U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 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, 1999
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) 434-1300
Securities registered pursuant to Section 12 (b) of the Exchange Act: None
Securities registered pursuant to Section 12 (g) of the Exchange Act:
Common Stock, $.0001 par value per share
(Title of Class)
Check whether the 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 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 $ 13,926,812.
Based upon the average bid and ask price on July 31, 1999 ($0.34), the aggregate
market value of the Common Stock, $.0001 par value per share, held by
non-affiliates of the registrant was approximately $5,238,904.
As of July 31, 1999, the issuer had 15,776,857 common shares, $.0001 par value,
outstanding.
Transitional Small Business Disclosure Format (check one)
Yes _ No X
Documents Incorporated by Reference: None
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PART 1
Introductory Comment - Forward Looking Statements
Statements contained in this Form 10-KSB include 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. The Company undertakes no obligation to publicly update or revise
any forward-looking statements, whether as a result of new information, future
events or otherwise.
ITEM 1. DESCRIPTION OF BUSINESS
General
Windswept Environmental Group, Inc. ("Windswept" or "the Company"), through its
wholly-owned subsidiaries, provides a full array of emergency response,
remediation and disaster restoration services to a broad range of clients. The
Company has expertise in areas of hazardous materials remediation, testing,
toxicology, training, wetlands restoration, wildlife and natural resources
rehabilitation, technical advisory, restoration and site renovation services.
The Company believes that it has assembled the resources, including key
environmental professionals, construction managers, and specialized equipment to
become a leader in the expanding worldwide emergency services market. The
Company believes that few competitors provide the diverse range of services
provided by Windswept on an emergency response basis. Management believes that
its unique breadth of services and its emergency response capability has
positioned the Company for rapid growth in this expanding market. 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, the
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) 434-1300.
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.
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Business
Operations
In order to position itself into stronger and more profitable markets, the
Company has undergone an evolution. The Company has added strategic capabilities
and resources over the last two years to move the business from its roots as an
asbestos abatement contractor to a hazardous materials clean-up and natural
resource restoration firm, and finally, to a full service emergency response
provider. The Company provides a broad range of services through vertically
integrated businesses in the service areas described below:
- Emergency Response and Catastrophe Restoration
- Site Restoration
- Natural Resource/Wetlands Restoration/Wildlife Rehabilitation
- Forensic Investigation
- Asbestos Abatement
- Fire and Flood Restoration
- Demolition
- Lead Abatement
- Underground Storage Tank Removal
- Soil Remediation
- Oil Spill Response - Land and Marine
- Hazardous Waste/Biohazard Clean-up
- Chemical Spill Response
- Duct Cleaning
- Indoor Air Quality Investigation
- Environmental and Health and Safety Training
- Environmental Testing
- Environmental Consulting Services
The Company has been performing an increasing number of emergency remediation
projects. The Company has specially trained emergency response teams that
respond to both hazardous and non-hazardous spills and other emergencies on land
and water on a 24 hour, seven day a week basis. The following examples are types
of emergencies for which the Company is capable of conducting response and
remediation: explosions, fires, earthquakes, mudslides, hazardous spills,
transportation catastrophes, storms, floods, and biological threats.
The Company's comprehensive emergency response abilities have greatly
expanded the Company's customer base to include those entities that value
immediate response, enhanced capabilities and customer service. The Company's
customers currently include Keyspan Energy Corporation, Mobil Oil, Long Island
Rail Road, and the New York State Department of Environmental Conservation for
services including hazardous materials spill response, oil spill containment,
sub-surface investigation and site remediation. The Company's customers include
Fortune 500(TM) companies, insurance companies, industrial concerns, oil
companies, banks, school districts, state, local and county governments,
commercial building owners and real estate development concerns. Management
expects insurance loss remediation and restoration to be an increasingly
significant portion of the Company's future revenues.
In order to address the needs of the insurance industry, the Company has
dedicated itself toward focusing the strategic integration of all of its
services. As a result, the Company provides its insurance customers with the
capability to respond to virtually any type of insurance loss. The Company is
able to perform all the tasks necessary to rapidly restore a property to
pre-loss conditions, thus minimizing dislocation, downtime and business
interruption.
Insurance customers represent a substantial portion of the Company's target
market; those with recurring needs for emergency services. The Company estimates
that in excess of 50% of its revenues are derived from previously served
customers. During fiscal 1999, one customer accounted for 10.2% of revenue.
While the Company has repeat business
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with many of its customers, the level of business with a particular
customer in a succeeding period is not expected to 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 "Management's Discussion and Analysis
or Plan of Operation - Results of Operations."
In order to provide emergency response services, it is necessary for the Company
to employ a professional staff and to maintain an inventory of vehicles,
equipment and supplies. The Company currently maintains a fleet of twenty-four
spill response vessels with skimmer, diving and booming capabilities,
thirty-nine vehicles (including vacuum trucks, earth moving equipment, supply
trucks and drilling vehicles) and twenty-nine trailers equipped with various
capabilities (such as the mobile wildlife clinic). The Company has the equipment
capacity to move 100,000 gallons of environmental waste in any 24-hour period
directly to a disposal facility either in drums, roll-offs or directly in tanker
trucks.
The Company has on its staff experts and licensed personnel in natural resource
restoration, spill response, hazardous material clean-up, wildlife
rehabilitation, environmental investigation and testing, construction, oil spill
response, and health and safety. The Company's staff includes four U.S. Coast
Guard certified captains and certified divers. The Company employs 20 wildlife
rehabilitators, 22 certified asbestos handlers, 14 accredited lead workers, 17
certified hazardous material workers, 2 toxicologists/environmental Ph.D.s, an
M.S. in marine biology, an MS in chemical engineering, a certified industrial
hygienist, an environmental biologist as well as individuals with various other
applicable expertise.
Competition
The Company believes that few of its competitors in the markets in which it
competes provide the full array of services that the Company performs as an
emergency response firm. The Company further believes that the turnkey approach
to the emergency response business provides a distinct advantage over its
competition.
The Company competes with approximately twenty environmental remediation
companies of similar size and approximately fifty construction firms of all
sizes in its area of operations. The Company sets itself apart from its
competitors by providing some unique services (such as wildlife rehabilitation,
natural resource recovery, water spill clean-up, forensic testing, biohazard
clean-up) and packages of services that complement one another. For example, the
oil spill response service line provides work for the Company's wetlands/natural
resource restoration, laboratory services and construction related services.
The Company has obtained "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. The Company
believes that it is one of approximately ten companies in the Northeast with the
"Class E" designation. To the best of management's knowledge, only two companies
on the east coast perform on-site natural resource restoration/wildlife
rehabilitation. The Company believes that it is the only company in the
Northeastern U.S. to possess both of these critical oil spill response
capabilities.
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 $5,270,000 at April 30, 1999, as
compared with $ 3,931,000 at April 30, 1998. The backlog represents the portion
of contracts in process at a point in time which have not been completed and
assumes that these contracts will be utilized to their full value. As the
contracts are completed, the backlog will be reduced and the related revenue
will be realized. The Company is currently working on virtually all of its
contracts in
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its backlog and anticipates that approximately 30% of this backlog had been
completed by the end of the first quarter, July 31, 1999. It is expected that
all but 20% of the backlog is to be completed by the end of fiscal year 2000.
Marketing
The Company has an aggressive marketing program that is directed toward
establishing and maintaining relationships with businesses which have ongoing
needs for one or more of the Company's services. The Company strives to achieve
internal growth by expanding services to its existing customer base and by
marketing itself as a multiple-service company with immediate response
capabilities. Clients who begin by utilizing one service often use other
services provided by the Company to ultimately serve all of their environmental,
related construction and emergency response needs.
Consistent with this strategy, during fiscal 1999, the Company consolidated the
sales and marketing efforts of its subsidiary companies into a centralized
group. This has allowed the Company to capitalize upon the synergy between
service lines while realizing a reduction in selling expense. The business
development staff was recruited by the Company for their experience, reputation,
and client base in respective areas of business. Once they join the Company
sales team, salespersons undergo an orientation in the full suite of Company
services.
The Company's services are principally marketed in the Northeastern United
States. Business is obtained through client referral, cross selling of services
to existing clients, sponsorship of training and development programs,
professional referrals from insurance companies, architect/engineering firms and
construction management firms for whom the Company has provided services,
competitive bidding, and advertising. In all of its marketing efforts, including
competitive bidding, the Company emphasizes its experience, industry knowledge,
safety record and reputation for timely performance of contracts. Furthermore,
the Company believes that most of its services provide opportunities to market
the other services provided by the Company.
Government Regulation
The following is an overview of pertinent industry regulations:
Oil Pollution Act of 1990 (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 natural
resources, wildlife and their habitats. Under the contingency plan, the
petroleum products storage or transportation company must retain an Oil Spill
Response Organization (OSRO) and a natural resources/wildlife rehabilitator.
OSRO'S are certified by the Coast Guard and receive designations based upon
level of capability. In the event of an incident, the OSRO on standby must
respond by being on site with containment capability within two to six hours of
notification.
Asbestos abatement firms are subject to federal, state and local 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.
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 requires testing
before, during and after construction or renovation. OSHA estimates that
1,000,000 workers fall under it'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
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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, all members of its on-site work
force are trained in all relevant 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.
Among its many services, the Company provides training programs on environmental
and safety hazards in the environmental, industrial and construction industry
trades. The training program is designed for use by supervisors, foremen,
project safety and health trainers, construction workers and laborers. The
training program includes the following topics: sources of exposure; health
effects; personal protective equipment and the medical surveillance required by
OSHA; and engineering controls and remediation procedures.
Insurance and Surety Bonds
The Company maintains comprehensive general liability insurance written on an
occurrence basis. The Company also carries comprehensive auto, professional and
pollution liability as well as worker's compensation and disability coverage.
Basic limits of liability are $6,000,000. In addition, the Company carries all
risk property insurance on all furniture, fixtures, equipment, machinery and
water craft.
Approximately 10% 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 the various types of work the Company performs,
their assessment of the Company's performance record and their view of the
credit worthiness of the Company. At present, the Company believes that surety
bonds for a number of the Company's service lines are available only from a
limited number of sureties. While the Company has no reason to believe that it
will not continue to be able to obtain the 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 certain components of the Company's
operations.
Employees/Technical Staff
As of July 31, 1999, the Company employs a core group of approximately 75
persons including executive officers, project managers, specialists,
supervisors, field staff, marketing and clerical personnel. During the past
fiscal year, the Company has decreased the number of sales and administrative
employees while increasing the number of billable project staff in order to
address the increased work load.
The Company attempts to provide year-round employment for its core field staff
by cross training. 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 promotes qualified field
workers to supervisory positions and supervisors into production management and
other staff positions, when applicable.
The Company employs laborers for field operations based upon the current
workload. Approximately 50 field staff and supervisors are employed on a steady
basis, with casual labor hired on an as-needed basis to supplement the work
force. The Company has a trade agreement effective through May 2000 with several
local unions that supply labor for bonded contract work. The availability of a
pool of skilled temporary labor allows the Company to meet peak work loads. The
Company has never had a work stoppage and believes that it has good relations
with its employees.
