UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
(Mark One)
(x) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934.
For the quarterly period ended October 31, 1998
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (D) OF THE SECURITIES
EXCHANGE ACT OF 1934.
For the Transition period from __________ to __________.
Commission File Number: 0-17072
WINDSWEPT ENVIRONMENTAL GROUP, INC.
(Exact name of small business issuer as specified in its charter)
Delaware 11-2844247
(State of other jurisdiction of (IRS Employer
incorporation or organization) Identification Number)
100 Sweeneydale Avenue, Bay Shore, New York 11706
(Address of principle executive offices)
(516) 694-7060
(Issuer's telephone number)
Indicate by check mark whether the issuer (1) filed all reports required to be
filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period 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___
Indicate the number of shares outstanding of each of the issuer's classes of
common equity, as of the latest practicable date.
Common Stock, Par Value $.0001 13,263,301
(Title of Each Class) (Outstanding at October 31, 1998)
Transitional Small Business Disclosure Format (check one): Yes ___ No _X_
<PAGE>
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
WINDSWEPT ENVIRONMENTAL GROUP, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
October 31,
1998 April 30,
(Unaudited) 1998
------------ ------------
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash $ 303,441 $ 33,915
Accounts receivable, net of allowance for doubtful
accounts of $140,143 and $280,000, respectively 3,043,139 2,517,517
Inventories 163,533 161,266
Costs and estimated earnings in excess of billings on uncompleted contracts 38,000 55,352
Prepaid and other current assets 371,768 325,061
Deferred income taxes 275,000 --
------------ ------------
Total current assets 4,194,881 3,093,111
PROPERTY AND EQUIPMENT, net of accumulated depreciation of
$2,376,126 and $1,953,634, respectively 2,545,104 2,799,191
OTHER ASSETS
Goodwill, net of accumulated amortization of $41,260 and $36,526, respectively 80,766 85,500
Note receivable, net of current portion of $83,031 and $80,460, respectively 178,713 209,245
Other assets 145,318 167,642
------------ ------------
TOTAL ASSETS $ 7,144,782 $ 6,354,689
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES
Accounts payable and accrued expenses $ 3,206,802 $ 3,361,578
Revolving credit note payable 1,984,420 --
Advances from factor -- 1,505,968
Billings in excess of costs and estimated earnings on uncompleted contracts 162,500 266,000
Payroll taxes payable 107,987 641,790
Current portion of long-term debt 592,250 955,367
Obligations of unconsolidated subsidiary, net 196,112 196,112
------------ ------------
Total current liabilities 6,250,071 6,926,815
OTHER LIABILITIES
Convertible notes 790,000 800,000
Long-term debt, net of current portion 598,244 227,604
Other liabilities -- 37,000
------------ ------------
Total liabilities 7,638,315 7,991,419
------------ ------------
COMMITMENTS AND CONTINGENCIES
SERIES A REDEEMABLE CONVERTIBLE PREFERRED STOCK
par value $.01; 1,300,000 shares issued and outstanding 1,300,000 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;
13,263,301 and 11,552,374 shares issued and outstanding, respectively 1,326 1,155
Additional paid-in capital 28,630,136 28,126,648
Accumulated deficit (30,391,190) (30,989,396)
Less deferred compensation (33,805) (75,137)
------------ ------------
Total stockholders' equity (deficit) (1,793,533) (2,936,730)
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) $ 7,144,782 $ 6,354,689
============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
1
<PAGE>
WINDSWEPT ENVIRONMENTAL GROUP, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
------------------ ----------------
October 31, October 31,
1998 1997 1998 1997
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Revenues $ 4,516,847 $ 3,601,372 $ 7,960,310 $ 6,896,735
Cost of revenues 3,206,378 3,086,938 5,527,535 6,271,852
------------ ------------ ------------ ------------
Gross profit 1,310,469 514,434 2,432,775 624,883
Selling, general and administrative expenses 864,755 1,088,893 1,703,350 2,265,113
------------ ------------ ------------ ------------
Income (loss) from operations 445,714 (574,459) 729,425 (1,640,230)
------------ ------------ ------------ ------------
Other income (expense):
Interest expense (157,745) (192,959) (434,051) (501,196)
Other, net 12,500 1,735 27,832 1,735
------------ ------------ ------------ ------------
Total other income (expense) (145,245) (191,224) (406,219) (499,461)
------------ ------------ ------------ ------------
Income (loss) before income tax benefit 300,469 (765.683) 323,206 (2,139,691)
Income tax benefit (275,000) -- (275.000) --
------------ ------------ ------------ ------------
