U.S. 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, 1998
Commission File No. 0-17072
WINDSWEPT ENVIRONMENTAL GROUP, INC.
(name of small business issuer in its charter)
Delaware 11-2844247
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
100 Sweeneydale Avenue, Bay Shore, New York 11706
(Address of principal executive offices) (Zip Code)
Issuer's telephone number: (516) 694-7060
Securities registered pursuant to Section 12 (b) of the Exchange Act: None
Securities registered pursuant to Section 12 (g) of the Exchange Act:
Common Stock, $.0001 par value per share
(Title of Class)
Check whether the issuer (1) has filed all reports required to be filed by
Section 13 or 15 (d) of the Exchange Act 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 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 amendment to this form 10-KSB. [ ]
The issuer's revenues for its most current fiscal year were $11,968,774.
Based upon the average bid and ask price on that July 31, 1998 ($.41) the
aggregate market value of the Common stock, $.0001 par value per share, held by
non-affiliates of the registrant was approximately $5,035,928.
As of July 31, 1998 the issuer had 12,369,750 common shares, $.0001 par value,
outstanding.
Transitional Small Business Disclosure Format (check one)
Yes ___ No _X_
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PART 1
ITEM 1. DESCRIPTION OF BUSINESS
General
Windswept Environmental Group, Inc. ("Windswept" or "the Company"), through its
wholly-owned subsidiaries, 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, and hazardous materials remediation,
testing, toxicology, training, technical advisory and site renovation services.
The Company believes that it has assembled the resources, including key
environmental professionals and community leaders, and specialized equipment, to
become a leader in the expanding worldwide emergency environmental services
market. The Company believes that few, if any, competitors provide such a
diversity of services within a critical 24 hour standby, rapid response basis
period. Management believes that this unique emergency capability has positioned
the Company to become one of the fastest growing full service environmental
remediation firms in the Northeast. See Note 3 to the Consolidated Financial
Statements for information regarding the Company's liquidity and certain
business risks.
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,
Company consolidated its facilities and its principal executive offices into one
location at 100 Sweeneydale Avenue, Bay Shore, New York, 11706. The telephone
number is 516-694-7060.
In December 1993 the Company acquired Trade-Winds Environmental Restoration,
Inc. ("Trade-Winds"), an asbestos abatement and lead remediation company. In
June 1995 the Company purchased a testing laboratory, New York Testing
Laboratories Inc. ("NYTL"), that offers hazardous materials testing
capabilities. On February 24, 1997, the Company acquired North Atlantic
Laboratories, Inc. ("NAL"), a certified environmental training, laboratory
testing and consulting services company.
Business of Issuer
Operations
The Company's business has evolved, and continues to evolve, in order to
continue to capitalize on market opportunities. The Company has added strategic
capabilities and resources through the years to move the business from its roots
as an asbestos abatement contractor to an oil spill and wildlife rehabilitator,
and now, a full service emergency response provider. The Company provides 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
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ITEM 1. DESCRIPTION OF BUSINESS (CONT'D)
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
services company with immediate response capabilities. Supplementing its core
business operations, the Company has historically sought out, and will continue
to seek out, opportunities which are compatible with the Company's strategic
focus. In December 1993 the Company acquired Trade-Winds, an asbestos abatement
and lead remediation company. In June 1995 the Company acquired NYTL, a testing
laboratory that offers hazardous materials testing capabilities. In February
1997 the Company acquired NAL, an environmental training, laboratory testing and
consulting services company.
Since the Company and its subsidiaries are able to perform their services
throughout the year, the business is not considered seasonal in nature. However,
it is affected by the timing of large contracts in certain of its service areas,
i.e., asbestos abatement and construction, as well as the timing of
catastrophes.
Suppliers & Customers
The Company purchases its supplies and materials used in its business from a
number of vendors, none of whom individually represented more than 10% of the
Company's purchases.
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 Company's
subsidiaries, clients who begin by utilizing one division or subsidiary often
use other divisions or subsidiaries within the Company to ultimately serve all
of their environmental needs. In order to address the needs of the insurance
industry, the Company has dedicated considerable resources toward focusing the
strategic integration of all of its subsidiaries services. As a result, the
Company provides its insurance customers with twenty-four hours per day, seven
days per week capability to respond to virtually any type of insurance loss.
This enables the Company's clients to rely upon it solely to perform all the
tasks necessary to rapidly restore a property to pre-loss conditions, thus
minimizing dislocation, downtime and business interruption. Management considers
insurance loss restoration to be an increasing significant portion of the
Company's business going forward. The Company's customers include Fortune 500TM
companies, insurance companies, industrial concerns, oil companies, banks,
school districts, state, local and county governments, commercial building
owners and real estate development concerns. 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 1998 sales to two customers, the New York State Department of
Environmental Conservation and the Long Island Rail Road, accounted for 10.5%
and 8.2% of the Company's sales, respectively. During fiscal 1997 sales to a
local municipality represented 16% of total sales. While the Company has repeat
business with many of its customers, the level of business with a particular
customer in a succeeding season is not expected to 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, the Company believes that the loss of any
single customer would not have a material adverse effect on the Company's
financial condition and results of operations. See " Managements Discussion and
Analysis or Plan of Operation - Results of Operations."
Marketing
The Company has an aggressive marketing program that is administered by a staff
of five 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.
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ITEM 1. DESCRIPTION OF BUSINESS (CONT'D)
The Company's environmental services are principally marketed in the
Northeastern United States. Business is obtained through client referral, client
expansion, participants in the Company's environmental training programs,
referrals from architects, insurance companies, 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 believes that its
surveying and sampling of materials services also provide opportunities to
market and sell its other environmental remediation services.
Emergency Response Capabilities
The Company has been 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, and
other 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, floods, and biological threats.
For spills on water, the Company's current fleet of seventeen spill response
boats are equipped with skimmer capabilities. The Company's staff includes U.S.
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 1998, the Company believes that it 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, including 35 wildlife rehabilitators on
staff, 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 in the Northeastern United States 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 the Company'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 possesses 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 Occupational Safety and Health Administration ("OSHA") and
Environmental Protection Agency ("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.
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ITEM 1. DESCRIPTION OF BUSINESS (CONT'D)
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". The Company believes that 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 EPA estimates that
936,000 workers fall under OSHA's Lead Based Paint Hazard Reduction Act.
Compliance/Health and Safety
The Company regards compliance with applicable environmental regulations and the
health and safety of its workforce as critical components of its overall
operations.
A substantial portion of the Company's equipment is OSHA approved and is
operated pursuant to a written corporate health and safety plan. Additionally,
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. Employees 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. The Company also carries comprehensive auto, professional and
pollution liability as well as worker's compensation and disability coverage.
Basic limits of liability are $1,000,000. In addition the Company carries all
risk property insurance on all furniture, fixtures, equipment, machinery and
water craft.
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 of the creditworthiness of the
Company. At present, the Company believes that 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, no assurance can be given in this regard. 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 generally 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 Company believes that the types of licenses the Company
possesses have reciprocity in most of the United States due to their adherence
to federal standards.
Patents, Trademarks, Licenses and Copyrights
The Company does not own any patents or registered trademarks or trade names.
The Company has common law trademark protection for certain of its trade names
and service marks. The Company has copyrights for certain of its promotional and
employee
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ITEM 1. DESCRIPTION OF BUSINESS (CONT'D)
training materials. The Company does not believe that intellectual property is a
competitive factor in its industry.
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, the Company believes that 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, on
standby, both an OSRO and one of the two wildlife rehabilitation concerns.
The Company competes with approximately ten environmental remediation companies
similar 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 its 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
rehabilitation, and marine oil spill response. Furthermore the Company has two
employees with environmental doctorates on staff, its 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.
Backlog
The Company's backlog totaled approximately $3,931,000 at April 30, 1998. The
backlog at April 30, 1998 included $3,875,000 of uncompleted work on fixed fee
contracts for Trade-Winds ($3,800,000) and NAL ($75,000). The backlog represents
the portion of contracts in process at a point in time which have not been
completed. As the contracts are completed, the backlog will be reduced and the
related revenue will be recognized. The Company is currently working on
virtually all of its contracts in its backlog and anticipates that all but
approximately 45% of this backlog was completed by the end of the first quarter,
July 31, 1998, in accordance with the terms of the contracts between the Company
and its customers. The remaining 55% is expected to be completed in the second
quarter ending October 31, 1998. The backlog for NYTL was $56,000 representing
orders for sample analysis and product testing which were completed during the
quarter ended July 31, 1998.
Employees/Technical Staff
As of July 1998, the Company employed a core group of approximately 80 persons
including managers, project specialists, supervisors and field labor, executive
marketing and clerical personnel. The Company also employs field laborers for
field operations based upon specific projects; therefore, the precise number
varies based upon the outstanding backlog. Approximately 50 to 200 laborers and
supervisors are employed on a steady basis, with casual labor hired on an
as-needed basis to supplement the work force.
A portion of the workforce who provide services in lead and asbestos related
areas are represented under a trade agreement the Company signed effective June
1, 1996 through May 2000 with several local unions that supply labor for bonded
contract work.
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.
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ITEM 2. FACILITIES
In May 1997, the Company signed a five year lease expiring 2002 with an option
to buy its 50,000 square foot facility located at 100 Sweeneydale Avenue, Bay
Shore, New York 11706 at a monthly rental of approximately $25,000. This
facility houses all the operations of the Company, other than its Brooklyn, New
York oil spill response center, in one location.
In May 1998, the Company signed a three-year lease expiring April 30, 2001, at
$12,000 per annum, for a facility located at 1100 Grand Street in Brooklyn, New
York Terminal. This facility serves as an oil spill response center.
Management considers the Company's facilities sufficient for its present and
currently anticipated future operations, and believes that these properties are
adequately covered by insurance.
ITEM 3. LEGAL PROCEEDINGS
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. To date, no charges have been filed against the
Company or any other member of management as a result of the Eastern District
investigation. The Company is awaiting the decision of the Securities and
Exchange Commission concluding as to whether it will follow a staff
recommendation that an enforcement action be filed seeking an injunction against
future violations of the securities laws. The Company has vigorously opposed
this recommendation on the grounds that all employees accused of wrongdoing have
been terminated and other adequate remedial measures have been taken voluntarily
by the Company.
The Company is a defendant in a litigation matter whereby one or more plaintiffs
claim to be entitled to additional wages while working for a subcontractor of
the Company. The amount of the claim has not been specified. Management believes
that the case is without merit, and intends to defend the action vigorously.
On December 10, 1997 the Company settled a lawsuit relating to $250,000 which
former management advanced during fiscal 1994 to the Mohave Shores Development,
Inc. in anticipation of developing land on an Indian reservation in Arizona
under a joint venture agreement. The Company expects to receive $120,000 over a
four year period under a non-interest bearing arrangement with payments
annually.
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 that 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.
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. Subsequently, this case was converted to a Chapter
7 Bankruptcy proceeding. LTS is in process of liquidation through these
bankruptcy proceedings. Management believes that the Company's financial
condition and results of operations will not be materially affected by the
proceeding.
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 1998.
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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
Small Cap Market until October 22, 1996, and on the Electronic Bulletin Board of
the NASD, under the symbol "WEGI", since that date. 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 1998
Quarter Ended HIGH BID LOW BID
------------- -------- -------
July 31 $ 1.06 $.66
October 31 .75 .44
January 31 .53 .10
April 30 .60 .11
FISCAL 1997
Quarter Ended
-------------
July 31 1.00 .63
October 31 1.00 .25
January 31 .94 .31
April 30 .88 .69
The Company has approximately 3,300 common shareholders of record at April 30,
1998. There have been no dividends declared or paid on the Common Stock and the
Company has no current intentions to declare or pay dividends on the Common
Stock. Under its Series A Convertible Preferred Stock Agreement, no common stock
dividends may be paid until all preferred dividends are paid in full. The
Company is also prohibited from paying dividends, other than Series A Redeemable
Convertible Preferred Stock dividends, under its Loan and Security Agreement
with Business Alliance Capital Corporation. Subject to the foregoing, the
Company currently intends to retain any future earnings for reinvestment in its
business. Any future determination to pay cash dividends will be at the
discretion of the Board of Directors and will be dependent upon the Company's
financial condition, results of operations, capital requirements and other
relevant factors.
Recent Sales of Unregistered Securities
In October 1996, the Company issued $100,000 principal amount of an unregistered
12% convertible note due 1999 to a Director of the Company. 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. The
Company issued 437,318 shares of common stock valued at $94,245 for legal
services and to settle legal obligations during fiscal 1998.The Company issued
104,000 shares of common stock valued at $78,742 as consideration for director
and certain employee compensation provided during fiscal 1998. In May 1998 the
Company received $68,000 for 425,000 shares of newly issued common stock. In
June 1998, the Company issued 100,000 shares of common stock valued at $37,000
for certain employee compensation. All of the foregoing securities were
restricted as to their resale 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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ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
Management's discussion and analysis should be read in conjunction with the
accompanying consolidated financial statements and notes thereto.
This Item 6 and other Items of this Form 10-KSB contain forward-looking
statements within the meaning of Section 27A of the Securities Act of 1933 and
Section 21E of the Securities Exchange Act of 1934. The Company's actual results
could differ materially from those set forth in the forward-looking statements.
Forward-looking statements included in this Form 10-KSB involve known and
unknown risks, uncertainties and other factors which could cause actual results,
performance (financial and operating) or achievements expressed or implied by
such forward looking statements not to occur or be realized. Such forward
looking statements generally are based upon the best estimates by the Company of
future results, performance or achievement, based upon current conditions and
the most recent results of operations. Forward looking statements may be
identified by the use of forward looking terminology such as "may", "will",
"expect", "believe", "estimate", "anticipate", "continue", or similar terms,
variations of those terms or the negative of those terms. Potential risks and
uncertainties include, among other things, such factors as the amount of the
Company's revenues, the success of the Company in limiting or reducing its
expenses, the frequency and magnitude of environmental disasters or disruptions,
the effects of new laws or regulations relating to environmental remediation,
the Company's ability to raise capital, the competitive environment within the
Company's industry, dependence on key personnel, economic conditions, and the
other factors and information disclosed and discussed in other sections in this
Form 10-KSB. Readers of this Form 10-KSB should carefully consider such risks,
uncertainties and other information, disclosures and discussions which contain
cautionary statements identifying important factors that could cause actual
results to differ materially from those provided in the forward looking
statements.
Results of Operations
Years Ended April 30, 1998 and 1997
Net loss and net loss per share for fiscal 1998 were $(5,609,795) and $(.55),
respectively. This compares to a net loss and net loss per share of $(4,613,750)
and $(.51), respectively, for fiscal 1997.
Revenue decreased $3,306,435, or 21.6%, from $15,275,209 in fiscal 1997 to
$11,968,774 in fiscal 1998. Revenue from Trade- Winds, the Company's primary
operating environmental services subsidiary declined $4,780,211, or 33.2%, from
$14,398,625 to $9,618,414. The majority of the decline was in asbestos and paint
removal service revenues, which declined $3,580,594, or 56.9%, and $2,364,677,
or 98.4%, respectively. In fiscal 1997, Trade-Winds was engaged on a large
asbestos abatement project at 60 Broad Street in New York and a significant
paint removal project for the New York City Housing Authority. Revenues
generated by New York City Agencies were approximately 20% of total revenues in
fiscal 1997. The Company had been prohibited from bidding on these projects in
fiscal 1998 due to the ongoing Eastern District investigation described in Item
3, Part I. This is the most significant reason for the decline in Trade-Winds
revenues in fiscal 1998. Accordingly, during fiscal 1998 the Company opted to
pursue new business areas where project risks could be limited. During fiscal
1998, the revenues from non-hazardous waste (e.g. oil spills) represented 41% of
Trade-Winds revenues as compared to 15% in fiscal 1997. Revenue from renovation
and construction represented 19% of Trade-Winds revenues in fiscal 1998 as
compared to 8% in fiscal 1997. Both are representative of the change in revenue
mix resulting from increased competition in Trade-Winds traditional revenue
service areas and the broadening of the Company's services. Revenue from NAL was
$1,516,280 in fiscal 1998 as compared to $258,019 in fiscal 1997. The large
increase was attributable to the fact that the Company was acquired in the
latter part of February 1997. Revenues from NYTL increased to $834,080 in fiscal
1998 from $618,565 in fiscal 1997.
The Company's cost of revenues consists primarily of labor and labor related
costs, including salaries to laborers, supervisors and foremen, payroll taxes,
training, insurance and benefits. Additionally, the Company's job expenses
include bonding and job related insurance cost, repairs, maintenance and rental
of job equipment, job materials and supplies, testing and sampling, and
transportation and recycling costs, among others. Cost of revenues as a
percentage of revenues was 85.7% for fiscal 1998 as compared to 84% in
8
<PAGE>
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION (CONT.)
fiscal 1997. Gross profit declined to 14.3% in fiscal 1998 as compared to 16% in
fiscal 1997. The decrease in gross margin was primarily a result of higher labor
and benefit (including worker's compensation insurance) costs due to
unionization of certain employees providing services in lead and asbestos areas
in June 1996, and cost overruns on certain fixed price contracts during the
quarter ended July 31, 1997.
Selling, general and administrative expenses for the year increased by $361,339,
or 7.3%, from $4,997,839 in fiscal 1997 to $5,359,178 in fiscal 1998, and
constituted approximately 44.8% and 32.7% of revenues, respectively, in fiscal
years 1998 and 1997. The Company has hired various engineering, technical
consulting, business development and marketing personnel to develop and extend
various business areas into which the Company has expanded pursuant to its
strategic focus. The Company intends to provide various additional value-added
services to its existing clientele and to strive to significantly enhance its
service offering to more profitable areas. These expenses were partially offset
by a reduction in promotion, consulting and legal expenses incurred in fiscal
1997. Additional selling, general and administrative expenses incurred in fiscal
1998 which exceed those of fiscal 1997 are: $130,215 of goodwill amortization
expense related to the NAL acquisition, $160,000 in additional occupancy
expenses, $70,000 in additional payroll tax penalties, and approximately
$200,000 in bad debt expense.
During the fourth quarter of 1998 the Company recorded a $1,287,000 impairment
loss related to its acquisition of NAL (acquired by the Company in February
1997). A lackluster financial performance in the final two quarters of the
fiscal year resulted in management's analysis of projected undiscounted
operating cash flows. Based on this analysis, as well as a market analysis
including competitive considerations, management determinated to write off the
full amount of the remaining goodwill.
Special charges of $1,316,901 in fiscal 1997 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.
In March 1997, management developed a plan to consolidate all of the Company's
operations in one facility in Bay Shore, 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
previously leased facilities vacated in early fiscal 1998. The additional
$50,000 includes estimated lease termination costs for the unexpired lease
obligation at the old facilities.
Interest expense increased from fiscal 1997 to fiscal 1998 by approximately
$609,000 or 341%. This increase is primarily attributable to the convertible
notes issued in fiscal 1997, including an increase in the amount of accretion of
interest on the discount related to the convertible notes of approximately
$275,000 ($356,154 in fiscal 1998 versus $81,346 in fiscal 1997), as well as an
increase in interest expense on the convertible notes of $70,000 ($82,000 in
fiscal 1998 versus $12,000 in fiscal 1997). The balance of the increase,
$264,000, results primarily from interest recorded pursuant to the revolving
credit facility the Company had with North Fork Bank from May 1997 through mid
February 1998, and the factoring arrangement the Company had with Prestige
Capital Corporation from mid February 1998 through July 1, 1998.
Other, net in fiscal 1998 primarily represents the gain on settlement of a
lawsuit. On December 10, 1997 the Company settled a lawsuit relating to $250,000
which former management advanced during fiscal 1994 to Mohave Shores
Development, Inc. in anticipation of developing land on an Indian reservation in
Arizona under a joint venture agreement. The Company is entitled to receive
$120,000 over a four year period under a non-interest bearing arrangement with
payments annually. The Company recorded this note at its fair value of $102,993
as other income in 1998. In fiscal 1997, other net consists primarily of a
$200,000 gain from the sale of a professional engineering license by the
Company's subsidiary, NYTL, for $225,000.
Write-offs of $298,000 in fiscal 1997 representing the total remaining carrying
value for all investments in non-marketable securities, are recorded as loss on
investments.
Liquidity and Capital Resources
As indicated in the Report of Independent Certified Public Accountants, the
Company's financial statements have been prepared assuming the Company will
continue as a going concern. As discussed in Note 3 in the accompanying
Consolidated Financial Statements, the Company has a stockholders' deficit of
$2,936,730 and an accumulated deficit of $30,989,396 at April 30, 1998, and has
not generated positive cash flow from operations to date. The Company has
financed its operations to date primarily through
9
<PAGE>
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION (CONT.)
Liquidity and Capital Resources (cont.)
issuances of debt and equity securities. At April 30, 1998, the Company had
$33,915 in cash and a working capital deficit of $3,833,704. In addition, as of
July 31, 1998 and April 30, 1998, the Company was in arrears with respect to
certain payroll tax obligations of approximately $345,000 and $580,000,
respectively, and as of April 30, 1998, with respect to preferred stock
dividends of $70,775. These factors raise substantial doubt about the Company's
ability to continue as a going concern. The financial statements do not include
any adjustments that might result from the outcome of this uncertainty.
Net cash used by operating activities amounted to $1,083,687 in fiscal 1998 and
$1,147,930 in fiscal 1997. Non-cash operating activities increased 41%, or
$962,504, from $2,316,557 in fiscal 1997, to $3,279,061 in fiscal 1998. The
increase primarily resulted from the charges totaling $1,410,000 from the
impairment and increase in the amortization of goodwill resulting from the
purchase of NAL in February 1997, the last quarter of fiscal 1997. Additionally,
there were increases in depreciation of $180,000, the one time $275,000
accretion charge related to the convertible notes described in Note 9 to the
accompanying Consolidated Financial Statements, and $203,000 increase in the
amortization of deferred compensation charges , an increase in amortization of
debt issuance costs of approximately $24,000, and an increase in the provision
of doubtful accounts of approximately $199,000. Management implemented new
collection procedures and controls during the latest fiscal year which resulted
in the increased write-off of old accounts. These increases were offset by the
absence of charges related to the writeoff of investments and abandonment of
leaseholds as well as reduced stock issuances for services. Accounts receivable
declined $402,233, reflecting the decline in Trade-Winds sales during the fiscal
year. Accounts payable and accrued expenses increased by $787,870, reflecting
the negative cash flow created by the losses incurred by the Company. The
Company has maximized its financing through the extension of its terms with
trade vendors. Cash used for capital expenditures amounted to $675,992 in fiscal
1998 (principally for leasehold improvements to its new Bay Shore facility) and
$465,266 for fiscal 1997.