Permits and Licenses
The Federal Government and certain states in the area in which the Company
operates require that asbestos and lead abatement firms be licensed. Licensing
generally requires that workers and supervisors receive training from state
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certified organizations and pass required tests. Certain states also require
that Wildlife Rehabilitators be licensed. The Company has approximately 20 such
licensed individuals on staff.
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
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 training materials. The Company does not believe that intellectual
property is a competitive factor in its industry.
Suppliers
The Company purchases its supplies and materials used in its business from a
number of vendors, none of whom individually represented more than 5% of the
Company's purchases.
ITEM 2. DESCRIPTION OF PROPERTY
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 monthly rentals of $20,833, $23,958, $24,916, $25,913
and $26,950 for fiscal years 1998, 1999, 2000, 2001 and 2002 respectively. The
option purchase price increases annually. 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 a
monthly rental of $1,000, 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.
The Company does not currently have any policy imposing limitations, whether by
quantity or type, with respect to investments in real estate or interests in
real estate, investments in real estate mortgages or the securities of or
interests in persons primarily engaged in real estate activities. Additionally,
there is no policy currently in effect regarding investments in real estate for
possible capital gain or income. The Company does not anticipate that the
creation of any policy regarding real estate investments, and changes to any
such policy once created, will require a vote of holders of the Company's
securities.
ITEM 3. LEGAL PROCEEDINGS
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 issuance 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. In addition, the Securities and Exchange Commission
also instituted an investigation of the Company. To date, no charges have been
filed against the Company or any other current member of management as a result
of the Eastern District investigation. On June 9, 1999, the Company's Board of
Directors approved making a settlement offer with the Securities and Exchange
Commission pursuant to which the Company will
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neither admit nor deny any allegations. If the Securities and Exchange
Commission approves the settlement offer, the Company will not incur any
monetary fines. Additionally, the Company's special defense counsel has advised
the Company that an Assistant United States Attorney confirmed that the
Government, at this time, does not intend to proceed further with its
investigation of the Company.
In December 1997, the Company was named as a third party defendant in a
litigation brought in the New York State Supreme Court, County of New York, by
one or more plaintiffs who 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 this 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. While the results of such litigation and claims
cannot be predicted with certainty, management believes that the final outcome
of such matters are adequately addressed by insurance and will not have a
materially adverse effect on the consolidated financial position, results of
operations and cash flows of the Company.
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
Not Applicable
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PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
(a) Market Information
The Company's common stock was traded on the small cap market on the NASDAQ
Small Cap Market until October 22, 1996, and has been traded 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 and 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.
<TABLE>
<CAPTION>
Price Range of Common Stock
---------------------------
FISCAL 1999
Quarter Ended HIGH BID LOW BID
------------- -------- -------
<S> <C> <C>
July 31 $.58 $.33
October 31 .45 .31
January 31 .44 .23
April 30 .50 .20
FISCAL 1999
Quarter Ended HIGH BID LOW BID
------------- -------- -------
July 31 $1.06 $.66
October 31 .75 .44
January 31 .53 .10
April 30 .60 .11
</TABLE>
As of August 9, 1999, the closing bid price on the NASD's Electronic Bulletin
Board was $0.36. The Company has approximately 3,050 common shareholders of
record at April 30, 1999. 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.
(b) Recent Sales of Unregistered Securities
The information set forth below is a list of all sales and issuances by the
Company of the Company's equity securities occurring during fiscal 1999, some of
which were disclosed in the Company's Quarterly Reports on Form 10-QSB.
In May of 1998, a note holder converted a note payable with a value of $10,000
into 20,000 shares of common stock.
The Company issued 343,333 shares of common stock valued at $105,600 for certain
legal services rendered during fiscal 1999. The Company issued 245,964 shares of
common stock to two individuals valued at $ 92,236 to pay dividends and interest
due on preferred stock.
In May 1998, the Company issued 25,000 shares of common stock valued at $11,400
as consideration for director
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compensation provided during fiscal 1998. In June 1998, the Company issued
100,000 shares of common stock valued at $37,000 as consideration for director
compensation provided during fiscal 1998.
In May 1998 the Company received $68,000 for 425,000 shares of newly issued
common stock (issue price $0.16 per share). In four separate transactions during
August and September 1998, the Company received $62,000 for 310,000 shares of
newly issued common stock (issue price $0.20 per share).
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.
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.
Results of Operations
Year Ending April 30, 1999 Compared to Year Ending April 30, 1998
Revenues
The Company's revenue increased $1,958,038, or 16.4%, from $11,968,774 in fiscal
1998 to $13,926,812 in fiscal 1999. The increase was a result of continuing
growth in abatement, remediation and construction services. In particular, the
Company experienced growth in the number and dollar volume of projects with
insurance sector clientele. Management expects insurance loss remediation and
restoration to be an increasingly significant portion of the Company's business
going forward.
Management believes that further revenue growth was hampered by the effects of
the ongoing Eastern District investigation described in Item 3, Part I, which
precluded the Company from bidding on work with New York City Agencies. Revenues
generated by New York City Agencies were approximately $3,000,000 in fiscal
1997, the last year in which the Company performed significant services for New
York City Agencies. Management believes that the resolution of this issue will
have a positive effect on the Company's revenue.
Payment delays in the third and fourth fiscal quarters on the Nassau County, New
York, funded Cancer Research Center, as discussed in the subsection entitled
"Net Profit/(Loss)", created cash flow restrictions and increased financing
costs which limited the Company's ability to fund additional projects. As a
result, revenues declined during the third and fourth fiscal quarters in
comparison with the first and second quarters of 1999. However, revenues for the
fourth quarter of fiscal 1999 increased by 30.3% when compared with the fourth
quarter of fiscal 1998.
The Company's backlog totaled approximately $5,270,000 at April 30, 1999, as
compared with $3,931,000 at April 30, 1998.
Gross Profit/Cost of Revenues
The cost of revenues increased $673,090 or 6.6% to $ 10,930,054 in fiscal 1999
from $10,256,964 in fiscal 1998. This increase reflects the costs related to the
16.4% increase in sales. 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.
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Cost of revenues as a percentage of revenues decreased to 78.5% in fiscal 1999
from 85.7% for fiscal 1998. Accordingly, gross profit increased to 21.5 % or
$2,996,758 in fiscal 1999 as compared to 14.3% or $1,711,810 in fiscal 1998.
Management believes that the increase of $1,284,948 or 75.1% was attributable to
increased volume overall, thereby lowering the allocation of indirect costs, and
to management's efforts to provide a broader and more profitable mix of
services. In addition, management has turned down work where the current high
cost of financing would have reduced the profit to minimal amounts.
The Company was involved in a highly technical fuel tank farm replacement
project at John F. Kennedy International Airport in New York. The Company
incurred significant cost overruns on this project due to unanticipated
equipment delivery delays. The delays necessitated the rental and installation
of temporary equipment until the manufacturer was able to provide the equipment
originally ordered by the Company. The Company is currently in litigation to
recoup losses in labor, materials and temporary equipment resulting from the
delayed delivery.
Selling, General and Administrative Expenses
Selling, general and administrative expenses for the year decreased by
$1,997,149, or 37.3%, to $3,362,029 in fiscal 1999 from $5,359,178 in fiscal
1998, and constituted approximately 24.1% and 44.8% of revenues, respectively,
in fiscal years 1999 and 1998. Commencing in the second quarter, the Company
consolidated various administrative, sales and managerial functions into
centralized groups which is more consistent with the Company's strategic focus
and as a result realized salary and related payroll fringe benefit savings of
approximately $1,400,000 in fiscal 1999.
Other factors affecting the reductions in Selling, General and Administrative
expenses include the following: 1) reduction of bad debt expense of $391,000 due
to improved internal controls and management collection efforts; 2) the
reduction of $50,000 in legal expenses due to the settlement and resolution of
certain non-operational legal matters; 3) the reduction of $113,000 in health
insurance costs due to the instituting of mandatory employee contributions, in
effect since the third quarter of fiscal 1998, as well as reductions in staff;
4) elimination of the goodwill amortization expense resulting from the
impairment loss recorded in the fourth quarter of fiscal 1998, and 5) a
reduction of advertising fees of $73,000 due to the redirection of resources to
more direct marketing efforts.
A New York State sales and use tax assessment attributable to periods prior to
February 1997 of approximately $150,000 with an additional $50,000 in related
interest offset some of the aforementioned reductions in Selling, General and
Administrative expenses and increased interest expense (see below) during fiscal
1999.
Management believes that further reductions in Selling, General and
Administrative expenses will be reflected as the staff reductions are effective
for a complete fiscal year 2000.
Interest Expense
Interest expense increased by $182,693 or 23.2% in fiscal 1999 to $970,269 from
$787,576 in fiscal 1998. The Company encountered extraordinary payment delays in
connection with a $430,000 lead abatement and restoration project at a Nassau
County funded Cancer Research Center. As a result, interest and borrowing
penalty clauses in the Company's lending agreement were activated. The resulting
interest, penalties and fees aggregated approximately $100,000. Lending
availability restrictions adversely affected cash flow. The increased financing
costs effected all projects. Payment for this project was received at the end of
the fourth quarter of fiscal 1999.
Other Income:
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 $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 Fiscal 1998.
11
<PAGE>
Net Profit (Loss)
Net loss and net loss attributable to common shareholders per share for fiscal
1999 were ($1,307,476) and ($ 0.11), respectively. This compares to a net loss
and net loss attributable to common shareholders per share of ($5,609,795) and
($.55), respectively for fiscal 1998.
The Company reported profits from operations for the first two quarters of
fiscal 1999, however losses in the third quarter eliminated the profits of the
previous quarters. Two non-recurring events (the equipment delays discussed in
the subsection entitled "Gross Profit/Cost of Revenues and the payment delays
discussed in the subsection entitled "Interest Expense") commenced in the third
quarter which adversely impacted financial operations in the third and fourth
fiscal quarters.
During the fourth quarter of 1998, the Company recorded a $1,287,000 impairment
loss related to its acquisition of North Atlantic Laboratories, Inc.
Liquidity and Capital Resources
As indicated in the report of the Company's Independent Accountants, the
Company's financial statements have been prepared assuming that the Company will
continue as a going concern. As of April 30, 1999, the Company has a
stockholders' deficit of $3,347,257 and an accumulated deficit of $32,296,872.
The Company has financed its operations to date primarily through issuance of
debt and equity securities. At April 30, 1999, the Company had $46,336 in cash
and a working capital deficit of $3,741,523. In addition, as of April 30, 1999,
the Company was in arrears with respect to certain payroll and sales tax
obligations of $63,000 and $463,000, respectively, as well as preferred stock
dividends of $39,000. In addition, the Company is in arrears with many of its
vendors. These factors raise substantial doubt as to 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 capital sufficient 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 is currently seeking strategic alliances or strategic
transactions to improve its financial condition. The Company requires
substantial working capital to support its ongoing operations. The Company's
backlog is approximately $5,270,000 as of April 30, 1999, 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, 1999, the Company has
no available debt capacity under its line with BACC (See Note 9 to the Notes to
the Consolidated Financial Statements) and is in default thereunder.
