the Company to make any
prepayment pursuant to such notice shall be reduced by the principal amount of
this Note so converted.
1.5 Application of Prepayments. In the case of any prepayment of less than
the entire unpaid principal amount of all outstanding Notes, the amount to be
prepaid shall be applied pro rata (as nearly as may be in multiples of $1,000)
to all outstanding Notes according to the respective unpaid principal amounts
thereof. Anything in this Section 1.5 or elsewhere in this Note to the contrary
notwithstanding, the Company may at any time or from time to time repurchase or
offer to repurchase Notes .pursuant to a pro rata offer for tenders made to all
holders of the Notes.
1.6 Surrender of Notes; Notation Thereon. Upon any prepayment of a portion
of the principal amount of this Note, the holder hereof at its option may
require the Company to make and deliver, at the expense of the Company (other
than for transfer taxes, if any), upon surrender of this Note, a new Note
payable to such holder, for the principal amount of this Note then remaining
unpaid, dated as of the date to which interest has been paid on the unpaid
principal amount of this Note (or, if no interest has been paid hereon, then
dated as of the date of this Note), or may present this Note to the Company for
notation hereon of the payment of the portion of the principal amount of this
Note so prepaid. As a condition of payment of all or any of the principal, of or
interest on this Note, the Company may require the holder to present this Note
for notation of such payment and, if this Note be paid in full, may require the
holder to surrender this Note.
ARTICLE 2
Conversion of Notes
2.1 Conversion; Conversion Price.
(a) On the date the registration statement registering the shares of Common
Stock (defined below) into which all of the Notes are then convertible becomes
effective under the Act, the entire principal amount of all of the Notes shall
be automatically converted into fully-paid and nonassessable shares of Common
Stock of the Company, par value $.0001 per share ("Common Stock") at the
conversion price, determined below, in effect on such date.
(b) At the option of the holder, subject to compliance with applicable
securities laws, all or any portion of the principal amount of this Note may, at
any time on or before the close of business on March 15, 2002, or in case this
Note or portion hereof shall have been
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<PAGE>
called for prepayment, then until and including, but (unless the Company shall
default in payment due upon the prepayment hereof) not after, the close of
business on the fifth business day next preceding the date fixed for such
prepayment, be converted into fully-paid and non-assessable shares of Common
Stock at the conversion price, determined below, in effect at the time of
conversion.
(c) The initial conversion price at which shares of Common Stock shall be
delivered upon conversion, of this Note shall be $0.50 per share, subject to
adjustment from time to time as provided in Section 2.4 below. The term
"conversion price" refers to the initial and/or an adjusted conversion price.
2.2 Surrender of Note Upon Conversion.
(a) Following the automatic conversion of this Note, this Note shall
represent the right to receive a certificate or certificates for the number of
shares of Common Stock into which this Note has been automatically converted,
registered in the name of the holder, plus any cash payable pursuant to Section
2.3 below, after surrender of this Note to the Company at its principal office.
(b) In order to exercise the conversion privilege, the holder shall
surrender this Note to the Company at its principal office and shall give
written notice to the Company at said office that the holder elects to convert
this Note or, if less than the entire principal amount of this Note is to be
converted, the portion hereof to be converted. Notes surrendered for conversion
shall be accompanied by proper assignments thereof to the Company or in blank.
(c) Upon conversion of this Note in part only, the Company shall execute
and deliver to the holder hereof, at the expense of the Company, a new Note or
Notes in principal amount equal to the unconverted portion of this Note. As
promptly as practicable after the surrender of this Note as aforesaid, the
Company shall issue and shall deliver at its principal office to the holder, or
on the holder's written order, a certificate or certificates for the number of
full shares issuable upon the conversion of the principal of this Note (or
portion hereof) in accordance with the provisions of this Article 2 and cash, as
provided in Section 2.3 below, in respect of any fraction of a share of Common
Stock issuable upon such conversion and in payment of any accrued interest. The
holder of this Note shall become the holder of record of the shares of Common
Stock into which this Note has been converted at the close of business on the
date of an automatic conversion or, with respect to an optional conversion, on
the date the Company receives this Note and the requisite notice and assignment,
as the case may be.
2.3 Fractional Shares; Accrued Interest.
(a) No fractional shares of Common Stock or scrip representing fractional
shares shall be issued upon conversion of this Note. Instead, the Company shall
pay cash equal
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<PAGE>
to the difference between the principal amount converted and the product of the
number of whole shares purchasable under this Note upon such conversion and the
conversion price.
(b) Subject to the next sentence, interest shall accrue on this Note
through the date of its conversion into Common Stock and shall be payable in
cash when the certificates(s) for the Common Stock into which this Note has been
converted are delivered to the holder. However, if this Note is automatically
converted into Common Stock prior to September 15, 1997, no interest shall be
due and payable to the holder.
2.4 Adjustment of Conversion Price.
(a) In the event the Company (i) declares any dividend on its Common Stock
in shares of its capital stock, (ii) subdivides the outstanding shares of its
Common Stock into a larger number of shares, (iii) combines the outstanding
shares of its Common Stock into a smaller number of shares, or (iv) issues by
reclassification of its Common Stock any shares of its capital stock (including
any reclassification in connection with a consolidation or merger in which the
Company is the continuing corporation), then the conversion price in effect on
the record date for such dividend or on the effective date of such subdivision,
combination or reclassification shall be proportionately adjusted so that the
record holder of this Note shall be entitled to receive the kind and amount of
shares which such holder would have owned or have been entitled to receive had
this Note been converted immediately prior to such date. Such adjustment shall
be made successively whenever any event listed above shall occur. If, as a
result of an adjustment made hereunder, the holder of shall become entitled to
receive shares of two or more classes of capital stock or shares of Common Stock
and other capital stock of the Company, the Board of Directors of the Company
(the "Board") shall determine the allocation of the adjusted conversion price
between shares of such classes of capital stock or shares of Common Stock and
other capital stock.
(b) After each adjustment of the conversion price pursuant to this Section
2.4, the Company will promptly prepare a certificate signed by the President,
and by the Secretary or an Assistant Secretary of the Company setting forth the
conversion price as so adjusted, and a brief statement of the facts accounting
for such adjustment. The Company will promptly cause a brief summary thereof to
be sent by to the record holder of this Note. No failure to give such notice nor
any defect therein or in the giving thereof shall affect the validity thereof
except as to the holder to whom the Company failed to give such notice or except
as to the holder whose notice was defective. The affidavit of the Secretary or
an Assistant Secretary of the Company that such notice has been given shall, in
the absence of fraud, be prima facie evidence of the facts stated therein.
(c) As used in this Section 2.4, the term "Common Stock" shall mean and
include the Company's Common Stock authorized on the date hereof and shall also
include any capital stock of any class of the Company thereafter authorized
which shall not be limited to a
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<PAGE>
fixed sum or percentage in respect of the rights of the holders thereof to
participate in dividends and in the distribution of assets upon the voluntary
liquidation, dissolution or winding up of the Company; provided, however, that
the shares issuable upon conversion of this Note shall include only shares of
such class designated in the Company's Certificate of Incorporation as common
Stock on the date the Notes were first issued or in the case, pursuant to
Section 2.4(a) hereof, (i) of any reclassification, change, consolidation,
merger, sale or conveyance of the character referred to in Section 2.4(a)
hereof, the stock, securities or property provided for in such Section 2.4(a),
or (ii) in the case of any reclassification or change in the outstanding shares
of Common Stock issuable upon the conversion of this note as a result of a
subdivision or combination or consisting of a change in par value, or from par
value to no par value,or from no par value to par value, such shares of Common
Stock as so reclassified or changed.
(d) Any determination as to whether an adjustment in the conversion price
in effect is required pursuant to this Section 2.4, or as to the amount of any
such adjustment, if required, shall be binding upon the holder of this Note and
the Company if made in good faith by the Board.
(e) No adjustment in the conversion price shall be required unless such
adjustment would require an increase or decrease of at least 5% in such price;
provided, however, that any adjustments which by reason of this subparagraph (e)
are not required to be made shall be carried forward and taken into account in
any subsequent adjustment. All calculations shall be made to the nearest cent or
the nearest one-hundredth of a share, as the case may be.
(f) If at any time as a result of an adjustment made pursuant to this
Section 2.4, the holder of this Note thereafter converted shall become entitled
to receive any shares of the Company other than Common Stock, the number of such
other shares so receivable upon of this Note shall be subject to adjustment from
time to time in a manner and on terms as nearly equivalent as practicable to the
provisions with respect to the shares issuable upon conversion of this Note
contained in this Section, and the provisions of this Section 2.4 with respect
to the shares issuable upon conversion of this Note shall apply on like terms to
any such other shares.
2.5 Reservation of Shares. The Company covenants that it will at all times
reserve and keep available out of its authorized Common Stock, solely for the
purpose of issue upon conversion of this Note as herein provided, such number of
shares of Common Stock as shall then be issuable upon the conversion of this
Note. The Company covenants that all shares of Common Stock which shall be so
issuable shall be duly and validly issued and, when issued in accordance with
the provisions of this Note, shall be fully paid and non-assessable.
2.6 Exercise of Conversion Right. By accepting this Note, the holder agrees
that any exercise of the conversion right will be made only in accordance with
applicable securities laws and, accordingly, that the holder will cooperate with
the Company to the extent reasonably
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<PAGE>
requested by the Company for the purposes of permitting such compliance.