In May 1997, the Company entered into a revolving bank credit facility with
North Fork Bank to obtain a revolving bank credit which provided for borrowings
up to $750,000 based on borrowing base calculations. On February 13, 1998 the
Company and its lender, North Fork Bank, entered into an agreement to amend its
revolving credit facility. Under the agreement, the Company agreed to pay off
all amounts due to the bank in excess of $200,000. The $200,000 balance was then
converted to a term note over two years at prime plus 3%. The bank agreed to
release its lien on the Company's accounts receivable and take a secondary
position thereon, but maintained its lien on all the Company's equipment and
other assets. In addition, the Company secured the personal guaranty of Michael
O'Reilly, the Company's Chief Executive Officer. The Company then entered into
an initial six-month factoring arrangement on its accounts receivable and paid
the bank approximately $550,000. As of April 30,1998 the factor had advanced
approximately $1,500,000 to the Company.
On June 1, 1998 the Company entered into a $2,445,000 Loan and Security
Agreement ("LSA") with Business Alliance Capital Corporation ("BACC"). Under the
agreement, the Company received approximately $595,000 under an equipment term
loan with a five year principal amortization and payments made on a monthly
basis. The chief executive officer provided BACC with an unlimited personal
guaranty. Simultaneous with the completion of the equipment financing with BACC,
the Company reached an agreement with the Internal Revenue Service with regard
to a payout schedule to satisfy its past due federal withholding tax
liabilities. Under the agreement $200,000 from the equipment financing was used
as an initial down payment against the federal withholding tax liabilities. The
Company agreed to pay the balance in six monthly installments of $35,000. The
Internal Revenue Service indicated that penalty payments already paid by the
Company would be considered for likely abatement; however, no assurance can be
given in this regard. A default under this agreement would most likely subject
the Company to the possibility of a federal tax lien on its assets. Also in
conjunction with the agreement, the Company utilized approximately $167,000 of
the proceeds to repay North Fork Bank, $30,000 to repay other equipment
financing necessary to release liens on collateral for the term loan, with the
Company netting approximately $177,000 after miscellaneous charges and legal
fees.
On July 1, 1998 the Company completed the second tranche of the BACC LSA
financing receiving $1,642,638 representing an 80% advance against eligible
accounts receivable. These monies were used to repay the factor $1,432,638, with
the balance of the proceeds, $210,000, being remitted to the Company.
10
<PAGE>
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION (CONT.)
Liquidity and Capital Resources (cont.)
Although management believes, based on the development of the Company's business
operations and its preliminary discussions with various potential investors and
other sources of financing, that it may be able to raise additional sufficient
capital to meet its working capital needs over the next twelve months, no
assurance can be given that it will be successful in this respect. The Company
requires substantial working capital to support its ongoing operations. The
Company's backlog is approximately $3,931,000 as of April 30,1998, and revenue
growth is expected in new service areas, as the result of the Company 's ability
to provide a broad range of services. As is common in the environmental services
industry, payments for services rendered are generally received pursuant to
specific draw schedules after services are rendered. Thus, pending the receipt
of payments for services rendered, the Company must typically fund substantial
project costs, including significant labor and bonding costs, from financing
sources within and outside the Company. Certain contracts, in particular those
with state or federal agencies, may provide for payment terms of up to 90 days
or more and may require the posting of substantial performance bonds which are
generally not released until completion of the project. As of July 31, 1998, the
Company has approximately $200,000 of available debt capacity under its line
with BACC (See Note 9 to the Notes to the Consolidated Financial Statements),
and may succeed in increasing that capacity should the Company's financial
conditions improve. 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 are expected to depend on numerous factors, including, but not
limited to: (i) the ability to successfully bid on environmental or construction
contracts, (ii) the ability to generate positive cash flow from operations, and
the extent thereof, (iii) the ability to raise additional capital or obtain
additional financing, and (iv) economic conditions.
The Year 2000
The Company has taken actions to make its systems, services and infrastructure
Year 2000 compliant. The Company is also beginning to inquire as to the status
of its key suppliers and vendors with respect to the Year 2000. The Company
believes it is taking the necessary steps to resolve Year 2000 issues; however,
there can be no assurance that a failure to resolve any such issue would not
have a material adverse effect on the Company. Management believes, based on
available information, that it will be able to manage its total Year 2000
transition without any material adverse effect on its business operations,
services or financial prospects.
ITEM 7. FINANCIAL STATEMENTS
See item 13 herein.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
(i.) On April 23, 1998, the accounting firm of PricewaterhouseCoopers LLP
declined to stand for reelection as independent accountants to audit the
registrant's financial statements for the current fiscal year. In July
1998, the Board of Directors of the Company engaged the firm of BDO
Seidman, LLP as the Company's new independent accountant.
(ii.)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.
The report of PricewaterhouseCoopers LLP for fiscal 1997 contained language
expressing substantial doubt about the Company's ability to continue as
going concern, but did not contain an adverse opinion or a disclaimer of
opinion, and was not otherwise qualified or modified as to uncertainty,
audit scope or accounting principles. There were no disagreements with
PricewaterhouseCoopers LLP requiring disclosure pursuant to Item
304(a)(1)(iv) of Regulation S-B. In addition, during the Company's two most
recent fiscal years and through the date hereof, neither the Company nor
anyone acting on the Company's behalf consulted with BDO Seidman, LLP on
matters which would require disclosure pursuant to Item 304(a)(2) of
Regulation S-B. The Company requested PricewaterhouseCoopers LLP to furnish
it a letter addressed to the Commission stating whether it agrees with the
above statements and PricewaterhouseCoopers LLP has done so.
11
<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 from time to time, 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 48 Chairman of the Board, President, and Chief
Executive Officer
Alan Schoenbart 39 Chief Financial Officer
Anthony Towell 67 Director
Samuel Sadove 45 Director
JoAnn O'Reilly 46 Director
Dr. Kevin Phillips 50 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 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 Gulf West Oil.
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.
Dr. Kevin Phillips has been a director since March 1998. Dr. Phillips is a
Partner and Principal in the firm of Fanning, Phillips, and Molnar, an
engineering firm located on Long Island, NY. Dr. Phillips has an M.S. Degree in
Hydrodynamics from the Massachusetts Institute of Technology and a PhD in
Environmental Engineering from the Polytechnic Institute of New York. He is a
licensed Professional Engineer in eight states, including New York, New Jersey,
and Connecticut, with over 21 years experience in geohydrology and environmental
engineering.
12
<PAGE>
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE
WITH SECTION 16(a) OF THE EXCHANGE ACT (CONT.)
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 more 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 Association 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 1998, except that Dr. Kevin Phillips failed to
file on a timely basis Form 3, when Dr. Phillips became a Director of the
Company, and all directors, with the exception of Dr. Phillips, failed to file
their reports timely on options issued in December 1997.
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.
ITEM 10. EXECUTIVE COMPENSATION
The following table sets forth the cash and other compensation paid by the
Company during the last three fiscal years to the Company's Chief Executive
Officer and President. No other executive officer's compensation exceeded
$100,000 for services in all capacities.
<TABLE>
<CAPTION>
Annual Compensation Long term Compensation
------------------- ----------------------
Name and Other Restricted Securities
Principal Fiscal Annual Stock Underlying
Position(s) Year Salary($) Bonus($) Compensation(3) Awards ($) Options
- ----------------- ------ --------- -------- ------------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C>
Michael O'Reilly, Chairman, Chief 1998 $220,000 $ 72,765 $ -- $ 938(1) 2,850,000(2)
Executive Officer, and President 1997 $198,657 $215,000 $ -- $3,000 2,650,000
1996 $156,000 $140,180 $ -- $ -0- 250,000
</TABLE>
(1) Received in fiscal 1998 for fiscal 1997, 1,000 restricted shares for
director services. Mr. O'Reilly additionally received 8,000 shares of Common
Stock for service on the Board of Directors (3,000 shares for fiscal 1996 and
5,000 shares for fiscal 1998). Mr. O'Reilly received 5,000 shares of Common
Stock when Trade-Winds was acquired. None of the shares are entitled to
dividends.
(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 (iii) a change of controlling
stockholders of the Company. On May 26, 1995, Mr. O'Reilly was granted options
to purchase 250,000 shares of Common Stock at an exercise price of $1.50 per
share, the fair market value on date of grant, repriced in September 1996 to
$.53 per share. On September 9, 1996, Mr. O'Reilly 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. All 650,000 shares previously
granted were repriced to $.22 on December 29, 1997. On December 29,1997 Mr.
O'Reilly was granted options for 200,000 shares of common stock at an exercise
price of $.22 per share, the fair market value on the date of grant.
(3) The value of all perquisites provided did not exceed the lesser of $50,000
or 10% of the officer's salary and bonus.
13
<PAGE>
ITEM 10. EXECUTIVE COMPENSATION (CONT.)
Option/SAR Grants in Last Fiscal Year
The following table sets forth (a) the number of shares underlying options
granted to Mr. Michael O'Reilly, Chairman, Chief Executive Officer, and
President, during fiscal 1998, (b) the percentage the grant represents of the
total number of options granted to all Company employees during fiscal 1998, (c)
the per share exercise price of each option, and (d) the expiration date of each
option.
<TABLE>
<CAPTION>
Potential Realizable Value
at Assumed Annual Rates of
Stock Price Appreciation
Individual Grants for Option Term
------------------------------------------------------------------------------- ----------------------------
Number of % of total
Securities Options/SAR's
Underlying Granted to Exercise
Options/SAR's Employees in Price Expiration
Name Granted (#) Fiscal Year ($) Shares Date 5% ($) 10% ($)
- ----------- ------------- -------------- ---------- ---- --------- ----------
<S> <C> <C> <C> <C> <C> <C>
Michael O'Reilly 200,000 7.9 0.22 December 28, 2002 56,156 70,862
400,000(1) 15.9 0.22 September 9, 2001 112,313 70,195
250,000(1) 9.9 0.22 September 9, 2001 141,725 88,578
</TABLE>
(1) Represents Repriced Options. See discussion below.
Aggregated Options/SAR Exercises in Last Fiscal Year and Fiscal Year End Option
Values
Set forth in the table below is information, with respect to Mr. Michael O'
Reilly, as to the (a) number of shares acquired during fiscal 1998 upon each
exercise (i.e. the difference between the market value of the shares at exercise
and their exercise price), (c) the total number of unexercised options held on
April 30, 1998, separately identified between those exercisable and those not
exercisable, and (i.v) the aggregate value of in-the-money, unexercised options
held on April 30, 1998, separately identified between those exercisable and
those not exercisable.
<TABLE>
<CAPTION>
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(2)
- ----- -------------- -------------- ------------- -------------
<S> <C> <C> <C> <C>
Michael O'Reilly -0- -0- 850,000/ $204,000/
2,000,000 (1) $900,000
</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 (iii) a change of controlling
stockholders of the Company.
(2) The value is calculated based on the aggregate amount of the excess of $.46
(the closing sale price per share for the Common Stock on April 30, 1998) over
the relevant exercise price(s).
14
<PAGE>
ITEM 10. EXECUTIVE COMPENSATION (CONT.)
Employment Agreement
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. This contract was renegotiated in October 1996
upon his being elected as the Company's Chairman, President and Chief Executive
Officer. Terms of the agreement provide for a base salary of $200,000 plus a
bonus of 2% of gross revenues, up 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. Effective January
1, 1998, the Board agreed to increase Mr. O'Reilly's salary by $60,000 per
annum. The Board's decision was in light of his increased responsibilities in
managing the affairs of the Company, and in consideration of his voluntary
decision to agree to amend his employment contract.
Stock Option Plans
For information regarding stock options and stock grants refer to Note 12 of the
Notes to the Consolidated Financial Statements.
Repricing of Options
On December 29, 1997, the Board of Directors approved the repricing of all
outstanding options granted under the Company stock option plans to then current
officer's, directors, and employees to $.22 per share of Common Stock (the fair
market value of the Common Stock as of the close of business on such date). Each
repriced option is otherwise identical to the optionee's prior option. This
repricing was approved primarily because of the importance to the Company of
providing equity incentives to key officers, directors, and employees who may be
considering alternative opportunities. The Board decided to include directors
and officers in the repricing because of the importance of their leadership,
administrative, and technical skills to the success of the Company's business.
Indemnification
Section 145 of the Delaware General Corporation Law provides that
indemnification of directors, officers, employees and other agents of a
corporation, and persons who serve at its request as directors, officers,
employees or other agents of another organization, may be provided by such
corporation.
The Company's Certificate of Incorporation includes provisions eliminating the
personal liability of its directors for monetary damages resulting from breaches
of their fiduciary duty except, pursuant to the limitations of the Delaware
General Corporation Law, (i) for any breach of ther fiduciary duty of loyalty to
the Company or its stockholders, (ii) for acts or omissions not in good faith or
which involve intentional misconduct or a knowing violation of law, (iii) under
Section 174 of the Delaware General Corporation Law, or any amendatory or
successor provisions thereto, or (iv) with respect to any transaction from which
the director derived an improper personal benefit. The Company's By-Laws provide
indemnification to directors, officers, employees, and agents, including against
claims brought under state or Federal Securities laws, to the full extent
allowable under Delaware law. The Company also has entered into indemnification
agreements with its directors and executive officers providing, among other
things, that the Company will provide defense costs against any such claim,
subject to reimbursement in certain events.
Compensation of Directors
In May 1998 each of the directors received grants of 5,000 shares of restricted
common stock as compensation for serving on the Board in fiscal 1998. In October
1996, non-qualified options to purchase an aggregate of 300,000 shares of Common
Stock exercisable at $.56 per share (repriced in December 1997 to $.22 per
share) were granted to non-employee directors of the Company. In December 1997,
non-qualified options to purchase an aggregate of 300,000 shares of Common Stock
at $.22 per share were granted to non-employee directors of the Company. In
March 1998, non-qualified options to purchase 90,000 shares of Common Stock were
given to Dr. Phillips when he became a Director.
15
<PAGE>
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth, as of July 31, 1998, 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
(iii) the officer named in the Summary Compensation Table and (iv) all executive
officers and directors of the Company as a group:
<TABLE>
<CAPTION>
Amount and Nature(1) of Percent of
Name and Address (1) Principal Occupation Beneficial Ownership Class
- -------------------- -------------------- --------------------- -----
<S> <C> <C> <C>
Michael O'Reilly Chairman, Chief Executive
Officer and President 889,000(2) 6.7
Samuel Sadove Director 206,000(3) 1.6
Anthony Towell Director 731,000(4) 5.6
Dr. Kevin Phillips Director 845,000(5) 6.4
JoAnn O'Reilly Director 106,000(6) *
Gary Molnar(7) Engineer 750,000(7) 5.7
Stephen J Bramsen(8) Retired 1,017,500(8) 8.2
Officers and Directors
As a Group (5 persons) 1,477,000(2,3,4,5,6) 9.8%
</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. The address of each director and
officer is c/o Windswept Environmental Group Inc., 100 Sweeneydale Avenue, Bay
Shore, New York 11706.
(2) Represents 39,000 shares (inclusive of 9,000 shares of Common Stock received
for service on the Board of Directors (3,000 shares for fiscal 1996, 1,000
shares for fiscal 1997 and 5,000 shares for fiscal 1998) of Common Stock owned
and 850,000 shares beneficially owned pursuant to currently exercisable options
at a price of $.22 per share. Does not include 100,000 shares of Common Stock
issuable upon the exercise of options held by JoAnn O'Reilly, Mr. O'Reilly's
wife, or 6,000 shares she received for service on the Board of Directors in
fiscal years 1998 and 1997 as to which he disclaims beneficial ownership.
Excludes a 2,000,000 share option not yet vested and exercisable only on the
happening of future events.
(3) Represents 200,000 shares issuable upon currently exercisable options at a
price of $.22 per share, 1,000 shares of Common Stock received for service on
the Board of Directors in fiscal year 1997 and 5,000 shares received for fiscal
1998.
(4) Includes 25,000 shares owned and 300,000 shares beneficially owned pursuant
to currently exercisable options at a price of $.22 per share. Also includes
400,000 shares of Common Stock 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 fiscal year 1997 and 5,000 shares for service on the Board
of Directors in fiscal 1998.
(5) Includes 90,000 shares beneficially owned pursuant to currently exercisable
options at a price of $.13 per share. Includes 650,000 shares of upon conversion
of Dr. Phillips 50% share of the 1,300,000 redeemable shares of convertible
preferred stock and 100,000 currently options exercisable at $.78 which were
received in connection with the Company's purchase of NAL in February 1997, of
which he was a principal. Dr. Phillips received 5,000 shares of Common Stock for
service on the Board of Directors in fiscal 1998.
(6) Includes100,000 shares issuable upon currently exercisable options at a
price of $.22 per share and does not include (a) 39,000 shares of Common Stock
owned by Michael O'Reilly, Ms. O'Reilly's husband, or (b) 850,000 shares
issuable upon currently exercisable 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 fiscal year 1997 and 5,000
shares for service on the Board of Directors in fiscal 1998.
(7) The address for Mr. Molnar is c/o Fanning, Philips, & Molnar, 909 Marconi
Avenue, Ronkonkoma, NY 11779. Includes 650,000 shares issuable upon conversion
of Mr. Molnar's 50% share of the $1,300,000 redeemable convertible preferred
stock and 100,000 options currently exercisable at $.78 which were received in
connection with the Company's purchase of NAL in February 1997, of which he was
a principal.
(8) The address for is Mr. Bramsen is 12 Wingate Place, Columbia, South Carolina
29229. Includes 312,500 restricted shares which Mr. Bramsen purchased from the
Company in May 1998 for $50,000, or $.16 per share.
16
<PAGE>
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
In July 1998, Michael O'Reilly, Chairman, Chief Executive Officer, and
President, individually guaranteed the LSA with BACC, a $2,445,000 obligation.
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. The Company has included interest due of $18,500 in
accrued expenses at April 30, 1998. Mr. Towell is also an officer and director
of Eastco Industrial Safety Corp., which sold approximately $195,000 and
$457,000 of material and supplies to the Company that were used on remediation
projects during fiscal 1998 and 1997, respectively.
At April 30, 1998 and 1997, and currently, 650,000 shares of Series A Redeemable
Convertible Preferred Stock are owned by Dr. Kevin Phillips, a director of the
Company. Dividends of $11,673 were paid to Dr. Phillips in fiscal 1998 (with an
additional $9,750 paid subsequent to the fiscal year end) and 50% of the
outstanding accrued dividends, including certain amounts for interest on late
payments of dividends, owing at April 30, 1998, or $35,388, are included in
accrued expenses at April 30, 1998. The Company's subsidiaries sold
approximately $15,000 of air monitoring and training services to Fanning,
Phillips, & Molnar, a company of which the director is a principal.
During fiscal 1997, the Company's former Chief Operating Officer, Leo Mangan,
was paid approximately $148,000 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
There were no reports on Form 8-K filed during the last quarter of the
fiscal year ended April 30, 1998.
c) Items Required by Item 601 of Regulation S-B
2.01 Merger Agreement for North Atlantic Laboratories, Inc. Included
as Exhibit 2.01 to Registrant's For Form 10 KSB for the year
ended April 30, 1997 filed September 29, 1997 and incorporated by
reference thereto.
3.01 Composite of Restated Certificate of Incorporation.
4.01 Specimen Common Stock Certificate.
4.02 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.
4.03 Form of Convertible Note Agreement Included as Exhibit 4.04 to
Registrant's For Form 10 KSB for the year ended April 30, 1997
filed September 29, 1997 and incorporated by reference thereto.
10.01 Option Certificate for 2,000,000 stock options with Mr. O'Reilly.
Included as Exhibit 4.05 to Registrant's Form 10 KSB for the year
ended April 30, 1997 filed September 29, 1997 and incorporated by
reference thereto.
10.02 Employment Agreement between the Company and Michael O' Reilly
entered into as of November 1, 1996. Included as Exhibit 10.02 to
Registrant's Form 10 KSB for the year ended April 30, 1997 filed
September 29, 1997 and incorporated by reference thereto.
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.
10.04 Purchase and Sale Agreement between Prestige Capital Corporation
and Trade-Winds. .Included as Exhibit 10.04 to Registrant's Form
10 QSB for the quarterly period ended January 31, 1998 filed
March 13, 1998 and incorporated by reference thereto.
10.05 Purchase and Sale Agreement between Prestige Capital Corporation
and North Atlantic Laboratories, Inc. Included as Exhibit 10.05
to Registrant's Form 10 QSB for the quarterly period ended
January 31, 1998 filed March 13, 1998 and incorporated by
reference thereto.
10.06 Purchase and Sale Agreement between Prestige Capital Corporation
and New York Testing, Inc. .Included as Exhibit 10.06 to
Registrant's Form 10 QSB for the quarterly period ended January
31, 1998 filed March 13, 1998 and incorporated by reference
thereto.
17
<PAGE>
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
10.07 Amendment No. 1 to Revolving Credit Agreement dated February 6,
1998 between Windswept Environmental Group, Inc. and North Fork
Bank. Included as Exhibit 10.06 to Registrant's Form 10 QSB for
the quarterly period ended January 31, 1998 filed March 13, 1998
and incorporated by reference thereto.
10.08 Promissory Note for $200,000 dated February 6, 1998 between
Windswept Environmental Group, Inc. and North Fork Bank. Included
as Exhibit 10.08 to Registrant's Form 10 QSB for the quarterly
period ended January 31, 1998 filed March 13, 1998 and
incorporated by reference thereto.
10.09 Personal Guaranty of all liability between Michael O'Reilly and
North Fork Bank. Included as Exhibit 10.09 to Registrant's Form
10 QSB for the quarterly period ended January 31, 1998 filed
March 13, 1998 and incorporated by reference thereto.
10.10 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.
10.11 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.
10.13 Loan and Security Agreement dated June 1, 1998 between Business
Alliance Capital Corporation and Windswept Environmental Group
Inc. and Subsidiaries.
10.14 Individual Guaranty of Michael O'Reilly to Business Alliance
Capital Corporation.
10.15 Revolving Credit Master Promissory Note for $1,850,000 with
Between the Company and Business Alliance Capital Corporation.
10.16 Term Loan for $595,000 Between the Company and Business Alliance
Capital Corporation.
10.17 Origination Fee Amendment dated August 1, 1998 between the
Company and Business Alliance Capital Corporation.
21 Subsidiaries of the Company
23.01 Consent of BDO Seidman, LLP
23.02 Consent of PricewaterhouseCoopers LLP
27 Financial Data Schedule
18
<PAGE>
WINDSWEPT ENVIRONMENTAL GROUP, INC.
TABLE OF CONTENTS
Page
----
Independent Auditors' Reports F-1, F-2
Consolidated Balance Sheet as of April 30, 1998 F-3
Consolidated Statements of Operations for the
years ended April 30, 1998 and 1997 F-4
Consolidated Statements of Stockholders' Equity (Deficit)
for the years ended April 30, 1998 and 1997 F-5
Consolidated Statements of Cash Flows for the
years ended April 30, 1998 and 1997 F-6
Notes to Consolidated Financial Statements F-7 to F-21
<PAGE>
Report of Independent Accountants
To the Board of Directors and
Stockholders of Windswept Environmental Group, Inc.