Net income (loss) 575,469 (765,683) 598,206 (2,139,691)
Dividends on Series A Convertible Preferred Stock 19,500 19,500 39,000 42,846
------------ ------------ ------------ ------------
Net income (loss) attributable to common shareholders $ 555,969 $ (785,183) $ 559,206 $ (2,182,537)
============ ============ ============ ============
Net income (loss) per common share:
Basic $ .04 $ (.08) $ .04 $ (.22)
============ ============ ============ ============
Diluted $ .03 $ (.08) $ .04 $ (.22)
============ ============ ============ ============
Weighted average number of common shares outstanding:
Basic 12,800,778 10,110,692 12,463,486 9,973,051
============ ============ ============ ============
Diluted 17,562,677 10,110,692 17,192,329 9,973,051
============ ============ ============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
2
<PAGE>
WINDSWEPT ENVIRONMENTAL GROUP, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE SIX MONTHS ENDED OCTOBER 31, 1998
(Unaudited)
<TABLE>
<CAPTION>
Common Stock
------------------------- Additional
Number of Par Paid-in Accumulated Deferred
Shares Value Capital Deficit Compensation Total
----------- ------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Balance at April 30, 1998 11,552,374 $ 1,155 $ 28,126,648 $(30,989,396) $ (75,137) $ (2,936,730)
Proceeds from private placements of
common stock 735,000 73 129,927 -- -- 130,000
Note conversion 20,000 2 9,998 -- -- 10,000
Issuance of common stock for services 583,089 59 251,574 -- -- 251,633
Issuance of common stock
for legal settlement 22,874 2 9,262 -- -- 9,264
Issuance of common stock for
employee and director compensation 125,000 13 48,387 -- -- 48,400
Amortization of deferred compensation -- -- -- -- 41,332 41,332
Dividends on preferred stock -- -- (39,000) -- -- (39,000)
Issuance of common stock and options for
accrued preferred dividends and related
interest 224,964 22 93,340 -- -- 93,362
Net income -- -- -- 598,206 -- 598,206
----------- ------------ ------------ ------------ ------------ ------------
Balance at October 31, 1998 13,263,301 $ 1,326 $ 28,630,136 $(30,391,190) $ (33,805) $ (1,793,533)
=========== ============ ============ ============ ============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
3
<PAGE>
WINDSWEPT ENVIRONMENTAL GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED
(Unaudited)
<TABLE>
<CAPTION>
October 31, October 31,
1998 1997
----------- -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) $ 598,206 $(2,139,691)
Adjustments to reconcile net income (loss) to net cash
used by operating activities:
Depreciation and amortization 505,886 983,633
Provision for doubtful accounts 15,393 78,097
Issuance of common stock and stock options for services 59,662 106,346
Gain on disposal of equipment (15,332) (1,735)
Deferred income taxes (275,000) --
Changes in operating assets and liabilities:
Accounts receivable (541,015) (1,273,217)
Inventories (2,267) (21,046)
Costs and estimated earnings in excess of billings
on uncompleted contracts 17,352 (6,965)
Due from officer -- (62,070)
Prepaid and other current assets 92,525 244,623
Other assets -- (17,538)
Accounts payable and accrued expenses 131,721 1,401,158
Payroll taxes payable (533,803) 263,214
Billings in excess of costs and estimated earnings
on uncompleted contracts (103,500) --
----------- -----------
NET CASH USED BY OPERATING ACTIVITIES (50,172) (445,191)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Collection of notes receivable 28,137 23,045
Proceeds from sale of assets -- 14,614
Proceeds from insurance settlement 20,332 --
Purchases of property and equipment (188,405) (586,974)
----------- -----------
NET CASH USED BY INVESTING ACTIVITIES (139,936) (549,315)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Principal payments of long-term debt and factor advances (2,230,286) (340,427)
Proceeds from revolving bank line, net 1,984,420 728,613
Proceeds from equipment term loan 595,000 --
Dividends paid on redeemable preferred stock (19,500) (23,346)
Proceeds from issuance of common stock 130,000 --
----------- -----------
NET CASH PROVIDED BY FINANCING ACTIVITIES 459,634 364,840
----------- -----------
NET INCREASE (DECREASE) IN CASH 269,526 (629,666)
CASH - BEGINNING 33,915 654,377
----------- -----------
CASH - ENDING $ 303,441 $ 24,711
=========== ===========
Cash paid during the period for:
Interest $ 385,152 $ 97,093
=========== ===========
Taxes $ 2,750 $ --
=========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
4
<PAGE>
WINDSWEPT ENVIRONMENTAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements of
the Company have been prepared by management in accordance with generally
accepted accounting principles for interim financial information and with
the instructions to Form 10-QSB and Item 310 of Regulation S-B.