ARTICLE 3
Defaults and Remedies
3.1 Events of Default. "Event of Default" wherever used herein means any
one of the following events (whatever the reason for such Event of Default and
whether it shall be voluntary or involuntary or be effected by operation of law
or pursuant to any judgment, decree or order of any court or any order, rule or
regulation of any administrative or governmental body):
A. Default in the due and punctual payment of the principal of this
Note when and as the same shall become due and payable, whether at the
maturity or at a date fixed for prepayment or by acceleration or otherwise;
or
B. Default in the due and punctual payment of any interest on this
Note, when and as such interest shall become due and payable, and
continuance of such default for a period of 10 days; or
C. The entry of a decree or order by a court having jurisdiction in
the premises adjudging the Company a bankrupt or insolvent, or approving as
properly filed a petition seeking reorganization, arrangement, adjustment
or composition of or in respect of the Company under the United States
Bankruptcy Code or any other applicable federal or state law, or appointing
a receiver, liquidator, assignee, trustee or sequestrator (or other similar
official) of the Company or of any substantial part of its property, or
ordering the winding up or liquidation of its affairs, and the continuance
of any such decree or order unstayed and in effect for a period of 60
consecutive days; or
D. The institution by the Company of proceedings to be adjudicated a
bankrupt or insolvent, or the consent by it to the institution of
bankruptcy or insolvency proceedings against it, or the filing by it of a
petition or answer or consent seeking reorganization or relief under the
United States Bankruptcy Code or any other applicable federal or state law,
or the consent by it to the filing of any such petition or to the
appointment of a receiver, liquidator, assignee, trustee, or sequestrator
(or other similar official) of the Company or of any substantial part of
its property, or the making by it of an assignment for the benefit of
creditors.
3.2 Acceleration of Maturity. Upon any Event of Default described in
Subsections C. or D. of Section 3.1, the principal of this Note, together with
the interest accrued thereon, shall become immediately due and payable. If any
Event of Default described in subsections A.
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<PAGE>
or B. of Section 3.1 occurs and is continuing, then the holder of this Note may
declare the principal of this Note to be due and payable immediately, by a
notice in writing to the Company, and, upon any such declaration, the principal
of this Note together with the interest accrued thereon shall become immediately
due and payable.
3.3 Remedies Cumulative. No remedy herein conferred upon the holder hereof
is intended to be exclusive of any other remedy and each and every such remedy
shall be cumulative and shall be in addition to every other remedy given
hereunder or now or hereafter existing at law or in equity or by statute or
otherwise.
3.4 Remedies Not Waived. No course of dealing between the Company and the
holder hereof or any delay in exercising any rights hereunder shall operate as
waiver by any holder hereof.
ARTICLE 4
Amendment and Waiver
By accepting this Note, the holder hereof agrees that any provision of this
Note, including any Event of Default, may, with the written consent of the
Company and such holder, be amended, or compliance therewith may be waived
(either generally or in a particular instance and either retroactively or
prospectively).
ARTICLE 5
Provisions Bind Successors and Assigns
All the provisions of this Note binding the Company or the holder shall
bind their respective successors and assigns, whether or not they state so
expressly.
ARTICLE 6
Headings
The headings in this Note are inserted for convenience of reference only
and shall in no way restrict or otherwise modify any of the provisions hereof.
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<PAGE>
ARTICLE 7
Notices
All notices, requests, consents and other communications hereunder shall be
in writing and shall be deemed to have been given or made when delivered by
hand, against acknowledgement of receipt, (including delivery by a recognized
overnight courier service), or on the third business day after mailing, if
mailed certified mail, return receipt requested, in each case addressed as
follows:
(a) if to the holder of this Note, to the last address of such holder
set forth in the Note registry records of the Company; or
(b) if to the Company, to the address of its principal office,
Attention: President.
ARTICLE 8
Governing Law
This Note shall be construed and enforced in accordance with, and governed
by, the law of the State of New York, without regard to principles of conflict
of laws.
IN WITNESS WHEREOF, WINDSWEPT ENVIRONMENTAL GROUP, INC. has caused this
Note to be executed in its corporate name by its duly authorized representative,
all as of the day and year first above written.
WINDSWEPT ENVIRONMENTAL GROUP, INC.
By:
--------------------------------
Title:
-----------------------------
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UNANIMOUS WRITTEN CONSENT
of the
BOARD OF DIRECTORS
of
COMPREHENSIVE ENVIRONMENTAL SYSTEMS, INC.
(a Delaware corporation)
The undersigned, constituting the entire Board of Directors of
Comprehensive Environmental Systems, Inc., a Delaware corporation (the
"Company"), hereby consent in writing as of the date hereof to the adoption of
the following resolutions pursuant to Section 141(f) of the Delaware General
Corporation Law and order that this written consent be filed with the minutes of
the proceedings of the Board of Directors:
WHEREAS, it is in the best interest of the Company to adopt an employee
benefit plan, as such term is defined in the Regulations promulgated under the
Securities Act of 1933 (the "Act"), under which shares of the Company's common
stock, $.0001 par value ("Common Stock"), may be issued as stock grants to
employees, officers, directors, consultants or advisors of the Company or under
which non-qualified stock options to purchase shares of Common Stock may be
issued to such individuals; now, therefore, it is hereby
RESOLVED, that, for the purpose of providing compensation or performance
incentives to Company directors, officers or employees or compensating
consultants or advisors of the Company for bona fide services rendered other
than in connection with capital-raising transactions, an Employee Benefit Plan
is hereby adopted and approved by this Board under which up to a total of
500,000 shares of Common Stock may be issued either as stock grants ("Stock
Grants") to employees, officers, directors, consultants or advisors of the
Company or upon exercise of non-qualified stock options ("Stock Options")
granted to such individuals, and 500,000 shares of Common Stock are hereby
reserved for such purposes; and be it further
RESOLVED, that all Stock Grants or Stock Options shall be made or granted
and evidenced by written agreement executed and delivered by the Company's Chief
Executive Officer, as the Plan's administrator (the "Administrator"), with the
sole discretion to determine the terms of Stock Grants and Stock Options; and be
it further
RESOLVED, that the Company is authorized and directed to register under the
Act on Form S-8 the 500,000 shares of Common Stock that may be issued pursuant
to the Employee Benefit Plan adopted hereby; and be it further
<PAGE>
RESOLVED, that each of the officers of the Company is hereby authorized and
directed, in the name and on behalf of the Company, to do all acts and things,
to sign, seal, execute and acknowledge all papers, instruments, documents and
certificates, from time to time necessary, desirable or appropriate to be done
or performed in order to carry out the purpose and intent of the foregoing
resolutions; and be it further
RESOLVED, that all acts and deeds heretofore done by officers of the
Company to effect the actions contemplated by the foregoing resolutions,
including the preparation, execution, acknowledgement or delivery of any
documents, be and hereby are, ratified, confirmed and approved in all respects.
IN WITNESS WHEREOF, the undersigned have executed this consent, which may
be executed in counterparts, as of the _________ day of January, 1997.
- ------------------- -------------------
Michael O'Reilly Anthony Towell
- ------------------- -------------------
Samuel Sadove JoAnn O'Reilly
2
<PAGE>
DRAFT: 2/21/97
CERTIFICATE OF DESIGNATIONS
OF
SERIES A CONVERTIBLE PREFERRED STOCK
(Pursuant to Section 151(g) of the General
Corporation Law of the State of Delaware)
COMPREHENSIVE ENVIRONMENTAL SYSTEMS, INC., a corporation organized and
existing under the laws of the State of Delaware (the "Corporation"), does
hereby certify that:
FIRST: The Corporation was incorporated in the State of Delaware on
March 21, 1986.
SECOND: Pursuant to authority conferred upon the Board of Directors of
the Corporation (the "Board") by Article FOURTH of the Amended and Restated
Certificate of Incorporation of the Corporation (the "Certificate of
Incorporation") and Section 151(g) of the General Corporation Law of the
State of Delaware, the Board has duly adopted the following resolutions,
which are still in full force and effect and are not in conflict with any
provisions of the Certificate of Incorporation or the Corporation's
By-Laws.
RESOLVED, that the Board hereby fixes and determines the designation of,
the number of shares constituting, and the rights, preferences, privileges, and
restrictions relating to, a series of Preferred Stock, as follows:
1. Designation; Amount; Stated Value.
From the Corporation's Ten Million (10,000,000) authorized shares of
Preferred Stock, par value $.01 per share, One Million Three Hundred Thousand
(1,300,000) shares are hereby designated Series A Convertible Preferred Stock
("Series A Preferred") with the rights, preferences, privileges and restrictions
specified herein. Each share of Series A Preferred shall have a stated value of
One Dollar ($1.00) (the "Stated Value").
<PAGE>
2. Dividends.
(a) The holders of record of the Series A Preferred, as of a date
fixed by the Board, shall be entitled to receive quarterly dividends, out
of funds legally available therefor, at a rate per annum, equal to the
higher of (i) six percent (6%) of the Stated Value and (ii) a percentage of
the Stated Value equal to the "Inflation Rate" (defined below) plus two and
one-half percent (2 1/2%). Dividends shall be payable in arrears on the
15th day of March, June, September and December of each year (each, a
"Dividend Payment Date") commencing June 15, 1997. If a dividend payment
date is not a business day, then the dividend shall be payable on the next
succeeding business day. Dividends shall accrue from the initial date of
issuance of the Series A Preferred (the "Original Issue Date,"), shall be
cumulative and, if not paid when due, shall bear simple interest on the
unpaid amount of the past due dividend at the prime rate of Citibank, N.A.,
that is published in The Wall Street Journal on the date the dividend was
payable, plus three percent (3%).