We have audited the accompanying consolidated balance sheet of Windswept
Environmental Group, Inc. as of April 30,1998 and the related consolidated
statements of operations, changes in stockholders' equity (deficit) and cash
flows for the year then ended. These financial statements are the responsibility
of the Company's management. Our responsibility is to express an opinion on
these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, as well
as evaluating the overall financial statement presentation. We believe that our
audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Windswept
Environmental Group, Inc. at April 30, 1998, and the results of their operations
and their cash flows for the year then ended in conformity with generally
accepted accounting principles.
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed in Note 3 to the
consolidated financial statements, the Company has incurred recurring losses
from operations, has a stockholders' deficit and a working capital deficiency,
and is in arrears with respect to certain of its obligations, including 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.
BDO Seidman, LLP
Melville, New York
August 13, 1998
F-1
<PAGE>
Report of Independent Accountants
To the Board of Directors and
Stockholders of Windswept Environmental Group, Inc.
In our opinion, the accompanying consolidated statements of operations, of
changes in stockholders' equity and of cash flows present fairly, in all
material respects, the results of operations and cash flows of Windswept
Environmental Group, Inc. (the "Company") for the year ended April 30, 1997 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. We have not audited the consolidated financial statements of the Company
for any period subsequent to April 30, 1997.
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.
PricewaterhouseCoopers LLP
Melville, New York
September 29,1997
F-2
<PAGE>
WINDSWEPT ENVIRONMENTAL GROUP, INC.
CONSOLIDATED BALANCE SHEET
APRIL 30, 1998
<TABLE>
<CAPTION>
ASSETS
CURRENT ASSETS
<S> <C>
Cash $ 33,915
Accounts receivable, net of allowance for
doubtful accounts of $280,000 2,517,517
Inventories 161,266
Costs and estimated earnings in excess of billings on
uncompleted contracts 55,352
Prepaid expenses and other current assets 325,061
----------
Total current assets 3,093,111
PROPERTY AND EQUIPMENT, net 2,799,191
OTHER ASSETS
Goodwill, net of accumulated amortization of $36,526 85,500
Notes receivable, net of current portion of $80,460 209,245
Other assets 167,642
----------
TOTAL ASSETS $6,354,689
==========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES
Accounts payable and accrued expenses $3,361,578
Advances from factor 1,505,968
Billings in excess of costs and estimated earnings
on uncompleted contracts 266,000
Payroll taxes payable 641,790
Current portion of long-term debt 955,367
Obligations of unconsolidated subsidiary, net 196,112
------------
Total current liabilities 6,926,815
OTHER LIABILITIES
Convertible notes 800,000
Long-term debt, net of current portion 227,604
Other liabilities 37,000
------------
TOTAL LIABILITIES 7,991,419
COMMITMENTS AND CONTINGENCIES
SERIES A REDEEMABLE CONVERTIBLE PREFERRED STOCK
par value $.01; 1,300,000 shares issued and
outstanding, at redemption value 1,300,000
STOCKHOLDERS' EQUITY (DEFICIT)
Preferred stock, $.01 par value,
10,000,000 shares authorized; --
Common stock, $.0001 par value,
50,000,000 shares authorized;
11,552,374 shares issued and outstanding 1,155
Additional paid-in capital 28,126,648
Accumulated deficit (30,989,396)
Less deferred compensation (75,137)
------------
Total stockholders' equity (deficit) (2,936,730)
------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) $ 6,354,689
============
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE>
WINDSWEPT ENVIRONMENTAL GROUP, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED APRIL 30, 1998 AND 1997
<TABLE>
<CAPTION>
1998 1997
------------ ------------
<S> <C> <C>
Revenues $ 11,968,774 $ 15,275,209
Cost of revenues 10,256,964 12,837,866
------------ ------------
Gross profit 1,711,810 2,437,343
------------ ------------
Selling, general and administrative expenses 5,359,178 4,997,839
Impairment loss (Note 5) 1,287,000 --
Special charges -- 1,316,901
Facility consolidation -- 509,720
------------ ------------
6,646,178 6,824,460
------------ ------------
Loss from operations (4,934,368) (4,387,117)
------------ ------------
Other income (expense):
Interest expense (787,576) (178,615)
Other, net 112,149 249,982
Loss on investments -- (298,000)
------------ ------------
Total other expense (675,427) (226,633)
------------ ------------
Net loss (5,609 795 (4,613,750)
Dividends on Series A Redeemable Convertible Preferred Stock 91,596 --
------------ ------------
Net loss attributable to common stockholders $ (5,701,391) $ (4,613,750)
============ ============
Basic and diluted net loss per common share $ (.55) $ (.51)
============ ============
Weighted average number of common shares outstanding 10,404,111 9,026,797
============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE>
<TABLE>
<CAPTION>
WINDSWEPT ENVIRONMENTAL GROUP, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
FOR THE YEARS ENDED APRIL 30, 1998 AND 1997
Common Stock Additional Stock
Number Par Paid-in Treasury Subscription
shares value Capital Stock Receivable
------------- --------- ------------ ----------- ------------
<S> <C> <C> <C> <C> <C>
Balance at April 30, 1996 6,097,366 $617 $25,159,377 $(58,000) $(46,988)
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 common 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 -- -- -- -- 46,988
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 -- --
Amortization of deferred compensation -- -- -- -- --
Net loss -- -- -- -- --
------------ -------- ------------ ------------ ------------
Balance at April 30, 1997 9,766,074 979 27,318,031 (10,000) --
Issuance of common stock for services 1,238,872 124 340,236 -- --
Issuance of stock options for services -- -- 10,000 -- --
Issuance of common stock for employee
and director compensation 409,940 41 163,265 -- --
Issuance of common stock to settle
legal obligations 137,488 13 40,556 -- --
Retirement of treasury stock -- (2) (9,998) 10,000 --
Accretion of discount on convertible notes -- -- 356,154 -- --
Amortization of deferred compensation -- -- -- -- --
Dividends -- -- (91,596) -- --
Net loss -- -- -- -- --
------------ -------- ------------ ------------ ------------
Balance at April 30, 1998 11,552,374 $1,155 $28,126,648 $ -- $ --
============ ======== ============ ============ ============
<CAPTION>
Accumulated Deferred
Deficit Compensation Total
------------ ------------ -----
<S> <C> <C> <C>
Balance at April 30, 1996 $(20,765,851) $(43,055) $4,246,100
Net proceeds from private placements
of common stock -- -- 1,232,425
Issuance of common stock for services -- (148,000) 331,142
Issuance of common 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
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
Amortization of deferred compensation -- 44,916 44,916
Net loss (4,613,750) -- (4,613,750)
------------ ------------ ------------
Balance at April 30, 1997 (25,379,601) (146,139) 1,783,270
Issuance of common stock for services -- (65,000) 275,360
Issuance of stock options for services -- -- 10,000
Issuance of common stock for employee
and director compensation -- (112,000) 51,306
Issuance of common stock to settle
legal obligations -- -- 40,569
Retirement of treasury stock -- -- --
Accretion of discount on convertible notes -- -- 356,154
Amortization of deferred compensation -- 248,002 248,002
Dividends -- -- (91,596)
Net loss (5,609,795) -- (5,609,795)
------------ ------------ ------------
Balance at April 30, 1998 $(30,989,396) $(75,137) $(2,936,730)
============ ============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE>
WINDSWEPT ENVIRONMENTAL GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED APRIL 30, 1998 AND 1997
<TABLE>
<CAPTION>
1998 1997
----------- ------------
CASH FLOWS FROM OPERATING ACTIVITIES
<S> <C> <C>
Net loss $(5,609,795) $(4,613,750)
Adjustments to reconcile net loss to net cash
used by operating activities:
Depreciation and amortization 1,603,917 822,470
Impairment loss 1,287,000 --
Provision for doubtful accounts 324,091 125,000
Gain on settlement of lawsuit (102,993) --
Loss on investments -- 298,000
Loss on abandonment/disposal of fixed assets -- 463,013
Common stock issued for services or for
settlement of litigation 176,064 538,999
Other, net (9,018) 69,075
Changes in assets and liabilities, net of effects of
acquisition of business:
Accounts receivable (646,324) (54,791)
Costs and estimated earnings in excess
of billings on uncompleted contracts (24,047) --
Inventories (2,552) 106,351
Prepaid expenses and other 418,914 (351,358)
Other assets 32,948 (63,970)
Accounts payable and accrued expenses 957,791 1,394,218
Billing in excess of costs and estimated earnings
on uncompleted contracts 215,930 --
Payroll taxes payable 294,386 118,813
----------- -----------
Net cash used by operating activities (1,083,687) (1,147,930)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of property and equipment, net (675,992) (465,266)
Proceeds from sale of assets 37,226 --
Collection of notes receivable 66,880 41,105
Decrease in security deposits -- 8,835
Acquisition of business, net of cash received -- (89,377)
----------- -----------
Net cash used by investing activities (571,886) (504,703)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Net proceeds from issuance of common stock -- 1,279,413
Proceeds from debt financing -- 1,350,381
Advances from factor, net 1,505,968 --
Debt issuance costs -- (142,406)
Principal payments of long-term debt (447,511) (313,311)
Deposit held for stock placement -- (150,000)
Payment of dividends (23,346) --
----------- -----------
Net cash provided by financing activities 1,035,111 2,024,077
----------- -----------
NET (DECREASE) INCREASE IN CASH (620,462) 371,444
CASH, BEGINNING OF YEAR 654,377 282,933
----------- -----------
CASH, END OF YEAR $ 33,915 $ 654,377
=========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE>
WINDSWEPT ENVIRONMENTAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED APRIL 30, 1998 AND 1997
1. DESCRIPTION OF BUSINESS ACTIVITIES
Windswept Environmental Group, 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 metropolitan area.
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.
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 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.
Concentration of Credit Risk
The Company establishes an allowance for accounts receivable based upon
factors surrounding the credit risk of specific customers, historical
trends and other information.
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.
Leasehold improvements are amortized over the lesser of the term of the
related lease or the estimated useful lives of the improvements.
F-7
<PAGE>
WINDSWEPT ENVIRONMENTAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED APRIL 30, 1998 AND 1997
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONT'D)
Accounting for the impairment of long-lived assets
Long-lived assets, such as intangible assets and property and equipment,
are evaluated for impairment when events or changes in circumstances
indicate that the carrying amount of the assets may not be recoverable
through the estimated undiscounted future cash flows from the use of these
assets. Goodwill amortization charged against earnings was $156,820 and
$58,745 in fiscal 1998 and 1997, respectively. There is an impairment of
goodwill in fiscal 1998. See Note 6.
Net Loss Per Share
Effective May 1, 1997, the Company adopted Statement of Financial
Accounting Standards No. 128, "Earnings per Share" ("SFAS 128") which
required 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, which are relevant to the current circumstances of the Company.
All equivalents including options, convertible debt, and convertible
preferred stock may have a dilutive effect in the future.
Income Taxes
The accompanying consolidated financial statements have been prepared in
conformity with Statement of Financial Accounting Standards 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.
A valuation allowance is provided for those net operating loss
carryforwards and temporary differences which are estimated to expire
before they are utilized.
The Company files a consolidated Federal tax return. Accordingly, Federal
income taxes are provided on the taxable income, if any, of the
consolidated group. State income taxes are provided on a separate company
basis, if and when taxable income, after utilizing available carry forward
losses, exceeds certain levels.
Debt Issuance Costs
The costs related to the issuance of the 10% convertible notes, totaling
$173,656, 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 $26,376 and $2,894 during the years ended April 30, 1998 and
1997, respectively.
Stock Option Plans
The Company follows Statement of Financial Accounting Standards No.123,
"Accounting for Stock-Based Compensation" ("SFAS 123"). SFAS 123 requires a
fair value-based method of accounting for stock compensation plans. As
permitted by SFAS 123, the Company has chosen to adopt the disclosure
requirements of SFAS 123, and continue to record stock compensation in
accordance with Accounting Principles Board Opinion No. 25, "Accounting for
Stock Issued to Employees" ("APB 25"). Under APB 25, charges are made to
earnings in accounting for stock options granted to employees when the
option exercise prices are below the fair market value of common stock at
the grant date.
The Company recognizes restricted stock awards for future services over the
period in which the related service is performed. Accordingly, the Company
has recorded these amounts as deferred compensation.
F-8
<PAGE>
WINDSWEPT ENVIRONMENTAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED APRIL 30, 1998 AND 1997
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONT'D)
Fair Value of Financial Instruments
As of April 30, 1998 the carrying value of cash, accounts receivable,
accounts payable, accrued expenses, advances from factor, notes payable and
current maturities of long-term debt approximated fair value because of
their short maturity. The carrying value of notes receivable approximated
fair value based on the discounted cash flow method. Based on a closing
market value of $.46 at April 30, 1998, the fair value of the Convertible
Notes was $828,000, and the fair value of the Series A Redeemable Preferred
Stock was $598,000. The Company believes that an undetermined discount for
lack of liquidity would be appropriate due to the large amount of stock
that would be issuable upon conversion. The fair value of fixed-rate
long-term debt, which approximates the carrying value on the financial
statements, is estimated using discounted cash flow analysis based on the
Company's incremental borrowing rates for similar types of borrowing
arrangements.
Reclassifications
Certain amounts included in the prior year's consolidated financial
statements have been reclassified to conform with the current year's
presentation.
New Accounting Standards
In June 1997, the Financial Accounting Standards Board issued SFAS No. 131,
"Disclosures about Segments of an Enterprise and Related Information,"
which establishes standards for the way that public enterprises report
information about operating segments in interim financial statements issued
to the public. It also establishes standards for disclosure regarding
products and services, geographic areas and major customers. SFAS 131
defines operating segments as components of an enterprise about which
separate financial information is available that is evaluated regularly by
the chief operating decision maker in deciding how to allocate resources
and in assessing performance. This standard is not expected to materially
impact the Company's disclosures when it is adopted.
3. LIQUIDITY AND BUSINESS RISKS
As indicated in the Report of Independent Certified Public Accountants, the
Company's financial statements have been prepared assuming that the Company
will continue as a going concern. As of April 30, 1998, the Company has a
stockholders' deficit of $2,936,730, an accumulated deficit of $30,989,396,
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, 1998, the Company had $33,915 in
cash, and a working capital deficit of $3,833,704. In addition, as of July
31, 1998 and April 30, 1998, the Company was in arrears with respect to
certain payroll tax obligations of approximately $345,000 and $580,000,
respectively, and as of April 30, 1998, with respect to preferred stock
dividends of $70,775.These factors raise substantial doubt about the
Company's ability to continue as a going concern. The financial statements
do not include any adjustments that might result from the outcome of this
uncertainty.
Although management believes, based on the development of the Company's
business operations and its preliminary discussions with various potential
investors and other sources of financing, that it may be able to raise
additional sufficient capital to meet its working capital needs over the
next twelve months, no assurance can be given that it will be successful in
this respect. The Company requires substantial working capital to support
its ongoing operations. Revenue growth is expected in new service areas, as
the result of the Company 's ability to provide a broad range of services.
As is common in the environmental services industry, payments for services
rendered are generally received pursuant to specific draw schedules after
services are rendered. Thus, pending the receipt of payments for services
rendered, the Company must typically fund substantial project costs,
including significant labor and bonding costs, from financing sources
within and outside the Company. Certain contracts, in particular those with
state or federal agencies, may provide for payment terms of up to 90 days
or more and may require the posting of substantial performance bonds which
are generally not released until completion of the project. As of July 31,
1998, the Company has approximately $200,000 of available debt capacity
under its line with BACC (See Note 9), and may succeed in increasing that
capacity should the Company's financial conditions improve. 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
F-9
<PAGE>
WINDSWEPT ENVIRONMENTAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED APRIL 30, 1998 AND 1997
3. LIQUIDITY AND BUSINESS RISKS (CONT'D)
it will be successful in obtaining the additional financing to meet its
obligations as they become due. The Company's future cash requirements are
expected to depend on numerous factors, including, but not limited to: (i)
the ability to successfully bid on environmental or construction contracts,
(ii) the ability to generate positive cash flow from operations, and the
extent thereof, (iii) the ability to raise additional capital or obtain
additional financing, and (iv) economic conditions.
4. ACCOUNTS RECEIVABLE
In February 1998, the Company' s three subsidiaries each entered into a
six-month Purchase and Sale Agreements ("PSA" ) with a commercial factor
which advanced each company 75% of its eligible receivables, as defined.
The factor maintained a security interest in the Company's accounts
receivable and advanced monies on a recourse basis. Interest rates ranged
from 3% for invoices outstanding thirty days to 11% for those outstanding
over a hundred days. Under the agreement the factor reserved the right to
charge-back purchased accounts, at the receivables amount net of unearned
interest, not paid within 100 days. The terms of the factoring agreement
allowed the Company to maintain effective control over the receivables and
therefore the agreement is recorded as a secured borrowing in accordance
with Statement of Financial Accounting Standards No. 125, " Accounting for
Transfers and Servicing of Financial Assets and Extinguishments of
Liabilities". The total amount of advances outstanding under the agreement
at April 30, 1998 was $1,505,968. Discounts on the factoring of receivables
recorded as interest expense amounted to $74,827 for the year ended April
30, 1998.
On July 1, 1998 the Company exercised its right to terminate the PSA at the
end of the six-month period and paid off all outstanding advances and
unpaid fees due the factor. See Note 9.
5. NOTES RECEIVABLE
Spartan note receivable, 8.25% $205,377
Mohave note receivable, interest imputed at 8.50% 84,508
--------
289,885
Less current portion included in prepaid expenses
and other current assets 80,640
--------
$209,245
========
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 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 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 monthly installments of $6,022 through June 2001.
On December 10, 1997 the Company settled a lawsuit relating to $250,000
which former management advanced during fiscal 1994 to Mohave Shores
Development, Inc. ("Mohave") in anticipation of developing land on an
Indian reservation in Arizona under a joint venture agreement. The Company
is entitled to receive $120,000 over a four year period under a
non-interest bearing arrangement with payments annually through January
2001. The Company recorded this note at its fair value of $102,993 as other
income in 1998.
F-10
<PAGE>
WINDSWEPT ENVIRONMENTAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED APRIL 30, 1998 AND 1997
6. ACQUISITION
In February 1997, the Company acquired all of the assets of North Atlantic
Laboratories, Inc ("NAL"), a certified environmental training, laboratory
testing, and consulting services company. The total consideration for the
purchase price was approximately $1,800,000 of which approximately
$1,460,000 was assigned to the excess of purchase price over the net assets
of the business acquired. In connection with this acquisition, the Company
issued 1,300,000 shares of Series A Redeemable Convertible Preferred Stock
("RCPS"), 200,000 shares of restricted common stock and 200,000 stock
options to purchase common stock of the Company exercisable at $.78 per
share, valued at $156,000 and $100,000, respectively. In addition, the
Company issued 52,835 restricted common shares valued at $43,853 for legal
services performed. See Notes 10 and 11.
In the fourth quarter of fiscal 1998, based on managements assessment of
the undiscounted future cash flows and consideration of other competitive
and market factors, an impairment loss of $1,287,000 was recorded related
to the remaining goodwill of NAL at April 30, 1998.
7. PROPERTY AND EQUIPMENT
Major classes of property and equipment at April 30, 1998 consist of the
following:
Estimated useful
life
----
Machinery and equipment 5-10 $3,122,509
Office furniture and equipment 3-7 269,182
Transportation equipment 3-5 863,169
Leasehold improvements 5 497,965
----------
4,752,825
Less: accumulated depreciation and amortization 1,953,634
----------
$2,799,191
==========
The Company is obligated under various capital leases for machinery and
equipment that expire at various dates through 2002. The carrying amount of
machinery and equipment under capital leases included in property and
equipment was as follows at April 30, 1998:
Machinery and equipment $122,695
Less: accumulated amortization 26,728
--------
$ 95,967
========
Depreciation expense for the years ended April 30, 1998 and 1997 was
$816,609 and $634,569, respectively.
8. OBLIGATION OF UNCONSOLIDATED SUBSIDIARY, NET
In January 1996, Laboratory Testing Services, Inc. ("LTS"), a wholly-owned
subsidiary of the Company filed a bankruptcy petition in the United States
Bankruptcy Court in the Eastern District of New York. Subsequently, this
case was converted to a Chapter 7 Bankruptcy proceeding. Concurrent with
the bankruptcy petition, the operations of LTS were ceased. The court
appointed bankruptcy trustee has been liquidating the assets of LTS to
satisfy LTS's corporate obligations. Management believes that the Company's
financial condition and results of operation will not be materially
affected by this proceeding.
F-11
<PAGE>
WINDSWEPT ENVIRONMENTAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED APRIL 30, 1998 AND 1997
9. DEBT AND LEASE OBLIGATIONS
Convertible notes at April 30, 1998 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. In May 1998, the holder of a $10,000 convertible
note chose to convert her note into 20,000 shares of common stock.
The holders of a majority of the convertible notes have 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 of the convertible
notes.
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 has recorded additional interest expense
on the convertible notes of $437,500 (1,400,000 shares at $.3125). The
additional interest expense was 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 $356,154 and
$81,346 was recorded during the years ended April 30, 1998 and 1997,
respectively.
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, 1998 is as follows:
Note payable to bank $ 183,333
Vehicle installment notes with finance company,
payable monthly with interest rates ranging from
8.45% to 11.75%, with terms expiring through May 2002 264,823
Equipment notes, payable monthly with interest rates
ranging from 6.78% to 32.6%, expiring through July 2000 206,780
Insurance premium financing, payable monthly with interest
rates ranging from 7.3% to 14.25%, expiring through March 1999 307,804
Litigation settlement, 6%, due September 1998 81,341
Capital lease obligations, 9.6% to 21.6% 114,503
Note payable, other, 10%, due September 1998 24,387
----------
1,182,971
Less: current portion 955,367
----------
$ 227,604
==========
In May 1997, the Company entered into a revolving bank credit facility (the
"Facility") which provided for borrowings up to $750,000 and was secured by
all of the Company's assets not previously pledged under a debt or lease
obligation. The Facility bore interest at the bank's prime rate plus 1.5%.
Borrowings were based on 80% of the Company's eligible receivables, as
defined. On February 13, 1998 the Company and its lender entered into an
agreement to amend the Facility. Under the agreement, the Company agreed to
pay off all amounts due the bank in excess of $200,000. The $200,000
balance was then converted to a term note over two years at prime plus 3%.