Accordingly, BACC currently has the legal right to foreclose on the Company's
assets, which could force the Company out of business. 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 continue 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.
On June 1, 1998 the Company entered into a $1,850,000 Loan and Security
Agreement ("LSA") for a revolving line of credit with Business Alliance Capital
Corporation ("BACC") secured by certain of the Company's assets. The
12
<PAGE>
revolving credit line was increased $650,000 to $2,500,000 in October 1998.
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 schedule of payments 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 paid the balance in six monthly installments of
$35,000.
Cash Flow
Net cash generated by operating activities was $601,368 in fiscal 1999 as
compared to net cash used by operating activities was $1,083,687 in fiscal 1998.
Accounts receivable declined $335,177 or 12.0% to $2,349,198, reflecting
improved collection procedures and controls implemented during fiscal 1999. This
decrease was more significant given the fact that revenues for the fourth
quarter of fiscal 1999 increased by 30.3% when compared with the fourth quarter
of fiscal 1998. This represents an improvement in the number of days in
collection to approximately 73 days from approximately 113 days in fiscal 1998.
Accounts payable and accrued expenses increased by $215,963 or 6.6% to
$3,558,041 primarily as a result of the costs relating to the 16% increase in
revenues. Cash used for capital expenditures was $379,367 in fiscal 1999 and
$675,992 in fiscal 1998. Management believes that the improvements in cash flow
are attributable to a shift in the Company's target clientele to entities with
less credit risk.
The Year 2000
The Company has taken actions to make its systems, services and infrastructure
Year 2000 compliant. Specifically, the Company believes that its accounting
system, estimating system, and all corporate office computers are Y2K compliant.
The Company is now assessing the mechanical and navigational systems on its
fleet of floating vessels, and although the Company has not completed the
process, it has not indicated any necessary changes to date. The Company expects
to compete this process by August 1999. The Company has inquired of its vendors
in the laboratory and consulting division regarding the Company's equipment
being Y2K compliant. The Company now estimates the costs related to Y2K
compliance to be approximately $25,000, exclusive of consulting fees, and the
Company expects to pay these costs out of working capital.
The Company has made inquires and been advised that its banks' and primary
lender's systems are Y2K compliant. As an emergency response provider, the
Company keeps a full inventory of supplies and other materials available at all
times. The Company's inquiries of its largest vendors have led to indications
that they are or expect to be, Y2K compliant by December 1999.
The Company has numerous customer relationships. The Company's current
customers will not necessarily be the same as those in the Year 2000 due to
nature of its business. However, the Company's inquiries its of largest and most
likely continuing clients indicate that they are in the process of becoming Y2K
compliant and many believe that they are already Y2K compliant. If this were not
the case, the Company's services may be more difficult to provide to these
customers. Increased difficulties would also arise if electric power or wireless
communications systems failed.
The Company has a computer consultant devoted to assessing and analyzing
Y2K issues and arranging for their final resolution. Although at this time, the
Company believes that it has resolved the most significant issues, the Company
may encounter some Y2K impact, which at this time is unforeseen. Due to the
nature of the Company's business, which is primarily labor based, management
believes that 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. The Company is in the
process of developing a Y2K contingency plan to the extent deemed appropriate.
13
<PAGE>
Seasonality
Since the Company and its subsidiaries are able to perform their services
throughout the year, the business is not considered seasonal in nature. However,
it is affected by the timing of large contracts in certain of its service areas,
i.e., asbestos abatement and construction, as well as the timing of
catastrophes.
ITEM 7. FINANCIAL STATEMENTS
Set forth below is a list of the financial statements of the Company included in
this Annual Report on Form 10-KSB.
Item Page*
- ---- -----
Report of Independent Certified Public Accountants F-2
Balance Sheet as of April 30, 1999 F-3
Consolidated Statements of Operations for the years ended
April 30, 1999 and 1998 F-4
Consolidated Statements of Stockholders' Equity (Deficit)
for the years ended April 30, 1999 and 1998 F-5
Consolidated Statements of Cash Flows for the years ended
April 30, 1999 and 1998 F-6
Notes to Consolidated Financial Statements F-7 to F-20
- ----------
* Page F-1 follows page 25 to this Annual Report on Form 10-KSB.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not Applicable.
14
<PAGE>
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE
WITH SECTION 16(a) OF THE EXCHANGE ACT
Directors of the Company hold office until the next annual meeting of
stockholders and until their successors have been elected and shall qualify, or
until their death, resignation or removal from office. The officers of the
Company are elected by the Board of Directors at the first meeting after each
annual meeting of the Company's stockholders and from time to time, and hold
office until their successors are chosen and qualified, or until their death,
resignation or removal from office. The current executive officers and directors
of the Company are as follows:
Name Age Position with the Company
- ---- --- -------------------------
Chairman of the Board, President
Michael O'Reilly 49 and Chief Executive Officer
Daniel G. Rosenberg 53 Chief Financial Officer
Anthony Towell 68 Director and Secretary
Samuel Sadove 46 Director
JoAnn O'Reilly 48 Director
Dr. Kevin Phillips 51 Director
The following is a brief summary of the business experience and background of
the current directors of the Company, based upon information provided to the
Company by such persons:
Michael O'Reilly has been Chairman of the Board of Directors, President and
Chief Executive Officer since 1996, and has been President of Trade-Winds
Environmental Restoration, Inc., a subsidiary of the Company, since 1993. Prior
to joining the company, Mr. O'Reilly was Vice President and COO of North Shore
Environmental Solutions, Inc., an environmental remediation firm which provided
a wide array of services, including asbestos, hazardous materials and lead
removal. He has sixteen years experience as an executive in the environmental
industry.
Daniel G. Rosenberg, CPA, JD joined the Company in April 1999 as its Chief
Financial Officer. Mr. Rosenberg is a certified public accountant and an
attorney admitted to practice in New York State. Mr. Rosenberg served as the
Chief Financial Officer of the following entities: Solid Capital US, Inc. from
January 1999 to April 1999, Nas Tel Technologies from February 1998 to April
1998, Oak Tree Medical Systems, Inc. from November 1996 to December 1996,
American Committee for Shaare Zedek Hospital in Jerusalem, Inc. from June 1996
to November 1996. Mr. Rosenberg was engaged in his own practice as a certified
public accountant, attorney and financial consultant from January 1996 to
January 1999, when not otherwise employed as a CFO. He specialized in working
with financially distressed entities, entities seeking to raise capital and
entities seeking strategic mergers. From 1980 to 1995, Mr. Rosenberg was
with Margolin, Winer & Evens LLC, a certified public accounting firm, serving as
a partner from 1981. From 1965 to 1980 Mr. Rosenberg held positions through the
managerial level with the certified public accounting firms of Deloitte & Touche
LLC, Mann Judd Landau and PricewaterhouseCoopers LLC.
Anthony Towell has been a director of the Company since November 1996. For more
than five years he has been the Vice President, Co-Chairman, and a Director of
Worksafe Industries, Inc., a publicly traded manufacturing company specializing
in industrial safety. He had held senior executive positions during an over 25
year career with the Royal Dutch Shell Group. Mr. Towell is also a Director and
CEO of Gulf West Oil.
JoAnn O'Reilly is an environmentalist presently involved with Michael O'Reilly
in the United States Fish and Wildlife Services ("USFWS") Captive Breeding
Program, specifically caring for listed endangered tortoise species under
special license. In addition, Ms. O'Reilly is a licensed cardiopulmonary
therapist and was employed by a Long Island, NY hospital from 1983 through 1997.
Ms. O'Reilly is the wife of Mr. Michael O'Reilly.
15
<PAGE>
Samuel Sadove, Ph.D, has been a director of the Company since 1996. Mr.
Sadove is a marine biologist who was the director of the Okeanos Ocean Research
Foundation, Inc. since founding the organization in 1980 until 1996. He is an
adjunct Professor at Long Island University, Southhampton College. Dr. Sadove
received an honorary Ph.D in Marine Sciences from Universite d'Aux Marseille.
Dr. Sadove is a member of the Technical Advisory Board of the Peconic National
Estuary Program, the U.S. Department of State's Habitat Working Group, and the
Board of Trustees of The Coastal Research and Education Society of Long Island.
Dr. Kevin Phillips has been a director since March 1998. Dr. Phillips is a
Partner and Principal in the firm of Fanning, Phillips & Molnar, an engineering
firm located on Long Island, NY. Dr. Phillips has a M.S. Degree in Hydrodynamics
from the Massachusetts Institute of Technology and a Ph.D. 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 20 years experience in geohydrology and environmental
engineering.
Directors receive no cash compensation for their services as directors, but are
reimbursed for expenses actually incurred in connection with attending meetings
of the Board of Directors. In June 1999, each of the directors received grants
of 5,000 shares of restricted common stock as compensation for serving on the
Board in fiscal 1999. 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 June 1999, non-qualified options to purchase an aggregate of
500,000 shares of Common Stock at an exercise price of $.1875 per share were
granted to non-employee directors of the Company. In August 1998, non-qualified
options to purchase an aggregate of 500,000 shares of Common Stock at an
exercise price of $.34 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 granted to a director in association with his appointment to
the Board. 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. During fiscal 1999, the Board of Directors met or acted by written
consent 4 times. All current directors attended not less than 75% of such
meetings (or executed such written consents) of the Board and committees on
which they serve.
The Board of Directors has a standing Audit Committee comprised of Messrs.
Towell and Sadove. The Audit Committee recommends engagement of the Company's
independent certified public accountants, and is primarily responsible for
reviewing and approving the scope of the audit and other services performed by
the Company's independent certified public accountants. The Committee reviews
and evaluates the Company's accounting principles and practices, systems of
internal controls, quality of financial reporting and accounting and financial
staff, as well as any reports or recommendations issued by the independent
accountants The Board of Directors has a Compensation Committee comprised of
Messrs. Towell and Sadove. The Board of Directors has no Nominating Committee.
Section 16(a) Beneficial Ownership Reporting Compliance
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 that 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 fiscal 1999, except that Daniel G. Rosenberg failed to
timely file a Form 3 when Mr. Rosenberg became an executive officer of the
Company and a Form 5 with respect to options granted in April 1999, and all
directors failed to timely file Form 4s and Form 5s with respect to shares of
Common Stock and options to purchase shares of Common Stock granted in August
1998 and April 1999, respectively.
16
<PAGE>
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, and for the one other individual who served as an
executive officer during fiscal 1999 whose total compensation for services
rendered to the Company during fiscal 1999 was $100,000 or more (each, a "Named
Executive Officer").