As used herein, "Inflation Rate" means an amount equal to the
percentage by which Consumer Price Index (defined below) shall have
increased over the twelve month period ending on the last day of the month
immediately preceding the date the applicable quarterly dividend began to
accrue. "Consumer Price Index" means the Consumer Price Index for all Urban
Consumers (CPI-U) (1982-84 = 100) for all Items, Northeast Region, issued
by the Bureau of Labor Statistics for the United States Department of
Labor, or the successor to such index.
(b) Shares of Series A Preferred that are converted into the
Corporation's Common Stock, par value $0.0001 per share ("Common Stock"),
as provided herein shall not accrue dividends following the date the
conversion is deemed effected and all accrued and unpaid dividends, and any
accrued and unpaid interest thereon, as of such date shall, at the time of
conversion, be paid in cash. No dividends or other distributions, other
than dividends payable solely in shares of Common Stock of the Corporation
shall be paid or set apart for payment on any shares of Common Stock unless
and until all accrued and unpaid dividends on the Series A Preferred shall
have been paid or set apart for payment.
(c) No dividends or other distributions shall be paid or set apart for
payment on any shares of Common Stock of the Corporation or other capital
stock of the Corporation ranking junior as to dividends or rights upon
dissolution or liquidation to the Series A Preferred unless and until all
accrued and unpaid dividends on the Series A Preferred shall have been paid
or set apart for payment.
3. Liquidation Preference. In the event of a liquidation, dissolution or
winding-up of the Corporation, whether voluntary or involuntary, the holders of
record of the Series A Preferred shall be entitled to receive ratably in full,
out of lawfully available assets of the Corporation, whether such assets are
stated capital or surplus of any nature, an amount in cash
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<PAGE>
per outstanding share of Series A Preferred equal to the sum of the Stated Value
and all dividends (whether or not declared) accrued and unpaid thereon, and any
accrued and unpaid interest thereon, as of the date of final distribution to
such holders, before any payment shall be made or any assets distributed to the
holders of Common Stock; provided, however, that, such rights shall accrue to
the holders of the Series A Preferred only in the event the Corporation's
payments with respect to the liquidation preferences of any holders of capital
stock of the Corporation ranking senior as to liquidation rights to the Series A
Preferred are fully met. If, upon any liquidation, dissolution and winding up,
the amount available for such payment to the holders of Series A Preferred shall
not be sufficient to pay in full the amounts payable on the Series A Preferred,
the holders of the Series A Preferred and any other class or series of the
Corporation's capital stock which may hereafter be created having parity as to
liquidation rights with the Series A Preferred shall share in the distribution
of the amount available in proportion to the respective preferential amounts to
which each is entitled. None of a consolidation or merger of the Corporation
with another corporation, a sale or transfer of all or part of the Corporation's
assets for cash, securities or other property, or a reorganization of the
Corporation shall be considered a liquidation, dissolution or winding-up of the
Corporation.
4. Voting Rights.
(a) Commencing the earlier of March 31, 1998 or the date of the
Corporation's annual meeting of stockholders held in 1998 and for so long
as [ percent] ([ %]) of the Series A Preferred issued on the Original Issue
Date shall remain outstanding, the holders of the Series A Preferred shall
be entitled to vote separately as a class to elect Kevin J. Phillips as a
member of the Board or, if he is unable to serve in such capacity, another
person, subject to the veto of the other members of the Board (which veto
shall not be unreasonably exercised). In such election, each share of
Series A Preferred shall be entitled to one vote and such director shall be
elected by a majority of votes cast.
(b) The holders of record of the Series A Preferred shall be entitled
to notice of, and to vote or consent to, all actions on which holders of
Common Stock are required or permitted to act upon, including, without
limitation, the election of directors. For such purpose, shares of Series A
Preferred shall have one (1) vote for every ten (10) shares of Common Stock
into which the Series A Preferred is then convertible until the second
anniversary of the Original Issue Date and, thereafter, shares of Series A
Preferred shall have one (1) vote for every share of Common Stock into
which the Series A Preferred is then convertible. All shares of Series A
Preferred shall vote together with the shares of Common Stock as a single
class, except as otherwise provided in Sections 4(a) and 4(c), in the
Certificate of Incorporation or By-laws of the Corporation or by law.
(c) So long as shares of Series A Preferred are outstanding, without
the approval (by vote or written consent, as provided by law) of the
holders of record of at leasta majority of the then outstanding shares of
Series A Preferred, voting separately as a class, the
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<PAGE>
Corporation shall not (i) alter or change the rights, preferences
privileges or restrictions of shares of Series A Preferred so as to affect
them adversely (whether by merger or otherwise), (ii) increase the
authorized number of shares of Series A Preferred or increase or decrease
the par value of the Series A Preferred, (iii) issue any shares of capital
stock ranking senior as to dividends or rights upon liquidation or
dissolution to the Series A Preferred or (iv) issue any shares of Common
Stock at a price below the Conversion Price (as defined below) to any
officer, director or 10% shareholder of the Corporation or to any
corporation controlled by or under common control with the Corporation.
(d) In addition to the rights contained in subsection (a) above, in
the event the Corporation has failed to make any four consecutive quarterly
dividend payments on the Series A Preferred, the majority in interest of
the holders of record of the Series A Preferred shall have the right to
elect a second director to the Board, to serve as director until such
accrued and unpaid dividends shall have been paid in full.
5. Conversion Rights.
(a) From and after the second anniversary of the Original Issue Date,
(or such earlier date when sales may be made pursuant to Rule 144 under the
Securities Act of 1933, as amended) shares of Series A Preferred shall be
convertible, at the option of the holder of record thereof, into fully paid
and nonassessable shares of the Common Stock at the rate of one share of
Common Stock for each share of Series A Preferred duly surrendered for
conversion, subject to adjustment as provided in Section 6 (the "Conversion
Price").
(b) In order to exercise the conversion rights set forth herein, a
holder of record of Series A Preferred shall surrender the certificate(s)
representing such shares, duly endorsed to the Corporation or in blank, at
the principal office of the Corporation or the Corporation's transfer agent
for its Common Stock, or at such other office as the Corporation may
designate, and shall give written notice to the Corporation, in form
reasonably satisfactory to the Corporation, that states such holder elects
to convert the Series A Preferred or a specified portion thereof, and sets
forth the name or names in which the certificate or certificates for shares
of Common Stock are to be issued (the "Conversion Notice"); provided,
however, that nothing in this Certificate of Designations shall be deemed
to permit any holder of Series A Preferred to designate another person to
be the holder of Common Stock issuable upon conversion of the Series A
Preferred if the issuance to such other person would violate Federal or
state securities laws or any agreement a holder of Series A Preferred has
with the Corporation regarding restrictions on transferability of any
securities of the Corporation held by such holder. Within seven (7)
business days after receipt of the Conversion Notice, surrender of the
certificate or certificates representing the Series A Preferred and payment
by the holder of any applicable transfer or similar taxes, the Corporation
shall issue and deliver (i) a certificate or certificates for the number of
full shares of Common Stock issuable upon conversion, in the name or names
and to the address or addresses specified in the Conversion Notice, subject
to any such restrictions
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<PAGE>
on transferability, and (ii) a check in payment for any fractional shares
pursuant to Section 10. The Corporation shall cancel the certificate(s) for
Series A Preferred upon the surrender thereof and shall execute and deliver
a new certificate for Series A Preferred representing the balance, if any,
of the number of shares evidenced by such certificate(s) not so converted.
Each Conversion Notice shall constitute a contract between the holder of
shares of Series A Preferred and the Corporation whereby the holder of such
shares shall be deemed to subscribe for the amount of Common Stock which
such holder shall be entitled to receive upon such conversion and whereby
the Corporation shall be deemed to agree that the surrender of the
certificate(s) therefor shall constitute full payment of such subscription
for Common Stock to be issued upon such conversion.
(c) A conversion of the Series A Preferred shall be deemed to have
been effected at the close of business on the date on which the Conversion
Notice shall have been received by the Corporation and the certificate or
certificates for Series A Preferred shall have been surrendered. Upon such
surrender, the holder thereof shall cease to be a stockholder with respect
thereto and all rights whatsoever with respect to such shares shall
terminate (except the rights of the holder to receive shares of Common
Stock and cash in respect of fractional shares and to receive accrued and
unpaid dividends under Section 2(b)), and the person or persons in whose
name any certificate(s) for Common Stock are issuable upon such conversion
shall be deemed to have become the holder of record of the shares
represented thereby.
6. Adjustment of Conversion Price.
(a) In the event the Corporation (i) declares any dividend on the
Common Stock in shares of its capital stock, (ii) subdivides the
outstanding shares of the Common Stock into a larger number of shares,
(iii) combines the outstanding shares of the Common Stock into a smaller
number of shares, or (iv) issues by reclassification of the Common Stock
any shares of its capital stock (including any reclassification in
connection with a consolidation or merger in which the Corporation is the
continuing corporation), then the Conversion Price in effect on the record
date for such dividend or on the effective date of such subdivision,
combination or reclassification shall be proportionately adjusted so that
the record holder of any shares of Series A Preferred converted after such
date shall be entitled to receive the kind and amount of shares which such
holder would have owned or have been entitled to receive had such shares of
Series A Preferred been converted immediately prior to such date. Such
adjustment shall be made successively whenever any event listed above shall
occur. If, as a result of an adjustment made hereunder, the holder of any
shares of Series A Preferred shall become entitled to receive shares of two
or more classes of capital stock or shares of Common Stock and other
capital stock of the Corporation, the Board shall determine the allocation
of the adjusted Conversion Price between shares of such classes of capital
stock or shares of Common Stock and other capital stock.