The bank agreed to release its lien on the Company's accounts receivable
and take a secondary position thereon, but maintained its lien on the
Company's equipment and all the other assets until it was repaid in
F-12
<PAGE>
WINDSWEPT ENVIRONMENTAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED APRIL 30, 1998 AND 1997
9. DEBT AND LEASE OBLIGATIONS (CONT'D)
full. In addition, the bank received the personal guaranty of the Company's
chief executive officer with respect to these obligations. Simultaneous
with the execution of the amendment of the bank agreement, the Company
entered into a six-month factoring arrangement with another lender with
respect to its accounts receivable and repaid the bank approximately
$550,000. See Note 4.
On June 1, 1998 the Company entered into a two-year Loan and Security
Agreement ("LSA") with Business Alliance Capital Corporation ("BACC"). The
LSA consisted of two parts, a term loan of $595,000 collateralized by the
Company's equipment and revolving advances up to a maximum of $1,850,000,
collateralized by the Company's accounts receivable, subject to a borrowing
base of 80% of the Company's eligible accounts, as defined. Interest on the
LSA is at 3% above prime. The term loan carries a five year principal
amortization. Interest is calculated on a monthly minimum daily average
loan balance of $750,000. The LSA carries an annual fee of 1% and a
servicing fee of .5% monthly (to be adjusted to .3% after the Company
satisfies certain conditions, as defined) of the average outstanding
balance of the advances. The Company is required to maintain a $250,000
life insurance policy on its CEO with BACC named as an irrevocable
beneficiary. The CEO has given BACC an unlimited personal guaranty on the
LSA. In the event of a default, as defined, the Company is required to pay
interest at 8% above the prime rate to BACC. In conjunction with the LSA,
the Company utilized approximately $218,000 of the proceeds of the term
loan to repay in full the outstanding note payable to the bank and certain
other equipment related capital lease obligations. The Company further
utilized $200,000 of the proceeds to effect an agreement with the Internal
Revenue Service relating to its overdue payroll taxes. On July 1, 1998, the
Company terminated its factoring agreement described in Note 4 and
transferred its receivable collaterization to BACC. The Factor was paid
$1,432,638 in full satisfaction of the Company's outstanding liability to
it. The Company received an additional advance of $210,000, for a total
initial advance of $1,642,638.
The vehicle installment and equipment notes are secured by the underlying
vehicles 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 certain Reg-S and other stock issuances
made by the Company from August through October 1994. The Company settled
this lawsuit in April 1997 for $150,000, net of $300,000 insurance
proceeds, with monthly payments of $6,250 through April 1998, and $7,000
monthly thereafter until April 1999. In the event the Company defaults (as
defined) on any of its payments, it 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, 1998, are as follows:
Year Ending
April 30,
---------
1999 $ 955,367
2000 110,412
2001 76,742
2002 39,940
2003 510
----------
$1,182,971
==========
F-13
<PAGE>
WINDSWEPT ENVIRONMENTAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED APRIL 30, 1998 AND 1997
9. DEBT AND LEASE OBLIGATIONS (CONT'D)
Future minimum lease payments under noncancellable operating leases for
office space and equipment and the present value of future minimum capital
lease payments as of April 30, 1998 are as follows:
<TABLE>
<CAPTION>
Year Ending Capital Operating
April 30, Leases Leases
---------- --------- ------------
<S> <C> <C>
1999 $ 64,835 $ 349,371
2000 41,076 360,864
2001 23,489 335,425
2002 8,170 323,399
--------- -----------
Total minimum lease payments 137,570 $ 1,369,059
===========
Less: amount representing interest
at rates ranging from 9.6% to 21.6% 23,067
--------
Present value of minimum
capitalized lease payments 114,503
Current portion 67,886
--------
Long-term capitalized lease obligations $ 46,617
=========
</TABLE>
Total rental expense under cancelable and noncancellable operating leases
was $286,888 and $209,754 for the years ended April 30, 1998 and 1997,
respectively.
10. REDEEMABLE CONVERTIBLE PREFERRED STOCK
In connection with the acquisition of North Atlantic Laboratories, Inc.
("NAL") in February 1997, the Company issued 1,300,000 RCPS having a
liquidation value of $1 per share plus accumulated dividends. The dividend
rate is the higher of (i) is 6%,or (ii) the inflation rate (as defined)
plus 2 1/2%. After February 1998, the RCPS holders can convert their
preferred shares to common at a ratio of one share of preferred to one
share of common stock, subject to adjustment. The RCPS is callable by the
Company in February 2002.
In March 1998, the holders of the RCPS utilized their right to elect one
member to the Board and vote together with common stockholders on the
election of additional Directors and all other Company matters. Each share
of RCPS has ten (10) votes until February 1999 and one (1) vote per share
thereafter. On March 15, 1998, one of the holders of the RCPS joined the
Board of Directors in accordance with the agreement.
Pursuant to the terms of the RCPS, the Company is prohibited, without first
obtaining the approval of at least a majority of the holders of the RCPS
from (i) altering or changing the rights, preferences, privileges or
restrictions of shares of Cumulative Preferred Stock, (ii) increasing the
authorized number of shares or adjust the par value of Cumulative Preferred
Stock, (iii) issuing any shares of capital stock ranking senior as to
dividends or rights upon liquidation or dissolution to the Cumulative
Preferred Stock or (iv) issuing any common stock at a price below the
conversion price, as defined, to any officer, director or 10% shareholder.
11. STOCK ISSUANCES
During the year ended April 30, 1998, the Company issued 1,238,872 shares
of common stock valued at $340,360 as consideration for various services
provided during fiscal 1998. The Company issued 409,940 shares of common
stock valued at $163,306 as consideration for director and certain employee
compensation provided during fiscal 1998. The Company issued 137,488 shares
of common stock valued at $40,569 to settle legal obligations during fiscal
1998.
In May 1998 the Company received $68,000 for 425,000 shares of restricted
common stock from a group of accredited investors. In June 1998 the Company
issued 200,000 shares of its common stock in exchange for legal services
rendered.
F-14
<PAGE>
WINDSWEPT ENVIRONMENTAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED APRIL 30, 1998 AND 1997
11. STOCK ISSUANCES (CONT'D)
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. See Note 6.
12. STOCK OPTIONS
At April 30, 1998 and 1997, the Company had a fixed stock-based
compensation plan. The Company has also issued options pursuant to option
agreements not subject to any plan.. 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 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 of common stock were granted effective May 26, 1995 at an
exercise price of $1.50 per share. Of this amount, options to purchase
100,000 shares of common stock were granted to the Company's former chief
financial officer, and options to purchase 250,000 shares of common stock
were granted to its current chief executive officer. Up to 50% of said
options were exercisable after six months from the date of grant and the
balance after one year. Options to purchase 350,000 shares of common stock
previously granted to its former Chief Executive Officer and former Chief
Operating Officer were canceled upon their termination in September 1996.
In September 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. As of July 31, 1998, 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 options vest immediately and expire
September 26, 2001.
On December 2, 1996, the Board of Directors repriced all options previously
issued to an exercise price of $.375 per share.
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 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 employees to purchase shares of the Company's common stock at an
exercise price of $.84 per share. The options may be exercised in full
after February 28, 1999 and expire February 28, 2002.
On July 1, 1997, the Company granted 58,370 non-qualified stock options to
employees to purchase shares of the Company's common stock at an exercise
price of $.75 per share. The options may be exercised in full after July 2,
1999 and expire June 30, 2002.
On July 28, 1997, the Company granted 6,154 non-qualified stock options to
employees to purchase shares of the Company's common stock at an exercise
price of $.8125 per share. The options may be exercised in full after July
28, 1999 and expire July 27, 2002.
On December 29, 1997, the Board of Directors repriced all options
previously issued to then current officers, directors, and employees to an
exercise price of $.22 per share. In addition, the Company granted
1,341,394 non-qualified stock options to employees to purchase shares of
the Company's common stock at an exercise price of $.22 per share. The
options may be exercised in full after December 29, 1999 and expire
December 28, 2002. Non-qualified stock options to purchase an aggregate
F-15
<PAGE>
WINDSWEPT ENVIRONMENTAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED APRIL 30, 1998 AND 1997
12. STOCK OPTIONS (CONT'D)
of 670,800 shares of common stock were granted to non-employee directors
and officers of the Company at $.22 per share. The options vest immediately
and expire December 28, 2002.
On March 13,1998, the Company granted 285,000 non-qualified stock options
to employees to purchase shares of the Company's common stock at an
exercise price of $.13 per share. The options may be exercised in full
after March 13, 2000 and expire March 12, 2003.
On March 13, 1998, the Company granted 90,000 non-qualified stock options
to non-employee directors to purchase shares of the Company's common stock
at an exercise price of $.13 per share. The options vest immediately and
expire March 12, 2003.
On April 4, 1998, the Company granted 70,969 non-qualified stock options to
employees to purchase shares of the Company's common stock at an exercise
price of $.12 per share. The options may be exercised in full after April
4, 2000 and expire April 3, 2003.
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
$6,270,795, or $.60 in 1998 and $4,906,898, or $.54 in 1997, 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 fiscal 1998 and 1997; expected volatility of 100% , no dividend yield,
and expected life of two to three years for the fiscal 1998 options and
five years for the fiscal 1997 options. The weighted average risk free
interest rate was 6.5% for 1998 and 1997.
A summary of the status of the Company's stock option plans as of April 30,
1998 and 1997 are presented below:
<TABLE>
<CAPTION>
Employees Range of Range of
& Directors Option Prices Non-Employee Option Prices
Options Per share Options Per Share
------- --------- --------- ---------
<S> <C> <C> <C> <C>
Outstanding at May 1, 1996 700,000 $1.50 -- --
Granted 1,523,052 $.38 - $.84 300,000 $.50 - $.78
Canceled (350,000) $1.50 -- --
Forfeited (26,025) $.38 - $.84 -- --
--------- ----------- ------- -----------
Outstanding at April 30, 1997 1,847,027 $.38 - $.84 300,000 $.50 - $.78
Granted 4,156,136 $.12 - $.81 18,100 $.01
Canceled (1,633,449) $.38 - $.84 -- --
Forfeited (301,052) $.22 - $.84 -- --
--------- ----------- ------- -----------
Outstanding at April 30, 1998 4,068,662 $.12 - $.38 318,100 $.01 - $.78
========= =========== ======= ===========
Options exercisable at April 30, 1997 1,050,000 $.38 - $.84 300,000 $.50 - $.78
========= =========== ======= ===========
Options exercisable at April 30, 1998 1,790,000 $.12 - $.38 318,100 $.01 - $.78
========= =========== ======= ===========
</TABLE>
<TABLE>
<CAPTION>
Number Weighted-Avg. Number
Range of Outstanding Remaining Weighted-Avg Exercisable Weighted-Avg.
Exercise Prices At 4/30/98 Contractual Life (years) Exercise Price At 4/30/98 Exercise Price
- --------------- ---------- ------------------------ -------------- ---------- --------------
<S> <C> <C> <C> <C> <C>
$.12 - .22 3,968,662 4.12 $0.21 1,690,000 $.22
$.375 100,000 2.07 $0.375 100,000 $.375
</TABLE>
F-16
<PAGE>
WINDSWEPT ENVIRONMENTAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED APRIL 30, 1998 AND 1997
12. STOCK OPTIONS (CONT'D)
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 exercisable 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
canceled in September 1996. Options for the same number of shares were
granted 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, 1998 and 1997 related to this option.
In September 1996, in connection with the Company's appointment of a new
Chairman, President and Chief Executive Officer, he was granted an option
to purchase 2,000,000 shares of Common Stock at an exercise price of $.01
per share which is 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 (iii) a change in controlling stockholders (as
defined), of the Company.
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.
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 exercisable commencing on the date of grant and expire February 23,
2002. See Note 6.
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 exercise price of $.50 per
share. These options were exercisable commencing on the date of grant and
expire April 1, 1999.
On October 22, 1997 in connection with certain financing services, the
Company issued options to purchase 18,100 shares of the Company's stock to
a consultant at an exercise price of $.01 per share. These options are
exercisable after October 23, 1998 and expire October 23, 2003.
On December 23, 1997 the Company registered 1,000,000 shares of common
stock to be made available with respect to the grants of awards under the
1997 Incentive Plan.
13. SPECIAL CHARGES
In September 1996, the Company entered into separate termination agreements
with the former Chief Executive Officer ("CEO"), Chief Operating Officer
("COO") and Special Securities Counsel ("SSC") to the Company. These
agreements called for the payment 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 Operations for the year ended Apri1 30, 1997 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
subsequent 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 guilty pleas to the charges of, among
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-17
<PAGE>
WINDSWEPT ENVIRONMENTAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED APRIL 30, 1998 AND 1997
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 were 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. LOSSES ON INVESTMENTS
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 transferred. See Note 12. In addition, the Company wrote off
$100,000 of the balance of its investment in Sovereign which it determined
to be impaired.
16. INCOME TAXES
No provision for income taxes was recorded during the years ended April 30,
1998 and 1997 due to net losses being incurred. At April 30, 1998, the
Company has net operating loss carry forwards for tax purposes of
approximately $20,600,000 which expire through 2013.
The Company's effective tax rate in 1998 and 1997 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:
1998 1997
------------ ------------
Net operating loss carryforwards $ 8,258,000 $ 7,176,000
Losses on investments 2,437,000 2,559,000
Other, net 144,000 347,000
------------ ------------
10,839,000 10,082,000
Less: Valuation allowance (10,839,000) (10,082,000)
------------ ------------
Net deferred tax asset $ -- $ --
============ ============
At April 30, 1998 and 1997, 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 that 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.
17. RELATED PARTY TRANSACTIONS
In February 1997 the Company issued 650,000 shares of RCPS to a director of
the Company and an additional 650,000 shares of RCPS to a partner of such
director. Dividends of $11,673 were paid to this director in fiscal 1998
(with an additional $9,750 paid subsequent to the fiscal year end) and 50%
of the outstanding accrued dividends (including certain amounts for
interest on late payments of dividends) owing at April 30, 1998, or
$35,388, are included in accrued expenses at April 30, 1998. The Company's
subsidiaries sold approximately $15,000 of air monitoring and training
services to a Company of which the director is a principal.
F-18
<PAGE>
WINDSWEPT ENVIRONMENTAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED APRIL 30, 1998 AND 1997
17. RELATED PARTY TRANSACTIONS (CONT'D)
During fiscal 1997, a director of the Company loaned the Company $100,000
in the form of a convertible note. The Company has included interest due of
$18,500 in accrued expenses at April 30, 1998. See Note 9. This director is
also an officer and director of a company which sold approximately $195,000
and $457,000 of material and supplies to the Company which was used on
remediation projects during fiscal 1998 and 1997, of which approximately
$72,000 is included in accounts payable and accrued expenses as of April
30, 1998.
During the fiscal years ended April 30, 1997, the former Chief Operating
Officer of the Company received $148,000 as fees for assisting the Company
in various capital raising transactions.
18. MAJOR CUSTOMERS
During fiscal 1998, two customers accounted for approximately 10.5% and
8.2% of the Company's sales, respectively. During fiscal 1997 one customer
accounted for 16% of the Company's sales.
19. INDUSTRY SEGMENTS
The Company's operations include environmental and construction operations.
Segment data for 1998 is presented below:
Loss from operations represents losses before interest and income taxes.
Identifiable assets by segment are those assets that are used in the
Company's operations in each segment. General corporate assets consist
principally of cash.
<TABLE>
<CAPTION>
Environmental Construction Consolidated
------------- ------------ ------------
<S> <C> <C> <C>
Revenues from unaffiliated customers $ 10,125,604 $ 1,843,170 $ 11,968,774
============ ============ ============
Loss from operations $ (4,343,086) $ (591,282) $ (4,934,368)
============ ============
General corporate income, net 112,149
Interest expense (787,576)
------------
Net Loss $ (5,609,795)
============
Identifiable assets $ 5,405,896 $ 914,878 $ 6,320,774
============ ============
Corporate assets 33,915
------------
Total assets $ 6,354,689
============
</TABLE>
20. SUPPLEMENTAL CASH FLOW INFORMATION
Cash payments during the years ended April 30, 1998 and 1997 included
interest of $317,219 and $93,145.
Non-cash operating activities included the payment of $169,921 in
liabilities utilizing common stock in 1998.
Non-cash investing activities included the acquisition of property and
equipment in exchange for vehicle installment notes and equipment notes of
$126,190 in 1998 and $372,789 in 1997. In fiscal 1997, non-cash investing
activities included the use of 1,300,000 shares of RCPS to acquire NAL.
Non-cash financing activities include $284,300 of annual insurance policy
financing in 1998. Additionally, $200,000 of the Facility described in Note
9 was converted into a long-term loan. 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.
F-19
<PAGE>
WINDSWEPT ENVIRONMENTAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED APRIL 30, 1998 AND 1997
20. SUPPLEMENTAL CASH FLOW INFORMATION (CONT'D)
Other non-cash transactions included $177,000 and $148,000 in deferred
compensation costs recorded in fiscal 1998 and 1997 related to long term
employee and outside consulting agreements paid with restricted stock.
21. 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
Company's former Chief Operating Officer, Leo Mangan, and 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. To date, no
charges have been filed against the Company or any other member of
management as a result of the Eastern District investigation. The Company
is awaiting the decision of the Securities and Exchange Commission
concluding as to whether it will follow a staff recommendation that an
enforcement action be filed seeking an injunction against future violations
of the securities laws. The Company has vigorously opposed this
recommendation on the grounds that all employees accused of wrongdoing have
been terminated and other adequate remedial measures have been taken
voluntarily by the Company.
The Company is a defendant in a litigation matter whereby one or more
plaintiffs claim to be entitled to additional wages while working for a
subcontractor of the Company. The amount of the claim has not been
specified. Management believes that the case is without merit, and intends
to defend the action vigorously.
On December 10, 1997 the Company settled a lawsuit relating to $250,000
which former management advanced during fiscal 1994 to the Mohave Shores
Development, Inc. in anticipation of developing land on an Indian
reservation in Arizona under a joint venture agreement. The Company expects
to receive $120,000 over a four year period under a non-interest bearing
arrangement with payments annually.
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 that 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.
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. Subsequently, this case was converted
to a Chapter 7 Bankruptcy proceeding. LTS is in process of liquidation
through these bankruptcy proceedings. Management believes that the
Company's financial condition and results of operations will not be
materially affected by this proceeding.
Sales tax examination
The Company is presently undergoing a New York State sales tax examination
for the period March 1, 1994 through September 28, 1997. The examination is
still in progress and the findings are yet inconclusive.
Employment Agreements
In November 1996 the Company entered into an employment agreement with the
Company's Chairman, President and Chief Executive Officer. Terms of the
agreement provide for a base salary of $200,000 plus a bonus of 2% of gross
revenues, up 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. The
chief executive 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. Effective
January 1, 1998, the Board agreed to increase the chief executives salary
by $60,000 per annum.
F-20
<PAGE>
WINDSWEPT ENVIRONMENTAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED APRIL 30, 1998 AND 1997
21. COMMITMENTS AND CONTINGENCIES (CONT'D)
Employment Agreements (cont.)
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 issued an
additional 100,000 shares on June 2, 1998, the 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.
22. SUBSEQUENT EVENTS
Settlement with IRS
In June 1998, the Company reached a tentative settlement with the Internal
Revenue Service ("IRS") relating to its outstanding payroll tax liability.
The Company has paid the IRS $270,000 through August 13, 1998, and is
expected to remit an additional $140,000 in four monthly installments of
$35,000 through December 1998.
Lease Amendment
On June 1, 1998 the Company amended its Sublease Agreement for its premises
in Bay Shore, New York to extend the period of time required to post a
$50,308 security deposit (required when the Company did not exercise its
purchase option) to April 30, 1999 from April 30, 1998. In consideration of
the extension, the Company will be required to pay a $5,000 fee.
F-21
<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: August 13, 1998
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
(Principal Accounting Officer)
Power of Attorney
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended,
this Annual Report on Form 10-KSB has been signed on August 13, 1998 by the
following persons in the capacities indicated. Each person whose signature
appears below constitutes and appoints Michael O'Reilly and Alan W. Schoenbart,
or either of them, with full power of substitution, his/her true and lawful
attorneys-in-fact and agents to do any and all acts and things in his/her name
and on his/her behalf in his/her capacities indicated below which they or either
of them may deem necessary or advisable to enable Windswept Environmental Group,
Inc. to comply with the Securities Exchange Act of 1934, as amended, and any
rules, regulations and requirements of the Securities and Exchange Commission,
in connection with this Annual Report on Form 10-KSB, including specifically,
but not limited to, power and authority to sign for him/her in his/her name in
the capacities stated below, any and all amendments thereto, granting unto said
attorneys-in-fact and agents, and each of them, full power and authority to do
and perform each and every act and thing requisite and necessary to be done in
such connection, as fully to all intents and purposes he/her might or could do
in person, hereby ratifying and confirming all that said attorneys-in-fact and
agents, or his substitute or substitutes, may lawfully do or cause to be done by
virtue thereof.
/s/ Michael O'Reilly
------------------------------------
MICHAEL O'REILLY, Chairman, President,
Chief Executive Officer and Director
(Principal Executive Officer)
/s/ Anthony Towell
------------------------------------
ANTHONY TOWELL, Director
/s/ Samuel Sadove
------------------------------------
SAMUEL SADOVE, Director
/s/ Joann O'Reilly
------------------------------------
JOANN O'REILLY, Director
/s/ Dr.Kevin Phillips
------------------------------------
DR. KEVIN PHILLIPS, Director
F-22
COMPOSITE
RESTATED CERTIFICATE OF INCORPORATION
of
WINDSWEPT ENVIRONMENTAL GROUP, INC.
FIRST. The name of this corporation is
Windswept Environmental Group, Inc.
SECOND. Its registered office in the State of Delaware is located at Three
Christina Centre, 201 N. Walnut Street, Wilmington, DE 19801, County of New
Castle. The name and address of its registered agent is The Company Corporation,
at the same address.
THIRD. The nature of the business and the objects and purposes proposed to
be transacted, promoted and carried on, are to do any or all the things herein
mentioned, as fully and to the same extent as natural persons might or could do,
and in any part of the world, viz.
"The purpose of the corporation is to engage in any lawful
act or activity for which corporations may be organized
under the General Corporation Law of Delaware."
FOURTH. The amount of the total authorized capital stock of this
corporation is as follows:
(a) Common Stock. Fifty Million (50,000,000) shares of Common Stock,
par value $.0001 per share; and
(b) Preferred Stock. Ten Million (10,000,000) shares of Preferred
Stock having a par value of $.01 per share, which may be divided into and
issued in Series. Holders of Preferred Stock shall not have the right to
cumulate their votes for the election of directors of the corporation and
shall not have preemptive rights. The Board of Directors is authorized,
from time to time, to divide the Preferred Stock into Series, to designate
each Series, to fix and determine separately for each Series any one or
more of the following relative rights and preferences, and to issue shares
of any Series then or previously designated, fixed and determined:
(i) The rate of dividends;
(ii) The price at and the terms and conditions on which shares
may be redeemed;
<PAGE>
(iii) The amount payable upon shares in the event of involuntary
liquidation;
(iv) The amount payable upon shares in the event of voluntary
liquidation;
(v) Sinking fund provisions for the redemption or purchase of
shares;
(vi) The terms and conditions on which shares may be converted if
the shares of any Series are issued with the privilege of conversion;
and
(vii) Voting rights.