<TABLE>
<CAPTION>
Annual Compensation Long Term Compensation
--------------------------- Awards
--------------------------
Other Restricted Securities
Fiscal Annual Stock Underlying
Name and Principal Position(s) Year Salary Bonus($) Compensation (4) Awards($) Options
- ------------------------------ ------ ------ -------- ---------------- ---------- ------------
<S> <C> <C> <C> <C> <C> <C>
Michael O'Reilly, Chairman, 1999 $259,615 $ 3,846 - $2,400(1) 250,000(3)
Chief Executive Officer, 1998 220,000 72,765 - 938(1) 200,000(3)
and President 1997 198,657 215,000 - - 2,400,000(2)(3)
Alan Schoenbart, CFO 1999 $114,638 $0 - - 150,000
1998 79,414 0 - - 170,800
<FN>
(1) Mr. O'Reilly received 5,000 shares of Common Stock in fiscal 1999 for
service on the board of directors in fiscal 1998, the fair value of which
shares was $2,400 on the date of the grant, May 7, 1998. He received
1,000 shares of Common Stock in fiscal 1998 for director services rendered
in fiscal 1997, the fair value of which was $938 at the time of the grant.
All of these shares were fully vested on the date of grant. The aggregate
value of Mr. O'Reilly's restricted stock holdings as of April 30, 1999
was $8,500. 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.
(3) 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 which were repriced in September 1996 to $.53
per share, and the amounts for fiscal 1997 do not include this repricing.
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. These 400,000 shares previously granted
were repriced to $.22 on December 29, 1997, and these amounts do not
include this repricing. On December 29,1997, Mr. O'Reilly was granted
options to purchase 200,000 shares of common stock at an exercise price of
$.22 per share, the fair market value on the date of grant. On August 18,
1998, Mr. O'Reilly was granted options for 250,000 shares at an exercise
price of $ 0.34 per share the fair market value on the date of the grant.
(4) The value of all perquisites provided did not exceed the lesser of
$50,000 or 10% of the officer's salary and bonus.
</FN>
</TABLE>
17
<PAGE>
Option/SAR Grants in Last Fiscal Year
The following table sets forth (a) the number of shares underlying options
granted to each Named Executive Officer, during fiscal 1999, (b) the
percentage the grant represents of the total number of options granted to all
Company employees during fiscal 1999, (c) the per share exercise price of each
option, and (d) the expiration date of each option.
<TABLE>
<CAPTION>
Number of % of Total
Securities Options/SAR's
Underlying Granted to Exercise
Options/SAR's Employees in Price Expiration
Name Granted (#) Fiscal Year ($/Shares Date Date
- ---- ----------- ----------- -------------- ----
<S> <C> <C> <C> <C>
Michael O'Reilly 250,000 15.6% $0.34 August 18, 2003
Alan W. Schoenbart 150,000 9.4% $0.375 November 12, 2003
</TABLE>
Aggregated Options/SAR Exercises in Last Fiscal Year and Fiscal Year End Option
Values
Set forth in the table below is information, with respect to each Named
Executive Officer, as to the (a) number of shares acquired during fiscal 1999
upon each exercise of options granted to such individuals, (b) the aggregate
value realized upon each exercise (i.e. the difference between the market value
of the shares at exercise and their exercise price), (c) the total number of
unexercised options held on April 30, 1999, separately identified between those
exercisable and those not exercisable, and (d) the aggregate value of
in-the-money, unexercised options held on April 30, 1999, separately identified
between those exercisable and those not exercisable.
<TABLE>
<CAPTION>
Number of Securities
Underlying Unexercised Value of Unexercised
Options at Fiscal Year-End In-the-Money Options
Shares Acquired Value (#) Exercisable/ at Fiscal Year-End ($)
Name on Exercise (#) Realized ($) Unexercisable Exercisable/Unexercisable(2)
- ---- --------------- ------------ -------------------------- ----------------------------
<S> <C> <C> <C> <C>
Michael O'Reilly -0- -0- 1,100,000/2,000,000(1) $25,500/$480,000
Alan W. Schoenbart -0- -0- 300,000/0 $ 4,500/$0
<FN>
(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
$.25 (the closing sale price per share for the Common Stock on April 30,
1999) over the relevant exercise price(s).
(3) In connection with Mr. Schoenbart's resignation, he forfeited 20,800 of
the options he received in December of 1997.
</FN>
</TABLE>
Employment Agreement
Trade-Winds had an employment agreement with its President, Michael O'Reilly,
for five years expiring in October 2001 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
18
<PAGE>
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.
Company Stock Plans
1998 Stock Incentive Plan
The Company has adopted the Company's 1998 Long Term Incentive Plan (the "1998
Incentive Plan") in order to motivate qualified employees and consultants of the
Company to assist the Company in attracting employees and to align the interests
of such persons with those of the Company's stockholders. The 1998 Incentive
Plan provides for the grant of "incentive stock options" within the meaning of
the Section 422 of the Internal Revenue Code of 1986, as amended, "non-qualified
stock options," stock appreciation rights, restricted stock, performance grants
and other types of awards to officers, key employees, consultants and
independent contractors of the Company and its affiliates.
The 1998 Incentive Plan, which is administered by the Board of Directors,
currently authorizes the issuance of a maximum of 2,000,000 shares of Common
Stock, which may be either newly issued shares, treasury shares, re-acquired
shares, shares purchased in the open market or any combination thereof.
Incentive stock options generally may be granted at an exercise price of not
less than the fair market value of shares of Common Stock on the date of grant,
and non-qualified stock options may be granted at an exercise price of not less
than 85% of such fair market value. If any award under the 1998 Incentive Plan
terminates, expires unexercised or is canceled, the shares of Common Stock that
would otherwise have been issuable pursuant thereto will be available for
issuance pursuant to the grant of new awards. The Company has issued an
aggregate of 1,595,764 shares of Common Stock under the 1998 Incentive Plan,
and, as of July 31, 1999, and 404,236 shares remain available for issuance under
the 1998 Incentive Plan. The 1998 Incentive Plan expires in August 2008.
1997 Stock Incentive Plan
The Company has adopted the Company's 1997 Incentive Plan (the "1997 Option
Plan") in order to motivate qualified employees and consultants of the Company
to assist the Company in attracting employees and to align the interests of such
persons with those of the Company's stockholders. The 1997 Option Plan provides
for the grant of "incentive stock options" within the meaning of the Section 422
of the Internal Revenue Code of 1986, as amended, "non-qualified stock options,"
or restricted stock to officers, employees, consultants and advisors of the
Company and its affiliates.
The 1997 Option Plan, which is administered by the Board of Directors, currently
authorizes the issuance of a maximum of 1,000,000 shares of Common Stock, which
may be either newly issued shares, treasury shares, re-acquired shares, shares
purchased in the open market or any combination thereof. Incentive stock options
generally may be granted at an exercise price of not less than the fair market
value of shares of Common Stock on the date of grant. If any award under the
1997 Option Plan terminates, expires unexercised or is canceled, the shares of
Common Stock that would otherwise have been issuable pursuant thereto will be
available for issuance pursuant to the grant of new awards. The Company has
issued an aggregate of 1,000,000 shares of Common Stock under the 1997 Option
Plan, and, as of July 31, 1999, and no shares remain available for issuance
under the 1997 Option Plan. The 1997 Option Plan expires in December 2007.
For further information regarding stock options and stock grants refer to Note
12 of the Notes to the Consolidated Financial Statements.
19
<PAGE>
Repricing of Options
On December 2, 1996, the Board of Directors repriced all outstanding stock
options to an exercise price of $.375 per share of Common Stock (the fair market
value of the Common Stock as of the close of business on such date). On December
29, 1997, the Board of Directors repriced all outstanding stock options to an
exercise price of $.22 per share of Common Stock (the fair market value of the
Common Stock as of the close of business on such date).
The 1996 and 1997 repricings were approved primarily because of the importance
to the Company of having meaningful equity incentives in the hands of key
officers, directors, employees and consultants. The Board believed that stock
options which are "out of the money" provide less compensatory incentive to an
officer, director, employee and consultant who may be considering alternative
opportunities. The Board decided to include directors and officers in the 1996
and 1997 repricings 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 their 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.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth, as of July 31, 1999, certain information
concerning the beneficial ownership of each class of the Company's voting stock
by (i) each beneficial owner of 5% or more of the Company's voting stock, based
on reports filed with the Securities and Exchange Commission and certain other
information; (ii) each of the Company's executive officers and (iii) all
executive officers and directors of the Company as a group:
20
<PAGE>
<TABLE>
<CAPTION>
Amount and Nature (2) of
Name and Address (1) Beneficial Ownership of Common Stock Percent of Common Stock
- -------------------- ------------------------------------ -----------------------
Ownership (3)
- --------------------
<S> <C> <C> <C>
Michael O'Reilly 1,527,333 (4) 8.9
Samuel Sadove 461,000 (5) 2.8
Anthony Towell 1,086,000 (6) 6.6
Dr. Kevin Phillips 1,187,982 (7) 7.1
JoAnn O'Reilly 311,000 (8) 1.9
Daniel G. Rosenberg 150,000 (9) *
Gary Molnar 887,982 (10) 5.4
Stephen J. Bramsen 1,023,000 6.5
Officers and Directors
As a Group (5 persons) 4,723,315 (2,3,4,5,6,7) 23.5
<FN>
* Less than 1%
(1) Unless otherwise indicated. The address of each director and officer is
c/o Windswept Environmental Group Inc., 100 Sweeneydale Avenue, Bay Shore,
New York 11706.
(2) Unless otherwise indicated, the Company believes that all persons named
in the table have sole voting and investment power with respect to all
shares of Common Stock beneficially owned by them. A person is deemed to be
the beneficial owner of securities which may be acquired by such person
within 60 days from the date on which beneficial ownership is to be
determined upon the exercise of options, warrants or convertible
securities.
(3) Each beneficial owner's percentage ownership is determined by assuming
that stock options and warrants that are held by such person (but not those
held by any other person) and which are exercisable within 60 days from the
date on which beneficial ownership is to be determined have been exercised.
(4) Represents 177,333 shares of Common Stock owned and 1,350,000 shares
beneficially owned pursuant to options to purchase shares of Common Stock
exercisable within 60 days. Does not include 11,000 shares of Common Stock
owned and 300,000 shares of Common Stock issuable upon the exercise of
options exercisable within 60 days by JoAnn O'Reilly, Mr. O'Reilly's wife,
to which he disclaims beneficial ownership. Also excludes a 2,000,000 share
option not yet vested and exercisable only on the happening of future
events. See Item 10 "Executive Compensation."
(5) Represents 11,000 shares of Common Stock owned and 450,000 shares
issuable upon the exercise of options exercisable within 60 days.
(6) Includes (a) 36,000 shares owned, (b) 650,000 shares beneficially owned
pursuant to options exercisable within 60 days and (c) 400,000 shares of
Common Stock issuable upon conversion of a $100,000 demand convertible note
payable.
(7) The address for Mr. Phillips is c/o Fanning, Philips & Molnar, 909
Marconi Avenue, Ronkonkoma, New York 11779. Includes (a) 132,982 shares of
Common Stock owned, (b) 405,000 shares beneficially owned pursuant to
options exercisable within 60 days and (c) 650,000 shares of Common Stock
obtainable upon conversion of Dr. Phillips' 50% share of the 1,300,000
shares of Series A Redeemable Convertible Preferred Stock.
(8) Includes 11,000 shares of Common Stock owned and 300,000 shares
issuable upon exercise of options exercisable within 60 days. Does not
include 177,333 shares of Common Stock owned and 1,350,000 shares issuable
upon the exercise of options exercisable within 60 days by Michael
O'Reilly, Ms. O'Reilly's husband,
21
<PAGE>
as to all of which she disclaims beneficial ownership.