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<PAGE>
(b) After each adjustment of the Conversion Price pursuant to this
Section 6, the Corporation will promptly prepare a certificate signed by
the President, and by the Secretary or an Assistant Secretary of the
Corporation setting forth the Conversion Price as so adjusted, and a brief
statement of the facts accounting for such adjustment. The Company will
promptly cause a brief summary thereof to be sent by ordinary first class
mail to each record holder of Series A Preferred at such holder's last
address as it shall appear on the registry books of the Corporation or its
transfer agent. No failure to mail such notice nor any defect therein or in
the mailing thereof shall affect the validity thereof except as to the
holder to whom the Corporation failed to mail such notice, or except as to
the holder whose notice was defective. The affidavit of the Secretary or an
Assistant Secretary of the Corporation that such notice has been mailed
shall, in the absence of fraud, be prima facie evidence of the facts stated
therein.
(c) As used in this Section 6, the term "Common Stock" shall mean and
include the Corporation's Common Stock authorized on the Original Issue
Date and shall also include any capital stock of any class of the
Corporation thereafter authorized which shall not be limited to a fixed sum
or percentage in respect of the rights of the holders thereof to
participate in dividends and in the distribution of assets upon the
voluntary liquidation, dissolution or winding up of the Corporation;
provided, however, that the shares issuable upon conversion of the Series A
Preferred shall include only shares of such class designated in the
Corporation's Certificate of Incorporation as Common Stock on the Original
Issue Date or (A) in the case of any reclassification, change,
consolidation, merger, sale or conveyance of the character referred to in
Section 6(a) hereof, the stock, securities or property provided for in such
section, or (B) in the case of any reclassification or change in the
outstanding shares of Common Stock issuable upon the conversion of the
Series A Preferred as a result of a subdivision or combination or
consisting of a change in par value, or from par value to no par value, or
from no par value to par value, such shares of Common Stock as so
reclassified or changed.
(d) Any determination as to whether an adjustment in the Conversion
Price in effect is required pursuant to this Section 6, or as to the amount
of any such adjustment, if required, shall be binding upon the holders of
the Series A Preferred and the Corporation if made in good faith by the
Board.
7. Reservation of Shares; Payment of Taxes.
(a) The Corporation covenants that it will at all times reserve and
keep available out of its authorized Common Stock, solely for the purpose
of issue upon conversion of the Series A Preferred, such number of shares
of Common Stock as shall then be issuable upon the conversion of all
outstanding Series A Preferred. The Corporation covenants that all shares
of Common Stock which shall be issuable upon conversion of the Series A
Preferred shall, at the time of delivery, be duly and validly issued, fully
paid, nonassessable and free from all taxes, liens and charges with respect
to the issue thereof (other than those which the Corporation shall promptly
pay or discharge, subject to Section 7(b)).
-6-
<PAGE>
(b) The Corporation shall pay all documentary, stamp or similar taxes
and other governmental charges that may be imposed with respect to the
issuance of the Series A Preferred, or the issuance or delivery of any
shares of Common Stock upon conversion of the Series A Preferred; provided,
however, that, if the shares of Common Stock are to be delivered in a name
other than the name of the holder of record of the certificate representing
any Series A Preferred being converted, then no such delivery shall be made
unless the person requesting the same has paid to the Corporation the
amount of transfer taxes or charges incident thereto, if any.
8. Redemption.
(a) The Series A Preferred shall be subject to redemption, in whole or
in part, on any date specified by the Company (the "Redemption Date") after
the fifth (5th) anniversary of the Original Issue Date at a price per share
(the "Redemption Price") equal to the higher of (i) One Dollar ($1.00) plus
accrued but unpaid dividends and (ii) the "Per Share Market Value" (defined
below) on the business day immediately preceding the "Redemption Notice"
(defined below). Any partial redemption shall be made pro rata based on the
number of shares of Series A Preferred owned of record by each holder.
(b) Notice of redemption (the "Redemption Notice") shall be given by
the Corporation to the holders of record of the shares to be redeemed, at
their respective addresses on the books of the Corporation, not less than
ten (10) or more than sixty (60) days prior to the Redemption Date. If the
Redemption Notice shall have been duly mailed and if, on or before the
Redemption Date, all funds necessary for such redemption shall have been
set aside by the Corporation in trust for the account of the holders of the
Series A Preferred to be redeemed, so as to be available therefor, then,
from and after the giving of the Redemption Notice, notwithstanding that
any certificate for shares of Series A Preferred so called for redemption
shall not have been surrendered for cancellation, all rights in or with
respect to such shares shall terminate except the right of the holder to
(i) receive the Redemption Price, without interest, upon compliance with
the procedures specified in the Redemption Notice, or (ii) convert such
shares of Series A Preferred into Common Stock pursuant to Section 6 by not
later than the second (2nd) business day immediately preceding the
Redemption Date.
(c) "Per Share Market Value" means on any particular date (a) the
closing bid price per share of the Common Stock on such date on The Nasdaq
National Market or Nasdaq Small Cap Market or other stock exchange on which
the Common Stock has been listed or if there is no such price on such date,
then the closing bid price on such exchange on the date nearest preceding
such date, or (b) if the Common Stock is not listed on The Nasdaq National
Market or Nasdaq SmallCap Market or any stock exchange, the closing bid
price for a share of Common Stock on the electronic bulletin board as
reported by the National Quotation Bureau Incorporated (or similar
organization or agency succeeding to its functions of reporting prices), or
(c) if the Common Stock is not reported by the National Quotation Bureau
Incorporated (or
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<PAGE>
similar organization or agency succeeding to its functions of reporting
prices), then the average of the "Pink Sheet" quotes, as determined in good
faith by the Corporation, or (d) if the Common Stock is not publicly traded
the fair market value of a share of Common Stock as determined in good
faith by the Board.
(d) Shares of Series A Preferred shall be subject to redemption at the
Redemption Price, in whole or in part, at the option of the record holder
thereof upon six (6) months' prior notice given to the Corporation, as
specified below, at any time following the tenth (10th) anniversary of the
Original Issue Date.
In order to exercise such redemption right, a holder of record of shares of
Series A Preferred shall surrender the certificate(s) representing the shares to
be redeemed, duly endorsed to the Corporation or in blank, at the principal
office of the Corporation or at such other office as the Corporation may
designate, accompanied by written notice to the Corporation, that states such
holder elects to have the Corporation redeem such holder's shares of Series A
Preferred or a specified portion thereof. On the date six (6) months following
receipt by the Corporation of such notice and surrender of the certificate(s)
representing the Series A Preferred, the Corporation shall deliver a check in
the amount of the aggregate Redemption Price. The Corporation shall cancel the
certificate(s) for Series A Preferred upon the surrender thereof and shall
execute and deliver with its payment of the Redemption Price a new certificate
for Series A Preferred, representing the balance, if any, of the number of
shares evidenced by such certificate(s) not so redeemed.
9. Status of Reacquired Shares. The shares of Series A Preferred which have
been issued and reacquired in any manner by the Corporation shall have the
status of authorized and unissued shares of Preferred Stock and may be
reclassified and reissued as a part of a new series of Preferred Stock to be
created by resolution or resolutions of the Board.
10. No Fractional Shares. The Corporation shall not be required to issue
fractional shares of Common Stock upon any conversion of Series A Preferred but
shall pay in lieu thereof an amount in cash equal to the same fraction of the
Per Share Market Value (as defined in Section 8(c)) parenthesis, on the date of
the applicable conversion.
11. Determination of the Board. Whenever this Certificate of Designations
requires determination to be made by the Board, such determination shall be
conclusive and shall be set forth in Board resolution.
12. Notices. Any notice required by these provisions to be given to the
holders of Series A Preferred shall be deemed given on the third business day
after mailing, first class mail, postage prepaid, or on the day of delivery if
sent by overnight courier, in each instance in an envelope address to each
holder of record of Series A Preferred at such holder's address appearing on the
books of the Corporation.
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<PAGE>
RESOLVED, FURTHER, that the President and the Secretary of the Corporation
be, and they hereby are, authorized and directed to prepare and file a
Certificate of Designations in accordance with this resolution and as required
by law.
IN WITNESS WHEREOF, the undersigned has executed this Certificate of
Designations on behalf of Comprehensive Environmental Systems, Inc. and does
affirm the foregoing as true under the penalties of perjury this day of
February, 1997.
COMPREHENSIVE ENVIRONMENTAL SYSTEMS, INC.
By:_________________________________________
Michael O'Reilly
President and Chief Executive Officer
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OPTION CERTIFICATE NO. 2/ O'REILLY
COMPREHENSIVE ENVIRONMENTAL SYSTEMS, INC,
Options for the Purchase of Common Stock
This is to certify that Michael O'Reilly ("O'Reilly") has been granted
non-qualified stock options ("Options") which entitle him to subscribe on the
form attached hereto for 2,000,000 authorized, validly issued, fully paid and
non assessable shares of common stock, $.0001 par value per share, of
Comprehensive Environmental Systems, Inc. (the "Company") at a price of $.01 per
share, subject to the terms and conditions set forth herein, upon surrender
hereof at the offices of the Company during the exercise period defined below,
together with full payment for the shares being purchased and accompanied at the
time of each exercise by such executed documents as the Company may reasonably
require to ensure that the common stock to be issued upon such exercise will be
issued in compliance with applicable federal and state securities laws. Unless
this certificate is so surrendered, the Options granted hereby shall be void and
the certificate of no value. If exercised in part, upon surrender the Company
will amend the option certificate and reissue a certificate to the option holder
which represents the remainder of the options not yet exercised.