Dividends on Preferred Stock, when and as declared by the Board of
Directors out of any funds legally available therefor, may, as designated
by the Board of Directors, be cumulative, and may, as designated by the
Board of Directors, have a preference over the Common Stock as to the
payment of such dividends.
In the event of voluntary or involuntary liquidation of the
corporation, the Preferred Stock shall have a preference in the assets of
the corporation over the Common Stock.
FIFTH. Every ten shares of Common Stock of the Corporation with a par value
of $.0001 per share outstanding on February 6, 1995 are hereby changed into one
share of Common Stock of the Corporation with a par value of $.0001 per share;
provided, however, that in lieu of issuing any fractional shares, there shall be
paid to each stockholder who, according to the foregoing provisions would
otherwise be entitled to receive as a stock dividend a fractional share of
Common Stock (whether or not in addition to one or more full shares) an amount
of cash equal to the value of such fractional share based on the closing price,
as reported, for shares of the Corporation's Common Stock by the NASDAQ on such
date, after giving effect to the stock change herein provided.
SIXTH. Intentionally omitted.
SEVENTH. The Directors shall have power to make and to alter or amend the
By-Laws, to fix the amount to be reserved as working capital, and to authorize
and cause to be executed, mortgages and items without limit as to the amount,
upon the property and franchise of the Corporation.
With the consent in writing, and pursuant to a vote of the holders of
a majority of the capital stock issued and outstanding, the Directors shall
have the authority to dispose, in any manner, of the whole property of this
corporation.
The By-Laws shall determine whether and to what extent the accounts
and books of this corporation, or any of them, shall be open to the
inspection of the stockholders; and
<PAGE>
no stockholder shall have any right of inspecting any account, or book
or document of this Corporation, except as conferred by the law or the
By-Laws, or by resolution of the stockholders.
The stockholders and directors shall have power to hold their meetings
and keep the books, documents and papers of the Corporation outside of the
State of Delaware, at such places as may be from time to time designated by
the By-Laws or by resolution of the stockholders or directors, except as
otherwise required by the laws of Delaware.
It is the intention that the objects, purposes and powers specified in
the Third paragraph hereof shall, except where otherwise specified in said
paragraph, be nowise limited or restricted by reference to or inference
from the terms of any other clause or paragraph in this certificate of
incorporation, but that the objects, purposes and powers specified in the
Third paragraph and in each of the clauses or paragraphs of this charter
shall be regarded as independent objects, purposes and powers.
EIGHTH. Directors of the corporation shall not be liable to either the
corporation or its stockholders for monetary damages for a breach of fiduciary
duties unless the breach involves: (1) a director's duty of loyalty to the
corporation or its stockholders; (2) acts or omissions not in good faith or
which involve intentional misconduct or a knowing violation of law; (3)
liability for unlawful payments of dividends or unlawful stock purchase or
redemption by the corporation; or (4) a transaction from which the director
derived an improper personal benefit.
INCORPORATED UNDER THE LAWS OF THE
STATE OF DELAWARE
Number Shares
WINDSWEPT ENVIRONMENTAL GROUP, INC.
50,000,000 AUTHORIZED SHARES $.0001 PAR VALUE NON-ASSESSABLE
THIS CERTIFIES THAT
IS THE RECORD HOLDER OF
Shares of WINDSWEPT ENVIRONMENTAL GROUP, INC. Common Stock transferable on the
books of the Corporation in person or by duly authorized attorney upon surrender
of this Certificate properly endorsed. This Certificate is not valid until
countersigned by the Transfer Agent and registered by the Registrar.
WITNESS the facsimile seal of the Corporation and the facsimile signatures
of its duly authorized officers.
Dated: Countersigned and Registered
OTC Corporate Transfer Service Co.
(Nassau County, N.Y.)
By
Transfer Agent and Registrar
Authorized Signature
SEAL
/s/Anthony P. Terrell /s/ Michael O=Reilly
Secretary President
<PAGE>
The following abbreviations, when used in the inscription on the face of this
certificate, shall be construed as though they were written out in full
according to applicable laws or regulations:
TEN COM - as tenants in common UNIF GIFT MIN ACT-_____Custodian_____
TEN ENT - as tenants by the entireties (Cust) (Minor)
JT TEN - as joint tenants with right of under Uniform Gifts to
survivorship and not as tenants Minors Act____________
in common (share)
Additional abbreviations may also be used though not in the above list.
For Value Received, ________________ hereby sell, assigned and
transfer unto
Please insert social security or other
identifying number of
assignee
_____________________________
________________________________________________________________________________
(Please print or typewrite name and address, including zip code, of assignee)
________________________________________________________________________________
________________________________________________________________________________
__________________________________________________________________________Shares
of the capital stock represented by the within certificate, and do hereby
irrevocably constitute and
appoint________________________________________________________________ Attorney
to transfer the said stock on the books of the within named Corporation with
full power of substitution in the premises.
Dated:___________________________________
NOTICE: Signature must correspond to the name as written upon
the face of this certificate in every particular,
without alteration or enlargement or any change
whatsoever, and must be guaranteed by a bank, broker or
any other eligible guarantor institution that is
authorized to do so under the securities transfer
agents medallion program (stamp) under rules
promulgated by the U.S. Securities and Exchange
Commission.
LOAN AND SECURITY AGREEMENT
This LOAN AND SECURITY AGREEMENT is entered into as of June 1, 1998 between
BUSINESS ALLIANCE CAPITAL CORP., a Delaware corporation (BACC), with its chief
executive office located at 300 Alexander Park, Princeton, New Jersey 08543 and
WINDSWEPT ENVIRONMENTAL GROUP, INC., TRADE-WINDS ENVIRONMENTAL RESTORATION,
INC., NORTH ATLANTIC LABORATORIES, INC. and NEW YORK TESTING LABORATORIES, INC.
(individually and collectively "Borrower"), each with its chief executive office
located at 100 Sweeneydale Avenue, Bay Shore, New York 11706.
The parties agree as follows
1. DEFINITIONS AND CONSTRUCTION
1.1 Terms. As used in this Agreement, the following terms shall have the
following meanings:
Accounts, means in addition to the definition of accounts in the Code, all
presently existing and hereafter arising accounts receivable, contract rights,
and all other forms of obligations owing to Borrower arising out of the sale or
lease of goods or the rendition of services by Borrower, whether or not earned
by performance, all credit insurance, guaranties, and other security therefor,
as well as all merchandise returned to or reclaimed by Borrower and Borrower's
Books relating to any of the foregoing.
Advances means all loans, advances and other financial accommodations by
BACC to or on account of the Borrower under Section 2 hereof.
Agreement means collectively this Loan and Security Agreement, any
concurrent or subsequent rider to this Loan and Security Agreement, and any
extensions, supplements, amendments, addenda or modifications to or in
connection with this Loan and Security Agreement or any such rider.
Authorized Officer means any officer or other representative of Borrower
authorized in a writing delivered to BACC to transact business with BACC.
BACC means Business Alliance Capital Corp., its successors and assigns.
BACC Expenses means all of the following: costs and expenses (whether
taxes, assessments, insurance premiums or otherwise) required to be paid by
Borrower under any of the Loan Documents which are paid or advanced by BACC;
filing, recording, publication, appraisal and search fees paid or incurred by
BACC in connection with BACC's transactions with Borrower; costs and expenses
incurred by BACC in the disbursement or collection of funds to or from Borrower;
charges resulting from the dishonor of checks; costs and expenses incurred by
BACC to correct any default or enforce any provision of the Loan Documents, or
in gaining possession of, maintaining, handling, preserving, storing, shipping,
selling, preparing for sale, or advertising to sell the Collateral, or any
portion thereof, irrespective of whether a sale is consummated; and costs and
expenses incurred by BACC in enforcing or defending the Loan Documents,
including, but not limited to, costs and expenses incurred in connection with
any proceeding, suit, enforcement of judgment, or appeal; and BACC's reasonable
attorneys' fees and expenses incurred in advising, structuring, drafting,
reviewing, administering, amending, terminating, enforcing, defending, or
otherwise representing BACC concerning the Loan Documents or the Obligations.
Borrower's Books means all of Borrower's books and records including all of
the following: ledgers; records indicating, summarizing, or evidencing
Borrower's assets or liabilities, or the Collateral; all information relating to
Borrower's business operations or financial condition; and all computer
programs, disk or tape files, printouts, runs, or other computer prepared
information, and the facilities containing such information.
Business Day means any day which is not a Saturday, Sunday, or other day on
which banks in the
- 1 -
<PAGE>
State of New Jersey are authorized or required to close.
Chattel Paper shall have the same meaning ascribed to such term in the
Code.
Code means the New Jersey Uniform Commercial Code, as amended from time to
time.
Collateral means all of the following: the Accounts; the Equipment; the
General Intangibles; the Chattel Paper; the Inventory; the Negotiable
Collateral; any money, deposit accounts or assets of Borrower which hereafter
come into the possession, custody, or control of BACC; all proceeds and
products, whether tangible or intangible, of any of the foregoing, including
proceeds of insurance covering any or all of the foregoing, and any and all
tangible or intangible property resulting from the sale or other disposition of
the foregoing, or any portion thereof or interest therein, and all proceeds
thereof, and any other assets of Borrower which may be subject to a lien in
favor of BACC.
Daily Balance means the amount of the Obligations owed at the end of a
given day.
Eligible Accounts means those Accounts created by Borrower in the ordinary
course of business, which are and at all times shall continue to be acceptable
to BACC in all respects; provided, however, that standards of eligibility may be
fixed and revised from time to time by BACC in BACC's exclusive judgment. In
determining such acceptability and standards of eligibility, BACC may, but need
not, rely on agings, reports and schedules of Accounts furnished by Borrower,
but reliance by BACC thereon from time to time shall not be deemed to limit
BACC's right to revise standards of eligibility at any time as to both
Borrower's present and future Accounts. In general, an Account shall not be
deemed eligible unless: (a) the Account debtor on such Account is and at all
times continues to be acceptable to BACC, and (b) such Account complies in all
respects with the representations, covenants and warranties hereinafter set
forth. Except in BACC's sole discretion, Eligible Accounts shall not include any
of the following (a) Accounts which the Account debtor has failed to pay within
Ninety (90) days of invoice date, and all Accounts owed by any Account debtor
that has failed to pay twenty-five percent (25%) or more of its Accounts owed to
Borrower within Ninety (90) days of invoice date; (b) Accounts with respect to
which goods are placed on consignment or for a guaranteed sale, or which contain
other terms by reason of which payment by the Account debtor may be conditional;
(c) Accounts with respect to which the Account debtor is not a resident of the
United States unless the Account is supported by foreign credit insurance or a
letter of credit, in both instances satisfactory to and assigned to BACC; (d)
Accounts with respect to which the Account debtor is the United States or any
department, agency or instrumentality of the United States, any State of the
United States or any city, town, municipality or division thereof unless all
filings have been made under the Federal Assignment of Claims Act or comparable
state or other statute; (e) Accounts with respect to which the Account debtor is
an officer, employee or agent of, or subsidiary of, related to, affiliated with
or has common shareholders, officers or directors with Borrower; (f) Accounts
with respect to which Borrower is or may become liable to the Account debtor for
goods sold or services rendered by the Account debtor to Borrower; (g) Accounts
with respect to an Account debtor whose total obligations to Borrower exceed
Twenty-five percent (25%) of all Accounts; (h) Accounts with respect to which
the Account debtor disputes liability or makes any claim with respect thereto,
or is subject to any insolvency proceeding, or becomes insolvent, fails or goes
out of business; (i) the Account arises out of a contract or purchase order for
which a surety bond was issued on behalf of Borrower; (j) Accounts in which BACC
does not have first priority and exclusive perfected security interest; or (k)
Accounts where the Account Debtor is in a jurisdiction for which Borrower is
required to file a notice of business activities or similar report and Borrower
has not filed such report within the time period required by applicable law.
Equipment means all of Borrower's present and hereafter acquired equipment,
machinery, machine tools, motors, furniture, furnishings, fixtures, motor
vehicles, rolling stock, processors, tools, pans, dies, jigs, goods (other than
consumer goods or farm products) and any interest in any of the foregoing, and
all attachments, accessories, accessions, replacements, substitutions,
additions, and improvements to any of the foregoing, wherever located.
ERISA means the Employee Retirement Income Security Act of 1974, as
amended, and the
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regulations thereunder.
ERISA Affiliate means each trade or business (whether or not incorporated
and whether or not foreign) which is or may hereafter become a member of a group
of which Borrower is a member and which is treated as a single employer under
ERISA Section 4001(b)( 1), or IRC Section 414.
Event of Default means the events specified in Section 8, below.
General Intangibles means all of Borrower's present and future general
intangibles and other personal property (including choses or things in action,
goodwill, patents, trade names; trademarks, service marks, blueprints, drawings,
purchase orders, customer lists, monies due or recoverable from pension funds,
route lists, infringement claims, computer programs, computer discs, computer
tapes, Borrower's Books, literature, reports, catalogs, deposit accounts,
insurance premium rebates, tax refunds, and tax refund claims) other than goods
and Accounts.
Guarantor means each person or entity which guarantees the Obligations.
Insolvency Proceeding means any proceeding commenced by or against any
person or entity under any provision of the federal Bankruptcy Code, as amended,
or under any other state or federal insolvency law, including assignments for
the benefit of creditors, formal or informal moratoria, compositions, or
extensions generally with its creditors.
Inventory means all present and future inventory in which Borrower has any
interest, including goods held for sale or lease or to be furnished under a
contract of service, Borrower's present and future raw materials, work in
process, finished goods, tangible property, stock in trade, wares, and materials
used in or consumed in Borrower's business, goods which have been returned to,
repossessed by, or stopped in transit by Borrower, packing and shipping
materials, wherever located, any documents of title representing any of the
above, and Borrower's Books relating to any of the foregoing.
IRC means the Internal Revenue Code of 1986, as amended, and the
regulations thereunder.
Loan Documents means, collectively, this Agreement, any Note or Notes, any
security agreements, pledge agreements, mortgages, deeds of trust or other
encumbrances or agreements which secure the Obligations, and any other agreement
entered into between Borrower and BACC or by Borrower or a Guarantor in favor of
BACC relating to or in connection with this Agreement or the Obligations.
Multiemployer Plan means a multiemployer plan as defined in ERISA Sections
3(37) or 4001(a)(3) or IRC Section 414(f).
Negotiable Collateral means all of Borrower's present and future letters of
credit, notes, drafts, instruments, documents, leases, and Chattel Paper.
Note means any promissory note made by Borrower to the order of BACC
concurrently herewith or at any time hereafter.
Obligations means all loans, advances, debts, liabilities (including all
interest and amounts charged to the Obligations pursuant to any agreement
authorizing BACC to charge the Obligations), obligations, lease payments,
guaranties, covenants, and duties owing by Borrower to BACC of any kind and
description (whether pursuant to or evidenced by the Loan Documents or by any
other agreement between BACC and Borrower, and irrespective of whether for the
payment of money), whether made or incurred prior to, on, or after the
Termination Date, direct or indirect, absolute or contingent, due or to become
due, now existing or hereafter arising, including any debt, liability or
obligation owing from Borrower to others which BACC may obtain by assignment or
otherwise, and all interest thereon and all BACC Expenses.
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Plan means any plan described in ERISA Section 3(2) maintained for
employees of Borrower or any ERISA Affiliate, other than a Multiemployer Plan.
Prime Rate means that rate designated by CoreStates Bank, or any successor
thereof, from time to time as its prime rate, which shall not necessarily
constitute its lowest available rate.
Term means the period from the date of the execution and delivery by BACC
of this Agreement through and including the later of (a) the Termination Date
and (b) the payment and performance in full of the Obligations.
Termination Date means (a) June 1, 2000, (the period through such date the
"Initial Term"), unless such date is extended pursuant to section 3.1 hereof,
and if so extended on one or more occasions the last date of the last such
extension, or (b) if earlier terminated by BACC pursuant to sections 2.1 or 9.1
hereof, the date of such termination.
1.2 Construction. Unless the context of this Agreement clearly requires
otherwise, references to the plural include the singular and to the singular
include the plural. The words hereof, herein, hereby, hereunder, and similar
terms in this Agreement refer to this Agreement as a whole and not to any
particular provision of this Agreement. Section, subsection, clause and exhibit
references are to this Agreement unless otherwise specified. Words importing a
particular gender mean and include every other gender.
1.3 Accounting Terms. All accounting terms not specifically defined herein
shall be construed in accordance with generally accepted accounting principles
(GAAP) as in effect from time to time. When used herein, the term financial
statements shall include the notes and schedules thereto.
1.4 Exhibits. All of the exhibits, addenda or riders attached to this
Agreement shall be deemed incorporated herein by reference.
1.5 Code. Any terms used in this Agreement which are defined in the Code
shall be construed and defined as set forth in the Code, unless otherwise
defined herein.
2. ADVANCES AND TERMS OF PAYMENT
2.1 Revolving Advances; Advance Limit. (A) Upon the request of Borrower,
made at any time or from time to time during the Term and so long as no Event of
Default has occurred and is continuing, BACC may, in its sole and absolute
discretion, make Advances in an amount up to eighty percent (80%) of the
aggregate outstanding amount of Eligible Accounts; provided, however, that in no
event shall the aggregate amount of the outstanding Advances be greater than, at
any time, the amount of One Million Eight Hundred Fifty Thousand and 00/100
Dollars ($1,850,000.00) (the Advance Limit); (B) Borrower has advised BACC that
Borrower currently factors its Accounts Receivable with Prestige Factors and
which factoring facility has a term through approximately July 1, 1998.
Accordingly Borrower may not obtain Advances under the revolving credit facility
provided for in this Section 2.1 until it furnishes to BACC (i) evidence of
termination of the factoring facility with Prestige Factors, (ii) evidence
satisfactory to BACC that upon the initial Advance under this Section 2.1 the
interest of Prestige Factors in the Accounts Receivable of Borrower will
terminate and that Prestige Factors will deliver UCC-3 Statements of Termination
and (ii) written authorization for BACC to wire transfer or otherwise remit to
Prestige Factors out of the initial Advances under this Section 2.1 an amount
necessary to satisfy in full Prestige Factors interest in all Accounts
Receivable and other assets of Borrower. If Borrower has not satisfied the
aforesaid conditions by July 10, 1998 and has not otherwise obtained Advances
under this Section 2.1 by July 10, 1998, BACC may in its sole discretion
immediately accelerate the Termination Date.
2.2 Term Loan. Contemporaneous with the execution hereof BACC shall lend to
Borrower the
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principal sum of Five Hundred Ninety-Five Thousand and no/100 ($595,000.00)
which sum, together with interest at the rate set forth below shall be paid in
twenty-three (23) equal consecutive monthly installments of principal of Nine
Thousand Nine Hundred Sixteen and 67/100 ($9,916.67) each beginning on July 1,
1998 and continuing on the same day of each month thereafter through May 1,
2000, followed by a final installment of the entire unpaid principal balance of
said term loan on June 1, 2000. Interest shall be paid contemporaneous with the
payments of principal. Notwithstanding the foregoing, the entire unpaid
principal balance and all accrued and unpaid interest shall be due and payable
in full on the Termination Date. In addition, if Borrower has not by July 10,
1998 satisfied the conditions set forth in Section 2.1(B) hereof and obtained
the initial Advances thereunder, BACC may accelerate the maturity date of the
unpaid principal balance of the term loan and Borrower shall pay to BACC, in
addition to all unpaid principal and interest, a termination fee of $29,750.00.
2.3 Overadvances. All Advances shall be added to and be deemed part of the
Obligations when made. If, at any time and for any reason, the aggregate amount
of the outstanding Advances exceeds the dollar or percentage limitations
contained in Section 2.1 (an Overadvance) then Borrower shall, upon demand by
BACC, immediately pay to BACC, in cash, the amount of such Overadvance. Without
affecting Borrower's obligation to immediately repay to BACC the amount of each
Overadvance, Borrower shall pay BACC a fee (the Overadvance Fee) in an amount
equal to Three percent (3%) per annum on the Overadvance amount for each day any
Overadvance exists. All such fees shall be computed on the basis of a three
hundred and sixty (360) day year for the actual number of days elapsed.
2.4 Authorization to Make Advances. BACC is hereby authorized to make the
Advances based upon telephonic or other instructions received from anyone
purporting to be an Authorized Officer, or, at the discretion of BACC, if such
Advances are necessary to satisfy any Obligations. All requests for Advances
shall specify the date on which such Advance is to be made (which day shall be a
Business Day) and the amount of such Advance. Requests received after 12:00 p.m.
Eastern time on any day shall be deemed to have been made as of the opening of
business on the immediately following Business Day. All Advances made under this
Agreement shall be conclusively presumed to have been made to, at the request
of, and for the benefit of Borrower when deposited to the credit of Borrower or
otherwise disbursed in accordance with the instructions of Borrower or in
accordance with the terms and conditions of this Agreement. Unless otherwise
requested by Borrower, all Advances shall be made by a wire transfer to the
deposit account of Borrower designated on schedule 2.4 annexed hereto, or such
other account as Borrower shall notify BACC in writing. Borrower shall pay to
BACC a funds transfer fee of $25.00 for each Advance. Said fees shall be payable
on the first day of each month of the Term for all Advances made during the
preceding month.
2.5 Interest.
A. Except where specified to the contrary in the Loan Documents, the
aggregate outstanding balances of the Obligations shall accrue interest at the
per annum rate of Three percentage points (3%) above the Prime Rate. The
Obligations shall bear interest from and after written notice by BACC to
Borrower of the occurrence of an Event of Default, and without constituting a
waiver of any such Event of Default, at the per annum rate of Eight percentage
points (8%) above the Prime Rate. All interest payable under the Loan Documents
shall be computed on the basis of a three hundred sixty (360) day year for the
actual number of days elapsed on the Daily Balance. Interest as provided for
herein shall continue to accrue until the Obligations are paid in full.
B. The interest rate payable by Borrower under the terms of this Agreement
shall be adjusted in accordance with any change in the Prime Rate from time to
time on the date of any such change. All interest payable by Borrower shall be
due and payable on the first day of each calendar month during the Term. BACC
may, at its option, add such interest and all BACC Expenses to the Obligations,
and such amount shall thereafter accrue interest at the rate then applicable
under this Agreement. Notwithstanding anything to the contrary contained in the
Loan Documents, the minimum interest payable by Borrower on the Advances shall,
from July 10, 1998 be calculated on a minimum daily average loan balance of
$750,000.00.