(9) Represents shares issuable upon the exercise of options to purchase
150,000 shares of Common Stock which are exercisable within 60 days.
(10) The address for Mr. Molnar is c/o Fanning, Philips & Molnar, 909
Marconi Avenue, Ronkonkoma, New York 11779. Includes (a) 122,982 shares of
Common Stock owned, (b) 650,000 shares issuable upon conversion of Mr.
Molnar's 50% shares of the 1,300,000 shares of Series A Redeemable
Convertible Preferred Stock and (c) 115,000 shares issuable upon exercise
of options exercisable within 60 days.
</FN>
</TABLE>
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, which was
subsequently increased to $3,095.000.
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
$30,500 in accrued expenses at April 30, 1999. Mr. Towell was also an officer
and director of Worksafe Industries, Inc., which sold approximately $189,778
and $195,000 of material and supplies to the Company that were used on
remediation projects during fiscal 1999 and 1998, respectively.
On December 16, 1998, the Company entered into an operating lease arrangement
with its Chief Executive. Under the arrangement, the Company leases a forty-two
foot fully-equipped custom Topaz boat for a period of two years. Annual rental
is approximately $75,000. The leasing arrangement was necessitated by a Marine
Assistance Contract the Company received with Keyspan Energy Corporation
covering the period January 1, 1999 through December 31, 2000. The arrangement
provides the Company with its largest floating vessel capable of handling
specialty equipment and facilitating an offshore support crew. The lease carries
a one year renewal option.
Due from officer represents the $ 100,000 the Chief Executive received as a
bonus based upon the calculation at the end of the second quarter of the current
fiscal year. Due to subsequent losses incurred by the Company in the third and
fourth quarters, the bonus is now due back to the Company.
At April 30, 1999 and 1998, and currently, 650,000 shares of Series A Redeemable
Convertible Preferred Stock are owned by Dr. Kevin Philips, a director of the
Company. Dividends and interest of $50,618 and $11,673 were paid to Dr. Philips
in fiscal 1999 and fiscal 1998, respectively. At April 30, 1999, accrued
expenses included $19,500 of dividend arrearages owed to Dr. Phillips. The
payment to Dr. Phillips in 1999 was comprised of the issuance of 122,982 shares
of Common Stock, 15,000 options to purchase Common Stock exercisable at $.41 per
share and cash of $9,750. In addition, the Company's subsidiaries sold
approximately $7,800 and $15,000 of services to Fanning Philips & Molnar, a
company of which Dr. Philips is a principal, in fiscal 1999 and 1998
respectively.
Stephen J. Bramsen, a principal stockholder of the Company, purchased 312,500
shares of Common Stock of the Company in May 1998 for $50,000, or $.16 per
share.
22
<PAGE>
The following stock options were repriced in December 1997:
<TABLE>
<CAPTION>
Original Repriced
Number of Shares Exercise Exercise
Name of Optionee Exerciseable Under Option Price Price
- ---------------- ------------------------- -------- --------
<S> <C> <C> <C>
Michael O'Reilly 250,000 $1.50 $.22
400,000 .53 .22
Joanne O'Reilly 50,000 $.56 $.22
Samuel Sadove 100,000 $.56 $.22
Anthony Towell 150,000 $.56 $.22
</TABLE>
The Company believes that all transactions entered into by the Company with its
officers, directors and principal stockholders have been on terms no less
favorable to the Company than those available from unrelated third parties.
See "Item 10 - Executive Compensation"
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
(a) Set forth below are all exhibits to this Annual Report on Form 10-KSB.
3.01 Composite of Certificate of Incorporation of the Company.
(Incorporated by reference to Exhibit 30.01 to the Company's Annual
Report on Form 10-KSB for the fiscal year ended April 30, 1998, filed
with the SEC on August 13, 1998).
3.02 By-laws of the Company. (Incorporated by reference to Exhibit 3.3 of
the Company's Registration Statement (No. 33-14370 N.Y.) filed with
the SEC on June 1, 1987).
4.01 Specimen Common Stock Certificate. (Incorporated by reference to
Exhibit 4.01 to the Company's Annual Report on Form 10-KSB for the
fiscal year ended April 30, 1998, filed with the SEC on August 13,
1998).
10.01 Specimen of Common Stock Purchase Warrant dated September 3, 1987.
(Incorporated by reference to Exhibit 4.1 of the Company's
Registration Statement (No. 33-14370 N.Y.) filed with the SEC on June
1, 1987).
10.02 Merger Agreement for North Atlantic Laboratories, Inc.
(Incorporated by reference to Exhibit 2.01 to Registrant's Annual
Report on Form 10-KSB for the fiscal year ended April 30, 1997 filed
with the SEC on September 29, 1997).
10.03 Form of Convertible Note Agreement. (Incorporated by reference to
Exhibit 4.04 to Registrant's Annual Report on Form 10-KSB for the
fiscal year ended April 30, 1997 filed with the SEC on September 29,
1997).
10.04 Option Certificate for 2,000,000 stock options issued to Michael
O'Reilly. (Incorporated by reference to Exhibit 4.05 to Registrant's
Annual Report on Form 10-KSB for the fiscal year ended April 30, 1997
filed with the SEC on September 29, 1997).
10.05 Employment Agreement between the Company and Michael O' Reilly
dated as of November 1, 1996. (Incorporated by reference to Exhibit
10.02 to Registrant's Form 10-KSB for the fiscal year ended April 30,
1997 filed with the SEC on September 29, 1997).
23
<PAGE>
10.06 1997 Stock Option Plan. (Incorporated by reference to Exhibit 4.1 to
the Company's Registration Statement on Form S-8 (No. 333-22491) filed
with the SEC on February 27, 1997).
10.07 1998 Stock Incentive Plan. (Incorporated by reference to Exhibit 4.1
to the Company's Registration Statement on Form S-8 (No. 333-61905)
filed with the SEC on August 20, 1998).
10.08 Purchase and Sale Agreement between Prestige Capital Corporation
and Trade-Winds. (Incorporated by reference to Exhibit 10.04 to
Registrant's Quarterly Report on Form 10-QSB for the quarterly period
ended January 31, 1998 filed with the SEC on March 13, 1998).
10.09 Purchase and Sale Agreement between Prestige Capital Corporation
and North Atlantic Laboratories, Inc. (Incorporated by reference to
Exhibit 10.05 to Registrant's Quarterly Report on Form 10-QSB for the
quarterly period ended January 31, 1998 filed with the SEC on March
13, 1998).
10.10 Purchase and Sale Agreement between Prestige Capital Corporation
and New York Testing, Inc. (Incorporated by reference to Exhibit 10.06
to Registrant's Quarterly Report on Form 10-QSB for the quarterly
period ended January 31, 1998 filed with the SEC on March 13, 1998).
10.11 Form of Warrant Agreement with American Stock Transfer Company
dated September 3, 1987. (Incorporated by reference to Exhibit 4.2 of
the Company's Registration Statement (No. 33-14370 N.Y.) filed with
the SEC on June 1, 1987).
10.12 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 with the SEC on June
1, 1987 and incorporated by reference thereto.
24
<PAGE>
10.13 Loan and Security Agreement dated June 1, 1998 between Business
Alliance Capital Corporation and Windswept Environmental Group Inc.
and Subsidiaries. (Incorporated by reference to Exhibit 10.13 to the
Company's Annual Report on Form 10-KSB for the fiscal year ended April
30, 1998 filed with the SEC on August 13, 1998).
10.14 Individual Guaranty of Michael O'Reilly to Business Alliance
Capital Corporation. (Incorporated by reference to Exhibit 10.14 to
the Company's Annual Report on Form 10-KSB for the fiscal year ended
April 30, 1998 filed with the SEC on August 13, 1998).
10.15 Revolving Credit Master Promissory Note for $1,850,000 between
the Company and Business Alliance Capital Corporation. (Incor-
porated by reference to Exhibit 10.15 to the Company's Annual
Report on Form 10-KSB for the fiscal year ended April 30, 1998 filed
with the SEC on August 13, 1998).
10.16 Term Loan for $595,000 Between the Company and Business Alliance
Capital Corporation. (Incorporated by reference to Exhibit 10.16 to
the Company's Annual Report on Form 10-KSB for the fiscal year ended
April 30, 1998 filed with the SEC on August 13, 1998).
10.17 Origination Fee Amendment dated August 1, 1998 between the
Company and Business Alliance Capital Corporation. (Incorporated by
reference to Exhibit 10.17 to the Company's Annual Report on Form
10-KSB for the fiscal year ended April 30, 1998 filed with the SEC on
August 13, 1998).
21.01 Subsidiaries of the Company
23.01 Consent of BDO Seidman, LLP
24.01 Powers of Attorney (set forth on the signature page of this Annual
Report on Form 10-KSB).
27 Financial Data Schedule
(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.
25
<PAGE>
WINDSWEPT ENVIRONMENTAL GROUP, INC.
TABLE OF CONTENTS
Page
Report of Independent Certified Public Accountants . . . . . . . . F-2
Consolidated Balance Sheet as of April 30, 1999. . . . . . . . . . F-3
Consolidated Statements of Operations for the
years ended April 30, 1999 and 1998. . . . . . . . . . . . . . . F-4
Consolidated Statements of Stockholders' Equity
(Deficit) for the years ended April 30, 1999 and 1998. . . . . . F-5
Consolidated Statements of Cash Flows for the
years ended April 30, 1999 and 1998. . . . . . . . . . . . . . . F-6
Notes to Consolidated Financial Statements . . . . . . . . . . . . F-7 to F-20
F-1
<PAGE>
Report of Independent Certified Public 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. and Subsidiaries as of April 30, 1999 and the related
consolidated statements of operations, changes in stockholders' equity (deficit)
and cash flows for the years ended April 30, 1999 and 1998. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with 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
audits provide 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. and Subsidiaries at April 30, 1999, and the results of
their operations and their cash flows for the years ended April 30, 1999 and
1998 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 sales
and 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.
/s/ BDO Seidman, LLP
BDO Seidman, LLP
Melville, New York
August 11, 1999
F-2
<PAGE>
WINDSWEPT ENVIRONMENTAL GROUP, INC.