The Options represented hereby are exercisable in whole or in part by
O'Reilly from time to time during the exercise period. The exercise period is
the period of five years commencing on the earlier of (i) the date of notice of
termination of the employment of O'Reilly as Chief Executive Officer by the
Company, other than "for cause", as defined in Section 9(a) of the O' Reilly
Employment Agreement entered into as of November 1, 1996, if such ever occurs,
or (ii) the date of change of a majority of the Board of Directors of the
Company other than through action by the Board of Directors in creating and
filling vacancies on the Board, or change of controlling stockholders of the
Company, if such ever occurs. These Options are non-transferable (except under
the laws of descent and distribution). The holder of this certificate shall not
have any of the rights of a stockholder in the Company by virtue of being such
holder unless and until the Options are exercised.
The Options granted hereby shall not be diluted by stock splits, dividends,
distributions, recapitalizations or otherwise occurring after the date hereof
and, upon such occurrence, appropriate adjustments to the number of Options
granted hereby shall be made by the Company.
Effective Date: September 12, 1996 as amended effective November 1, 1996
Attest: COMPREHENSIVE ENVIRONMENTAL SYSTEMS, INC.
___________________ BY: ______________________________________
TITLE: Authorized Signatory
EMPLOYMENT AGREEMENT
This EMPLOYMENT AGREEMENT ("Agreement") is made and entered into as of
November 1, 1996 by and between COMPREHENSIVE ENVIRONMENTAL SYSTEMS, INC., a
business corporation organized and existing under the laws of the State of
Delaware and having its executive offices at 72B Cabot Street, West Babylon, New
York 11704 ("Company"), and MICHAEL O'REILLY, residing at 35 Tuthill Road, E,
Moriches, N.Y. 11940 ("Mr. O'Reilly").
W I T N E S S E T H :
WHEREAS, Mr. O'Reilly is currently serving as President and Chief Executive
Officer of the Company and as a member of the Company's Board of Directors
("Board"); and
WHEREAS, the Company desires to secure for itself the continued
availability of Mr. O'Reilly's services; and
WHEREAS, for purposes of securing for the Company Mr. O'Reilly's services,
the Board has approved and authorized the execution of this Agreement with Mr.
O'Reilly on the terms and conditions set forth herein; and
WHEREAS, Mr. O'Reilly is willing to continue to make his services available
to the Company on the terms and conditions set forth herein;
NOW, THEREFORE, in consideration of the premises and the mutual covenants
and obligations hereinafter set forth, the Company and Mr. O'Reilly hereby agree
as follows:
Section 1. Employment
The Company hereby agrees to continue the employment of Mr. O'Reilly and
Mr. O'Reilly hereby agrees to continue such employment during the period and
upon the terms and conditions set forth in this Agreement.
Section 2. Employment Period.
Except as otherwise provided in this Agreement to the contrary, the terms
and conditions of this Agreement shall be and remain in effect during the period
of employment ("Employment Period" established under this section 2. The
Employment Period shall be for a term of five (5) years commencing as of
November 1, 1996 and ending on October 31, 2001.
<PAGE>
Section 3. Duties
Mr. O'Reilly shall serve as President and Chief Executive Officer of the
Company. Mr. O'Reilly's responsibilities, duties and authority as President and
Chief Executive Officer of the Company shall, subject to the direction of the
Board and the By-laws of the Company and any applicable provisions of the
General Corporation Laws of the State of Delaware, be those commonly associated
with such position and shall include, but shall not be limited to, the
employment, general supervision and direction of all operating officers, the
employment, general supervision and direction of the Company's personnel and
planning for the Company's long-term needs and objectives. Mr. O'Reilly shall be
responsible for the general supervision and management of the business affairs
of the Company, and, under authority given to him by the Board, shall execute
documents in the name of the Company and do such other official acts on behalf
of the Company as are appropriate and permitted by the By-laws of the Company.
Mr. O'Reilly shall serve as President and Chief Executive Officer of the
Company's subsidiary, Trade Winds Environmental Restorations Inc. of Long Island
("Trade Winds"), without additional compensation therefor.
Section 4. Compensation
(a) In consideration for the services rendered by Mr. O'Reilly under this
Agreement, the Company shall pay to Mr. O'Reilly a salary at an annual rate
equal to Two Hundred Thousand Dollars ($200,000.00). The annual salary payable
under this section 4(a) shall be paid in approximately equal installments in
accordance with the Company's customary payroll practices.
(b) In addition to the salary provided under section 4(a), Mr. O'Reilly
shall receive a bonus for each fiscal quarter of the Company during the term of
this Agreement in an amount equal to 2% of the "Adjusted Gross Revenues" (as
hereinafter defined) of the Company for such fiscal quarter; provided, however,
that in no event shall Mr. O'Reilly's aggregate bonus for any fiscal year during
the term of this Agreement exceed 25% of the "Pre-Tax Income" (as hereinafter
defined) of the Company and its subsidiaries for such fiscal year (the "Maximum
Bonus"). As used herein, "Adjusted Gross Revenues" shall mean gross revenues of
the Company and its subsidiaries less the sum of all write-offs taken, or
reserves created, for bad debts during such fiscal quarter ("Adjustments"); and
"Pre-Tax Income" shall mean the net income of the Company and its subsidiaries
before any charges for federal, state or other taxes relating to income. All
computations of Adjusted Gross Revenues and Pre-Tax Income hereunder shall be
made by the Company in accordance with generally accepted accounting principles.
Mr. O'Reilly's bonus shall be paid within thirty (30) days following the
end of each fiscal quarter (the "Bonus Payment Date") during the term of this
Agreement in the following manner: an amount equal to 50% of the bonus shall be
paid in cash; and the balance of the bonus ("Balance") shall be paid by the
issuance to Mr. O'Reilly of such number of shares, of the Company's common
stock, which when multiplied by the "fair market value" per share (as herein
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<PAGE>
defined), shall equal the Balance. For purposes of this paragraph 4(b), "fair
market value" per share shall be determined as follows:
(1) If the common stock is listed on a national securities exchange or
admitted to unlisted trading privileges on such exchange or listed for
trading on the Nasdaq Stock Market or other automated quotation system
which provides information as to the last sale price, the current value
shall be the average of the last sales price of one share of common stock
on such exchange or system for the ten (10) trading days preceding the
Bonus Payment Date; or
(2) If the common stock is not so listed or admitted to unlisted
trading privileges, the current value shall be the average of the reported
last bid and asked prices of one share of common stock as reported by
Nasdaq, the National Quotation Bureau, Inc. or other similar reporting
service, for the ten (10) trading days preceding the Bonus Payment Date; or
(3) If the common stock is not so listed or admitted to unlisted
trading privileges and bid and asked prices are not so reported, the fair
market value of one share of common stock shall be an amount, not less than
book value, determined in such reasonable manner as may be prescribed by
the Board of Directors of the Company.
The bonus payment made following the fourth quarter of any fiscal year shall be
adjusted, as necessary, if the aggregate bonus payments in respect of such year
exceed the Maximum Bonus or to reflect any Adjustments not theretofore taken
into account with respect to the previous four fiscal quarters.
Section 5. Employee Benefit Plans and Programs.
(a) Mr. O'Reilly shall be entitled to a minimum of 4 weeks of paid vacation
in each calendar year, all of which shall be deemed accrued, earned and
available for use on the first day of the year.
(b) The Company shall purchase or lease for Mr. O'Reilly's exclusive use a
[new, domestic or imported luxury-class] automobile of his choice and shall
replace such automobile, at Mr. O'Reilly's request, not more frequently than
once in any period of two (2) years. The Company shall pay, or reimburse Mr.
O'Reilly for his payment of, any and all expenses for the maintenance and
operation of such automobile, including, without limitation, fuel, oil,
maintenance and repairs, and the cost of liability and property damage
insurance.
(c) The Company shall also purchase or lease for Mr. O'Reilly's exclusive
use a beeper and cellular telephone of his choice and shall pay, or reimburse
Mr. O'Reilly for his payment of, all charges relating thereto.
(d) In addition to any group-term life insurance coverage available
pursuant to section 5(e) of this Agreement, the Company shall, at its sole
expense, provide additional term or other
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<PAGE>
life insurance coverage on Mr. O'Reilly's life providing a death benefit of not
less than 1 Million Dollars ( $1,000,000); provided, however, that such coverage
is available on commercially reasonable terms. If such coverage is provided, the
Company shall own and control (by split-dollar agreement, collateral assignment
or otherwise) the cash surrender value, if any, of the policy providing such
coverage and, for so long as it shall own and control such cash surrender value,
shall be entitled upon Mr. O'Reilly's death to receive a portion of the death
benefit proceeds equal to the greater of such cash surrender value immediately
prior to the time of death or the aggregate amount of its premiums paid. The
remainder of the death benefit shall be disposed of as determined by Mr.
O'Reilly, in his discretion. To the extent permitted under the terms of such
policy, at any time during the Employment Period hereunder and for a period of
ninety (90) days thereafter, but in any event prior to his death, Mr. O'Reilly
may purchase the Company's interest, if any, in such policy by agreeing to
assume the liability for future premium payments and paying the Company an
amount equal to the policy's cash surrender value, if any, at the time of
purchase.