(c) In no event shall interest on the Obligations exceed the highest lawful
rate in effect from time to time. It is not the intention of the parties hereto
to make an agreement which violates any applicable state or federal
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usury laws. In no event shall Borrower pay or BACC accept or charge any interest
which, together with any other charges upon the principal or any portion
thereof, exceeds the maximum lawful rate of interest allowable under any
applicable state or federal usury laws. Should any provision of this Agreement
or any existing or future Notes or Loan Documents between the parties be
construed to require the payment of interest or any other fees or charges which
could be construed as interest which, together with any other charges upon the
principal or any portion thereof and any other fees or charges which could be
construed as interest, exceeds the maximum lawful rate of interest, then any
such excess shall be applied to the remaining principal balance of the
Obligations, if any, and the remainder refunded to Borrower.
2.6 Collection of Accounts. BACC or a BACC designee may, at any time, with
or without notice to Borrower, notify customers or Account debtors that the
Accounts have been assigned to BACC, and that BACC has a security interest in
them and collect the Accounts directly, and add the reasonable collection costs
and expenses to the Obligations, but, unless and until BACC does so or gives
Borrower other written instructions, Borrower shall notify all Account debtors
to remit payments on Accounts to a lockbox to be designated by BACC. All such
payments remitted to the lockbox shall be credited to a deposit account of BACC
and into which account remittances from account debtors of other clients of BACC
may be credited. If notwithstanding said notice Borrower obtains payment on any
Account, Borrower shall receive all payments on Accounts and other proceeds,
including cash, of Collateral in trust for BACC and immediately deliver said
payments to BACC in their original form as received from the Account debtor,
together with any necessary endorsements.
2.7 Crediting Payments. The receipt of any item of payment by BACC shall,
subject to final payment of such item, be provisionally applied to reduce
Obligations on the date of receipt of such item by BACC, but the receipt of such
an item of payment shall for the purpose of calculation of interest on the
Obligations not be deemed to have been paid to BACC until four (4) Business Days
after the date of BACC's actual receipt of such item of payment. Notwithstanding
anything to the contrary contained herein, payments received by BACC after 11:00
a.m. Eastern time shall be deemed to have been received by BACC as of the
opening of business on the immediately following Business Day.
2.8 Origination Fee. In consideration of BACC entering into this Agreement,
Borrower shall pay BACC an origination fee of Eighteen Thousand Five Hundred
Dollars ($18,500.00), $1,541.67 of which shall be paid on execution hereof and
the balance in eleven monthly installments of $1,541.67 commencing on July 1,
1998 and on the same day of each month thereafter until paid in full ), and
thereafter an origination fee of Eighteen Thousand Five Hundred Dollars
($18,500.00) on each annual anniversary of the date hereof.
2.9 Servicing Fee. Borrower shall pay BACC a servicing fee in an amount
equal to one half of one percent (.5%) of the daily average outstanding balance
of the Advances during each month on or before the first (1st) day of each
calendar month in respect of BACC's services for the preceding calendar month,
during the Term, including each Renewal Term, or so long as the Obligations are
outstanding. The servicing fee will be reduced to three-tenths of one percent
(.3%) if (i) no Event of Default exists and (ii) BACC determines, in its good
faith discretion, following an updated examination of the books and records of
the Borrower, that Borrower has, in the ordinary course of business satisfactory
evidence that services giving rise to Accounts were actually rendered.
2.10 Field Examination Fee. Borrower shall pay BACC a fee in an amount
equal to Six Hundred Dollars ($600.00) per day per examiner, plus out-of-pocket
expenses for each examination of Borrower's Books or the other Collateral
performed by BACC or its designee provided that so long as no Event of Default
exists the Borrower shall not be responsible to pay such examination fees in
excess of $9,000.00 per loan year.
2.11 Late Reporting Fee. Borrower shall pay to BACC a fee in an amount
equal to Fifty Dollars ($50.00) per document per day for each Business Day any
report, financial statement or schedule required by this Agreement to be
delivered to BACC is past due.
2.12 Monthly Statements. BACC shall render monthly statements to Borrower
of all
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Obligations, including statements of all principal, interest and BACC Expenses,
and Borrower shall have fully and irrevocably waived all objections to such
statements and the contents thereof unless, within thirty (30) days after
receipt, Borrower shall deliver to BACC, by registered, certified or overnight
mail as set forth in Section 12 hereof, written objection to such statement
specifying the error or errors, if any, contained therein.
3. TERM
3.1 Term and Renewal Date. This Agreement shall become effective upon
execution by BACC and continue in full force through the Initial Term and from
year to year thereafter (a "Renewal Term") if BACC, at its option, in writing
agrees to extend the Term for one (1) year from the then Termination Date,
provided that Borrower has not exercised its termination right in accordance
with this Section 3.1. Borrower may terminate the Term on the then Termination
Date by giving BACC at least sixty (60) days prior written notice by registered
or certified mail, return receipt requested. In addition, BACC shall have the
right to terminate this Agreement immediately at any time upon the occurrence of
an Event of Default. No such termination shall relieve or discharge Borrower of
its duties, Obligations and covenants hereunder until all Obligations have been
paid and performed in full, and BACC's continuing security interest in the
Collateral shall remain in effect until the Obligations have been fully and
irrevocably paid and satisfied in cash or cash equivalent. On the Termination
Date of this Agreement, the Obligations shall be immediately due and payable in
full.
3.2 Early Termination Fee. If the Term is terminated by BACC upon the
occurrence of an Event of Default, or is terminated by Borrower except as
provided in Section 3.1, in view of the impracticability and extreme difficulty
of ascertaining actual damages and by mutual agreement of the parties as to a
reasonable calculation of BACC's lost profits as a result thereof, Borrower
shall pay BACC upon the effective date of such termination a fee in an amount
equal to: (a) five percent (5.0%) of the Advance Limit if such termination
occurs on or prior to the first (1st) anniversary of the commencement date of
the Initial Term; (b) four percent (4.0%) of the Advance Limit if such
termination occurs after the first (1st) anniversary of the commencement date of
the Initial Term but prior to the second (2nd) anniversary of the commencement
date of the Initial Term; or (c) two percent (2.0%) of the Advance Limit if such
termination occurs during any Renewal Term. Such fee shall be presumed to be the
amount of damages sustained by BACC as the result of an early termination and
Borrower acknowledges that it is reasonable under the circumstances currently
existing. The fee provided for in this Section 3.2 shall be deemed included in
the Obligations.
4. CREATION OF CONTINUING SECURITY INTEREST
4.1 Grant of Continuing Security Interest. Borrower hereby grants to BACC a
continuing security interest in all presently existing and hereafter acquired or
arising Collateral in order to secure prompt repayment of the Obligations and in
order to secure prompt performance by Borrower of each and all of its covenants
and Obligations under the Loan Documents and otherwise. BACC's continuing
security interest in the Collateral shall attach to all Collateral without
further act on the part of BACC or Borrower.
4.2 Negotiable Collateral. In the event that any Collateral, including
proceeds, is evidenced by or consists of Negotiable Collateral, Borrower shall
notify BACC and upon the request of BACC, immediately endorse and assign such
Negotiable Collateral to BACC and deliver physical possession of such Negotiable
Collateral to BACC.
4.3 Delivery of Additional Documentation Required. Borrower shall execute
and deliver to BACC concurrently with Borrower's execution and delivery of this
Agreement and at any time thereafter at the request of BACC, all financing
statements, continuation financing statements, fixture filings, security
agreements, ship mortgages, chattel mortgages, pledges, assignments,
endorsements of certificates of title, applications for title, affidavits,
reports, notices, schedules of accounts, letters of authority, and all other
documents that BACC may request, in form satisfactory to BACC, to perfect and
maintain perfected BACC's continuing security interests in the Collateral and in
order to fully consummate all of the transactions contemplated under the Loan
Documents.
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4.4 Power of Attorney. Borrower hereby irrevocably makes, constitutes and
appoints BACC (and any person designated by BACC) as Borrower's true and lawful
attorney-in-fact with power to sign the name of Borrower on any of the above
described documents or on any other similar documents to be executed, recorded
or filed in order to perfect or continue perfected BACC's continuing security
interest in the Collateral. In addition, Borrower hereby appoints BACC (and any
person designated by BACC) as Borrower's attorney-in-fact with power to: (a)
sign Borrower's name on verifications of Accounts, and on notices to Account
debtors; (b) send requests for verification of Accounts; (c) endorse Borrower's
name on any checks, notes, acceptances, money orders, drafts or other forms of
payment or security that may come into BACC's possession; (d) notify the post
office authorities to change the address for delivery of Borrower's mail to an
address designated by BACC, to receive and open all mail addressed to Borrower,
and to retain all mail relating to the Collateral and forward all other mail to
Borrower; (e) make, settle and adjust all claims under Borrower's policies of
insurance, endorse the name of Borrower on any check, draft, instrument or other
item of payment for the proceeds of such policies of insurance and make all
determinations and decisions with respect to such policies of insurance. The
appointment of BACC as Borrower's attorney-in-fact and each and every one of
BACC's rights and powers, being coupled with an interest, is irrevocable so long
as any Accounts in which BACC has a continuing security interest remain unpaid
and until all of the Obligations have been fully repaid and performed. BACC
shall have no obligation to protect any rights of Borrower against any person
obligated on any Collateral.
4.5 Right To Inspect. BACC shall have the right at any time or times
hereafter during Borrower's usual business hours, or during the usual business
hours of any third party having control over Borrower's Books to inspect
Borrower's Books in order to verify the amount or condition of, or any other
matter relating to, the Collateral or Borrower's financial condition. BACC also
shall have the right at any time or times hereafter during Borrower's usual
business hours to inspect and examine the Inventory and the Equipment and to
check and test the same as to quality, quantity, value and condition.
5. REPRESENTATIONS AND WARRANTIES
Borrower represents and warrants to BACC the following and acknowledges:
5.1 No Prior Encumbrances; Security Interests. Borrower has good and
marketable title to the Collateral, free and clear of liens, claims, security
interests or encumbrances, except for the security interests to be satisfied
from the proceeds of the first Advances hereunder, the continuing security
interests granted to BACC by Borrower, and those disclosed on Schedule 5.1
annexed hereto. Other than those expressly permitted by this Agreement, Borrower
will not create or permit to be created any security interest, lien, pledge,
mortgage or encumbrance on any Collateral or any of its other assets.
5.2 Bona Fide Accounts. All Accounts represent bona fide sales or leases of
goods and/or services for which Borrower has an unconditional right to payment.
None of the Accounts are subject to any rights of offset, counterclaim,
cancellation or contractual rights of return.
5.3 Merchantable Inventory. All Inventory is now and at all times hereafter
shall be of good and merchantable quality, free from defects.
5.4 Location of Inventory and Equipment. The Inventory and Equipment is not
now and shall not at any time or times hereafter be stored with a bailee,
warehouseman, processor, or similar party. Borrower shall keep the Inventory and
Equipment only at the following locations: 100 Sweeneydale Avenue, Bay Shore,
New York 11706.
5.5 Inventory Records. Borrower now keeps and hereafter at all times shall
keep correct and accurate records itemizing and describing the kind, type,
quality and quantity of the Inventory and Borrower's cost of said items.
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5.6 Retail Accounts. No Accounts arise from the sale of goods for personal,
family or household purposes.
5.7 Relocation of Chief Executive Office. The chief executive office of
Borrower is at the address indicated on the first page of this Agreement and
Borrower will not, without thirty (30) days' prior written notice to BACC,
relocate such office.
5.8 Due Incorporation and Qualification. Borrower is and shall at all times
hereafter be a corporation duly organized and existing under the laws of the
state of its incorporation and is qualified and licensed to do business and is
in good standing in any state in which the conduct of its business or its
ownership of assets requires that it be so qualified.
5.9 Fictitious Name. Borrower is conducting its business under the
following trade or fictitious name(s) and no others: [none]. Borrower has
complied with the fictitious name laws of all jurisdictions in which compliance
is required in connection with its use of such name(s).
5.10 Permits and Licenses. Borrower holds all licenses, permits,
franchises, approvals and consents required for the conduct of its business and
the ownership and operation of its assets.
5.11 Due Authorization. Borrower has the right and power and is duly
authorized to enter into the Loan Documents to which it is a party.
5.12 Compliance with Articles; Bylaws. The execution by Borrower of the
Loan Documents to which it is a party does not constitute a breach of any
provision contained in Borrower's Certificate or Articles of Incorporation or
its Bylaws, nor does it constitute an event of default under any material
agreement to which Borrower is now or may hereafter become a party.
5.13 Litigation. There are no actions, proceedings or claims pending by or
against Borrower before any court or administrative agency in excess of
$10,000.00 which are not reported in Borrowers 10-Q for the period ending
January 31, 1998 and Borrower has no knowledge or notice of any pending,
threatened or imminent litigation, governmental investigations, or claims,
complaints, actions, or prosecutions involving Borrower, except for ongoing
collection matters in which Borrower is the plaintiff. If any such actions,
proceedings or claims arise during the Term, Borrower shall promptly notify BACC
in writing.
5.14 No Material Adverse Change in Financial Statements. All financial
statements relating to Borrower which have been or may hereafter be delivered to
BACC (I) have been prepared in accordance with GAAP; (ii) fairly present
Borrower's financial condition as of the date thereof and Borrower's results of
operations for the period then ended; and (iii) disclose all contingent
obligations of Borrower. In addition no material adverse change in the financial
condition of Borrower has occurred since the date of the most recent of such
financial statements.
5.15 Solvency. Borrower is now, and shall be at all times through the Term,
solvent and able to pay its debts (including trade debts) as they mature.
5.16 ERISA. Neither Borrower or any ERISA Affiliate, nor any Plan is or has
been in violation of any of the provisions of ERISA, any of the qualification
requirements of IRC Section 401(a), or any of the published interpretations
thereof. No lien upon the assets of Borrower has arisen with respect to any
Plan. No prohibited transaction within the meaning of ERISA Section 406 or IRC
Section 4975(c) has occurred with respect to any Plan. Neither Borrower nor any
ERISA Affiliate has incurred any withdrawal liability with respect to any
Multiemployer Plan. Borrower and each ERISA Affiliate have made all
contributions required to be made by them to any Plan or Multiemployer Plan when
due. There is no accumulated funding deficiency in any Plan, whether or not
waived.
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5.17 Environmental Laws and Hazardous Materials. Borrower has complied, and
at all times through the Term will comply, with all Environmental Laws. Borrower
has not and will not cause or permit any Hazardous Materials to be located,
incorporated, generated, stored, manufactured, transported to or from, released,
disposed of, or used at, upon, under, or within any premises at which Borrower
conducts its business, or in connection with Borrower's business except in
compliance with all Environmental Laws. To the best of Borrower's knowledge, no
prior owner or operator of any premises at which Borrower conducts its business
has caused or permitted any of the above to occur at, upon, under, or within any
of the premises. Borrower will not permit any lien to be filed against the
Collateral or any part thereof under any Environmental Law, and will promptly
notify BACC of any proceeding, inquiry or claim relating to any alleged
violation of any Environmental Law, or any alleged loss, damage or injury
resulting from any Hazardous Material. BACC shall have the right to join and
participate in, as a party if it so elects, any legal or administrative
proceeding initiated with respect to any Hazardous Material or in connection
with any Environmental Law. "Hazardous Material" includes without limitation any
substance, material, emission, or waste which is or hereafter becomes regulated
or classified as a hazardous substance, hazardous material, toxic substance or
solid waste under any Environmental Law, asbestos, petroleum products, urea
formaldehyde, polychlorinated biphenyls (PCBs), radon, and any other hazardous
or toxic substance, material, emission or waste. Environmental Law means the
Comprehensive Environmental Response, Compensation, and Liability Act of 1980,
as amended, the Resource Conservation and Recovery Act of 1976, the Hazardous
Materials Transportation Act, the Toxic Substances Control Act, the regulations
pertaining to such statutes, and any other safety, health or environmental
statutes, laws, regulations or ordinances of the United States or of any state,
county or municipality in which Borrower conducts its business or the Collateral
is located.
5.18 Tax Compliance. Borrower has filed all tax returns required to be
filed by it, except for those which are under appropriate extensions, and upon
disbursement of the first Advance hereunder will have paid all taxes due and
payable on said returns and on any assessment made against it or its assets.
5.19 Reliance by BACC; Cumulative. Each warranty, representation and
agreement contained in this Agreement shall be automatically deemed repeated by
Borrower with each request for an Advance and shall be conclusively presumed to
have been relied on by BACC regardless of any investigation made or information
possessed by BACC. The warranties, representations and agreements set forth
herein shall be cumulative and in addition to any and all other warranties,
representations and agreements which Borrower shall now or hereafter give, or
cause to be given, to BACC.
6. AFFIRMATIVE COVENANTS
Borrower covenants and acknowledges that during the Term Borrower shall
comply with all of the following:
6.1 Collateral and Other Reports. Borrower shall on each Business Day
report to BACC all Accounts arising since its most recent report to BACC and
shall execute and deliver to BACC, no later than the fifteenth (15th) day of
each month during the Term, a detailed aging of the Accounts, a reconciliation
statement and a summary aging, by vendor, of all accounts payable of Borrower
and any book overdraft. Borrower shall deliver to BACC, as BACC may from time to
time require, collection reports, sales journals, invoices, original delivery
receipts, customers' purchase orders, shipping instructions, bills of lading and
other documentation respecting shipment arrangements. Absent such a request by
BACC, copies of all such documentation shall be held by Borrower as custodian
for BACC.
6.2 Returns. Returns and allowances, if any, as between Borrower and any
Account debtors, shall be permitted on the same basis and in accordance with the
usual customary practices of Borrower as they exist at the date of the execution
and delivery of this Agreement. If at any time prior to the occurrence of an
Event of Default any Account debtor returns any Inventory to Borrower, Borrower
shall promptly determine the reason for such return and, if Borrower accepts
such return, issue a credit memorandum (with a copy to be sent to BACC) in the
appropriate amount to such Account debtor. Borrower shall promptly notify BACC
of all returns and
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recoveries and of all disputes and claims.
6.3 Designation of Inventory. Borrower shall contemporaneous with the
execution hereof and from time to time hereafter, but not less frequently than
monthly, execute and deliver to BACC a designation of Inventory specifying the
cost and the wholesale market value of Borrower's Inventory, and further
specifying such other information as BACC may reasonably request.
6.4 Financial Statements, Reports, Certificates. Borrower shall deliver to
BACC: (a) as soon as available, but in any event within thirty (30) days after
the end of each month during the Term, a balance sheet and profit and loss
statement prepared by Borrower covering Borrower's operations during such
period; and (b) as soon as available, but in any event within one hundred twenty
(120) days after the end of each of Borrower's fiscal years, financial
statements of Borrower for each such fiscal period, audited by independent
certified public accountants acceptable to BACC. Such financial statements shall
include a balance sheet and profit and loss statement, and the accountants'
management letter. Borrower shall also deliver Borrower's Form 10-Qs,, 10-Ks or
8-Ks, if any, as soon as the same become available, and any other report
reasonably requested by BACC relating to the Collateral and the financial
condition of Borrower and together with the above, a certificate signed by its
chief financial officer to the effect that all reports, statements or computer
prepared information of any kind or nature delivered or caused to be delivered
to BACC under this Section 6.4 fairly present its financial condition and that
there exists on the date of delivery of such certificate to BACC no condition or
event which constitutes an Event of Default.
6.5 Tax Returns, Receipts. Borrower shall deliver to BACC copies of each of
its future federal income tax returns, and any amendments thereto, within thirty
(30) days of the filing thereof. Borrower further shall promptly deliver to
BACC, upon request, satisfactory evidence of Borrower's payment of all
withholding and other taxes required to be paid by it.
6.6 Guarantor Reports. Borrower agrees to cause each Guarantor to deliver
its annual financial statements and copies of all federal income tax returns as
soon as the same are available and in any event no later than thirty (30) days
after the same are required to be filed by law.
6.7 Title to Equipment. Upon BACC's request, Borrower shall immediately
deliver to BACC, properly endorsed, any and all evidences of ownership of,
certificates of title, or applications for title to any items of Equipment.
6.8 Maintenance of Equipment. Borrower shall keep and maintain the
Equipment in good operating condition and repair, and shall make all necessary
replacements thereto so that its value and operating efficiency shall at all
times be maintained and preserved. Borrower shall not permit any item of
Equipment to become a fixture to real estate or an accession to other property,
and the Equipment is now and shall at all times remain Borrower's personal
property.
6.9 Taxes. All Federal, state and local assessments and taxes, whether
real, personal or otherwise, due or payable by, or imposed, levied or assessed
against Borrower or any of its assets or in connection with Borrower's business
shall hereafter be paid in full, before they become delinquent or before the
expiration of any extension period or otherwise in accordance with payment
program agreed to by the taxing authority. Borrower shall make due and timely
payment or deposit of all federal, state and local taxes, assessments or
contributions required of it by law, and will execute and deliver to BACC, on
demand, appropriate certificates attesting to the payment or deposit thereof.
6.10 Insurance. Borrower, at its expense, shall keep and maintain the
Collateral insured against all risk of loss or damage from fire, theft,
vandalism, malicious mischief, explosion, sprinklers, and all other hazards and
risks of physical damage included within the meaning of the term "extended
coverage" in such amounts
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as are ordinarily insured against by similar businesses. Borrower shall also
keep and maintain comprehensive general public liability insurance and property
damage insurance, and insurance against loss from business interruption,
insuring against all risks relating to or arising from Borrower's ownership and
use of the Collateral and its other assets and the operation of its business.
All such policies shall be in such form, with such companies and in such amounts
as may be satisfactory to BACC. Borrower shall deliver to BACC certified copies
of such policies and evidence of the payments of all premiums therefor. All such
policies (except those of public liability and liability property damage) shall
contain a Lender's Loss Payable endorsement in a form satisfactory to BACC,
naming BACC as sole loss payee thereof, and containing a waiver of warranties.
All proceeds payable under such policies shall be payable to BACC and applied to
the Obligations.
6.11 BACC Expenses. Borrower shall immediately and without demand reimburse
BACC for all BACC Expenses as set forth herein and in the other Loan Documents
and Borrower hereby authorizes the payment of such BACC Expenses.
6.12 Compliance With Law. Borrower shall comply, in all material respects,
with the requirements of all applicable laws, rules, regulations and orders of
governmental authorities relating to Borrower and the conduct of its business.
6.13 Accounting System. Borrower at all times hereafter shall maintain a
standard and modern system of accounting in accordance with GAAP with ledger and
account cards or computer tapes, disks, printouts and records pertaining to the
Collateral containing such information as may from time to time be requested by
BACC.
6.14 Life Insurance. Borrower shall assign to BACC prior to the First
Advance under the revolving credit facility provided for in paragraph 2.1 hereof
a life insurance policy on the life of Michael O'Reilly in the amount of
$250,000.00 with BACC appearing as an irrevocable beneficiary in said policy.