CONSOLIDATED BALANCE SHEET
APRIL 30, 1999
ASSETS
<TABLE>
<CAPTION>
CURRENT ASSETS
<S> <C>
Cash $ 46,336
Accounts receivable, net of allowance for
doubtful accounts of $100,000 2,249,198
Due from officer 100,000
Inventories 129,620
Costs and estimated earnings in excess of billings
on uncompleted contracts 157,000
Prepaid expenses and other current assets 379,970
-------------
Total current assets 3,062,124
PROPERTY AND EQUIPMENT, net 2,333,530
OTHER ASSETS
Goodwill, net of accumulated amortization of $45,994 76,032
Notes receivable, net of current portion of $105,764 110,912
Other assets 162,524
-------------
Total assets $ 5,745,122
=============
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES
Accounts payable and accrued expenses $ 3,558,041
Revolving credit note payable 1,200,596
Billings in excess of costs and estimated earnings
on uncompleted contracts 226,000
Payroll taxes payable 107,570
Sales taxes payable 481,826
Current portion of long-term debt 1,033,502
Obligations of unconsolidated subsidiary, net 196,112
-------------
Total current liabilities 6,803,647
OTHER LIABILITIES
Convertible notes 790,000
Long-term debt, net of current portion 198,732
-------------
Total liabilities 7,792,379
-------------
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; 14,135,073 shares issued
and outstanding 1,414
Additional paid-in capital 28,948,201
Accumulated deficit (32,296,872)
-------------
Total stockholders' equity (deficit) (3,347,257)
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) $ 5,745,122
=============
</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, 1999 AND 1998
<TABLE>
<CAPTION>
1999 1998
<S> <C> <C>
Revenues $ 13,926,812 $ 11,968,774
Cost of revenues 10,930,054 10,256,964
------------- -------------
Gross profit 2,996,758 1,711,810
------------- -------------
Selling, general and administrative expenses 3,362,029 5,359,178
Impairment Loss - 1,287,000
------------- -------------
3,362,029 6,646,178
------------- -------------
Loss from operations (365,271) (4,934,368)
------------- -------------
Other income (expense):
Interest expense (970,269) (787,576)
Other, net 28,064 112,149
------------- -------------
Total other expense (942,205) (675,427)
------------- -------------
Net loss (1,307,476) (5,609,795)
Dividends on Series A Redeemable Convertible
Preferred Stock 78,000 91,596
------------- -------------
Net loss attributable to common stockholders $ 1,385,476) $ (5,701,391)
============= =============
Basic and diluted net loss per common share $ (.11) $ (.55)
============= =============
Weighted average number of common shares
outstanding 13,064,314 10,404,111
============= =============
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE>
WINDSWEPT ENVIRONMENTAL GROUP, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
FOR THE YEARS ENDED APRIL 30, 1999 AND 1998
<TABLE>
<CAPTION>
Common Stock
-------------------
Number of Additional Accumulated Deferred
shares Par Value Paid-in Capital Treasury Stock Deficit Compensation Total
--------- --------- --------------- -------------- ----------- ------------ -----
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at April 30, 1997 9,766,074 $ 979 $ 27,318,031 $(10,000) $(25,379,601) $(146,139) $ 1,783,270
Issuance of common stock for services 1,238,872 124 340,236 - - (65,000) 275,360
Issuance of stock options for services - - 10,000 - - - 10,000
Issuance of common stock for employee
and director compensation 409,940 41 163,265 - - (112,000) 51,306
Issuance of common stock to settle
legal obligations 137,488 13 40,556 - - - 40,569
Retirement of treasury stock - (2) (9,998) 10,000 - - -
Accretion of discount on convertible
notes - - 356,154 - - - 356,154
Amortization of deferred compensation - - - - - 248,002 248,002
Dividends on preferred stock - - (91,596) - - - (91,596)
Net loss - - - - (5,609,795) - (5,609,795)
---------- ------- ------------- --------- ------------- ---------- -----------
Balance at April 30, 1998 11,552,374 1,155 28,126,648 - (30,989,396) (75,137) (2,936,730)
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 1,284,528 129 466,623 - - - 466,752
Issuance of common stock to settle
legal obligations 38,874 4 13,420 - - - 13,424
Issuance of common stock and options
for employee and director
compensation 258,333 26 178,374 - - - 178,400
Amortization of deferred compensation - - - - - 75,137 75,137
Dividends on preferred stock - - (78,000) - - - (78,000)
Issuance of common stock and options
for accrued preferred stock
dividends and related interest 245,964 25 101,211 - - - 101,236
Net loss - - - - (1,307,476) - (1,307,476)
---------- ------- ------------- --------- ------------- ---------- ------------
Balance at April 30, 1999 14,135,073 $1,414 $ 28,948,201 $ - $(32,296,872) - $(3,347,257)
========== ======= ============= ========= ============= ========== ============
</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, 1999 AND 1998
<TABLE>
<CAPTION>
1999 1998
----------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES
<S> <C> <C>
Net loss $(1,307,476) $(5,609,795)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Depreciation and amortization 929,633 1,603,917
Impairment loss - 1,287,000
Provision for doubtful accounts (66,858) 324,091
Gain on settlement of lawsuit - (102,993)
Common stock issued for accrued interest on
preferred stock dividends 23, 236 -
Common stock and options issued for services
or for settlement of litigation 658,576 176,064
Other, net - (9,018)
Changes in assets and liabilities:
Accounts receivable 335,177 (646,324)
Costs and estimated earnings in excess of
billings on uncompleted contracts (101,648) (24,047)
Inventories 31,646 (2,552)
Prepaid expenses and other current assets (29,605) 418,914
Other assets 5,118 32,948
Accounts payable and accrued expenses 215,963 957,791
Billing in excess of costs and estimated
earnings on uncompleted contracts (40,000) 215,930
Payroll and sales taxes payable (52,394) 294,387
------------ ------------
Net cash provided by (used in) operating
activities 601,368 (1,083,687)
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of property and equipment, net (379,367) (675,992)
Proceeds from sale of assets - 37,226
Collection of notes receivable 73,029 66,880
Loan to officer (100,000) -
------------ ------------
Net cash (used in) investing activities (406,338) (571,886)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES
Net proceeds from issuance of common stock 130,000 -
Proceeds from revolving credit line 1,200,596 -
(Payments to) advances from factor, net (1,505,968) 1,505,968
Proceeds from long-term debt 1,123,199 -
Principal payments of long-term debt (1,110,936) (447,511)
Payment of dividends (19,500) (23,346)
------------ ------------
Net cash provided by (used in) financing
activities (182,609) 1,035,111
------------ ------------
NET INCREASE (DECREASE) IN CASH 12,421 (620,462)
CASH, beginning of year 33,915 654,377
------------ ------------
CASH, end of year $ 46,336 $ 33,915
============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE>
WINDSWEPT ENVIRONMENTAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED APRIL 30, 1999 AND 1998
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. In providing
a turnkey environmental solution, the Company also provides demolition,
renovation and other general construction services. The Company provides
these services to a diversified customer base located primarily in the 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, estimated profitability, the effect of
contract penalty provisions and final contract settlements may result in
revisions to estimates of costs and income and are recognized in the period
in which the revisions are determined.
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, 1999 AND 1998
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
$9,468 and $156,820 in fiscal 1999 and 1998, respectively. There is an
impairment of goodwill in fiscal 1998. See Note 6.
Earnings (Loss) Per Share
Basic earnings (loss) per share ("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 in fiscal 1999 and 1998. Although they would currently be
antidilutive, equivalents including options, convertible debt, and
convertible preferred stock which may have a dilutive effect in the future
would aggregate an additional 8,158,456 shares.
Income Taxes
Deferred taxes are provided based on the temporary differences between
the financial statement carrying amounts and the tax bases 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 $30,588 and $26,376 during the years ended April 30,
1999 and 1998, 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 to employees 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, 1999 AND 1998
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONT'D)
Fair Value of Financial Instruments
As of April 30, 1999 the carrying value of cash, accounts receivable
accounts payable, revolving credit note payable, 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 price
of the Company's common stock of $.25 at April 30, 1999, and the conversion
provisions of the underlying instruments, the fair value of the Convertible
Notes was $445,000, and the fair value of the Series A Redeemable Preferred
Stock was $325,000. 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.
Segment Reporting
During fiscal 1999, the Company adopted Statement of Financial
Accounting Standards 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 financial
statements. It also establishes disclosure standards regarding products and
services, geographic areas and major customers. The Company's operations
are conducted in a single unified segment - environmental services.
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, 1999,
the Company has a stockholders deficit of $3,347,257 and an accumulated
deficit of $32,296,872. The Company has financed its operations to date
primarily through issuances of debt and equity securities. At April 30,
1999, the Company had $46,336 in cash, and a working capital deficit of
$3,741,523. In addition, at April 30, 1999, the Company was in arrears with
respect to certain payroll tax and sales tax obligations of approximately
$63,000 and $463,000, respectively, and preferred stock dividends of
$39,000. In addition, the Company is in arrears with many of its vendors.
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 capital sufficient 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 is currently seeking strategic
alliances or strategic transactions to improve its financial condition. 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 April 30,
1999, the Company has no available debt capacity under its line with BACC
(See Note 9) and is in default thereunder. Accordingly BACC currently has
the right to foreclose on the Company's assets, which could force the
Company out of business. 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
F-9
<PAGE>
WINDSWEPT ENVIRONMENTAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED APRIL 30, 1999 AND 1998
3. LIQUIDITY AND BUSINESS RISKS (CONT'D)
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 related construction contracts, (ii) the ability to
continue 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 Agreement ("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 one 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". 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. Discounts on the
factoring of receivables and the termination fee paid, recorded as interest
expense, aggregated $155,633 for the year ended April 30, 1999.
5. NOTES RECEIVABLE
<TABLE>
<CAPTION>
<S> <C>
Spartan note receivable, 8.25% $143,757
Mohave note receivable, interest imputed at 8.50% 72,919
--------
216,676
Less current portion included in prepaid expenses
and other current assets 105,764
--------
$110,912
========
</TABLE>
The Spartan note receivable, which arose from an October 1996
settlement of a litigation against Spartan, is secured by a first mortgage
on real property and is 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.
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 ("goodwill"). In the fourth quarter
of fiscal 1998, based on management's assessment of the undiscounted future
cash flows and consideration of other competitive and market factors, an
impairment loss of $1,287,000 was recorded relating to the remaining
goodwill of NAL at April 30, 1998.
F-10
<PAGE>
WINDSWEPT ENVIRONMENTAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED APRIL 30, 1999 AND 1998
7. PROPERTY AND EQUIPMENT
Major classes of property and equipment at April 30, 1999 consist of the
following:
<TABLE>
<CAPTION>
Estimated useful life
---------------------
<S> <C> <C>
Machinery and equipment 5-10 $3,347,018
Office furniture and equipment 3-7 339,971
Transportation equipment 3-5 943,322
Leasehold improvements 5 501,881
----------
5,132,192
Less: accumulated depreciation and amortization 2,798,662
----------
$2,333,530
==========
</TABLE>
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, 1999:
<TABLE>
<S> <C>
Machinery and equipment $ 337,767
Less: accumulated amortization 139,605
----------
$ 198,162
==========
</TABLE>
Depreciation expense for the years ended April 30, 1999 and 1998 was
$845,028 and $816,609, 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.
9. DEBT AND LEASE OBLIGATIONS
Convertible notes at April 30, 1999 are as follows:
<TABLE>
<S> <C>
10% convertible notes, due March 2002 $690,000
12% convertible notes, related party, due August 2000 100,000
--------
$790,000
========
</TABLE>
In March 1997, the Company completed a private offering of 10%
convertible notes to several accredited investors. The Company received
gross proceeds of $700,000 and incurred direct issuance costs of $173,656
related to the sale of the notes. The 10% convertible notes 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 shares of common stock
issuable upon conversion of the notes. The Company has reserved 1,380,000
shares of the common stock issuable upon conversion of the convertible
notes.