Accordingly, they do not include all of the information and footnotes
required by generally accepted accounting principles for complete financial
statements. In the opinion of management, all adjustments (consisting of
normal recurring accruals) considered necessary for a fair presentation
have been included. The results of operations for interim periods are not
necessarily indicative of the results to be expected for the full year.
These consolidated interim financial statements should be read in
conjunction with the financial statements and notes thereto included in the
Company's Form 10-KSB for the fiscal year ended April 30, 1998.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Reclassifications - Certain amounts included in the prior year's
consolidated financial statements have been reclassified to conform with
the current period presentation.
3. LIQUIDITY AND BUSINESS RISKS
The Company's financial statements have been prepared assuming that the
Company will continue as a going concern. As of October 31, 1998 the
Company has a stockholders' deficit of $1,793,533 and an accumulated
deficit of $30,391,190. The Company has financed its operations to date
primarily through issuances of debt and equity securities. At October 31,
1998, the Company had $303,441 in cash, and a working capital deficit of
$2,055,190. These factors raise substantial doubt about the Company's
ability to continue as a going concern. These financial statements do not
include any adjustments that might result from the outcome of this
uncertainty.
In June 1998, the Company entered into a revolving credit facility to
obtain a revolving credit line of $2,445,000, secured by certain of the
Company's assets. This revolving credit line was increased by $650,000 to
$3,095,000 in October 1998. The current quarter's results reflect efforts
to improve the Company's overall gross margins and control its selling,
general, and administrative expenses. Revenue growth is expected to
continue and further expense reductions are planned; however, no assurance
can be given in this regard. The Company is currently engaged in various
discussions with potential investors regarding possible equity
transactions. 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 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. EQUITY TRANSACTIONS
During May 1998 the Company received $68,000 from several private
accredited investors for 425,000 shares, or $.16 per common share. Also
during May 1998 , a convertible noteholder converted a $10,000 note into
20,000 shares of common stock. During August and September 1998, the
Company received $62,000 from several private accredited investors for
310,000 shares, or $.20 per common share.
On August 18, 1998 the Company's Board of Directors granted options to
purchase 750,000 shares of common stock to the directors of the Company,
which included 250,000 to the Chief Executive Officer. In addition, options
to purchase 100,000 shares of common stock were issued to the Company's
Chief Financial Officer. All of these options are exercisable immediately
at an exercise price of $.34, and expire August 17, 2003.
On August 20, 1998 the Company's Board of Directors approved the Company's
1998 Stock Incentive Plan ("Plan"). Under the Plan, the Company is
permitted to grant awards up to a maximum of 2,000,000 shares of common
stock as restricted stock, incentive stock options, non-qualified options,
phantom stock and otherwise.
5
<PAGE>
WINDSWEPT ENVIRONMENTAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
4. EQUITY TRANSACTIONS (cont.)
For the six months ended October 31, 1998, the Company issued 504,142
shares valued at $221,633 related to prior fiscal year obligations for
legal and consulting services. The Company issued 78,947 shares and 22,874
shares valued at $30,000 and $9,264 for current fiscal year legal services
and a legal settlement, respectively. The Company issued 100,000 shares of
common stock valued at $37,000 to its Vice President of Business
Development which it had been contractually obligated to issue. The
Company's five directors were issued 5,000 shares each valued at $11,400 in
the aggregate. The Company issued 224,964 shares of its common stock and
30,000 options (exercisable at $.375) in payment of all accrued and unpaid
preferred stock dividends and interest due through October 31, 1998. During
the six month period ended October 31, 1998, 467,604 stock options were
forfeited.