(e) Except as otherwise provided in this Agreement, Mr. O'Reilly shall,
during the Employment Period, be treated as an employee of the Company and be
entitled to participate in and receive benefits under the Company's group life,
health (including hospitalization, medical and major medical), dental, accident
and long term disability insurance plans, and such other employee benefit plans
and programs, including, but not limited to, any pension plans, incentive
compensation plans or programs (whether or not employee benefit plans or
programs), and any stock option and appreciation rights plan, employee stock
ownership plan and restricted stock plan, as may from time to time be maintained
by, or cover employees of, the Company, in accordance with the terms and
conditions of such employee benefit plans and programs and compensation plans
and programs and with the Company's customary practices.
Section 6. Investments and Other Business Interests.
Mr. O'Reilly may engage in personal business and investment activities for
his own account; provided, however, that such personal business and investment
activities shall not [materially] interfere with the performance of his duties
under this Agreement, and shall in all events be subject to the provisions of
Section 10 hereof.
Section 7. Working Facilities and Expenses.
Mr. O'Reilly's principal place of employment shall be at the Company's
executive offices at the address first above written, or at such other location
as the Company and Mr. O'Reilly may mutually agree upon. The Company shall
provide Mr. O'Reilly at his principal place of employment with a private office,
secretarial services and other support services and facilities suitable to his
position with the Company and necessary or appropriate in connection with the
performance of his assigned duties under this Agreement. The Company shall
reimburse Mr. O'Reilly for his ordinary and necessary business expenses,
including, without limitation, [fees for memberships in one business or social
club of his choice and in such other clubs and organizations as Mr. O'Reilly and
the Company shall mutually agree are necessary and appropriate for business
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<PAGE>
purposes], and his travel and entertainment expenses incurred in connection with
the performance of his duties under this Agreement upon presentation to the
Company of an itemized account of such expenses in such form as the Company may
reasonably require.
Section 8. Termination of Employment with Company Liability
(a) In the event that Mr. O'Reilly's employment with the Company shall
terminate during the Employment Period on account of:
(i) Mr. O'Reilly's voluntary resignation from employment with the
Company within ninety (90) days following:
(A) the failure of the Company's Board to appoint or re-appoint
or elect or re-elect Mr. O'Reilly to the offices of President and
Chief Executive Officer (or a more senior office) of the Company and
Trade Winds;
(B) the failure of the stockholders of the Company to elect or
re-elect Mr. O'Reilly as a Director of the Company;
(C) a material failure of the Company, whether by amendment of
the Company's Certificate of Incorporation or By-laws, action of the
Board or the Company's stockholders or otherwise, to vest in Mr.
O'Reilly the functions, duties, or responsibilities prescribed in
section 3 of this Agreement or the By-Laws of the Company;
(D) a material breach of this Agreement by the Company; or
(E) a "Change of Control"(as hereinafter defined) of the Company;
as used herein, a "Change of Control" shall mean:
(a) individuals who as of the date hereof constitute the
Board (the "Incumbent Board") cease for any reason to constitute
a majority of the Board other than through action by the Board in
creating and filling vacancies on the Board; or
(b) either
(i) the acquisition by any individual, entity or group
(within the meaning of Section 13 (d)(3) or 14 (d)(2) of the
Securities Exchange Act of 1934, as amended (the "Exchange
Act") (a "Person") of beneficial ownership (within the
meaning of Rule 13d-3 promulgated under the Exchange Act) of
voting securities of the Company where such acquisition
causes such Person to own 20% or more of the outstanding
voting securities of the Company ("Securities Acquisition");
or
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<PAGE>
(ii) the approval by the shareholders of the Company of
a reorganization, merger or consolidation or sale or other
disposition of all or substantially all of the assets of the
Company ("Business Combination"),
unless pursuant to such Securities Acquisition or Business
Combination (A) all or substantially all of the individuals and
entities who were the beneficial owners of the outstanding voting
securities of the Company prior to the Securities Acquisition or
Business Combination beneficially own more than [66 2/3 %] of the
then outstanding voting securities of the Company (if it is the
surviving corporation) or the surviving corporation (if it is
other than the Company) in substantially the same proportions as
their ownership immediately prior to the Securities Acquisition
or Business Combination, and (B) at least a majority of the
members of the Board of the surviving corporation were members of
the Incumbent Board immediately prior to the Securities
Acquisition or Business Combination; or
(ii) the discharge of Mr. O'Reilly by the Company for any reason other
than for "cause" as provided in section 9(a);
then the Company shall provide the benefits and pay to Mr. O'Reilly the amounts
provided for under section 8(b). Notwithstanding anything contained herein to
the contrary, the Company shall not be liable for the payments and benefits
under section 8(b) in the case of a resignation described in section 8(a)(i)(C)
or (D) for reasons other than failure to pay compensation due hereunder unless
Mr. O'Reilly has given written notice to the Company of its breach and the
Company fails to cure such breach within thirty (30) days thereafter or Mr.
O'Reilly has, within the twelve (12) month period ending on the date of his
resignation, given the Company written notice of a substantially similar breach
which was subsequently cured.
(b) Upon the termination of Mr. O'Reilly's employment with the Company
under circumstances described in section 8(a) of this Agreement, the Company
shall pay and provide to Mr. O'Reilly (or, in the event of his death, to his
estate):
(i) his earned but unpaid salary as of the date of the termination of
his employment with the Company, and his earned but unpaid bonus as of the
date of his termination, pro-rated for the fiscal quarter during which his
termination occurs (based on the number of days that he was in the
Company's employ during such fiscal quarter) if the termination is other
than on the last day of a fiscal quarter;
(ii) except as provided in section 8(b)(iv), the benefits, if any, to
which he is entitled as a former employee under the employee benefit plans
and programs and compensation plans and programs maintained for the benefit
of the Company's officers and employees;
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(iii) continued life, health (including hospitalization, medical and
major medical), dental, accident and long term disability insurance
benefits, in addition to that provided pursuant to section 8(b)(ii), and
after taking into account the coverage provided by any subsequent employer,
if and to the extent necessary to provide for Mr. O'Reilly for the
remaining unexpired Employment Period, coverage equivalent to the coverage
to which he would have been entitled if he had continued working for the
Company during the remaining unexpired Employment Period at the highest
annual rate of compensation achieved during that portion of the Employment
Period which is prior to Mr. O'Reilly's termination of employment with the
Company;
(iv) within thirty (30) days following his termination of employment
with the Company and in lieu of any monetary payments to which he may be
entitled under any severance pay plan, program or policy, a lump sum
payment, in an amount equal to the present value of the salary that Mr.
O'Reilly would have earned at the rate set forth in section 4(a) if he had
continued working for the Company during the remaining unexpired Employment
Period, where such present value is to be determined using a discount rate
of six percent (6%) per annum, compounded monthly (or the compounding
period corresponding to the Company's regular payroll periods with respect
to its officers, if not monthly), such lump sum to be paid in lieu of all
other payments of salary provided for under this Agreement in respect of
the period following any such termination (other than the additional
severance payment provided for in section 8(c) as set forth therein);
(v) within thirty (30) days following his termination of employment
with the Company, a lump sum payment in an amount equal to the excess, if
any, of: (A) the present value of the benefits to which he would be
entitled under any benefit plans maintained by, or covering employees of,
the Company if he were 100% vested thereunder and had continued working for
the Company during the remaining unexpired employment period at the highest
annual rate of compensation achieved during that portion of the Employment
Period which is prior to Mr. O'Reilly's termination of employment with the
Company, over (B) the present value of the benefits to which he is actually
entitled under any benefit plans maintained by, or covering employees of,
the Company as of the date of his termination, where such present values
are to be determined using a discount rate of six percent (6%) per annum,
compounded monthly;
(vi) within thirty (30) days following his termination of employment
with the Company a lump sum cash payment in the amount of the payments that
would have been made to Mr. O'Reilly (in cash and stock) under section 4(b)
of this Agreement if he had continued working for the Company during the
remaining unexpired Employment Period and had earned an annual bonus
payment for each fiscal quarter equal to the highest amount actually paid
to Mr. O'Reilly for any fiscal quarter pursuant to section 4(b); provided,
however, that at Mr. O'Reilly's option, he may elect by notice to the
Company given within twenty (20) days following his termination of
employment, in lieu of the payments set forth in the preceding sentence of
this clause (vi) to receive cash payments
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on the Bonus Payment Dates (as defined in Section 4(b) hereof) during the
remaining unexpired Employment Period in an amount equal to the higher of
(x) the bonus that Mr. O'Reilly would have received (in cash and stock)
pursuant to Section 4(b) for each fiscal quarter if he had continued
working for the Company throughout the remaining unexpired Employment
Period, or (y) the highest amount actually paid to Mr. O'Reilly (in cash
and stock) for any fiscal quarter pursuant to Section 4(b);
(vii) at the election of Mr. O'Reilly made within thirty (30) days
following his termination of employment with the Company, upon the
surrender of options or appreciation rights issued to Mr. O'Reilly under
any stock option and appreciation rights plan or program or restricted
stock plan maintained by, or covering employees of, the Company, a lump sum
payment in an amount equal to the product of:
(A) in the case of a stock option or appreciation rights plan or
program:
(I) the excess of (A) the fair market value of a share of
stock of the same class as the stock subject to the option or
appreciation right, determined as of the date of termination of
employment, over (B) the exercise price per share for such option
or appreciation right, as specified in or under the relevant plan
or program; multiplied by
(II) the number of shares with respect to which options or
appreciation rights are being surrendered; and
(B) in the case of a restricted stock plan:
(I) the fair market value of a share of stock of the same
class of stock granted under such plan, determined as of the date
of Mr. O'Reilly's termination of employment; multiplied by
(II) the number of shares which are being surrendered.