F-11
<PAGE>
WINDSWEPT ENVIRONMENTAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED APRIL 30, 1999 AND 1998
9. DEBT AND LEASE OBLIGATIONS (CONT'D)
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 was
recorded during the year ended April 30, 1998.
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
note is payable in full in August 2000.
<TABLE>
<CAPTION>
Long-term debt at April 30, 1999 is as follows:
<S> <C>
BACC term loan $495,833
Vehicle installment notes with finance companies,
payable monthly with interest rates ranging from
8.45% to 11.75%, with terms expiring through
May 2002 187,766
Equipment notes, payable monthly with interest rates
ranging from 9.95% to 11.27%, expiring through July
2000 85,336
Insurance premium financing, payable monthly with
interest rates ranging from 7.7% to 11.6%, expiring
through March 2000 306,183
Litigation settlement, 6% due May 1999 3,508
Capital lease obligations, 9.5% to 33.6% 153,608
----------
1,232,234
Less: current portion 1,033,502
----------
$ 198,732
----------
</TABLE>
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 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
F-12
<PAGE>
WINDSWEPT ENVIRONMENTAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED APRIL 30, 1999 AND 1998
9. DEBT AND LEASE OBLIGATIONS (CONT'D)
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 LSA was modified at various times during the 1999 fiscal year, to
increase the maximum revolving advances against the accounts receivable
collateral to $2,500,000 and to provide for temporary permissible
over-advances through April 16, 1999. The term of the LSA was extended to
December 1, 2000. Additionally, in February 1999, the service fee on the
LSA was increased to 1% of the average outstanding advance balances.
Effective March 1, 1999 through April 30, 1999, interest was charged at the
default rate. At April 30, 1999, the Company was not in compliance with
various technical provisions of the LSA; accordingly, the $495,833 balance
of the term loan is included in the caption "Current portion of long-term
debt".
The vehicle installment and equipment notes are secured by the
underlying vehicles and equipment.
Aggregate maturities of convertible notes and other long-term debt for
each of the five years following April 30, 1999, are as follows:
<TABLE>
<CAPTION>
Year Ending April 30,
---------------------
<S> <C>
2000 $1,033,502
2001 190,141
2002 798,081
2003 510
----------
$2,022,234
==========
</TABLE>
Future minimum lease payments under noncancelable operating leases for
office space and equipment and the present value of future minimum capital
lease payments as of April 30, 1999 are as follows:
<TABLE>
<CAPTION>
Year Ending April 30, Capital Leases Operating Leases
--------------------- -------------- ----------------
<S> <C> <C>
2000 $ 86,351 $ 425,864
2001 61,511 370,425
2002 84,195 323,399
--------- ----------
Total minimum lease payments 232,057 $1,119,688
==========
Less: amount representing interest
at rates ranging from 9.5% to 33.6% 78,449
---------
Present value of minimum capitalized
lease payments 153,608
Current portion 55,713
---------
Long-term capitalized lease
obligations $ 97,895
=========
</TABLE>
Total rental expense under cancelable and noncancelable operating
leases was $304,961 and $286,888 for the years ended April 30, 1999 and
1998, respectively.
F-13
<PAGE>
WINDSWEPT ENVIRONMENTAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED APRIL 30, 1999 AND 1998
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 shares of
redeemable convertible preferred stock ("RCPS") having a liquidation
value of $1 per share plus accumulated dividends. The dividend rate is
the higher of (i) 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 had 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 adjusting 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, 1999, the Company issued shares of
common stock in the following transactions: (i) 735,000 shares in several
private placements for proceeds of $130,000, (ii) 1,284,528 shares valued
at $466,752 as consideration for various legal and consulting services,
(iii) 258,333 shares valued at $98,400 as compensation for directors and
certain employee services provided, (iv) 38,874 shares valued at $13,424
to settle legal obligations, (v) 245,964 shares valued at $92,236 for
accrued dividends and interest on the redeemable convertible preferred
stock and (vi) 20,000 shares upon the conversion of a convertible note in
the principal amount of $10,000.
During the year ended April 30, 1998, the Company issued shares of
common stock in the following transactions: (i) 1,238,872 shares valued
at $340,360 as consideration for various services; (ii) 409,940 shares
valued at $163,306 as compensation for directors and certain employee
services provided and (iii) 137,488 shares valued at $40,569 to settle
legal obligations.
12. STOCK OPTIONS
At April 30, 1999 and 1998, 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, 1999,
7,000 options issued under this plan have been exercised.
F-14
<PAGE>
WINDSWEPT ENVIRONMENTAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED APRIL 30, 1999 AND 1998
12. STOCK OPTIONS (CONT'D)
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
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.
In August 1998, the Board of Directors approved the Company's 1998
Stock Incentive Plan, which covered 2,000,000 shares of Company stock.
Under this plan, the Company may grant incentive stock options,
non-qualified stock options, restricted stock, stock appreciation rights,
or other awards to employees, directors, officers, and consultants. All
shares available for grant under this plan have been registered under the
Securities Act of 1933, as amended.
F-15
<PAGE>
WINDSWEPT ENVIRONMENTAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED APRIL 30, 1999 AND 1998
12. STOCK OPTIONS (CONT'D)
On August 18, 1998, the Company granted 850,000 non-qualified
stock options to non-employee directors and officers of the Company at
$.34 per share. The options vest immediately and expire August 17, 2003.
The Company recorded compensation expense of $80,000 in connection with
the options granted to non-employee directors.
On November 13, 1998, the Company granted 500,000 non-qualified
stock options to employees to purchase shares of the Company's common
stock at an exercise price of $.375 per share. These options may be
exercised in full after November 13, 2000 and expire November 12, 2003.
On November 13, 1998, the Company granted 50,000 non-qualified
stock options to its former chief financial officer at $.375 per share.
The options vest immediately and expire November 12, 2003.
On March 30, 1999, the Company granted 50,000 non-qualified stock
options to an employee to purchase shares of the Company's common stock
at an exercise price of $.2031 per share. These options may be exercised
in full after March 30, 2001 and expire March 29, 2004.
On April 19, 1999, the Company granted 150,000 non-qualified stock
options to its chief financial officer to purchase shares of the
Company's common stock at an exercise price of $.2031 per share. The
options vest immediately and expire April 18, 2004.
The Company applies APB Opinion No. 25 and related interpretations
in accounting for its plans. Accordingly, no compensation cost has been
recognized for its stock option plans. 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 $1,521,309, or $.12 in fiscal 1999 and $6,270,795, or $.60 in
fiscal 1998, 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 1999 and 1998;
expected volatility of 46.1% for 1999 and 100% for 1998, no dividend
yield, and expected life of two to three years for the fiscal 1999 and
1998 options. The weighted average risk free interest rate was 5.3% for
fiscal 1999 and 6.5% for fiscal 1998.
On February 24, 1997, 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 expired April 1, 1999. See Note 9.
On October 22, 1997 in connection with certain consulting
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 October 28, 1998, in connection with a payment of accrued
interest on unpaid preferred stock dividends, the Company issued 30,000
options at an exercise price of $.41 per share. These options are
exercisable commencing on the date of grant and expire on October 27,
2003.
F-16
<PAGE>
WINDSWEPT ENVIRONMENTAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED APRIL 30, 1999 AND 1998
12. STOCK OPTIONS (CONT'D)
A summary of the status of the Company's stock option plans as of
April 30, 1999 and 1998 is presented below:
<TABLE>
<CAPTION>
Employees and Range of Option Non-Employee Range of Option
Directors Options Prices Per Share Options Prices Per Share
----------------- ---------------- ------------ ----------------
<S> <C> <C> <C> <C>
Outstanding at April 30, 1997 1,847,027 $.38-$.84 300,000 $.50-$.78
Granted 4,156,136 $.12-$.81 18,100 $.01
Canceled (1,633,499) $.38-$.84 - -
Forfeited (301,052) $.22-$.84 - -
----------- --------- ------- ---------
Outstanding at April 30, 1998 4,068,662 $.12-$.38 318,100 $.01-$.78
Granted 1,600,000 $.20-$.38 30,000 $.41
Forfeited (838,306) $.12-$.38 100,000 $.50
----------- --------- ------- ---------
Outstanding at April 30, 1999 4,830,356 $.12-$.38 248,100 $.01-$.78
=========== ========= ======= =========
Options exercisable at April 30, 1998 1,790,000 $.12-$.38 318,000 $.01-$.78
=========== ========= ======= =========
Options exercisable at April 30, 1999 3,363,194 $.12-$.38 248,100 $.01-$.78
=========== ========= ======= =========
</TABLE>
<TABLE>
<CAPTION>
Weighted Average
Number Remaining Nummber
Range of Exercise Outstanding at Contractual Life Weighted Average Exercisable Weighted Average
Prices 4/30/99 (years) Exercise Price at 4/30/99 Exercise Price
- ----------------- -------------- ---------------- ---------------- ----------- ----------------
<S> <C> <C> <C> <C> <C>
$.12-$.38 4,730,356 3.49 $.25 3,263,194 $.25
$.375 100,000 1.07 $.375 100,000 $.375
</TABLE>
In September 1996, the Company granted to its Chairman, President and
Chief Executive Officer, 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. No amounts have been charged to
compensation expense in the accompanying statements of operations for the
years ended April 30, 1999 and 1998 related to this option.
13. INCOME TAXES
No provision for income taxes was recorded during the years ended
April 30, 1999 and 1998 due to net losses being incurred. At April 30,
1999, the Company has net operating loss carryforwards for tax purposes of
approximately $21,900,000 which expire through 2014.
The Company's effective tax rate in fiscal 1999 and 1998 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:
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
Net operating loss carryforwards $ 8,850,000 $ 8,258,000
Losses on investments 2,437,000 2,437,000
Other, net 39,000 144,000
------------ ------------
11,326,000 10,839,000
Less: Valuation allowance (11,326,000) (10,839,000)
------------ ------------
Net deferred tax asset $ - $ -
============ ============
</TABLE>
F-17
<PAGE>
WINDSWEPT ENVIRONMENTAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED APRIL 30, 1999 AND 1998
13. INCOME TAXES (CONT'D)
At April 30, 1999 and 1998, the Company has provided a full valuation
allowance against the gross deferred tax asset since, in management's
judgment, 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.
14. RELATED PARTY TRANSACTIONS
The Company leases a boat from its President and Chief Executive
Officer for use in its marine operations. The lease commenced on December
16, 1998 and expires on December 15, 2000 with an option, by the Company,
to extend the lease to December 15, 2001. The lease calls for six monthly
payments of $10,000 and eighteen monthly payments of $5,000. If extended,
the additional twelve payments are $5,000 each. The lease also provides for
a refundable security deposit of $30,000, of which $20,000 has been paid as
of April 30, 1999. The Company is responsible for all taxes, insurance and
repairs. In the fiscal year ended April 30, 1999, the Company made lease
payments of $50,000.
Due from officer represents the $100,000 the Chief Executive received
as a bonus based upon the calculation at the end of the second quarter of
fiscal 1999 (see Note 17). Due to subsequent losses incurred by the
Company, the bonus is now due back to the Company.