Borrower is to keep said policy in full force and effect, and pay all premiums
as they fall due and furnish to BACC upon request proof of payment of said
premiums. If Borrower shall fail to do so, BACC may, in its discretion, pay any
premiums due on said policy which shall constitute BACC Expenses. It shall be
the obligation of Borrower to notify BACC of its failure to pay any premiums
when they become due.
6.15 Borrower shall promptly, but in no event later than two days after it
has knowledge thereof, notify BACC of its receipt of notice of Default by
Borrower under its lease for any premises operated by Borrower.
7. NEGATIVE COVENANT
Borrower covenants and acknowledges that during the Term Borrower shall not
undertake any of the following:
7.1 Extraordinary Transactions and Disposal of Assets. Without the prior
written consent of BACC which shall not be unreasonably withheld enter into any
transaction not in the ordinary and usual course of its business as conducted on
the date hereof, including but not limited to the sale, lease, disposal,
movement, relocation or transfer, whether by sale or otherwise, of any its
assets other than sales of Inventory in the ordinary and usual course of its
business as presently conducted; incur any indebtedness for borrowed money or
other indebtedness outside the ordinary and usual course of its business as
conducted on the date hereof, including the existing 10% and 12% convertible
notes of Borrower, except for renewals or extensions of existing debts permitted
by BACC; or make any advance or loan.
7.2 Change Name. Change its name, business structure or identify or add any
new fictitious name except upon not less than thirty (30) days prior written
notice to BACC.
7.3 Merge, Acquire. Merge, acquire, or consolidate with or into any other
business
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organization without the prior written consent of BACC which shall not be
unreasonably withheld.
7.4 Guaranty. Guaranty or otherwise become in any way liable with respect
to the obligations of any third party, except by endorsement of instruments or
items of payment for deposit to the account of Borrower for negotiation and
delivery to BACC.
7.5 Restructure. Make any change in its financial structure or business
operations without the prior written consent of BACC which shall not be
unreasonably withheld.
7.6 Prepayments. Prepay any existing indebtedness owing to any third party
other than trade payables without the prior written consent of BACC which shall
not be unreasonably withheld.
7.7 Change of Management. Cause, permit or suffer any material change in
the senior management of Borrower.
7.8 Loans and Advances. Make any loans, advances or extensions of credit to
any officer, director, executive employee or shareholder of Borrower (or any
relative of any of the foregoing), or to any entity which is a subsidiary of,
related to, affiliated with or has common shareholders, officers or directors
with Borrower in excess of the aggregate outstanding sum of $10,000.00.
7.9 Distributions. Make any distribution or declare or pay any dividends
(in cash or in stock) on, or purchase, acquire, redeem or retire any of its
capital stock, of any class, whether now or hereafter outstanding, other than
dividends (currently 6%) on the existing redeemable convertible preferred stock
of Borrower, without the prior written consent of BACC which shall not be
unreasonably withheld.
7.10 Accounting Methods. Modify or change its method of accounting or enter
into, modify or terminate any agreement presently existing or at any time
hereafter entered into with any third party for the preparation or storage of
Borrower's records of Accounts and financial condition without said party
agreeing to provide BACC with information regarding the Collateral or Borrower's
financial condition. Borrower waives the right to assert a confidential
relationship, if any, it may have with any such third party in connection with
any information requested by BACC hereunder, and agrees that BACC may contact
any such party directly in order to obtain such information.
7.11 Business Suspension. Suspend or go out of business.
8. EVENTS OF DEFAULT
The occurrence of any one or more of the following events shall constitute
an Event of Default by Borrower hereunder:
8.1 Failure to Pay. Borrower's failure to pay when due and payable, or when
declared due and payable, any portion of the Obligations (whether principal,
interest, taxes, BACC Expenses, or otherwise);
8.2 Failure to Perform. Borrower's or a Guarantor's failure to perform,
keep or observe any term, provision, condition, representation, warranty,
covenant or agreement contained in this Agreement, in any of the Loan Documents
or in any other present or future agreement between Borrower, and/or a Guarantor
and BACC;
8.3 Misrepresentation. Any misstatement or misrepresentation now or
hereafter exists in any warranty, representation, statement, aging or report
made to BACC by, Borrower and/or a Guarantor or any officer, employee, agent or
director thereof, or if any such warranty, representation, statement, aging or
report is withdrawn by such person;
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8.4 Material Adverse Change. There is a material adverse change in
Borrower's, or a Guarantor's, business or financial condition;
8.5 Material Impairment. There is a material impairment of the prospect of
repayment of the Obligations or a material impairment of BACC's continuing
security interests in the Collateral;
8.6 Levy or Attachment. Any portion of Borrower's assets is attached,
seized, subjected to a writ or distress warrant or is levied upon, or comes into
the possession of any judicial officer or assignee;
8.7 Insolvency by Borrower or Guarantor. An Insolvency Proceeding is
commenced by Borrower or a Guarantor;
8.8 Insolvency Against Borrower. An Insolvency Proceeding is commenced
against Borrower or a Guarantor;
8.9 Injunction Against Borrower. Borrower is enjoined, restrained or in any
way prevented by court order from continuing to conduct all or any material part
of its business;
8.10 Government Lien. A notice of lien, levy or assessment is filed of
record with respect to any of Borrower's or a Guarantor's assets by the United
States Government, or any department, agency or instrumentality thereof, or by
any state, county, municipal or other governmental agency, or any taxes or debts
owing at any time hereafter to any one or more of such entities becomes a lien,
whether choate or otherwise, upon any of Borrower's or a Guarantor's assets and
the same is not paid on the payment date thereof;
8.11 Judgment. A judgment is entered against Borrower or a Guarantor;
8.12 Default to Third Party. There is a default in any material agreement
to which Borrower or a Guarantor is a party or by which Borrower or a Guarantor
or any of their assets are bound;
8.13 Subordinated Debt Payments. Borrower makes any payment on account of
indebtedness which has now or hereafter been subordinated to the Obligations,
except to the extent such payment is allowed under any subordination agreement
entered into with BACC;
8.14 Termination of Guarantor. A Guarantor dies or terminates its guaranty;
or
8.15 ERISA Violation. A prohibited transaction within the meaning of ERISA
Section 406 or IRC Section 1975(c) shall occur with respect to a Plan which
could have a material adverse effect on the financial condition of Borrower; any
lien upon the assets of Borrower in connection with any Plan shall arise;
Borrower or any ERISA Affiliate shall completely or partially withdraw from a
Multiemployer Plan and such withdrawal could, in the opinion of BACC, have a
material adverse effect on the financial condition of Borrower. Borrower or any
of its ERISA Affiliates shall fail to make full payment when due of all amounts
which Borrower or any of its ERISA Affiliates may be required to pay to any Plan
or any Multiemployer Plan as one or more contributions thereto; Borrower or any
of its ERISA Affiliates creates or permits the creation of any accumulated
funding deficiency, whether or not waived; the voluntary or involuntary
termination of any Plan which termination could, in the opinion of BACC, have a
material adverse effect on the financial condition of Borrower or Borrower shall
fail to notify BACC promptly and in any event within ten (l0) days of the
occurrence of an event which constitutes an Event of Default under this clause
or would constitute an Event of Default upon the exercise of BACC's judgment.
Notwithstanding anything contained in this Section 8 to the contrary, BACC
shall refrain from exercising its rights and remedies and an Event of Default
shall not be deemed to have occurred by reason of the
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occurrence of any of the events set forth in Sections 8.8, 8.10 or 8.11 hereof
if, within ten (10) days, or in the case of an event under Section 8.6 if within
thirty (30) days, from the date thereof, the same is released, discharged,
dismissed, bonded against or satisfied; provided, however, BACC shall not be
obligated to make Advances to Borrower during such period.
9. BACC'S RIGHTS AND REMEDIES
9.1 Rights and Remedies. Upon the occurrence of an Event of Default, BACC
may, at its election, without notice of such election and without demand, do any
one or more of the following:
(a) Declare all Obligations, whether evidenced by the Loan Documents or
otherwise, immediately due and payable in full:
(b) Cease advancing money or extending credit to or for the benefit of
Borrower under the Loan Documents or under any other agreement between Borrower
and BACC;
(c) Terminate this Agreement as to any future liability or obligation of
BACC, but without affecting BACC's rights and security interest in the
Collateral and without affecting the Obligations;
(d) Settle or adjust disputes and claims directly with Account debtors for
amounts and upon terms which BACC considers advisable and, in such cases, BACC
will credit the Obligations with the net amounts received by BACC in payment of
such disputed Accounts, after deducting all BACC Expenses;
(e) Cause Borrower to hold all returned Inventory in trust for BACC,
segregate all returned Inventory from all other property of Borrower or in
Borrower's possession and conspicuously label said returned Inventory as the
property of BACC;
(f) Without notice to or demand upon Borrower or a Guarantor, make such
payments and do such acts as BACC considers necessary or reasonable to protect
its security interest in the Collateral. Borrower shall assemble the Collateral
if BACC so requires and deliver or make the Collateral available to BACC at a
place designated by BACC. Borrower authorizes BACC to enter any premises where
the Collateral is located, to take and maintain possession of the Collateral, or
any part of it, and to pay, purchase, contest or compromise any encumbrance,
charge or lien which in BACC's determination appears to be prior or superior to
its security interest and to pay all expenses incurred in connection therewith;
(g) Ship, reclaim, recover, store, finish, maintain, repair, prepare for
sale, advertise for sale and sell (in the manner provided for herein) the
Collateral. BACC is hereby granted a license or other right to use, without
charge, Borrower's labels, patents, copyrights, rights of use of any name, trade
secrets, trade names, trademarks, service marks, and advertising matter, or any
asset of a similar nature, pertaining to the Collateral, in completing the
production of, advertising for sale and sale of the Collateral. Borrower's
rights under all licenses and all franchise agreements shall inure to BACC's
benefit;
(h) Sell the Collateral at either a public or private sale, or both, by way
of one or more contracts or transactions, for cash or on terms, in such manner
and at such places (including Borrower's premises) as BACC determines is
commercially reasonable. It is not necessary that the Collateral be present at
any such sale;
(i) BACC shall give notice of the disposition of the Collateral as follows:
(1) To the Borrower and each holder of a security interest in the
Collateral who has filed with BACC a written request for notice, a notice
in writing of the time and place of public sale or, if the sale is a
private sale or some other disposition other than a public sale is to be
made, then the time on or after which the private sale or other disposition
is to be made;
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(2) The notice hereunder shall be personally delivered or mailed,
postage prepaid, to Borrower as provided in Section 12 hereof, at least
five (5) calendar days before the date fixed for the sale, or at least five
(5) calendar days before the date on or after which the private sale or
other disposition is to be made, unless the Collateral is perishable or
threatens to decline speedily in value. Notice to persons other than
Borrower claiming an interest in the Collateral shall be sent to such
addresses as they have furnished to BACC;
(j) BACC may credit bid and purchase at any public sale:
(k) Any deficiency which exists after disposition of the Collateral as
provided herein shall be immediately paid by Borrower. Any excess will be
remitted without interest by BACC to the party or parties legally entitled to
such excess; and
(l) In addition to the foregoing, BACC shall have all rights and remedies
provided by law (including those set forth in the Code) and any rights and
remedies contained in any Loan Documents and all such rights and remedies shall
be cumulative.
9.2 No Waiver. No delay on the part of BACC in exercising any right, power
or privilege under any Loan Document shall operate as a waiver, nor shall any
single or partial exercise of any right, power or privilege under such Loan
Documents or otherwise, preclude other or further exercise of any such right,
power or privilege.
10. TAXES AND EXPENSES REGARDING THE COLLATERAL.
If Borrower fails to pay any monies (whether taxes, assessments, insurance
premiums or otherwise) due to third persons or entities, or fails to make any
deposits or furnish any required proof of payment or deposit, or fails to
perform any of Borrower's other covenants under any of the Loan Documents, then
in its discretion and without prior notice to Borrower, BACC may do any or all
of the following: (a) make any payment which Borrower has failed to pay or any
part thereof; (b) set up such reserves in Borrower's loan account as BACC deems
necessary to protect BACC from the exposure created by such failure; (c) obtain
and maintain insurance policies of the type described in Section 6.10 hereof and
take any action with respect to such policies as BACC deems prudent; or (d) take
any other action deemed necessary to preserve and protect its interests and
rights under the Loan Documents. Any payments made by BACC shall not constitute:
(a) an agreement by BACC to make similar payments in the future or (b) a waiver
by BACC of any Event of Default. BACC need not inquire as to, or contest the
validity of, any such expense, tax, security interest, encumbrance or lien and
the receipt of notice for the payment thereof shall be conclusive evidence that
the same was validly due and owing.
11. WAIVERS
11.1 Demand, Protest. Borrower waives demand, protest, notice of protest,
notice of default or dishonor, notice of payment and nonpayment, notice of any
default, and notice of nonpayment at maturity and acknowledges that BACC may
compromise, settle or release, without notice to Borrower, any Collateral and/or
guaranties at any time held by BACC. Borrower hereby consents to any extensions
of time of payment or partial payment at, before or after the Termination Date.
11.2 No Marshaling. Borrower, on its own behalf and on behalf of its
successors and assigns hereby expressly waives all rights, if any, to require a
marshaling of assets by BACC or to require that BACC first resort to some
portion(s) of the Collateral before foreclosing upon, selling or otherwise
realizing on any other portion thereof.
11.3 BACC's Non-Liability for Inventory or Equipment. So long as BACC
complies with its obligations, if any, under Section 9-207 of the Code, BACC
shall not in any way or manner be liable or responsible for: (a) the safekeeping
of the Inventory or Equipment; (b) any loss or damage thereto occurring or
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arising in any manner or fashion from any cause; (c) any diminution in the value
thereof; or (d) any act or default of any carrier, warehouseman, bailee,
forwarding agency or other person whomsoever. All risk of loss, damage or
destruction of the Inventory or Equipment shall be borne by Borrower.
12. NOTICES
Unless otherwise provided herein, all consents, waivers, notices or demands
by any party relating to the Loan Documents shall be in writing and (except for
financial statements and other informational documents which may be sent by
first-class mail, postage prepaid) shall be telecopied (followed up by a
mailing), personally delivered or sent by registered or certified mail, postage
prepaid, return receipt requested, or by receipted overnight delivery service to
Borrower or to BACC, as the case may be, at their addresses set forth below
If to Borrower: Windswept Environmental Group, Inc.
100 Sweeneydale Avenue
Bay Shore, New York 11706
Attn: Michael O'Reilly
Fax # (516) 435-4337
If to BACC: Business Alliance Capital Corp.
300 Alexander Park
Princeton, New Jersey 08543
Attn: Jeffrey Goldrich
Fax # (609)514-1137
Any party may change the address at it is to receive notices hereunder by
notice in writing in the foregoing manner given to the other. All notices or
demands sent in accordance with this Section 12 shall be deemed received on the
earlier of the date of actual receipt or five (5) calendar days after the
deposit thereof in the mail or on the date telecommunicated if telecopied.
13. DESTRUCTION OF BORROWER'S DOCUMENTS
All documents, schedules, invoices, agings or other papers delivered to
BACC may be destroyed or otherwise disposed of by BACC four (4) months after
they are delivered to or received by BACC, unless Borrower requests, in writing,
the return of the said documents, schedules. invoices or other papers and makes
arrangements, at Borrower's expense, for their return.
14. GENERAL PROVISIONS
14.1 Effectiveness. This Agreement shall be binding and deemed effective
when executed by Borrower and executed and delivered by BACC.
14.2 Successors and Assigns. This Agreement shall bind and inure to the
benefit of the respective successors and assigns of each of the parties;
provided, however, that Borrower may not assign this Agreement or any rights
hereunder and any prohibited assignment shall be absolutely void. No consent to
an assignment by BACC shall release Borrower from its Obligations. Without
notice to or the consent of Borrower, BACC may assign this Agreement and its
rights and duties hereunder and BACC reserves the right to sell, assign,
transfer, negotiate or grant participations in all or any part of, or any
interest in BACC's rights and benefits hereunder. In connection therewith, BACC
may disclose all documents and information which BACC now or hereafter may have
relating to Borrower or Borrower's business. Borrower and BACC do not intend any
of the benefits of the Loan Documents to inure to any third party, and no third
party shall be a third party beneficiary hereof or thereof.
14.3 Section Headings. Headings and numbers have been set forth herein for
convenience
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only.
14.4 Interpretation. Neither this Agreement nor any uncertainty or
ambiguity herein shall be construed or resolved against BACC or Borrower,
whether under any rule of construction or otherwise. On the contrary, this
Agreement has been reviewed by each party and shall be construed and interpreted
according to the ordinary meaning of the words used so as to fairly accomplish
the purposes and intentions of the parties hereto.
14.5 Severability of Provisions. Each provision of this Agreement shall be
severable from every other provision of this Agreement for the purpose of
determining the legal enforceability of such provision.
14.6 Amendments in Writing. This Agreement cannot be changed or terminated
orally. This Agreement is the entire agreement between the parties with respect
to the matters contained herein. This Agreement supersedes all prior agreements,
understandings and negotiations, if any, all of which are merged into this
Agreement.
14.7 Counterparts. This Agreement may be executed in any number of
counterparts each of which, when executed and delivered, shall be deemed to be
an original and all of which, when taken together, shall constitute but one and
the same Agreement.
14.8 Indemnification. Borrower hereby indemnifies, protects, defends and
saves harmless BACC and any member, officer, director, official, agent, employee
and attorney of BACC, and their respective heirs, successors and assigns
(collectively, the "Indemnified Parties"), from and against any and all losses,
damages, expenses or liabilities of any kind or nature and from any suits,
claims or demands, including reasonable counsel fees incurred in investigating
or defending such claim, suffered by any of them and caused by, relating to,
arising out of, resulting from, or in any way connected with the Loan Documents
and the transactions contemplated therein or the Collateral (unless caused by
the gross negligence or willful misconduct of the Indemnified Parties)
including, without limitation: (a) losses, damages, expenses or liabilities
sustained by BACC in connection with any environmental cleanup or other remedy
required or mandated by any Environmental Law; (b) any untrue statement of a
material fact contained in information submitted to BACC by Borrower or a
Guarantor or the omission of any material fact necessary to be stated therein in
order to make such statement not misleading or incomplete; (c) the failure of
Borrower or a Guarantor to perform any obligations required to be performed by
Borrower or a Guarantor under the Loan Documents; and (d) the ownership,
construction, occupancy, operations, use and maintenance of any of Borrower's or
a Guarantor's assets. The provisions of this paragraph 14.8 shall survive
termination of this Agreement and the other Loan Documents.
15. CHOICE OF LAW, VENUE AND JURY TRIAL WAIVER
THE VALIDITY OF THE LOAN DOCUMENTS, THEIR CONSTRUCTION, INTERPRETATION, AND
ENFORCEMENT AND THE RIGHTS OF THE PARTIES HERETO SHALL BE DETERMINED UNDER,
GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE INTERNAL LAWS OF THE STATE OF
NEW JERSEY, WITHOUT REGARD TO PRINCIPLES OF CONFLICTS OF LAW. THE PARTIES AGREE
THAT ALL ACTIONS OR PROCEEDINGS ARISING IN CONNECTION WITH THE LOAN DOCUMENTS
SHALL BE TRIED AND LITIGATED ONLY IN THE STATE COURTS LOCATED IN THE COUNTY OF
MERCER, STATE OF NEW JERSEY, THE FEDERAL COURTS WHOSE VENUE INCLUDES THE STATE
OF NEW JERSEY, OR AT THE SOLE OPTION OF BACC, IN ANY OTHER COURT IN WHICH BACC
SHALL INITIATE LEGAL OR EQUITABLE PROCEEDINGS AND WHICH HAS SUBJECT MATTER
JURISDICTION OVER THE MATTER IN CONTROVERSY. BORROWER AND BACC EACH WAIVES, TO
THE EXTENT PERMITTED UNDER APPLICABLE LAW, THE RIGHT TO A TRIAL BY JURY IN ANY
PROCEEDING UNDER THE LOAN DOCUMENTS OR RELATING TO THE DEALINGS OF BORROWER AND
BACC AND ANY RIGHT EACH MAY HAVE TO ASSERT THE DOCTRINE OF "FORUM NON
CONVENIENS" OR TO OBJECT TO VENUE TO THE EXTENT ANY PROCEEDING IS BROUGHT IN
ACCORDANCE WITH THIS SECTION 15.
- 18 -
<PAGE>
Borrower and BACC have executed this Agreement at BACC's place of business
in Princeton, New Jersey as of the date first above written.
WINDSWEPT ENVIRONMENTAL GROUP, INC.
a Delaware corporation
Signed by: /s/Michael O'Reilly
--------------------------
Print Name: Michael O'Reilly
Title/Capacity: Chairman, CFO
TRADE-WINDS ENVIRONMENTAL
RESTORATION, INC.
a New York corporation
Signed by: /s/Michael O'Reilly
--------------------------
Print Name: Michael O'Reilly
Title/Capacity: President
NORTH ATLANTIC LABORATORIES, INC.
a New York corporation
Signed by: /s/Michael O'Reilly
--------------------------
Print Name: Michael O'Reilly
Title/Capacity: Vice President
NEW YORK TESTING LABORATORIES, INC.
a Delaware corporation
Signed by: /s/Michael O'Reilly
--------------------------
Print Name: Michael O'Reilly
Title/Capacity: Vice President
BUSINESS ALLIANCE CAPITAL CORP.
a Delaware corporation
Signed by: /s/William F. Seinbold
--------------------------
Print Name: William F. Seinbold
Title/Capacity: Senior Vice President
- 19 -
<PAGE>
Schedule 2.4
Deposit Account of Borrower for Advances
Trade-Winds Environmental Restoration, Inc.
Account # 842500736765
----------------------
Bank Name and Wire Transfer Instructions:
Chase Manhattan Bank
--------------------
ABA # 021000021
- 20 -
<PAGE>
Schedule 5.1
EXISTING LIENS WHICH ARE TO CONTINUE
Interest of Prestige Factors in the Accounts Receivable of Borrower which shall
terminate upon the initial Advance under Section 2.1 hereof.
Liens on specific items of equipment as set forth on Exhibit 5.1 annexed hereto.
- 21 -
INDIVIDUAL GUARANTY
GUARANTY, dated as of June 1, 1998, by Michael O'Reilly 35 Tuthill Point
Road, East Moriches, N.Y. 11940 ("Guarantor") in favor of Business Alliance
Capital Corp. ("BACC"), 300 Alexander Park, Princeton, New Jersey 08543.
WHEREAS, WINDSWEPT ENVIRONMENTAL GROUP, INC., TRADE-WINDS ENVIRONMENTAL
RESTORATION, INC., NORTH ATLANTIC LABORATORIES, INC. and NEW YORK TESTING
LABORATORIES, INC. (individually and collectively "Borrower") are now and may in
the future be indebted to BACC for loans and advances and other financial
accommodations made or to be made by BACC to or on behalf of Borrower, and
WHEREAS, to induce BACC to make and/or to continue to make loans and other
financial accommodations to or on behalf of Borrower, Guarantor has agreed to
execute and deliver a guaranty of all present and future liabilities of Borrower
to BACC.