For purposes of this section 8(b)(vii) and for purposes of determining Mr.
O'Reilly's right following his termination of employment with the Company to
exercise any options or appreciation rights not surrendered pursuant hereto, Mr.
O'Reilly shall be deemed fully vested in all options and appreciation rights
under any stock option or appreciation rights plan or program maintained by, or
covering employees of, the Company, even if he is not vested under such plan or
program.
(c) In the event that a termination of employment occurs pursuant to
section 8(a), on or after November 1, 1999 and prior to October 31, 2001, then
in addition to all of the payments and benefits which the Company shall pay or
provide pursuant to section 8(b), the Company shall
8
<PAGE>
also pay to Mr. O'Reilly (or his estate, as applicable) within thirty (30) days
following his termination of employment, the following severance payments:
(A) a lump sum cash payment in an amount equal to one year of Mr.
O'Reilly's salary as set forth in section 4(a); plus
(B) a lump sum cash payment in an amount equal to the highest annual
bonus payment that was actually paid to Mr. O'Reilly (in cash and stock)
for any fiscal year pursuant to section 4(b).
(d) The Company and Mr. O'Reilly hereby stipulate that the damages which
may be incurred by Mr. O'Reilly following any termination of employment pursuant
to Section 8(a) are not capable of accurate measurement as of the date first
above written and that the payments and benefits contemplated by section 8(b)
and 8(c) constitute reasonable damages under the circumstances and shall be
payable without any requirement of proof of actual damage and without regard to
Mr. O'Reilly's efforts, if any, to mitigate damages.
Section 9. Termination without Additional Company Liability.
In the event that Mr. O'Reilly's employment with the Company shall
terminate during the Employment Period on account of:
(a) the discharge of Mr. O'Reilly for "cause" which, for purposes of this
Agreement, shall mean his repeated and gross negligence in the fulfillment of,
or repeated failure of Mr. O'Reilly to fulfill, his material obligation under
this Agreement, in either event after due written notice thereof (which notice
requirement shall be deemed satisfied if due written notice of a substantially
similar act or omission shall have been given within twelve (12) months prior to
such discharge), or serious willful misconduct by Mr. O'Reilly in respect of his
obligations hereunder, or his conviction of a felony under the laws of the
United States or any State, but only if such gross neglicence, repeated failure,
willful misconduct or conviction materially impairs his ability to effectively
perform his duties under this Agreement; provided, however, that cause shall not
include, without limitation:
(i) the refusal by Mr. O'Reilly of an assignment not consistent with
the status, titles and reporting requirements set forth herein or
contemplated hereby; or
(ii) bad judgment or negligence of Mr. O'Reilly; or
(iii) any act or omission (other than one constituting a material
breach of trust committed in willful and reckless disregard of the
interests of the Company and undertaken for personal gain) in respect of
which a determination could properly have been made by the Board that Mr.
O'Reilly met the applicable standard of conduct prescribed for
indemnification or reimbursement under the By-Laws of the Company or
9
<PAGE>
the laws of the State in which the Company is then chartered, in each case
in effect at the time of such act or omission; or
(iv) any act or omission with respect to which notice of termination
is given more than twelve (12) months after the earliest date on which any
non-employee director of the Company who was not a party to such act or
omission knew or should have known of such act or omission; or
(b) Mr. O'Reilly's voluntary resignation from employment with the Company
for reasons other than those specified in section 8(a)(i);
(c) Mr. O'Reilly's death; or
(d) a determination by the Company that Mr. O'Reilly is totally and
permanently disabled and as a result thereof is unable to perform his material
duties hereunder for a continuous period of [365] days;
then the Company shall have no further obligations under this Agreement, other
than the payment to Mr. O'Reilly (or, in the event of his death, to his estate)
of his earned but unpaid salary as of the date of the termination of his
employment; [his earned but unpaid bonus as of the date of his termination,
pro-rated for the fiscal quarter during which his termination occurs (based on
the number of days he was in the Company's employ during such fiscal quarter) if
the date of termination is other than on the last day of a fiscal quarter]; and
the provisions of such other benefits, if any, to which he is entitled as a
former employee under this Agreement and the employee benefit plans and programs
and compensation plans and programs maintained by, or covering employees of, the
Company.
Section 9A. Severance at Expiration of Employment Period.
In the event that at the expiration of the Employment Period, Mr.
O'Reilly's employment is not continued for any reason, then the Company shall
pay to Mr. O'Reilly (or his estate, as applicable) his earned but unpaid salary
as of the date of the termination of his employment and his earned but unpaid
bonus as of the date of his termination, pro-rated for the fiscal quarter during
which his termination occurs (based on the number of days he was in the
Company's employ during such fiscal quarter) if the date of termination is other
than on the last day of a fiscal quarter; shall provide to Mr. O'Reilly all of
the benefits, if any, to which he is entitled as a former employee under this
Agreement and the employee benefit plans and programs and compensation plans and
programs maintained by, or covering employees of, the Company; and, in addition,
shall pay to Mr. O'Reilly the severance payments set forth in section 8(c)
hereof.
Section 10. Covenant Not To Compete.
10
<PAGE>
Mr. O'Reilly hereby covenants and agrees that, during the Employment Period
and in the event of his termination of employment with the Company prior to the
expiration of the Employment Period, for a period of one (1) year following the
date of his termination of employment with the Company (or, if less, for the
remaining unexpired Employment Period), he shall not, without the written
consent of the Company, become an officer, employee, consultant, director or
trustee of any entity, or any direct or indirect subsidiary or affiliate of any
such entity, that directly or indirectly competes with this Company in any
market area in which it is active; provided, however, that this section 10 shall
not apply if Mr. O'Reilly's employment is terminated for the reasons set forth
in section 8(a), and provided, further, that if Mr. O'Reilly's employment shall
be terminated on account of disability as provided in section 9(d) of this
Agreement, this section 10 shall not prevent Mr. O'Reilly from accepting any
position or performing any services if (a) he first offers, by written notice,
to accept a similar position with, or perform similar services for, the Company
on substantially the same terms and conditions and (b) the Company declines to
accept such offer within ten (10) days after such notice is given.
Section 11. Confidentiality; Proprietary Information.
(a) Unless he obtains the prior written consent of the Company (which
consent shall not be unreasonably withheld), Mr. O'Reilly shall keep
confidential and shall refrain from using for the benefit of any person or
entity other than the Company or any entity which is a subsidiary of the Company
or of which the Company is a subsidiary, any material document or information
obtained from the Company, or from its parent or subsidiaries, in the course of
his employment with any of them concerning their properties, operations or
business (unless such document or information is readily ascertainable from
public or published information or trade sources or has otherwise been made
available to the public through no fault of his own) until the same ceases to be
material (or becomes so ascertainable or available); provided, however, that
nothing in this section 11 shall prevent Mr. O'Reilly, with or without the
Company's consent, from participating in or disclosing documents or information
in connection with any judicial or administrative investigation, inquiry or
proceeding to the extent that such participation or disclosure is required under
applicable law.
(b) Mr. O'Reilly acknowledges that during the course of his employment with
the Company he may develop or otherwise acquire papers, files or other records
involving or relating to confidential or secret processes, formulas,
discoveries, inventions, machinery, plans, design information of any kind,
devices, material, research, new product development, customers or customer
lists. All such papers, files and other records shall be the exclusive property
of the Company and shall, together with any and all copies thereof, be returned
to the Company upon Mr. O'Reilly's termination of employment.
Section 12. Solicitation.
Mr. O'Reilly hereby covenants and agrees that in the event of his
termination of employment with the Company prior to the expiration of the
Employment Period, for a period of
11
<PAGE>
one (1) year following his termination of employment with the Company (or, if
less, the remaining unexpired Employment Period), he shall not, without the
written consent of the Company, either directly or indirectly:
(a) solicit, offer employment to, or take any other action intended, or
that a reasonable person acting in like circumstances would expect, to have the
effect of causing any officer or employee of the Company (other than a member of
Mr. O'Reilly's family) or any subsidiary of the Company to terminate his or her
employment and accept employment or become affiliated with, or provide services
for compensation in any capacity whatsoever to, any entity that directly or
indirectly competes with this Company in any market area in which it is then
active;
(b) provide any information, advice or recommendation with respect to any
officer or employee of the Company (other than a member of Mr. O'Reilly's
Family) or any subsidiary of the Company to any entity engaged or to be engaged
in the same or competing business with the Company that is intended, or that a
reasonable person acting in like circumstances would expect, to have the effect
of causing any such officer or employee to terminate his or her employment and
accept employment or become affiliated with, or provide services for
compensation in any capacity whatsoever to, any entity that directly or
indirectly competes with the Company in any market area in which it is then
active; provided, however, that nothing in this Section 12(b) shall be construed
as prohibiting Mr. O'Reilly from serving as a reference if so requested by an
officer or employee of the Company or subsidiary of the Company;
(c) solicit, provide any information, advice or recommendation or take any
other action intended, or that a reasonable person acting in like circumstances
would expect, to have the effect of causing any customer of the Company with
which Mr. O'Reilly has had substantial contact to terminate an existing business
or commercial relationship with the Company;
provided, however, that this section 12 shall not apply if Mr. O'Reilly's
employment is terminated for any of the reasons set forth in section 8(a).
Nothing in this section 12 shall prevent Mr. O'Reilly from directly or
indirectly advertising employment opportunities or disseminating marketing
materials through newspapers of general circulation or other mass media.
Section 13. No Effect on Employee Benefit Plans or Programs.