On October 2, 1998 the Company issued 50,000 stock options to an employee,
exercisable at $.40. On November 13, 1998, the Company issued 550,000 stock
options to certain of its employees, exercisable at $.375. These options
expire in October 2003.
5. RELATED PARTY TRANSACTIONS
The Company purchased materials and supplies of $127,651, and had an
outstanding balance payable at October 31, 1998 of $97,686 to a Company
with which one of its directors is affiliated. The same director is owed
$100,000 on a 12% convertible note payable in full in December 1999.
6. DEBT
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 $2,500,000
(as amended October 19,1998), 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 Company's 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 and
transferred its receivable collateralization 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.
7. STATEMENTS OF CASH FLOWS
During the six months ended October 31, 1998, the Company's non-cash
operating activities included the payment of $221,633 in current
liabilities utilizing its common stock. The Company also utilized $37,000
in common stock to satisfy a previous contractual obligation. See Note 4.
Non-cash financing activities include $136,841 of annual insurance premium
financing and $93,362 of common stock and options issued in payment of
accrued preferred dividends and related interest.
6
<PAGE>
WINDSWEPT ENVIRONMENTAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
8. 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 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.
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 as yet inconclusive.
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 $375,000 through November 3, 1998, and is
expected to remit a final payment of approximately $39,000 in December
1998. Previously paid penalties in excess of $85,000 were abated during the
quarter ended October 31,1998 and are reflected as a reduction of selling,
general, and administrative expenses.
7
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
The following discussion of the fiscal six months ended October 31, 1998 and
1997, should be read in conjunction with the Consolidated Financial Statements
contained herein, including the notes thereto.
This Item 2 and other items in this Form 10-QSB 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-QSB 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-QSB, and in the Company's annual report on Form 10-KSB for the year
ended April 30, 1998. Readers of this Form 10-QSB 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
Net income and net income per share for the quarter and six month period ended
October 31,1998 was $575,469 and $.04 and $598,206 and $.04, respectively,
compared to a net loss and loss per share for the quarter and six-month period
ended October 31, 1997 of $(765,683) and $(.08) and $(2,139,691) and $(.22),
respectively.
Revenues for the quarter ended October 31, 1998 increased by $915,475, or 25%,
to $4,516,847 from $3,601,372. Revenues for the first six months of fiscal 1999
increased by $1,063,575, or 15%, to $7,960,310 from $6,896,735. The increase in
revenues was primarily reflected in the second quarter results of the Company's
Trade-Winds subsidiary, where asbestos remediation revenues increased 31% or
approximately $640,000, and construction/ renovation revenues increased 72% or
approximately $797,000. The revenues of the other Company subsidiaries, North
Atlantic Laboratories, Inc. ("NAL") and New York Testing Laboratories,
Inc.("NYTL"), remained approximately flat compared to the prior periods, with
slight declines in revenues of 2% for NAL, to $894,820 from $910,061, and 6% for
NYTL, to $561,499 from $594,494 over the six month period.
Gross margins for the quarter and six month period ended October 31, 1998
increased to 29% and 31%, respectively, compared to 14% and 9% for the quarter
and six months ended October 31, 1997, respectively. The increased margins were
attributable primarily to management efforts during the past year to provide a
broader and more profitable mix of services at its Trade-Winds subsidiary. In
addition, management believes that it has become more proficient in estimating
its project costs and has turned down work where competitive factors would lead
to projected project losses. Margins at the Company's Trade-Winds subsidiary
increased to 28% from 7% over the comparative prior six month period. The gross
margins in the period ended October 31, 1997 were a result of the recognition of
losses in that period related to certain longer-term contracts with projected
losses, the effect of higher labor and benefit (including worker's compensation
insurance) costs due to unionization 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 quarter ended October 31,
1998 declined by $224,138, or 21%, to $864,755 from $1,088,893 in the quarter
ended October 31, 1997. Selling, general and administrative expenses for the six
month period ended October 31, 1998 declined by $561,763, or 25% to $1,703,350
from $2,265,113 in the six month period ended October 31, 1997. The decline for
the six-month period was primarily related to approximate reductions as follows:
bad debt expense, $63,000 (due to improved internal controls and management
collection efforts); legal expenses, $55,000 (due to a reduction in SEC
investigation and compliance and other non-operational type legal matters),
health insurance, $35,000 (due to mandatory contributions required of employees
since the third quarter of fiscal 1998), goodwill amortization expense of
$76,000 (due to the impairment loss recorded in the fourth quarter of
fiscal1998), fines and penalties, $127,000 (reduced due to the settlement
agreement with the Internal Revenue Service), sales and office salaries and
related taxes, $220,000 (due to the staff reductions in February and September
1998), and $18,000 in laboratory consulting fees. The decline was offset in part
by a $100,000 estimated bonus accrual recorded for the Chief Executive Officer
in accordance with his employment contract. The decline in selling, general and
administrative expenses for the quarter ended October 31, 1998 was primarily due
to an abatement of fines and penalties of approximately $87,000 compared to an
approximate $43,000 expense during the comparative quarter ended October 31,
1997, or accounting for $130,000 of the decline. The balance of the decline for
the quarter ended October 31,
8
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations. (continued)
RESULTS OF OPERATIONS (cont.)