NOW, THEREFORE, in consideration of the foregoing premises to induce BACC
to make loans and other financial accommodations to or on behalf of Borrower,
and with full knowledge that said loans and other financial accommodations would
not be issued without this Guaranty, the undersigned Guarantor agrees as
follows:
1. The term "Liability of Borrower" shall include all obligations and
liabilities, direct or indirect, absolute or contingent, joint and several, now
or hereafter existing, due or to become due of Borrower to, or held or to be
held by the BACC for its own account or as agent for others, whether created
directly or acquired by assignment or otherwise, including without limitations
the obligation and liabilities arising under that certain Loan and Security
Agreement dated June 1, 1998, between Borrower and BACC, as same may be amended
or modified from time to time.
2. Guarantor hereby guarantees full, prompt and unconditional payment when
due of each and every Liability of Borrower to BACC, now existing or hereafter
incurred, whether matured or unmatured, and the full, prompt, and unconditional
performance of every term and condition of any transaction to be kept and
performed by Borrower to BACC. This Guaranty is a primary obligation of the
undersigned and shall be a continuing inexhaustible Guaranty without limitation
as to the amount or duration and may not be revoked except by notice (the
"Notice") in writing to BACC received at least thirty (30) days prior to the
date set for such revocation; however, no Notice shall affect the liability
under this Guaranty for any such Liability of the Borrower arising prior to the
date set for revocation whether made before or after the Notice.
3. Guarantor hereby represents and warrants the following:
(A) He has the power to execute, deliver and carry out the terms and
provisions of this Guaranty which has been duly executed and delivered and
constitutes Guarantor's binding, valid and enforceable obligation,
enforceable in accordance with his terms, except as enforcement thereof may
be limited, modified or prevented by any law relating to bankruptcy,
insolvency or the like.
(B) He is not in default under any indenture, mortgage, deed of trust
or other instrument to which he is a party or by which he or any of his
assets may be bound. Neither the execution and delivery of this Guaranty,
nor the consummation of the transactions herein contemplated, nor
compliance with the provisions hereof will to the best of his knowledge
violate any law or regulation, or any order or decree of any court or
governmental instrumentality, or will conflict with, or result in the
breach of, or constitute a default under, any indenture, mortgage, deed of
trust, agreement or other instrument to which Guarantor is a party or by
which he may be bound, or result in the creation or imposition of any lien,
charge or encumbrance upon any of the property of Guarantor thereunder.
-1-
<PAGE>
(C) His most recent financial statement furnished to BACC accurately
represents his financial condition as of the date thereof and there has
been no material adverse change in such condition from the date of said
financial statement to the date hereof.
(D) He has relied upon his own due diligence in making his own
independent evaluation and appraisal of Borrower, Borrower's business
affairs and financial condition including the Liability of Borrower to
BACC; will continue to be responsible for making his own independent
appraisal of such matters; and Guarantor has not relied upon and will not
hereafter rely upon BACC for information regarding Borrower, any collateral
or the Liability of Borrower to BACC.
4. Without incurring responsibility to Guarantor and without impairing or
releasing Guarantor's obligation hereunder, BACC may at any time and from time
to time, without the consent of or notice to Guarantor, upon any terms or
conditions:
(A) Change the manner, place or terms of payment, and/or change or extend
from time to time the time for payment or renew or alter the Liability of
Borrower or any security therefor, and this Guaranty shall apply to the
Liability of Borrower as so changed, extended, renewed or altered; (B) Sell,
exchange, release, surrender, realize upon or otherwise deal with in any manner
and in any order any property by whomsoever at any time pledged, mortgaged or in
which a lien is given to secure the Liability of Borrower or the indebtedness of
any of the Obligors, as such term is defined below, to BACC;
(C) Exercise or refrain from exercising any rights against Borrower or any
surety, endorser or guarantor (including the Guarantor) ("Obligor") or against
any security, or otherwise act or refrain from acting;
(D) Release, settle or compromise any Liability of Borrower or any
obligation of any Obligor, dispose of any security therefor, with or without
consideration, or any liability incurred directly or indirectly in respect
thereof or hereof;
(E) Apply any sums by whomsoever paid or howsoever realized to any
Liability of Borrower; and
(F) Take or refrain from taking any or all actions against Borrower, any
Obligor, or any of the security, whether similar or dissimilar to the foregoing.
5. (A) No invalidity, irregularity or unenforceability of all or any part
of the Liability of Borrower or the impairment or loss of any security therefor,
whether caused by any actions or inactions of BACC, or otherwise, shall affect,
impair or be a defense to this Guaranty.
(B) Guarantor hereby waives any right of subrogation to any security.
(C) Guarantor hereby waives any claim, right or remedy Guarantor may now
have or hereafter acquire against the Borrower that arises hereunder and/or as a
result of Guarantor's performance hereunder including, without limitation, any
claim, remedy or right of subrogation, reimbursement, exoneration, contribution,
indemnification, or participation in any claim, right or remedy of BACC against
Borrower or any security which BACC now has or hereafter acquires, whether or
not such claim, right or remedy arises in equity, under contract, by statute,
under common law or otherwise.
6. Upon an Event of Default under the Liability of Borrower, BACC may,
without notice to Borrower declare the Liability of Borrower immediately due and
payable by Guarantor. If BACC refers this
-2-
<PAGE>
Guaranty to an attorney for collection, Guarantor shall pay BACC any and all
reasonable attorneys' fees and other costs and expenses incurred by in enforcing
BACC's rights hereunder.
7. (A) If claim is ever made upon BACC for repayment or recovery of any
amount or amounts received by BACC in payment or on account of any of the
Liability of Borrower and BACC repays all or part of said amount by reason of
(a) any judgment, decree or order of any court or administrative body having
jurisdiction over BACC or any of its property, or (b) any settlement or
compromise of any such claim effected by BACC with any such claimant (including
Borrower), then, and in such event, Guarantor agrees that any such judgment,
decree, order, settlement or compromise shall be binding upon it,
notwithstanding any revocation hereof or the cancellation of any instrument
evidencing any Liability of Borrower, and Guarantor shall be liable to BACC
under this Guaranty for the amount so repaid or recovered to the same extent as
if such amount had never originally been received by BACC.
(B) This Guaranty shall remain in full force and effect, and shall be
automatically reinstated, without any further action on the part of the BACC if
BACC is required, in any bankruptcy, insolvency, or other proceeding involving
the Borrower, to return or rescind any payment made to or value received by BACC
from or for the account of the Borrower. This paragraph shall remain in full
force and effect notwithstanding any revocation or termination of this Guaranty
or release by BACC of Guarantor unless this paragraph is specified in such
release by BACC.
(C) Settlement of any claim by BACC against Borrower or any other Obligor,
whether in any proceedings or not, and whether voluntary or involuntary, shall
not reduce the amount due under this Guaranty except to the extent of any amount
actually received by BACC under any such settlement that is applied to the
Liability of Borrower.
(D) All rights, powers and remedies of BACC hereunder and under any
agreement(s) between Borrower or any other Obligor and BACC, now, or at any time
hereafter in force, shall be cumulative and not alternative, and shall be in
addition to all rights, powers and remedies given to BACC by law.
(E) No delay on the part of BACC in exercising any of its options, powers
or rights or partial or single exercise thereof shall constitute a waiver
thereof. No waiver of any of BACC's rights hereunder and no modification or
amendment of this Guaranty shall be deemed to be made by BACC unless the same
shall be in writing, executed on behalf of BACC by a duly authorized officer,
and each such waiver, if any, shall apply only with respect to the specific
instance involved, and shall in no way impair the rights of BACC or the
obligations of Guarantor to BACC in any other respect at any other time.
(F) Guarantor hereby authorizes BACC, in its sole discretion, to disclose
any financial or other information about Guarantor to any present, future or
prospective participant, or successor in interest in any loan, advance or other
financial accommodation to the Borrower from the BACC, or any regulatory body or
agency having jurisdiction over BACC.
(G) Guarantor shall indemnify, defend, and hold BACC harmless from any
claim, cause of action, demand, or other matter that is brought or threatened
against BACC by Borrower, or by any third party including, without limitation,
any receiver, trustee, or other person appointed in any bankruptcy, insolvency,
or other proceeding involving Borrower, and from all costs and expenses
(including, without limitation, attorney's fees and expenses) relating to or
arising out of BACC's relationship with Borrower (each of which may be defended,
compromised, settled, or pursued with counsel of BACC's selection) but at
Guarantor's risk and expense. This paragraph shall remain in full force and
effect notwithstanding any termination of this Guaranty or release by BACC of
Guarantor unless this paragraph is specified in such release by BACC.
(H) Neither Guarantors' obligation to pay and perform in accordance with
the terms of this Guaranty, nor any remedy for the enforcement thereof nor the
amount of the Liability of Borrower shall be
-3-
<PAGE>
impaired, modified, changed, stayed, released or limited in any manner
whatsoever by any impairment, modification, change, discharge, release,
limitation or stay of the Liability of Borrower or the obligations of any of the
Obligors or its estate in bankruptcy or any remedy for the enforcement thereof,
resulting from the operation of any present or future provision of the
bankruptcy code of the United States or other statute, State or Federal, or from
the decision of any court interpreting any of the same, and Guarantor shall be
obligated under this Guaranty and the amount of the Liability of Borrower shall
for the purposes of this Guaranty be determined as if no such impairment, stay,
modification, change, discharge, release or limitation had occurred.
(I) Guarantor waives notice of acceptance of this Guaranty and notice of
any Liability of Borrower to which it may apply and waives notice of default,
non-payment, partial payment, presentment, demand, protest, notice of protest or
dishonor and all other notices to which Guarantor might otherwise be entitled,
or which might be required by law to be given to it by BACC.
(J) This Guaranty shall be binding upon Guarantor and its successors and
shall inure to the benefit of BACC, its successors and assigns, and shall be
construed in accordance with the laws of the State of New Jersey.
(K) Guarantor agrees to furnish to BACC within ninety (90) days of the end
of each year a financial statement in form satisfactory to BACC.
(L) If Guarantor consists of more than one entity, the liabilities and
obligations of each such entity shall be joint and several and the word
"Guarantor" means each of them, any of them and/or all of them.
(M) As used herein, the singular shall include the plural, the plural the
singular and the use of the masculine, feminine or neuter gender shall include
all genders.
(N) GUARANTOR WAIVES TRIAL BY JURY IN ANY ACTION UNDER OR RELATING TO THIS
GUARANTY AND TO THE LIABILITY OF BORROWER TO BACC.
WITNESS: /s/ Michael O'Reilly
- -------- -----------------------------
Name: Michael O'Reilly
/s/ John Lander
- -------------------------
John Lander
-4-
<PAGE>
STATE OF NEW JERSEY )
) SS:
COUNTY OF ESSEX )
BE IT REMEMBERED, that on this 1st day of June, in the year Nineteen
Hundred Ninety-Eight, before me, Michael O'Reilly, personally appeared Michael
O'Reilly who I am satisfied are the person(s) who has/have signed the within
instrument; and I having first made known to him/them the contents thereof,
he/they did acknowledge that he/they signed, sealed and delivered the same as
his/their voluntary act and deed.
/S/ ALAN D. WIENER
------------------
ALAN D. WIENER
ATTORNEY AT LAW
OF THE STATE OF NEW JERSEY
-5-
REVOLVING CREDIT MASTER
PROMISSORY NOTE
$1,850,000.00 Princeton, New Jersey
June 1, 1998
FOR VALUE RECEIVED, the undersigned WINDSWEPT ENVIRONMENTAL GROUP, INC.,
TRADE-WINDS ENVIRONMENTAL RESTORATION, INC., NORTH ATLANTIC LABORATORIES, INC.
and NEW YORK TESTING LABORATORIES, INC. (individually and collectively
"Borrower") jointly and severally promise to pay to the order of BUSINESS
ALLIANCE CAPITAL CORPORATION (herein called "BACC") at 300 Alexander Park,
Princeton, New Jersey, 08543, or such other address as BACC may notify Borrower,
such sum up to One Million Eight Hundred Fifty Thousand and 00/100
($1,850,000.00) Dollars, together with interest as hereinafter provided, as may
be outstanding on Advances by BACC to Borrower under Paragraph 2.1 of the Loan
and Security Agreement dated June 1, 1998 between BACC and Borrower (said
Agreement as amended or modified from time to time the "Loan Agreement").
Capitalized terms not otherwise defined herein have the meanings set forth in
the Loan Agreement. The Loan Agreement is incorporated herein as though fully
set forth and Borrower acknowledges its reading and execution. The principal
amount due hereunder shall be paid to BACC on June 1, 2000 or as may otherwise
be provided for in the Loan Agreement.
On the first day of each month hereafter, Borrower shall pay BACC accrued
interest, computed on the basis of a 360 day year, for the actual number of days
elapsed, on the daily unpaid balance of the Advances, at the per annum rate of
three (3%) percentage points above the Prime Rate, in effect from time to time.
If there is a change in the Prime Rate, the rate of interest on the Advances
shall be changed accordingly as of the date of the change in the Prime Rate,
without notice to Borrower.
To secure the payment of this Note and the Obligations, Borrower has
granted to BACC a continuing security interest in and lien on the Collateral.
In addition to all remedies provided by law upon default on payment of this
Note, or upon an Event of Default, BACC may, at its option:
(1) Declare this Note and the Obligations immediately due and payable;
-1-
<PAGE>
(2) Collect interest on this Note at the default rate set forth in the Loan
Agreement from the date of such Event of Default, and if this Note is referred
to an attorney for collection, collect reasonable attorneys' fees; and
(3) Exercise any and all remedies provided for in the Loan Agreement.
-2-
<PAGE>
BORROWER WAIVES PRESENTMENT FOR PAYMENT, PROTEST AND NOTICE OF PROTEST FOR
NON-PAYMENT OF THIS NOTE AND TRIAL BY JURY IN ANY ACTION UNDER OR RELATING TO
THIS NOTE AND THE ADVANCES EVIDENCED HEREBY.
WINDSWEPT ENVIRONMENTAL GROUP, INC.
By: /s/ Michael O'Reilly
--------------------------------
Name: Michael O'Reilly
Title: President
TRADE-WIND ENVIRONMENTAL
RESTORATION, INC.
By: /s/ Michael O'Reilly
--------------------------------
Name: Michael O'Reilly
Title: President
NORTH ATLANTIC LABORATORIES, INC.
By: /s/ Michael O'Reilly
--------------------------------
Name: Michael O'Reilly
Title: Vice President
NEW YORK TESTING LABORATORIES, INC.
By: /s/ Michael O'Reilly
--------------------------------
Name: Michael O'Reilly
Title: Vice President
-3-
TERM LOAN
PROMISSORY NOTE
$595,000.00 Princeton, New Jersey
June 1, 1998
FOR VALUE RECEIVED, the undersigned WINDSWEPT ENVIRONMENTAL GROUP, INC.,
TRADE-WINDS ENVIRONMENTAL RESTORATION, INC., NORTH ATLANTIC LABORATORIES, INC.
and NEW YORK TESTING LABORATORIES, INC. (individually and collectively
"Borrower") jointly and severally promise to pay to the order of BUSINESS
ALLIANCE CAPITAL CORPORATION (herein called "BACC") at 300 Alexander Park,
Princeton, New Jersey 08543 or such other address as BACC may notify Borrower,
the sum of Five Hundred Ninety-Five Thousand and 00/100 ($595,000.00) Dollars,
together with interest as hereinafter provided. This note evidences a term loan
by BACC to Borrower under Paragraph 2.2 of the Loan and Security Agreement dated
June 1, 1998 between BACC and Borrower (said Agreement to amended or modified
from time to time the "Loan Agreement"). Capitalized terms not otherwise defined
herein have the meanings set forth in the Loan Agreement. The Loan Agreement is
incorporated herein as though fully set forth and Borrower acknowledges its
reading and execution. The principal amount due hereunder shall be paid to BACC
in twenty-three (23) equal consecutive monthly installments of Nine Thousand
Nine Hundred Sixteen and 67/100 ($9,916.67) Dollars each commencing on the first
(1st) day of July 1998 and continuing on the same day of each month thereafter
through and including May 1, 2000 and followed by a final installment on June 1,
2000 on which date the entire unpaid principal balance hereof and all accrued
and unpaid interest shall be due and payable. Notwithstanding the foregoing the
entire unpaid principal balance hereof and all accrued and unpaid interest shall
be due and payable on the Termination Date or as otherwise set forth in the Loan
Agreement.
On the first day of each month hereafter, Borrower shall pay BACC accrued
interest, computed on the basis of a 360 day year, for the actual number of days
elapsed, on the daily unpaid balance of the Advances, at the rate of three (3%)
percent per annum above the Prime Rate, in effect from time to time. If there is
a change in the Prime Rate, the rate of interest on the Advances shall be
changed accordingly as of the date of the change in the Prime Rate, without
notice to Borrower.
To secure the payment of this Note and the Obligations, the Borrower has
granted to BACC a security interest in and lien on the Collateral.
In addition to all remedies provided by law upon default on payment of this
Note, or upon an Event of Default, BACC may, at its option:
(1) Declare this Note and the Obligations immediately due and payable;
(2) Collect interest on this Note at the default rate set forth in the
Loan Agreement from the date of such default, and if this Note is
referred to an attorney for collection, collect reasonable attorneys'
fees; and
(3) Exercise any and all remedies provided for in the Loan Agreement.
- 1 -
<PAGE>
THE BORROWER WAIVES PRESENTMENT FOR PAYMENT, PROTEST AND NOTICE OF PROTEST
FOR NON-PAYMENT OF THIS NOTE AND TRIAL BY JURY IN ANY ACTION UNDER OR RELATING
TO THIS NOTE AND THE ADVANCES EVIDENCED HEREBY.
WINDSWEPT ENVIRONMENTAL GROUP, INC.
By: /s/ Michael O'Reilly
--------------------------------
Name: Michael O'Reilly
Title: President
TRADE-WIND ENVIRONMENTAL
RESTORATION, INC.
By: /s/ Michael O'Reilly
--------------------------------
Name: Michael O'Reilly
Title: President
NORTH ATLANTIC LABORATORIES, INC.
By: /s/ Michael O'Reilly
--------------------------------
Name: Michael O'Reilly
Title: Vice President
NEW YORK TESTING LABORATORIES, INC.
By: /s/ Michael O'Reilly
--------------------------------
Name: Michael O'Reilly
Title: Vice President
- 2 -
as of August 1, 1998
Windswept Environmental Group, Inc.
Trade-Winds Environmental Restoration, Inc.
North Atlantic Laboratories, Inc.
New York Testing Laboratories, Inc.
100 Sweeneydale Avenue
Bay Shore, NY 11706
Re: Loan and Security Agreement dated as of June 1, 1998 (the "Loan
Agreement")
Gentlemen:
This is to confirm our mutual agreement to correct an error in the Loan
Agreement as to the amount of the origination fee as set forth in paragraph 2.8
of the Loan Agreement which inaccurately calculated same on only the amount of
the revolving credit facility when it should have been calculated on the amount
of both the revolving credit facility and the term loan. Accordingly, we have
mutually agreed to modify paragraph 2.8 of the Loan Agreement to read as
follows:
2.8 Origination Fee. In consideration of BACC entering this Agreement,
Borrower shall pay BACC an origination fee of Twenty Four Thousand Four Hundred
Fifty Dollars ($24,450.00), $2,037.50 of which shall be paid on execution hereof
and the balance in eleven monthly installments of $2,037.50 commencing on July
1, 1998 and on the same day of each month thereafter until paid in full, and
thereafter an origination fee of Twenty Four Thousand Four Hundred Fifty Dollars
($24,450.00) on each annual anniversary of the date hereof.
Except as herein set forth, the Loan Agreement and all other Loan Documents
shall remain in full force and effect.
Business Alliance Capital Corp.
By: /s/ Tedd Koppa
--------------------------------
Name: Tedd Koppa
Title: Chief Executive Officer
Agreed to:
Windswept Environment Group, Inc.
And other Borrowers under the Loan Agreement
By: /s/ Michael O'Reilly
----------------------------
Name: Michael O'Reilly
Title: President
Exhibit 21
----------
WINDSWEPT ENVIRONMENTAL GROUP, INC.
List of Subsidiaries
State of Other Jurisdiction of
Name Incorporation or Organization
- ---- -----------------------------
New York Testing Laboratories Inc. .................................... Delaware
North Atlantic Laboratories Inc. ...................................... New York
Sound Coast Remediation Inc. .......................................... Delaware
Trade-Winds Environmantal Restoration, Inc. ........................... Delaware
CONSENT OF INDEPENDENT
CERTIFIED PUBLIC ACCOUNTANTS
WINDSWEPT ENVIRONMENTAL GROUP, INC.
BAYSHORE, NEW YORK
We hereby consent to the incorporation by reference in the Registration
Statements on Forms S-8 (No. 333-22491 and No. 333-43305) of our report dated
August 13, 1998, relating to the consolidated financial statements of Windswept
Environmental Group, Inc. appearing in the Company's Annual Report on
Form 10-KSB for the year ended April 30, 1998.
BDO SEIDMAN, LLP
Melville, New York
August 13, 1998
EXHIBIT 23.2
------------
Consent of Independent Accountants
We hereby consent to the incorporation by reference in the Registration
Statements on Forms S-8 (No. 333-22491 and No. 333-43305) of Windswept
Environmental Group, Inc. of our report dated September 29, 1997 appearing on
page F-2 of this Annual Report on Form 10-KSB.
PricewaterhouseCoopers LLP
Melville, New York
August 13, 1998
<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, 1998 AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> APR-30-1998
<PERIOD-START> MAY-01-1997
<PERIOD-END> APR-30-1998
<CASH> 33,915
<SECURITIES> 0
<RECEIVABLES> 2,797,517
<ALLOWANCES> 280,000
<INVENTORY> 161,266
<CURRENT-ASSETS> 3,093,111
<PP&E> 4,752,825
<DEPRECIATION> 1,953,634
<TOTAL-ASSETS> 6,354,689
<CURRENT-LIABILITIES> 6,926,815
<BONDS> 1,064,604
1,300,000
0
<COMMON> 1,155
<OTHER-SE> (2,937,885)
<TOTAL-LIABILITY-AND-EQUITY> 6,354,689
<SALES> 11,968,774
<TOTAL-REVENUES> 11,968,774
<CGS> 10,256,964
<TOTAL-COSTS> 15,616,142
<OTHER-EXPENSES> 1,287,000
<LOSS-PROVISION> 324,091
<INTEREST-EXPENSE> 787,576
<INCOME-PRETAX> (5,609,795)
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