The termination of Mr. O'Reilly's employment during the term of this
Agreement or thereafter, whether by the Company or by Mr. O'Reilly, shall have
no effect on the rights and obligations of the parties hereto under the
Company's pension plan, group life, health, (including hospitalization, medical
and major medical), dental, accident and long term disability insurance plans or
such other employee benefit plans or programs, or compensation plans or programs
(whether or not employee benefit plans or programs) and any stock option and
appreciation rights plan, employee stock ownership plan and restricted stock
plan, as may be maintained by, or cover employees of, the Company from time to
time.
12
<PAGE>
Section 14. Indemnification and Attorneys' Fees.
The Company shall provide Mr. O'Reilly with payment of legal fees and
indemnification to the maximum extent permitted by the Delaware General
Corporation Law. The Company shall indemnify and hold harmless Mr. O'Reilly
against reasonable costs, including legal fees and expenses, incurred by him in
connection with or arising out of any action, suit or proceeding in which he may
be involved to defend or enforce the terms of this agreement, without regard to
whether Mr. O'Reilly is the prevailing party in such action, suit or proceeding.
Section 15. Excise Tax.
(a) If, in connection with the termination of Mr. O'Reilly's employment,
Mr. O'Reilly shall be liable for the payment of an excise tax under section 4999
of the Code with respect to any payment of money or property made by the
Company, the Company shall pay to Mr. O'Reilly an amount to indemnify Mr.
O'Reilly against such excise tax and against any additional income and excise
taxes imposed on him as a result of such indemnification. With respect to any
payment that is made to Mr. O'Reilly under the terms of this Agreement in the
year of his termination of employment and on which an excise tax under section
4999 of the Code will be assessed, the payment determined under this section
15(a) shall be made to Mr. O'Reilly not later than thirty (30) days following
his termination of employment. With respect to any payment made under the terms
of this Agreement in any other year and on which an excise tax under section
4999 of the Code will be assessed, the payment under this section 15(a) shall be
made to Mr. O'Reilly not later than December 31st of the year in which the
payment on which such excise tax will be assessed is made to Mr. O'Reilly or, if
earlier, the date on which such tax is required to be remitted to the Internal
Revenue Service. The payments made by the Company under this section 15(a) shall
be determined by the Company on the basis of advice from the firm of independent
certified public accountants regularly retained by the Company to audit its
books and shall be subject to subsequent adjustment as provided in section
15(b).
(b) In the event that Mr. O'Reilly's liability for the excise tax under
section 4999 of the Code for a taxable year is subsequently determined to be
different than the amount paid for such year pursuant to section 15(a), Mr.
O'Reilly or the Company, as the case may be, shall pay to the other party at the
time that the amount of such excise tax is finally determined, an appropriate
amount, plus interest, such that the payment made under section 15(a), when
increased by the amount of the payment made to Mr. O'Reilly under this section
15(b) by the Company, or when reduced by the amount of the payment made to the
Company under this section 15(b) by Mr. O'Reilly, equals the amount finally
determined to have been properly payable to Mr. O'Reilly under section 15(a).
The interest paid under this section 15(b) shall be determined at the rate
provided under section 1274(b)(2)(B) of the Code. To confirm that the proper
amount, if any, was paid to Mr. O'Reilly under this section 15, Mr. O'Reilly
shall furnish to the Company a copy of each tax return which reflects a
liability for an excise tax payment under section 4999 of the Code with respect
to a payment made by the Company, at least twenty (20) days before the date on
which such return is required to be filed with the Internal Revenue Service. If
Mr. O'Reilly
13
<PAGE>
fails to furnish any such return by the prescribed date, then (i) the Company's
payment obligation hereunder shall be deferred until twenty (20) days after the
date on which such return is actually furnished and (ii) the Company shall have
no liability to indemnify Mr. O'Reilly against any excess tax payment which the
Company reasonably believes to have been made in error.
Section 16. Successors and Assigns; Survivorship.
This Agreement will inure to the benefit of and be binding upon Mr.
O'Reilly, his legal representatives, heirs and assigns, and the Company, its
respective successors and assigns, including any successor by merger or
consolidation or a statutory receiver or any other person or firm or corporation
to which all or substantially all of the respective assets and business of the
Company may be sold or otherwise transferred.
Section 17. Waiver.
Failure to insist upon strict compliance with any of the terms, covenants
or conditions hereof shall not be deemed a waiver of such term, covenant, or
condition. A waiver of any provision of this Agreement must be made in writing,
designated as a waiver, and signed by the party against whom its enforcement is
sought. Any waiver or relinquishment of any right or power hereunder at any one
or more times shall not be deemed a waiver or relinquishment of such right or
power at any other time or times.
Section 18. Notices.
Any communication required or permitted to be given under this Agreement,
including any notice, direction, designation, consent, instruction, objection or
waiver, shall be in writing and shall be deemed to have been given at such time
as it is delivered personally, or five (5) days after mailing if mailed, postage
prepaid, by registered or certified mail, return receipt requested, addressed to
such party at the address listed below or at such other address as one such
party may by written notice specify to the other party:
If to Mr. O'Reilly:
100 Sweeneydale Avenue
Bay Shore, New York 11706
----------------------
with copy to:
Esanu Katsky Korins & Siger
605 Third Avenue
New York, New York 10158
Attention: Roy M. Korins, Esq.
14
<PAGE>
If to the Company:
Comprehensive Environmental Systems, Inc.
72B Cabot Street
West Babylon, New York 11704
Attention: Corporate Secretary
Section 19. Severability.
A determination that any provision of this Agreement is invalid or
unenforceable shall not affect the validity or enforceability of any other
provision hereof.
Section 20. Counterparts.
This Agreement may be executed in two (2) or more counterparts, each of
which shall be deemed an original, and all of which shall constitute one and the
same Agreement.
Section 21. Governing Law.
This Agreement shall be governed by and construed and enforced in
accordance with the laws of the State of New York, without reference to
conflicts of law principles.
Section 22. Headings and Construction
The headings of sections in this Agreement are for convenience of reference
only and are not intended to qualify the meaning of any section. Any reference
to a section number shall refer to a section of this Agreement, unless otherwise
stated.
Section 23. Survival.
The rights and obligations of the Company and Mr. O'Reilly under sections
10, 11, 12, 14 and 15 of this Agreement shall survive the termination or
expiration of this Agreement, notwithstanding anything contained herein to the
contrary.
Section 24. Equitable Remedies.
The Company and Mr. O'Reilly hereby stipulate that monetary damages shall
be an inadequate remedy for violations of sections 10, 11 and 12, of this
Agreement and agree that equitable remedies, including, without limitation, the
remedies of specific performance and injunctive relief, shall be available with
respect to the enforcement of such provisions.
Section 25. Entire Agreement, Modifications.
15
<PAGE>
This instrument contains the entire agreement of the parties relating to
the subject matter hereof, and supersedes in its entirety any and all prior
agreements, understandings or rep-representations relating to the subject matter
hereof, provided however, that the terms of this Agreement do not supersede the
terms of any grant or award to Mr. O'Reilly of any non-qualified stock options
or any similar or successor benefit, plan or program. No modifications of this
Agreement shall be valid unless made in writing and signed by the parties
hereto.
IN WITNESS WHEREOF, the Company has caused this Agreement to be executed
and Mr. O'Reilly has hereunto set his hand, all as of the day and year first
above written.
/s/ Michael O'Reilly
--------------------
MICHAEL O'REILLY
ATTEST: COMPREHENSIVE ENVIRONMENTAL
SYSTEMS, INC.
By: /s/ Anthony P. Towell By: /s/ Anthony P. Towell
----------------- -----------------
Anthjony P. Towell, Secretary Anthony P. Towell, Director
/s/ Samuel Sadove
- -----------------
Samuel Sadove, Director
16
Exhibit 23
Consent of Independent Accountants
----------------------------------
We hereby consent to the incorporation by reference in the Registration
Statement on Form S-8 (No.333-22491) of Windswept Environmental Group, Inc. of
our report dated September 29, 1997 appearing on page F-1 of this Annual Report
on Form 10-KSB.
/s/ Price Waterhouse LLP
Price Waterhouse LLP
Melville, New York
September 29, 1997
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM
THE FINANCIAL STATEMENTS AS OF AND FOR THE FISCAL YEAR ENDED APRIL
30, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> Apr-30-1997
<PERIOD-START> May-01-1996
<PERIOD-END> Apr-30-1997
<CASH> 654,377
<SECURITIES> 0
<RECEIVABLES> 2,395,284
<ALLOWANCES> 200,000
<INVENTORY> 158,714
<CURRENT-ASSETS> 3,525,253
<PP&E> 3,992,936
<DEPRECIATION> 1,151,153
<TOTAL-ASSETS> 8,385,390
<CURRENT-LIABILITIES> 3,901,421
<BONDS> 1,254,560
1,300,000
0
<COMMON> 979
<OTHER-SE> 1,928,430
<TOTAL-LIABILITY-AND-EQUITY> 8,385,390
<SALES> 15,275,209
<TOTAL-REVENUES> 15,275,209
<CGS> 12,549,864
<TOTAL-COSTS> 12,549,864
<OTHER-EXPENSES> 180,000
<LOSS-PROVISION> 6,980,480
<INTEREST-EXPENSE> 178,615
<INCOME-PRETAX> (4,613,750)
<INCOME-TAX> 0
<INCOME-CONTINUING> (4,613,750)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (4,613,750)
<EPS-PRIMARY> (.51)
<EPS-DILUTED> 0
</TABLE>