1998 consisted primarily of $38,000 in goodwill amortization expense, and
approximately $84,000 in sales and office salaries.
Interest expense for the quarter ended October 31, 1998 declined $35,214, or
18%, to $157,745 from $192,959 in the quarter ended October 31, 1997. Interest
expense for the six months ended October 31, 1998 declined $67,145, to $434,051
from $501,196 in the six-month period ended October 31,1997. During the quarter
and six month period ended October 31, 1997 the Company incurred approximately
$116,000 and $356,000 of interest expense relating to the accretion of a
discount on the $700,000 of convertible notes issued in the fourth quarter of
fiscal 1997. There was no related accretion charge in the comparative periods
for fiscal 1999. The substantial interest expense during the six month period
ended October 31, 1998 was principally attributable to the high cost of
receivable factoring in the months of May and June 1998. The Company began its
borrowing base agreement with BACC as of July 2,1998. (See Note 6 to the
Condensed Consolidated Financial Statements). The LSA carries an annualized
interest rate of approximately 18%.
LIQUIDITY AND CAPITAL RESOURCES
The Company's financial statements have been prepared assuming that the Company
will continue as a going concern. As of October 31, 1998 the Company has a
stockholders' deficit of $1,793,533 and an accumulated deficit of $30,391,190.
The Company has financed its operations to date primarily through issuances of
debt and equity securities. At October 31, 1998, the Company had $303,441 in
cash, and a working capital deficit of $2,055,190. These factors raise
substantial doubt about the Company's ability to continue as a going concern.
These financial statements do not include any adjustments that might result from
the outcome of this uncertainty.
In June 1998, the Company entered into a revolving credit facility to obtain a
revolving credit line of $2,445,000, secured by certain of the Company's assets.
The revolving credit line was increased by $650,000 to $3,095,000 in October
1998. The current quarter's results reflect managements efforts to improve the
Company's gross margins and control its selling, general, and administrative
expenses. Revenue growth is expected to continue and further expense reductions
are planned; however, no assurance can be given in this regard. The Company is
currently engaged in various discussions with potential investors regarding
possible equity transactions. 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 Company believes that its current resources together with anticipated
continued positive cash flow from operations, if any, and the LSA, should
provide sufficient cash to meet the Company's needs for approximately the next
twelve months.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
See Note 8 to the Condensed Consolidated Financial Statements.
Item 2. Changes in Securities
In May 1998, the Company issued an aggregate 425,000 shares of Common
Stock to four accredited investors for aggregate proceeds of $68,000.
These transactions were non-public offerings exempt from registration
under the Securities Act of 1933, as amended, pusuant to Section 4(2)
thereof.
In August 1998, the Company issued 150,000 shares of Common Stock to
one accredited investor for $30,000. This transaction was a non-public
offering exempt from registration under the Securities Act of 1933, as
amended, pursuant to Section 4(2) thereof.
In September 1998, the Company issued an aggregate 80,000 shares of
Common Stock to a total of two accredited investors for aggregate
proceeds of $16,000. These transactions were non-public offerings
exempt from registration under the Securities Act of 1933, as amended,
pursuant to Section 4(2) thereof.
In September 1998, the Company issued 80,000 shares of Common Stock to
a non-accredited investor for $16,000. This transaction was a
non-public offerings exempt from registration under the Securities Act
of 1933, as amended, pursuant to Section 4(2) thereof.