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 and interest of $50,618 and $11,673
were paid to this director in fiscal 1999 and 1998, respectively. At April
30, 1999 accrued expenses included $19,500 of dividend arrearages owed to
this director. The Company's subsidiaries sold approximately $7,800 and
$15,000 of services to a company of which the director is a principal in
fiscal 1999 and 1998, respectively.
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 $30,500 in accrued expenses at April 30, 1998. See Note 9.
This director is also an officer and director of a company which sold
approximately $183,000 and $195,000 of material and supplies to the Company
which was used on remediation projects during fiscal 1999 and 1998, of
which approximately $84,000 is included in accounts payable and accrued
expenses as of April 30, 1999.
15. MAJOR CUSTOMERS
During fiscal 1999 and 1998, one customer in each fiscal year
accounted for 10.2% and 10.5%, respectively, of the Company's sales.
16. SUPPLEMENTAL CASH FLOW INFORMATION
Cash payments during the years ended April 30, 1999 and 1998 included
interest of $937,830 and $317,219.
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 and equipment installment notes and
capitalized lease obligations of $100,000 in 1999 and $126,190 in 1998.
Non-cash financing activities include $350,000 and $284,300 of annual
insurance policy financing in 1999 and 1998, respectively. Non-cash
financing activities in fiscal 1999 include $78,000 of preferred stock
dividends paid in shares of common stock. Additionally, $200,000 of the
Facility described in Note 9 was converted into a long-term loan in fiscal
1998.
Other non-cash transactions included $177,000 in deferred compensation
costs recorded in fiscal 1998 related to long term employee and outside
consulting agreements paid with shares of common stock.
F-18
<PAGE>
WINDSWEPT ENVIRONMENTAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED APRIL 30, 1999 AND 1998
17. 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.
In addition, the Securities and Exchange Commission also instituted an
investigation of the Company. To date, no charges have been filed against
the Company or any other current member of management as a result of the
Eastern District investigation. On June 9, 1999, the Company's Board of
Directors approved making a settlement offer with the Securities and
Exchange Commission pursuant to which the Company will neither admit nor
deny any allegations. If the Securities and Exchange Commission approves
the settlement offer, the Company will not incur any monetary fines.
Additionally, the Company's special defense counsel has advised the Company
that an Assistant United States Attorney confirmed that the Government, at
this time, does not intend to proceed further with its investigation of 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 such liti-
gation 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.
Employment Agreement
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.
Effective January 1, 1998, the Board agreed to increase the chief
executive's salary by $60,000 per annum.
18. SUBSEQUENT EVENTS
New York State Sales Tax Examination
An examination conducted by New York State Sales Tax auditors for the
period March 1, 1994 through February 28, 1997, that was concluded in July
1999, resulted in the Company recording sales and use tax expense of
$151,557 and related interest expense of $52,526 during the 1999 fiscal
year.
F-19
<PAGE>
WINDSWEPT ENVIRONMENTAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED APRIL 30, 1999 AND 1998
Issuances of Common Stock and Warrants
From May 1, 1999 through August 6, 1999 the Company issued shares of
common stock in the following transactions: (i) 882,334 shares in private
placements for proceeds of $142,350 which included the issuance of warrants
to purchase 200,000 additional shares of the Company's common stock
exercisable at $.20 per share, (ii) 767,450 shares valued at $171,809 as
consideration for various consulting services, (iii) 25,000 shares valued
at $5,078 as compensation to directors and (iv) 7,000 shares for proceeds
of $2,625 upon exercise of stock options.
F-20
<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, 1999
WINDSWEPT ENVIRONMENTAL GROUP, INC.
By: /s/ Michael O'Reilly
MICHAEL O'REILLY, Chairman, President
and Chief Executive Officer
By: /s/ Daniel G. Rosenberg
DANIEL G. ROSENBERG, CPA, JD
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, 1999 by the
following persons in the capacities indicated. Each person whose signature
appears below constitutes and appoints Michael O'Reilly and Daniel G. Rosenberg,
CPA, JD 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/ Daniel G. Rosenberg
DANIEL G. ROSENBERG, CPA, JD
Chief Financial Officer (Principal Accounting
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
26
<PAGE>
EXHIBIT INDEX
3.01 Composite of Certificate of Incorporation of the Company.
(Incorporated by reference to Exhibit 30.01 to the Company's Annual
Report on Form 10-KSB for the fiscal year ended April 30, 1998, filed
with the SEC on August 13, 1998).
3.02 By-laws of the Company. (Incorporated by reference to Exhibit 3.3 of
the Company's Registration Statement (No. 33-14370 N.Y.) filed with
the SEC on June 1, 1987).
4.01 Specimen Common Stock Certificate. (Incorporated by reference to
Exhibit 4.01 to the Company's Annual Report on Form 10-KSB for the
fiscal year ended April 30, 1998, filed with the SEC on August 13,
1998).
10.01 Specimen of Common Stock Purchase Warrant dated September 3, 1987.
(Incorporated by reference to Exhibit 4.1 of the Company's
Registration Statement (No. 33-14370 N.Y.) filed with the SEC on June
1, 1987).
10.02 Merger Agreement for North Atlantic Laboratories, Inc.
(Incorporated by reference to Exhibit 2.01 to Registrant's Annual
Report on Form 10-KSB for the fiscal year ended April 30, 1997 filed
with the SEC on September 29, 1997).
10.03 Form of Convertible Note Agreement. (Incorporated by reference to
Exhibit 4.04 to Registrant's Annual Report on Form 10-KSB for the
fiscal year ended April 30, 1997 filed with the SEC on September 29,
1997).
10.04 Option Certificate for 2,000,000 stock options issued to Michael
O'Reilly. (Incorporated by reference to Exhibit 4.05 to Registrant's
Annual Report on Form 10-KSB for the fiscal year ended April 30, 1997
filed with the SEC on September 29, 1997).
10.05 Employment Agreement between the Company and Michael O' Reilly
dated as of November 1, 1996. (Incorporated by reference to Exhibit
10.02 to Registrant's Form 10-KSB for the fiscal year ended April 30,
1997 filed with the SEC on September 29, 1997).
10.06 1997 Stock Option Plan. (Incorporated by reference to Exhibit 4.1 to
the Company's Registration Statement on Form S-8 (No. 333-22491) filed
with the SEC on February 27, 1997).
10.07 1998 Stock Incentive Plan. (Incorporated by reference to Exhibit 4.1
to the Company's Registration Statement on Form S-8 (No. 333-61905)
filed with the SEC on August 20, 1998).
10.08 Purchase and Sale Agreement between Prestige Capital Corporation
and Trade-Winds. (Incorporated by reference to Exhibit 10.04 to
Registrant's Quarterly Report on Form 10-QSB for the quarterly period
ended January 31, 1998 filed with the SEC on March 13, 1998).
10.09 Purchase and Sale Agreement between Prestige Capital Corporation
and North Atlantic Laboratories, Inc. (Incorporated by reference to
Exhibit 10.05 to Registrant's Quarterly Report on Form 10-QSB for the
quarterly period ended January 31, 1998 filed with the SEC on March
13, 1998).
10.10 Purchase and Sale Agreement between Prestige Capital Corporation
and New York Testing, Inc. (Incorporated by reference to Exhibit 10.06
to Registrant's Quarterly Report on Form 10-QSB for the quarterly
period ended January 31, 1998 filed with the SEC on March 13, 1998).
10.11 Form of Warrant Agreement with American Stock Transfer Company
dated September 3, 1987. (Incorporated by reference to Exhibit 4.2 of
the Company's Registration Statement (No. 33-14370 N.Y.) filed with
the SEC on June 1, 1987).
10.12 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 with the SEC on 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. (Incorporated by reference to Exhibit 10.13 to the
Company's Annual Report on Form 10-KSB for the fiscal year ended April
30, 1998 filed with the SEC on August 13, 1998).
10.14 Individual Guaranty of Michael O'Reilly to Business Alliance
Capital Corporation. (Incorporated by reference to Exhibit 10.14 to
the Company's Annual Report on Form 10-KSB for the fiscal year ended
April 30, 1998 filed with the SEC on August 13, 1998).
10.15 Revolving Credit Master Promissory Note for $1,850,000 with
between the Company and Business Alliance Capital Corporation.
(Incorporated by reference to Exhibit 10.15 to the Company's Annual
Report on Form 10-KSB for the fiscal year ended April 30, 1998 filed
with the SEC on August 13, 1998).
10.16 Term Loan for $595,000 Between the Company and Business Alliance
Capital Corporation. (Incorporated by reference to Exhibit 10.16 to
the Company's Annual Report on Form 10-KSB for the fiscal year ended
April 30, 1998 filed with the SEC on August 13, 1998).
27
<PAGE>
10.17 Origination Fee Amendment dated August 1, 1998 between the
Company and Business Alliance Capital Corporation. (Incorporated by
reference to Exhibit 10.17 to the Company's Annual Report on Form
10-KSB for the fiscal year ended April 30, 1998 filed with the SEC on
August 13, 1998).
21.01 Subsidiaries of the Company
23.01 Consent of BDO Seidman, LLP
24.01 Powers of Attorney (set forth on the signature page of this Annual
Report on Form 10-KSB).
27 Financial Data Schedule
28
WINDSWEPT ENVIRONMENTAL GROUP, INC.
List of Subsidiaries
Name State or Other Jurisdiction of Incorporation or Organization
New York Testing Laboratories Inc. ....................................Delaware
North Atlantic Laboratories Inc. ......................................New York
Sound Coast Remediation Inc. ..........................................Delaware
Trade-Winds Environmental Restoration, Inc. ...........................Delaware
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
WINDSWEPT ENVIRONMENTAL GROUP, INC.
BAY SHORE, NEW YORK
We hereby consent to the incorporation by reference in the Registration
Statements on Forms S-8 (No. 333-61905, No. 333-22491 and No. 333-43305) of our
report dated August 11, 1999, 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, 1999.
/s/ BDO Seidman, LLP
BDO SEIDMAN, LLP
Melville, New York
August 13, 1999
<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, 1999 AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> Apr-30-1999
<PERIOD-START> May-1-1998
<PERIOD-END> Apr-30-1999
<CASH> 46,336
<SECURITIES> 0
<RECEIVABLES> 2,349,198
<ALLOWANCES> 100,000
<INVENTORY> 129,620
<CURRENT-ASSETS> 3,062,124
<PP&E> 5,132,192
<DEPRECIATION> 2,798,662
<TOTAL-ASSETS> 5,745,122
<CURRENT-LIABILITIES> 6,803,647
<BONDS> 988,732
1,300,000
0
<COMMON> 1,414
<OTHER-SE> (3,348,671)
<TOTAL-LIABILITY-AND-EQUITY> 5,745,122
<SALES> 13,926,812
<TOTAL-REVENUES> 13,926,812
<CGS> 10,930,054
<TOTAL-COSTS> 10,930,054
<OTHER-EXPENSES> 28,064
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 970,269
<INCOME-PRETAX> (1,307,476)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1,307,476)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,307,476)
<EPS-BASIC> (.11)
<EPS-DILUTED> (.11)
</TABLE>