9
<PAGE>
PART II - OTHER INFORMATION (continued)
Item 3. Defaults Upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
None
Item 5. Other Information
In October and November 1998 the Company issued 224,964 and 21,000
shares of Common Stock, respectively, in payment of all accrued
dividends and interest on its Series A Preferred Stock through October
31, 1998.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits: 10.18 - Amendment to Advance Limit in the Loan and
Security Agreement dated June 1, 1998.
10.19 - Modified and Restated Revolving Credit Master
Promissory Note.
27 - Financial Data Schedule
(b) Reports on Form 8-K
No reports on Form 8-K have been filed during the quarter for
which this report is filed.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities and
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned thereunto duly authorized.
Dated: November 17, 1998
WINDSWEPT ENVIRONMENTAL GROUP, INC.
By: /s/ Michael O'Reilly
----------------------------------
MICHAEL O'REILLY, Chairman and
Chief Executive Officer
By: /s/ Alan W.Schoenbart
----------------------------------
ALAN W. SCHOENBART,
Chief Financial Officer
10
as of October 19, 1998
Windswept Environmental Group, Inc.
Trade-Winds Environmental Restoration, Inc.
North Atlantic Laboratories, Inc.
New York Testing Laboratories, Inc.
100 Sweeneydale Avenue
Bay Shore, New York 11706
Re: Loan and Security Agreement dated as of June 1, 1998 (the "Loan
Agreement")
Gentlemen:
This is to confirm our approval of your request for an increase to
$2,500,000.00 of the maximum amount of the revolving credit facility provided
for in the Loan Agreement. Accordingly we have agreed to modify section 2.1(A)
of the Loan Agreement to read as follows:
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 Two
Million Five Hundred Thousand and 00/100 Dollars ($2,500,000.00) (the
Advance Limit);
In consideration of our agreeing to so increase the maximum amount of the
revolving credit facility, you shall pay to us a facility fee of $6,500.00.
Our approval shall not constitute a waiver of any Events of Default, if any
so exist, or any future violation of any provisions of the Loan Agreement or any
other Loan Documents.
By your execution hereof Borrower agrees to pay all costs and expenses,
including reasonable attorneys fees and disbursements, incurred by BACC in
connection with the preparation of this letter agreement and the other documents
created in connection herewith. Capitalized terms not defined herein but defined
in the Loan Agreement shall have the same meaning ascribed to such terms in the
Loan Agreement. Your execution shall also act as your representation that the
execution of this letter agreement has been authorized by all required corporate
action, that this letter agreement constitutes the valid and binding obligation
of the Borrower, is enforceable in accordance with its terms and that no
material adverse change in the financial condition of the Borrower has occurred
and the Borrower's reaffirmation of its grant to BACC of a lien on the
Collateral.
Except as herein set forth, the Loan Agreement and all other Loan Documents
shall remain in full force and effect. Our agreement as aforesaid is subject to
your written agreement with the terms hereof by signing and returning a copy
hereof where so indicated below along with the enclosed Modified and Restated
Revolving Credit Master Promissory Note, and by the written consent of guarantor
where so indicated below.
BUSINESS ALLIANCE CAPITAL CORP.
By: /s/ William F. Seibold
-------------------------------
Name: William F. Seibold
Title: Senior Vice President
<PAGE>
Agreed to:
Windswept Environmental Group, Inc.
By: /s/ Michael O'Reilly
---------------------------------------
Name: Michael O'Reilly
Title: President
Trade-Winds 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
The undersigned, guarantor of the Liabilities of the Borrower to BACC,
hereby consents to the above letter and agrees that same shall not affect his
Individual Guaranty dated as of June 1, 1998, which guaranty remains in full
force and effect.
/s/ Michael O'Reilly
-------------------------
Michael O'Reilly
MODIFIED AND RESTATED
REVOLVING CREDIT MASTER
PROMISSORY NOTE
$2,500,000.00 Princeton, New Jersey
as of October 19, 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 Two Million Five Hundred Thousand and 00/100 ($2,5000,000.00)
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;
(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.
-1-
<PAGE>
This Note represents a modification and restatement of that certain
Revolving Credit Master Promissory Note of Borrower to BACC in the principal sum
of $1,850,000.00 dated June 1, 1998 and is not intended to be novation of said
note or the loans evidenced thereby.
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-
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